Free trade agreements are essential for a smooth functioning of the global economy, but there have been no new major global agreements since 1994. Since then, there have been three global recessions and a proliferation of technology and progress—not to mention the many geopolitical and economic changes that have occurred.
Originating talks of the Trans-Pacific Partnership (TPP) began over a decade ago, and now involves 12 nations—the US, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The overarching goal is to eliminate trade barriers in order to encourage increased trade and, ultimately, stimulate greater economic activity among partners.
If agreed and ratified, the TPP would be the largest trade agreement to date, with an estimated $28.1 trillion of GDP—or approximately 36% of the world’s GDP—24% of global exports, and 11% of the total population. Specifically addressing the auto sector, the TPP would involve the elimination of the 2.5% tariff on light vehicles and 25% on light trucks, while also simplifying import and export processes with consistent requirements and enforcement among member countries.
Seven of participating countries currently produce light vehicles for local and export markets. These are Australia, Canada, Japan, Malaysia, Mexico, the US and Vietnam. The total light vehicle assembly volumes of these markets in 2014 reached nearly 27 million (30% of the global output) and are expected to hit over 29 million by 2021. The US and Japan produce the highest volumes of finished vehicles. Japan has the highest level of exported volumes to fellow TPP markets at 2.1 million units in 2014, accounting for more than half of the total light vehicle exports from the country and the US receives 1.5 million of these exports.
Three Japanese automakers already assemble their pick-ups within the US and most of the consumption is within North America. In fact, Japanese brands produced over 70% of the vehicles sold in the US in 2014. Considering that existing and growing production of Japanese vehicles is already domestic, the net effect of elimination of tariffs on finished vehicle exports and imports between the US and Japan is not critical.
If the TPP is enacted, parts imported into the US must be primarily procured within one of the 12 member countries to avoid the 2.5% tariff. The NAFTA calls for a 62.5% minimum procurement rate, but the current TPP proposals include a gradual increase to reach 75% minimum procurement rate. This clause can be problematic for suppliers with a high level of content from Thailand and India, and the jump to 75% only complicates matters.
Another round of discussions is planned, as and when the final details are hammered out. If the TPP is enacted, elimination of tariffs could create a different competitive landscape in the industry within these countries in the future, impacting manufacturing and import/export strategies of automakers and parts suppliers operating within the TPP bloc.
The author is partner, Price Waterhouse, and an auto sector expert