TPP and the Asian supply chain

How it may affect your business

  • Most Asian bases for Japanese automakers outside TPP zone
  • Consider TPP rules of origin when considering supply chain
  • Need for easier, cheaper transport among TPP countries

On 5 October, an agreement was reached among 12 Pacific Rim countries on the Trans-Pacific Partnership (TPP), a wide-ranging trade agreement concerning matters of economic policy across a number of major industries, such as automotive, agriculture, pharmaceuticals and consumer goods.

Reached after five years of negotiations, the TPP could result in significant changes to both the global and Asian supply chains.

What is the TPP?

The TPP is a trade agreement that covers a number of areas of economic policy, including a lowering of trade barriers, a common framework for intellectual property, labour and environmental law, and an effort to establish an investor-state dispute settlement mechanism.

It is the largest regional trade group, representing 40% of the world’s economy in its membership: Canada, Mexico, Chile, Peru, Australia, New Zealand, Brunei, Malaysia, Singapore, Vietnam, the US and Japan. The last two nations alone represent 30% of the world’s £48trn economy and are the two biggest players in the TPP. Other countries, such as the Philippines, Thailand, Taiwan and South Korea have expressed interest in joining.

Some estimates claim that the TPP would boost global GDP by nearly £197bn per year. If ratified, the agreement would lower or eliminate tariffs on 99.9% of manufactured products.

Although an agreement has been reached, the US, Japan and other governments now face the challenge of overcoming domestic resistance to ratification.

The full repercussions of the TPP are likely to take many years to become fully evident. Much of the Japanese media coverage has focused on the negative impact of the agreement, with Japan’s sensitive agriculture sector in particular having shown steady opposition to the agreement since 2010. However, the picture for the economy as a whole, and for certain sectors, seems positive.

Impact on supply chain and logistics

The TPP claims to be a fully regional agreement by facilitating the development of production and supply chains among its members. This, in turn, would support job creation, the improvement of living standards and welfare, as well as the promotion of sustainable growth among participating nations.

Japan’s transport and logistics industry would benefit greatly from the TPP, as the deal would stimulate the country’s trade with the US and other partner countries. Since the automotive, electronics and consumer goods industries are the chief customers of logistics service providers, an increase in international sales of original equipment manufacturers and parts suppliers across these industries would be a blessing for major logistics and transport players.

The removal of tariffs for imports into key markets, such as the US and Canada, is likely to provide an impetus for Japanese and Asian manufacturers, and result in a small increase in exports and international freight.

US manufacturers, meanwhile, are unlikely to gain any advantage as Japan has zero import duties, and no import barriers, on cars.

TPP players to take more initiative

The majority of Asian production bases for Japanese automakers are in China, Indonesia and Thailand-countries outside the TPP. While Japan’s automotive industry has embraced the agreement, experts have observed that there will be considerable effort needed to align with the TPP in the areas of procurement and supply chain strategy, due to there being some difficulty locating alternative parts in Malaysia and Singapore.

Japanese and other Asian manufacturers must begin to take into consideration the TPP rules of origin-which dictate the percentage of parts that must be made in TPP countries for a product to qualify for lower tariffs-when making decisions about their supply chain.

Similarly, logistics firms must provide new trade routes and complement existing ones to provide easier and cheaper sea and air transport among TPP countries.

The future

The TPP remains to be approved by the governments of each country involved. However, the changing political landscape, especially in the US and Canada, will dictate whether the TPP becomes a reality. There is a lot that can go wrong; stay tuned.