TPP deal is bad for China, good for container shipping, analysts say

HONG KONG — Analysis of the giant Trans-Pacific Partnership free trade agreement continues to pour in, with a top China economist predicting it will slash 2.2 percent off the mainland GDP while maritime analyst Drewry said the deal would lead to increasing container volumes.

The Washington-led TPP was reached last week as 12 Pacific Rim countries signed up to the trade pact. China is excluded from the deal, which prompted People’s Bank of China research bureau chief economist Ma Jun to make his bleak forecast in a research paper compiled jointly with the Shanghai Securities News.

“Simulation results show that, with China’s accession compared to the scenario of China not joining, China will lose 2.2 percent of GDP,” Ma’s research showed.

It is not the kind of FTA a country would want to be excluded from. The deal covers 40 percent of the global economy and is the largest free trade deal since the North American Free Trade Agreement (NAFTA) between the U.S., Canada and Mexico was established in 1994. TPP covers a range of industries and promises to reduce or eliminate tariffs and quotas on many products traded between the member countries. Estimates are that the deal will see more than 18,000 tariffs on U.S. products reduced to zero.

Those involved in the trade partnership are the U.S., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Kevin Gaynor, head of fixed income research for Europe, Middle East and Asia at Nomura, said there were strong economic incentives among the countries involved to conclude the trade accord. "The participating states represent 40 percent of the world’s GDP, which is why removal of trade barriers will mean a lot in economic terms," he said.

On whether China would join the TPP at some point, Gaynor was non-committal. "China is currently busy setting up its own trade arrangements, like the Regional Comprehensive Economic Partnership. But in a couple of years’ time, who knows?"

Ma’s estimate of the GDP loss comes at a difficult time for China, which is in the grip of an economic slowdown and falling trade growth. Vietnam is one of China’s trading partners that is part of the TPP and there are fears that the free trade agreement might speed up the migration of factories from the mainland to its southern neighbour as manufacturers take advantage of tariff cuts on raw materials.

Even as agreement in the TPP deal was finally reached after five years, a World Bank report announced it was cutting its growth forecast for the Asia-Pacific region for this year and 2016 because of the risks posed by China’s economic slowdown and the looming rise in U.S. interest rates.

The head of the International Monetary Fund was also issuing growth warnings. Christine Lagarde warned there could be an economic "vicious cycle" caused by higher U.S. interest rates and the Chinese slowdown. She said these threats could jeopardize recent economic gains in Asia and Latin America.

The TPP now needs to be ratified by the legislatures of all the member countries and is expected to face strong resistance, not least in the U.S. where Democratic presidential hopeful Hillary Clinton has already expressed her opposition.

While there is uncertainty over the politics of the deal, London-based analyst Drewry believes the TPP will provide increasing container volume growth for the participating nations.

In its Container Insight Weekly, Drewry said it had found evidence that supported the argument that free trade deals encouraged heightened trade growth, specifically in the container shipping arena.

One of the most significant FTAs in recent years was the pact between the 10 member states of the Association of Southeast Asian Nations with China in 2005, Drewry said. In the 10 years before the deal, the annual growth rate for China’s merchandise exports to ASEAN was broadly in line with the rest of the world at 17 percent.

“Following the deal the 10-year CAGR increased to 19 percent. Not such a significant gain you might think, but consider that the annual rate to the rest of the world had dipped in that period to 13 percent,” the analyst said.

ASEAN started to accelerate beyond the overall trend from 2009 onwards, which suggests it takes a few years after implementation for the trade benefits to really kick-in.

This was the case when Drewry looked at the impact on trade, measured in U.S. dollar value, which has been less immediate than seen with China-ASEAN. Since 2005, U.S. trade with non-FTA partners, such as with its second-largest trading partner China, has grown faster than it has with its FTA partners.

Between 2005 and 2014 U.S. exports to non-FTA partners increased by 85 percent versus 74 percent for FTAs, while imports were up by 42 percent against 40 percent respectively. The faster pace of growth with non-FTAs explains why the share of U.S. merchandise trade for its FTA partners has barely moved in the last 10 years, even as new FTA partners were joining.

However, Drewry found that as with the China-ASEAN pact, U.S. trade growth with its FTA partners appears to be gaining momentum and if the comparison period is narrowed, U.S. exports and imports to FTA partners are seen increasing at a faster pace. Between 2009 and 2014 exports to FTA countries have grown by 64 percent, versus 45 percent for all non-FTAs, while imports from FTAs have expanded by 57 percent against 47 percent.

The analyst said FTA partners had a much smaller, but growing, share of the containerized trade with the U.S. than they did with total merchandise trade, controlling about 19 percent of the two-way box trade in 2014, as measured in tons, up from 18 percent in 2013. China accounted for 30 percent while other non-FTA trading partners took the remaining 51 percent.

Drewry concluded that the liberalization of trade was a growing trend and one that would benefit container shipping companies in the long-run. In the mid-term, it recommended investment in shipping and port infrastructure within countries that had expanded their FTA scope.