TPP: What it means for Latin America

TPP: What it means for Latin America

Widely hailed as the most important free trade agreement in history, the Trans-Pacific Partnership incorporates 12 countries from the Pacific Rim, accounting for 40% of the world’s GDP and 25% of world trade.

The agreement includes widely different economies; from global heavyweights Japan and the U.S. to small nations like Brunei.

Three Latin American countries have joined the TPP, which has yet to be ratified by each country’s legislative body: Mexico, Chile and Peru. These three economies are among the most dynamic in the region and together with Colombia form the Pacific Alliance, a regional free-trade bloc.

Expectations on the TPP abound for these Latin American economies, from a boost in competitiveness and production to a threat to local industries.

Agreements, challenges and opportunities

As with every free trade deal, the agreement featured disputes among its members over contentious issues. These ranged from intellectual property rights to access to dairy markets and the percentage of components needed for products to be considered as TPP-made.

Latin American countries expressed their concern on several issues, among them property rights for biologic drugs, agreed at five to eight years of exclusivity against generic imitators. This move pleased Chile and Peru, who had expressed their concern that longer exclusivity periods would lead to high prices for their consumers.

Mexico voiced reservations over the ratio of TPP-made components required for a product to be exempt from import tariffs. This was finally agreed at 45% for vehicles, down from 62.5% under NAFTA.

Although Mexico, Peru and Chile have pursued free-trade agreements and economic integration, their economies differ substantially and are dependent on distinct sources for growth. While Mexico has been successful at developing a wide manufacturing base and has moved up on global supply chains, Chile and Peru are more dependent on commodity exports.

Skeptics note that the TPP will not bring about the economic benefits that many expect to these Latin American countries.

Together, these economies already have dozens of bilateral free trade agreements – Mexico alone has 46, while Chile has bilateral agreements with each of the members of the TPP. Moreover, commodity exporters like Peru and Chile already benefit from low import tariffs and these three countries already have access to the crucial U.S. market.

However, supporters of the TPP argue that it would open up new sectors for trade and investment, such as agriculture, dairy and meat in traditionally protectionist countries like Japan.

Furthermore, experts note that the TPP will provide a great opportunity for these Latin American countries to move up on the Pacific supply chain while increasing productivity and competitiveness. The deal is also regarded as an opportunity to compete with China, as the scrapping of tariffs and taxes lowers production costs and allows for the integration of supply chains among industry players in different countries.

Analysts seem to disagree on which Latin American country will reap the most benefits from the TPP. Some note that Mexico has much to gain from the agreement, since it is better integrated with the United States and boasts an important manufacturing base.

Others note that Chile and Peru will be the major winners, since their commodities will find new markets now that China has decelerated and will see increased investment in more value-added sectors. Credit Suisse forecasts Peru will get a boost of 1.2% of its GDP by 2025 as a result of the TPP, while Chile and Mexico will see GDP rise by 0.7 and 0.5%, respectively.

Broader implications for Latin America

Opportunities and challenges abound ahead of an eventual TPP enforcement; winners and losers are expected within the member countries and among the TPP nations.

In the Latin American context, the TPP will continue to highlight the ideological and economic differences among its countries. While Mexico, Peru and Chile are set to consolidate their positions as free-trade advocates in the regional context (with the possibility of Colombia joining in the future), it will further alienate more protectionist Latin American countries, mainly Argentina, Bolivia, Venezuela, and even Brazil.

Moreover, the TPP will also highlight the increasing dependency of certain Latin American countries on China. Although Chile and Peru are more dependent on Chinese demand for commodities than Mexico (which directly competes with China on manufacturing for the U.S. market), their eventual entry into the TPP will contribute to lessen their dependence on the world’s second largest economy.

Moreover, the TPP would allow these countries to directly compete with China on investments and manufacturing as they integrate themselves into global supply chains along the Pacific Rim.

Countries like Brazil, Bolivia and Venezuela, highly dependent on Chinese investment and wary of economic integration with the United States, will closely watch the economic developments resulting from the TPP, especially at a time when Chinese growth and demand for commodities is decreasing.

The TPP will provide a valuable opportunity to diversify these countries’ economies.

However, this will only be achieved if they undertake the necessary measures to compete with their Asian counterparts, mainly by investing heavily in order to increase productivity and competitiveness in key sectors. Failure to do so will result in unaltered economic prospects and the erosion of uncompetitive domestic industries, unable to compete with Asian powerhouses. Mexico, Chile and Peru have great opportunities ahead of them – it is up to each of them to stand up to the challenge. 

Categories: Finance, Latin America

About Author

Eduardo Arcos

Eduardo Arcos is a policy analyst and freelance journalist. He holds an M.Sc. in Security Studies from University College London and a B.A. in International Relations from the Monterrey Institute of Technology and Higher Education (ITESM). His research focuses on international political economy, peace and security and Latin American affairs.