How Would The Trans-Pacific Partnership (TPP) Affect Global Currency Prices?

What is the TPP?

The Trans-Pacific Partnership (TPP) is a major trade agreement deal that has been negotiated between 12 countries:

• United States
• Japan
• Vietnam
• Malaysia
• Singapore
• Brunei
• Canada
• Mexico
• Australia
• New Zealand
• Chile
• Peru

The accord, which is detailed in a 6,000-page proposal, calls for tariff reductions for most goods and services traded between the countries. In all, the agreement would cover about 18,000 tariffs. Some goods and services, however, are not included. Tariffs on most goods like farm and industrial products would be eliminated immediately after the accord is ratified. Other tariffs, such as those on certain goods deemed sensitive, would remain initially and be eliminated over time.^[1]

The deal has been agreed upon by the governments of the countries that participated in the talks, but it must be ratified by their respective legislatures. The deal would involve a collective consumer market of around 800 million people, more than twice the size of the U.S. market and more than one-and-a-half times the size of the European market. The countries involved account for nearly 40% of global trade. And other countries—India, China and Korea have expressed interest—could be added without the approval of the U.S. Congress.^[1]

The TPP grew out of the Trans-Pacific Strategic Economic Partnership, also known as the 'Pacific 4' (P-4), which was signed between Brunei, Chile, New Zealand and Singapore in June 2005. The U.S. entered discussions with the P4 countries for a broader agreement in February 2008. The first round of TPP negotiation began in March 2010 and included the P-4 countries in addition to Australia, the U.S., Peru and Vietnam. Negotiations were completed in 2015 and the framework for the deal was released in November of that year.^[1]

Controversy Over Currency Manipulation

One of the significant controversies surrounding the TPP is the issue of currency manipulation. Some industries and companies believe that nations can gain trade leverage in the international market by allowing their currencies to weaken in order to favour the sale of their exports abroad. Because no two countries use exactly the same currency policies, it's often alleged that certain countries artificially weaken their currencies through such actions as intervening in the currency market or by lowering interest rates.^[2]

To prevent that possibility, the TPP was the first U.S. trade accord to specifically include a mechanism to curb abusive practices through currency policy manipulation. The agreement on currency is spelled out in a document called "The Joint Declaration of the Macroeconomic Policy Authorities of Trans-Pacific Partnership Countries."^[3]

The declaration is not a binding or enforceable document. However, it calls for commitments by each signatory member to "refrain from competitive devaluation" and assure their exchange rate systems "reflect underlying economic fundamentals." It also requires each member country to make public disclosures on intervention in currency markets, foreign exchange reserves, portfolio investment flows and other items.^[3]

Impact on Major Currencies

The implementation of a trade accord involving nearly 40% of global trade would likely have a significant impact on the currency markets of countries both inside and outside of the deal. That's because it could largely increase the flow of goods and services between the participating nations. While the trade linkages brought by the TPP are complex, in general changes in exports promote changes in trade balances and growth that can have an impact on the value of each country's currency.

According to World Bank data, exports of member countries are seen increasing by between about 5% and 30% by 2030 over their previously anticipated levels.^[4] But at the same time, imports could increase by similar amounts, possibly neutralising the effects of expanded trade. However, the more integrated trade relations may boost the value-added potential for countries operating within the bloc, thus attracting more trade revenue and investment capital to them.

The GDP of member countries is seen increasing between 1% and 10%.^[4] This data suggests that the accord will likely have a mild-to-robust strengthening impact on the currencies of most countries involved, because it should increase their exports and GDP growth.

For many it will either improve existing foreign trade surpluses or help reduce trade deficits. The impact from country to country may vary, however, depending on the relative advantages they can gain from the agreement. Countries that are not members of the agreement will see mixed impact: some will lose severely due to trade diversion away from their markets, and other will see neutral or even slightly positive effects because of their existing trade integration with TPP member countries.^[4]

Australia AUD

Australia can be expected to make modest gains with the accord, with exports growing by up to 5% and GDP growing by 1% or more. It could benefit particularly by increased trade with Japan, to which it is already a large commodities exporter. This may help offset some of the trade deficit Australia runs with the U.S. Overall, these factors suggest the Australian dollar could see a slight strengthening effect from the deal.^[5]

China RMB

A part of the discussion involving the TPP centers on China and its effect on global trade. The country would not be part of the agreement, at least initially, and thus would be excluded in benefiting from the lower tariffs made available to the member countries.

China has been blamed by some countries for maintaining its currency at an artificially low price and flooding the global market with exports. The ratification of the treaty could be detrimental to China's access to global markets, making its goods relatively more expensive compared to those from member countries.

China is a central trade player in Asia, so its exports could grow slightly with the TPP, but likely less than 1%. However, it would lose some of its ground in the value-added chain, and GDP growth would slip by about 0.1%. Overall, the implementation of the TPP would thus have a weakening effect on China's renminbi. The nation could be allowed to join the agreement at a later date, but to do so it would have to agree to the rules against currency manipulation and make its economic and currency policies more transparent.^[6]

United Kingdom GBP

The United Kingdom is not a member of the TPP agreement and would not benefit initially from its implementation. As a part of broader Europe, the U.K. would stand to increase exports slightly with implementation of the deal, but GDP growth could be negatively impacted. If the U.K. opts to leave the EU as determined under its 2016 Brexit referendum, it would be free to solicit entrance into the TPP deal at a later date. However, the initial implementation of the TPP pact would likely have a weakening effect on the British pound.^[7]

New Zealand NZD

New Zealand would fare well with the accord. It would open the markets of some of its regional neighbors and in the U.S., with which it currently doesn't have free-trade agreement. Its exports are seen growing by more than 5% and its GDP is seen growing by up to 2%. This suggests the overall effect on its currency, the New Zealand dollar, would be strengthening.^[8]

Mexico MXN

Mexico already has free-trade agreements with most of the countries in the TPP and thus may not see a large market expansion. It will stand to make moderate gains, with exports growing between 3% and 5%, and GDP increasing by 1% or more. The deal's effect on its currency, however, will likely be muted.^[5]

Japan JPY

Japan stands to be a big beneficiary from the agreement. It's already a large trading partner with the U.S. and would increase its influence in the Asian region with the deal. Its exports are projected to increase by more than 20% with the approval of the TPP and its GDP is seen increasing by more than 2%. Overall, these projections suggest the deal would have a strengthening effect on the yen.^[9]

Malaysia MYR

Malaysia would be a strong beneficiary from the deal, with its exports growing by more than 15% and GDP growing by more than 6%. One of the main benefits for Malaysia would be free trade with the U.S. Its currency, the ringgit, can be expected to gain strength with the deal.^[10]

Chile CLP

Chile already holds free-trade agreements with most of the countries in the TPP and therefore may not see significant inroads into new markets. Chile is expected to see modest gains from the deal, with exports rising by up to 5% and GDP increasing by around 1%. The effect on the Chilean peso will likely be neutral.^[5]

Canada CAD

Among North American participants in the TPP, Canada has the most to gain with the deal, in particular through expanding trade with Japan. Canada can be expected to see moderate benefits overall, with exports growing by up to 5% and GDP expanding by up to 1%. These factors suggest the Canadian dollar will likely see a neutral-to-strengthening effect.^[12]

United States USD

The United States is the largest participant in the TPP and accounts for about 80% of trade flows within the group. It's a net importer from the countries that make up the group. The main advantages for the U.S. would be to gain greater access to some markets of TPP participants that are currently closed to its goods and services. The deal may also divert some international trade away from China, reducing the influence of that country on the U.S. trade deficit.^[13]

U.S. exports are expected to increase by up to 5% with the TPP deal and the GDP may be boosted by up to 1%. As a result, the U.S. dollar could see a muted, neutral effect or undergo slight strengthening.^[13]

South Korea KRW

South Korea is not a member of the TPP and is expected to suffer from the effects of the deal, because trade may be diverted from its economy. Its exports are seen declining by about 1% and its GDP may contract by up to 0.2%. Given this, the deal would likely have a slight weakening effect on its currency, at least initially. South Korea may be able to join the TPP at a later date, though.^[14]

Russia RUB

Russia is not a member of the TPP and would not directly benefit from the deal. However, the nation is a member of the Eurasian Economic Union (EEU), a group of nations from the former Soviet Union that has free-trade deals with many of the TPP member countries. As a result, it could expect export growth of around 1% and GDP growth of 0.1% from the deal. Because of this, the TPP may have a slight strengthening effect on the ruble.

Euro EUR

Europe would be negatively affected by the TPP. Approximately 30% of EU exports go to TPP countries, and some of that trade would be diverted by the deal. However, the increased trade of EU partner countries will mitigate some of the negative impact. As a result, EU exports would increase by around 0.5%, but the GDP would decrease slightly. This suggests that the deal would have a neutral or slightly weakening impact on the euro.^[16]

India INR

India is not a member of the TPP but has expressed interest in joining the deal. Initially, however, it would be negatively affected by the implementation of the accord. Because of its trade ties with many TPP members, India's exports could gain slightly from the deal. However, the agreement would lower India's GDP by about 0.2%. As a result the agreement could be expected to have a neutral or slightly weakening impact on the Indian rupee.^[17]

Singapore SGD

Singapore is a trade-intensive economy that participates heavily in the value-added chains of manufacturing in the Asian and global economies. The country would benefit particularly from the net increase in trade in the region brought by the implementation of the TPP. With approval of the deal, Singapore's exports could increase by more than 5% and the GDP could grow by 2%. With these effects, the country's currency, the Singapore dollar, would likely undergo strengthening.^[18]

Thailand THB

Thailand is not a member of the TPP. It depends on the export markets of many members of the group, because it would be among the most negatively affected by the implementation of the accord. Thailand's exports are seen declining by more than 1% and the country's GDP growth could decline by 0.8% or more. Because of this, implementation of the agreement would likely have a weakening effect on the Thai baht.^[19]

Philippines PHP

Philippines is also not a member of the TPP and would likely be hurt by the implementation of the accord. The deal is seen lowering its exports by about 0.5% and GDP growth by about 0.2%. Because of this, the accord would have a weakening effect on the Philippine peso.^[20]

Peru PEN

As a member of the TPP, Peru would be benefited by the implementation of the partnership. The country's exports could grow by more than 5% and GDP could grow by 2%. These projections suggest the implementation of the agreement will have a strengthening effect on the Peruvian sol.^[5]

Non-TPP Asian Countries

While the TPP will be positive for the economy of Asia as a whole, many countries in the continent are not members of the agreement and their trade will likely suffer from its implementation. These include Pakistan, Hong Kong, Taiwan, Nepal and Bangladesh. Overall, trade in non-TPP Asian countries could increase slightly, but overall GDP in those countries could decline by about 0.1%. The agreement would likely have a neutral-to-slightly weakening effect on the currencies of those countries.^[18]

Non-TPP Latin American Economies

Aside from Peru, Chile and Mexico, major Latin American countries are not involved in the TPP and their trade is expected to be hurt by the agreement. Because of Latin American integration with some important TPP trade partners, exports could gain slightly following the deal, but overall GDP growth would be negatively affected.^[4]

In particular, major Latin American countries like Brazil, Argentina and Colombia may see a negative impact. Overall, Latin American exports are seen growing by about 0.5% with the deal, but GDP growth is seen flat or slightly negative. Because of this, implementation of the accord could have a weakening effect on major Latin American currencies like the Brazilian real, the Argentine peso and the Colombian peso.^[4]

Will The TPP Be Approved?

The Trans-Pacific Partnership has been scheduled to undergo votes for ratification in the legislatures of several of its member countries, including in the U.S. The U.S. Congress has given President Barack Obama fast-track authority over the accord, meaning it can either approve or reject the agreement, but cannot make alterations to it.

The approval may undergo political influence from the result of the 2016 U.S. presidential election.

Republican President-elect Donald Trump said he disapproved of the proposal and that it would work to hurt the competitiveness of U.S. industry and widen the national trade deficit. While a vote on the matter could occur, theoretically, during a lame-duck congress before the end of 2016, high-ranking members of congress have said a vote will likely be put off until the new administration takes office in 2017.^[21]

Summary

The implementation of the Trans-Pacific Partnership would have a significant impact on the shape of trade in the world, unifying the influence of key Asian trading partners outside of China, and rivaling the European Union in economic weight. The intensity and exact impact of the agreement on major world currencies can't be known until it goes into effect. However, the agreement would generally strengthen the currencies of member countries and weigh against those that are not participants as value-added trade is diverted away from the latter group.

The implementation of the accord would increase trade in the Pacific region, which could mitigate some of the negative impact on currencies of non-TPP members. Further, some new members may be allowed to join the TPP over time, altering the effects of the accord on global trade flows.

In the meantime, significant uncertainty continues to loom over the ratification of the agreement as key members, especially the U.S., weigh its long-term value for their global trade and economic positions.

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