TPP. You’ve heard about it incessantly for the past year, and while you understand the gist of the agreement, Trump’s election puts everything into question. Let’s take a look at what stands to change in an effort to gauge just what might come of one of Trump’s primary platforms.
Manufacturing
One of the major components of TPP regards tariffs in the participating countries. How the tariff structure might change comes in a wide range of possibilities. If the U.S. drops out of TPP altogether, then the structure stays as it is.
If the member nations renegotiate, then you can still expect Trump to push for tariff options that protect U.S. production. His major goal is to reduce trade deficits, and that comes largely from encouraging more goods to be produced domestically. In order to gauge how things will change, you have to look at the two most likely scenarios separately.
If the U.S. abandons TPP and negotiations fail, then you can expect a gradual shift of manufacturing to leave East Asia and return to North America. This prediction assumes that other policy changes, indirectly linked to TPP, will push this exact agenda. If that were to happen, you would see immediate GDP growth in North America and Europe, and immediate GDP decline in the Pacific.
Long-term predictions are a little different. By reducing the amount of American money investing in sweatshops, the labor market in those regions is forced to adapt. The inevitable result is wage growth and eventual GDP gains. Naturally, none of these changes completely restructure labor markets, but at minimum, tens of thousands of workers will eventually see better working conditions as a result, and the net change in global GDP benefits.
International Import Export
As you just read, President Trump’s major goal is to reduce America’s trade deficits. This is a complicated animal for a number of reasons. First, reducing trade deficits usually comes from devaluing currency, but other policy changes and projected growth look good for the USD.
On top of that, the major currency competition for the USD is facing far more turmoil and unpredictability. This makes it difficult for entities to import goods produced in the U.S.
That gets compounded when you look at the current state of TPP. Taxes and production regulations are designed to increase U.S. trade deficits in favor of the other member nations. The general idea is to entice American money to invest in these emerging markets, and these are the points you can expect Trump to attack. Whether they are renegotiated or completely abandoned, American investment will trend towards staying domestic, and the U.S. GDP will grow while TPP nations see a loss.
Ultimately, impending TPP changes won’t annihilate international trade, but there will be reductions. Many major global economies will lean on domestic growth more than globalization. This could cause a short-term drop in global GDP, but ultimately it pushes for better international stability and long-term benefits. Either way, you can expect the U.S. to come out ahead in all of it.
Currency Manipulation
Trump has been very vocal about the need to label active currency manipulators. The TPP protects member countries from this, and when tied to manufacturing and general international trade, you can already see how good or bad currency manipulation can be for different countries. The biggest player is China.
Before 2016, China spent years of effort to devalue the Yuan and boost exports. Restructured international investments caused a sharp, unexpected drop in the Yuan’s value, and the government has reversed its efforts. This strange reversal has primed China to create trade deficits of its own and become a major international import country, and this is where things get very interesting.
The biggest possible swing in this complicated endeavor is the possible role reversal between China and the U.S. Manufacturing will cross the Pacific again, and China, with an overvalued currency, will be a primary importer of U.S. goods.
At first glance this looks like it doesn’t change global GDP by much, but when you consider how much higher U.S. wages are, it leads to a net GDP growth. Chinese currency holdings stand to finance international economic expansion in the wake of the collapsing TPP provisions.
You’ll notice that I haven’t thrown very many hard numbers at you in this talk, and that’s because the margin of error is just too big. The differences between abandoning TPP and altering it measure in trillions of dollars, and with 12 member nations, changes to the agreement are guaranteed to be convoluted. Pinpointing precise numerical changes just isn’t possible until countries make some solid offers.
Regards,
Ethan Warrick
Editor
Wealth Authority
