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Who Wins and Loses with the TPP?

On Monday, officials from 12 Pacific rim countries finalized the terms of the Trans-Pacific Partnership (TPP) at a meeting in Atlanta. The trade deal encompasses around 40% of global GDP and has been in the works for a decade.

Lawmakers in the US, Japan, Singapore, Brunei, Vietnam, New Zealand, Australia, Canada, Mexico, Peru, Chile and Malaysia have yet to approve the deal, and it faces stiff domestic opposition in every country that permits opposition. Critics decry the secrecy surrounding TPP negotiations; the text is still not available to the public. Leaked documents provide a glimpse of the agreement, but reflect old drafts.

Special interest groups in every country, from dairy farmers in New Zealand to auto workers in Mexico, Japan, the US and Canada, have cried foul, while at the same time doing their best to influence negotiations. Political rifts have been compounded by upcoming elections in the US and Canada, recent elections in Japan (and Singapore, but that’s a different beast), a defenestration in Australia and growing political discontent in Mexico and Malaysia. Human rights and environmental pressure groups are nervous. Union bosses and small business owners are nervous. Should investors be?

Investing in the TPP

The first question is whether the TPP's many fractious signatories will follow through and adopt the deal. Despite the abundance of controversy, it seems unlikely the pact will founder at this point. The diplomatic equivalent of a supertanker, it has ten years of momentum behind it and the sheer economic mass to propel it through fierce opposition. Its implementation will almost certainly be slow, difficult and uneven. Disagreements will arise. But the largest signatories will probably ratify it, and that means—what?

According to one estimate, the TPP could raise its twelve member countries’ GDP by $285 billion by 2015. According to another, the figure could be just $74 billion by 2035. Dealing with a subject this huge and opaque, reliable forecasts are hard to come by. But a few key issues have received special media attention, and these have relatively clear implications for specific companies. For the pharmaceutical, tobacco and automotive industries, the TPP is big, but it’s not good news for everybody.

Pharmaceuticals

Following July’s TPP summit in Maui, pharmaceutical patent protections remained one of the deal’s biggest sticking points. And so it remained until Sunday, when The Guardian reported that an agreement between the US and Australia had very nearly put the issue to rest (Chile, Peru and other unspecified countries had yet to get on board). The deal may impact US pharmaceutical companies that market “biologics,” a relatively new class of drugs that are being used to treat cancer and other illnesses.

Under the status quo, the US allows manufacturers to retain exclusive access to clinical data for 12 years; the argument is that this privilege encourages R&D investment, spurring innovation. Australia allows for five years, a limit that currently applies to US drug makers in that market; they contend that by allowing biosimilar versions (analogous to generics) to be sold sooner, the shorter window keeps drug prices lower. The US trade delegation had pushed for an extension to eight years, which has met with vigorous public opposition in Australia and elsewhere. In New Zealand, Jane Kelsey, said, “The stark reality is that any such deal would cost New Zealanders' lives.”

The specifics of the new arrangement are unclear. Descriptions indicate there may be two sets of protections, one lasting five years and the other having the potential to last eight. According to Bloomberg, drug makers with significant biologics operations, which stand to benefit from enhanced protections, include AbbVie Inc (ABBV), Celgene Corp (CELG) and Amgen Inc (AMGN). Meanwhile companies such as Pfizer Inc (PFE) might have to wait longer to market biosimilars in these countries. American drug makers may have improved their position in Pacific markets overall, but to what extent, and at whose expense, remains to be seen.

Tobacco

Among the main points of contention surrounding the TPP is the issue of investor-state dispute settlements (ISDSs), which opponents warn will compromise national sovereignty by allowing corporations to sue governments over breaches of commercial treaties. Nobel laureate Joseph Stiglitz has weighed in against the deal, saying “U.S.-based tobacco companies have used foreign investor adjudication mechanisms created by agreements like the TPP to fight regulations intended to curb the public-health scourge of smoking.” He is referring to motions filed by Philip Morris International Inc (PM) against Australia and Uruguay over plain-packaging and graphic warning-label requirements.

ISDSs remain in the finalized TPP deal, but critics have won at least one major concession: tobacco companies will not be allowed to take advantage of the mechanism, a change which could affect Japan Tobacco Inc (ADR: JAPAY) as well as Philip Morris. Other changes to the secretive tribunals will be introduced, including a code of conduct for lawyers, according to TheNew York Times. These compromises could influence future trade deals such as the US-EU Transatlantic Trade and Investment Partnership (TTIP), which in turn could have repercussions for companies not directly affected by the TTP, such as British American Tobacco plc (BTI).

Tobacco companies’ exclusion from the TPP’s ISDS scheme has drawn the ire of Senators Thom Tillis and Richard Burr of North Carolina, both Republicans. “If the carve-out is in there, I’ll work hard to defeat it,” Tillis told the Wall Street Journal on Friday. Such opposition may be an added headache for Obama, who barely won trade-promotion authority (TPA) for the deal and faces a revolt by a number of Democratic factions, including environmentalists, human rights activists, unions and the party’s Sanders-Warren anti-corporate wing.

Automotive

Squabbles over tariffs and local-content requirements for automakers have involved Japan, the US, Canada and Mexico (the second, third, fourth and seventh biggest car exporters by dollar amount in 2014, respectively) all heavily invested in the outcome.

According to CBC News, the deal requires that 45% of imported vehicles and core parts originate in a TPP country, along with 40% of other parts, in order to be sold duty-free. Existing North American Free Trade Agreement (NAFTA) requirements require that 62.5% of a vehicle’s value and 60% of parts be produced within a member country, that is, Canada, the US or Mexico. Japan had been pushing these countries to accept 30% NAFTA-manufactured vehicle imports duty-free.

Ford Motor Company (F) has expressed opposition to the TPP over worries about currency manipulation and has urged Congress to reject the deal. General Motors Company (GM) also stands to lose if initial reports are correct about local-content rule changes. Japanese car makers led by Toyota Motor Corp Ltd (TM), meanwhile, have gained the ability to export vehicles containing more Asian components to North America with reduced tariffs.

Senator Sherrod Brown of Ohio, a Democrat, issued this statement on the issue: “TPP would be devastating to the auto supply chain by reducing the NAFTA standard for rule of origin for autos and auto parts. This would result in a flood of unfair imports, would offshore jobs, and would hurt American workers and manufacturers.” Auto workers in Canada and Mexico are similarly concerned.

Conclusion

If the TPP manages to navigate the domestic challenges it will encounter in nearly every member country, investors can expect to see changes in a number of industries. Tobacco may lose ground to tougher regulations. Biologics makers might enjoy reinforced intellectual property protections, perhaps at the expense of companies marketing biosimilars—not to mention patients. Japanese car companies will have a leg up in NAFTA markets, which may damage North American car makers and the local economies that depend on them.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

David Floyd

David Floyd is an Atlanta native and a Kenyon alum living in Brooklyn. He writes about the intersections of investing, politics, energy and international relations. His work also appears at Investopedia.

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