#SMEExportersInTheKnow Series: CPTPP Now In Force – Its Impact on US SMEs and Supply Chains

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) -- officially entered into force on 30 December 2018 -- is renamed from the original Trans-Pacific Partnership (TPP) after the United States pulled out in March 2017. The CPTPP is set to facilitate trade among its 11 member countries (Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam) by reducing trade barriers, increasing regulatory coherence and transparency, and lowering operating costs for businesses when exporting/importing.
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Sixty days after the sixth of eleven members (in this case, Australia) ratified the pact on 30 October 2018, the CPTPP was bound to be effective.  As a result, on 30 December, tariff reductions went into effect for trade among Australia, Canada, Japan, Mexico, New Zealand, Japan, and Singapore, with a second round of tariff cuts happening just two days later on 1 January 2019.  For the other signatories — Vietnam, Malaysia, Chile, Peru and Brunei – the CPTPP will come into force sixty days after they each ratify the agreement and tariff cuts will be in line with already-implemented reduction schedules.

How does CPTPP impact the United States?

Under the original TPP, US real income would have increased by $131 billion annually, or 0.5% of GDP, according to an October 2017 analysis conducted by the Peterson Institute of International Economics (PIIE)[1]. Many import tariffs would have been eliminated upon implementation, benefitting US industries and increasing the US competitiveness on the global stage. Specifically, US agriculture would have gained roughly 20% of all farm income by expanding exports due to tariff cuts on ag products[2]. Furthermore, the TPP could have enabled more US SMEs to participate in a broadened supply chain, sourcing intermediate goods for domestic production at lower costs and providing new market access for exports. 

However, without the United States, PIIE estimates that not only do the total generated economic benefits of the CPTPP shrink by 70%, but the United States results in a $2 billion net loss in real income given the market preferences and advantages formed in the CPTPP trade bloc[3].  In order for businesses in CPTPP countries to lower import/export costs, it is anticipated that many businesses will adjust their supply chains to remain within the CPTPP trade bloc. In the absence of US bilateral FTAs with CPTPP members, higher tariffs and other barriers will likely prompt businesses to focus on intra-CPTPP trade, disrupting any advantages US exporters had in accessing CPTPP markets. For instance, US agricultural products will be immediately disadvantaged in the Japanese market – the largest economy among CPTPP members – as Japan lowers duties on imported agricultural products from CPTPP members including Australia, Canada, and New Zealand. Many US agricultural groups have voiced concerns of the loss of industry competitiveness due to the US pull-out from the TPP. The US Meat Export Federation estimates more than $600 million and $550 million in export losses of pork and beef, respectively, by 2023 as a result of the entry into force of both CPTPP and the EU-Japan EPA[4]. The National Association of Wheat Growers also wrote in the joint statement that an estimated $500 million will be lost annually after CPTPP implementation[5].

CPTPP members are actively looking to expand the pact to include more members, such as Thailand, South Korea, and the United Kingdom, post-Brexit. As the trade pact grows bigger, more benefits will be generated to support businesses in many sectors. Lower barriers will enable more new entrants to compete among others, and businesses and consumers are expected to enjoy better services and products at reasonable prices with fair competition. If the United States is willing to return to the TPP pact, we believe US companies of all sizes, including US SMEs, and American jobs will benefit.
 
How can US SMEs stay competitive in CPTPP member countries?

Given SMEs’ relative lack of resources compared to multinationals, it is difficult for small enterprises to adjust supply chains quickly because building the networks takes time. Given the market disruption resulting from the free trade agreements, including the CPTPP, it is critical that SMEs consider evaluating their export/import businesses by taking the following steps[6]:

1. Identify potential competitors that benefit from the CPTPP.

• In what countries are your major competitors present?
  
• How do they benefit from the CPTPP?
  

2. Understand how costs may change in your supply chain.

• Do your suppliers source differently?
  
• Are the prices higher/lower due to the CPTPP?
  

3. Identify new sourcing opportunities.

• Do you purchase from abroad directly?
• Are you able to find a more price-competitive supplier that was able to lower his input costs given the entry of CPTPP that may be passed on to customers?
  

​4. Readjustment, if necessary.

• Once you have identified and evaluated your risks and opportunities, you might have a better understanding of your operating costs when exporting.
• Deciding whether to absorb (relative) price increases or to raise the prices for your products helps you to strategize your position in the market.

 
If you are an SME exporter and need help with supply chain review and possible adjustment, please contact TradeMoves to learn more about our variety of services specific to SME exporters. In addition, please also refer to our previous blogs, as well as Twitter and LinkedIn on keys to succeed in your export business.
 
Chinyen Cheng
[email protected]
(+1) 240.389.9003

[1] Going It Alone in the Asia-Pacific: Regional Trade Agreements Without the United States, Peterson Institute of International Economics, Working Paper 17-10, October 2017.
[2] TPP: Overall U.S. Benefits, Office of United States Trade Representative, 2015.
[3] Going It Alone in the Asia-Pacific: Regional Trade Agreements Without the United States, Peterson Institutes of International Economics, Working Paper 17-10, October 2017.
[4] USMEF Assesses Potential Pork and Beef Industry Losses Due to Japan’s Preferential Trade Agreements, US Meat Export Federation, 28 July 2018.
[5] The Trump Administration Can Prevent the Threat of Wheat Export Losses Under CPTPP, US Wheat Associates, 6 July 2018.
[6] 6 Steps to Assess Your Small Business’ Readiness to Export, U.S. Small Business Administration, 2 March 2014; How Global Trade Agreements Impact Your Small Business, Supply Chain Basics, The Balance Small Business, 20 April 2018.