TPP Nations seek safety of the pack

There is a renewed focus on the Trans Pacific Partnership (TPP) agreement given global economic fundamentals [a eurozone still mired in debt, Japan struggling to emerge from 15 years of deflation and a slowdown in China’s growth economy. Rising global unemployment should also be added to this toxic mix. An agreement would certainly reduce the friction of tariffs and protectionist trade policies among TPP nations. It’s a case of banding together through difficult economic times for mutual benefit. Will the global economic slowdown push TPP nations to finally reach a trade agreement?  Alfonso Esparza, senior currency strategist, OANDA reports.

The Trans-Pacific Partnership is a free trade pact that covers issues such as e-commerce, rules of origin, investment, financial services, intellectual property, transparency, competition, and environment. It aims to increase existing trade relationships and create new ones among member nations.  An expansion of 2005’s Trans-Pacific Strategic Economic Partnership Agreement (TPSEP), made by Brunei, Chile, New Zealand, and Singapore, the TPP has grown in scope and membership. Negotiations now include Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, Vietnam, and Japan – the newest member to join the table when talks resume on July 15^th.

The TPP intends to accelerate trade between partners. For example New Zealand supplies 76 percent of Mexico’s imported sheep meat and Mexico exports 240 million pounds to New Zealand. Clearly, removing tariffs will increase those figures to the benefit of consumers and producers in both countries.

The agreement is not without its detractors. Groups ranging from anti-copyright protection advocates to Japanese farmers have voiced their concerns. In Japan, Shinzo Abe has promised farmers that their salaries will double in the next 10 years even as the tariffs that protect them from competition disappear.

Meanwhile, the markets wait to see how the intersection of “Abenomics” and the TPP will influence the direction of the global economy.

Japan: a case study of TPP potential

Japan is the perfect example of how bold economic policy and government spending can have positive effects for an economy in the short run. The yen has fallen more than 25% versus the US dollar since Shinzo Abe became Prime Minister in December 2012. A weak yen has helped boost exports and drive the Tokyo stock exchange to five-year highs. For those trends to continue, they must be supported by deeper structural changes.

Of all the major policy changes announced under Abe’s relatively young administration, Japan’s newfound desire to join the Trans-Pacific Partnership could be the one with the longest impact.

Prime Minister Abe has indicated that his approach to fixing the Japanese economy consists of three parts, or “arrows”: monetary stimulus, government spending, and structural reforms. The TPP would fall under the third arrow, as it’s designed to make Japanese industry and institutions more competitive to achieve Abe’s massive export targets.

Joining the TPP may support the economy’s growth in the long term. As the Japanese economy enters into a sustained growth phase the currency will strengthen but Abe’s plan is to offset exporter foreign exchange losses with an increase in export volume. This will benefit importing nations, too, as it gives them a way to reduce their deficits by partnering with strategic providers on a free-trade basis.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

June 4, 2013

Source: FSEGlobalMarkets