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Companies linked to a newly-inked Pacific trade pact may reduce their reliance on the world's largest economy following President Donald Trump's controversial tariffs.
Rising U.S. protectionism reinforces the importance of a multilateral trading order — the kind represented by the Trans-Pacific Partnership deal — strategists have widely argued. It could also see companies based in TPP member nations shy away from doing business stateside.
Known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or TPP-11, the landmark free-trade agreement will cut tariffs between 11 countries, which include Australia, Canada, Chile, Japan, Malaysia and Mexico. It was signed the same day that Trump authorized steel and aluminum duties — controversial taxes that pushed Beijing to enforce tit-for-tat action on Monday.
"In an environment of growing uncertainty and risk, the CPTPP helps by providing stability," said Deborah Elms, executive director at the Singapore-based Asian Trade Centre. "The agreement itself provides considerable new opportunities for member firms to find new markets or to save money — this should push companies to diversify their own portfolio and rely less on the U.S."
The Trump administration's trade policy is centered on bilateral negotiations rather than multilateral agreements, but that's troublesome for companies based in TPP member countries. When possible, multinationals or small-and-medium sized enterprises could be motivated to strengthen cooperation with fellow TPP members instead of turning to the U.S.
That's entirely possible, said Alexander Capri, visiting senior fellow at National University of Singapore. Still, it's nearly impossible for companies to completely ignore the U.S., he added.
To leapfrog American tariffs, some Pacific-based corporations that can't afford to be excluded from the U.S. market may move manufacturing stateside, which would harmonize with the White House's wishes, Capri explained.
Many have warned that Trump's decision to exit the TPP places the U.S. at a competitive disadvantage in trading with TPP members, particularly in agriculture.
"For example, under CPTPP, Australian beef exporters will now pay only a 9 percent tariff on their sales in Japan, while their U.S. competitors will continue to face a basic tariff rate of 38 percent," the Center for Strategic and International Studies said in a note.
The "fear of losing out through trade diversion may give others an incentive to join the pact," Roland Rajah, director of the international economy program at Australian think tank Lowy Institute, said in a note last month.
Still, it's too early to assess what impact the new pact will have in upholding the agenda of open markets, international cooperation and a rules-based system, he cautioned.