A NEW WORLD OF OPPORTUNITY How the CPTPP will open doors for Canadian businesses

The CPTPP has been signed in principle. Here’s what Canadian businesses need to know.

Background

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a free trade agreement between 11 nations that, if ratified by any six of those nations, will eliminate tariffs on the vast majority of goods traded between the participating nations. Canada is expected to ratify the CPTPP in March 2019.

Canada was an anticipated signatory of the agreement’s initial incarnation, the Trans-Pacific Partnership (TPP), a trade deal that initially involved four nations, but later expanded to 12, including the United States, Canada, Australia, New Zealand, Mexico, Peru, Chile, Japan, Malaysia, Brunei, Singapore and Vietnam.

Negotiations around the TPP were fraught with controversy over a number of critical issues, including the investor-state dispute system (ISDS), the impact of low-cost labour in Southeast Asia on developed markets and impact of changes to intellectual property rights on key industries, such as health care and pharma.

Despite the numerous points of contention, the 12-nation pact was all but ready for ratification in late 2016. However, the new U.S. administration, led by President Donald Trump, withdrew the country’s participation from the agreement on its third day in office. Many believed America’s withdrawal would be too large an economic void for the remaining members to carry on without U.S. participation.

From TPP to CPTPP

After the U.S. withdrawal, the TPP appeared to be defunct, but in the summer of 2017 the remaining 11 members chose to revisit the possibility of proceeding with a revamped Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP. The decision was spurred on by a mutual desire to foster freer trade between nations and continents, a sentiment that became particularly critical in the face of what seemed to be a rising tide of global protectionism.

Recent research shows the CPTPP would still be advantageous to its signatory states, and Canada in particular, even without U.S. participation. A recent study by the Canwest Foundation, a think tank focusing on issues specific to western Canada, revealed CPTPP would likely generate an increase of 2.43% in exports among CPTPP nations. It would also raise real GDP across the trade bloc by generating an estimated $22 billion in economic activity by 2035.

Interestingly, the study reveals Canada would fare better under a CPTPP than the original TPP12 with an increase in economic activity of $3.4 billion versus $2.8 billion. The study notes that with the exception of the dairy sector, Canada’s agricultural sector stands to gain the most from CPTPP while the dairy sector will be adversely affected by competition from New Zealand and textiles and apparel slightly affected by increased competition from Southeast Asia.

Assuming it is ratified, CPTPP will be particularly important to Canada in the event of a U.S. withdrawal from NAFTA. Between the CPTPP and the Comprehensive Economic Trade Agreement (CETA), the provisionally applied free trade agreement between Canada and the European Union, Canadian businesses will have access to the vast majority of the world’s most critical trade markets and, perhaps most importantly, free trade with nations that have become pivotal links in global supply chains (e.g. Singapore, Vietnam, etc.).

Benefits to Canadian Business

Canadian industries stand to gain substantially from Canada’s participation in CPTPP. Canada currently has an export disadvantage in bilateral trade among member nations with which it does not currently hold a free trade agreement (seven out of 11 countries). Those countries typically have much higher tariffs for Canadian goods entering their shores than Canada has for the goods imported into Canada from CPTPP nations.

The removal of tariffs would create a level playing field and give far freer access to Canadian industries looking for export opportunities in CPTPP markets, particularly those in Asia. It is estimated CPTPP would save $428 million in tariffs each year, mostly from trade with Japan, Vietnam and Australia. It is further estimated the CPTPP would increase imports by $3.6 billion.

Canada’s beef, poultry and pork industries would stand to gain substantially from market access to Japan as would producers of machinery who would be able to fill heightened demand for their wares in Australia and Malaysia.

The NAFTA Factor

The outcome of the ongoing NAFTA negotiations, and particularly the regional value content requirements on autos, will have some effect on how Canada’s auto sector chooses to use the CPTPP. The CPTPP provides Canada’s auto sector with the ability to import critical auto components from Japan, such as touch screens and other modern components, in a more cost-effective, tariff-free manner. But there will be a downside for Canada’s auto parts sector. The CPTPP’s low content requirement of 45% for finished vehicles and 30-45% for automotive parts means Canadian-based auto makers will be more inclined to purchase a higher volume of auto parts from low-cost locations via the CPTPP, rather than from Canadian or U.S. auto parts makers. A drop in the purchase of auto parts from U.S. parts makers would exacerbate the trade imbalance between the U.S. and Canada in a sector that has been at the heart of the NAFTA negotiations.

The U.S. is currently asking for the regional content value requirements in NAFTA to be raised from 62.5% to 75%. Should that increase become part of a final deal, Canadian based auto makers and auto parts makers will have to severely limited the volume of auto content they source from Japan or other CPTPP countries or risk being unable to take advantage of the cost efficiency associated with NAFTA.

The impact of a NAFTA withdrawal or changes to NAFTA regional content requirements on the value of CPTPP would be similar in the apparel sector in which producers currently source a substantial portion of their materials and production labour from Southeast Asia. Garment manufacturers would be able to bring in imports at an even lower cost than they already enjoy, allowing them to be competitive in international markets.

Negotiating CPTPP

While most parties agreed on the critical aspects of the CPTPP, certain bones of contention remained.

The removal of intellectual property protections that were introduced and insisted on by the U.S. had been the primary objective in the early stages of the CPTPP’s negotiations. The original TPP agreement allowed for lengthier patent terms for pharmaceuticals, a cause for concern among health advocates who noted the changes could delay the availability of more affordable generic drugs, which could make some drugs financially inaccessible to those who need them urgently and/or place greater financial burden on Canada’s already over-burdened health-care system.

Supply management has also been a very thorny issue for Canadian negotiators. Canada’s dairy industry was very unhappy that Canada had conceded additional dairy imports in the CETA agreement and will be equally if not more upset about any additional concessions related to dairy imports. This will be further exacerbated by the possibility of additional access being given to the US to the Canadian dairy market as part of the NAFTA negotiations.

Similar to its NAFTA negotiating position, Canada’s government would like to see the CPTPP include progressive provisions around gender equality, environmental protections and labour rights – all of which will be difficult provisions for some of the CPTPP’s members to accept given that their competitive advantages are often rooted in the cost advantages associated with less rigorous environmental and labour standards.

Signing CPTPP

Canada signed onto the CPTPP in principle on March 8, 2018. However, the agreement will still need to go through a full ratification process in all member states. Canadian officials have said they believe the ratification process can be achieved “expeditiously” with hopes of full ratification by the end of 2019.

For businesses in Canada, the combined impact of joining the CPTPP, as well as the CETA agreement with Europe cannot be overstated. For many businesses, such agreements open the doors to enormous markets of opportunity with limited competition from other developed nations. It also serves to break dependency on the U.S. market, which has shown recently a desire to pull away from open borders with Canada vis-à-vis anti-dumping and countervailing duties on Canadian lumber imports, as well as the imposition of tariffs on steel and aluminum imports.

Supporting our customers’ needs

Livingston will continue to monitor the progress of developments regarding the ratification of the CPTPP and will continue to provide updates.

If you have any immediate questions please contact 1-800-837-1063.