Trade agreement potentials

Is your company prepared to reap the benefits of TPP?

Multination trade deals like TPP promise to boost trade and open new doors for business. Does your company have what it takes to seize the opportunity? How can you prepare your business?

2016 seems to be the year of trade deals, especially for Asia. Latest statistics confirm the impression that there are too many to even keep track of. According to The Economist, the number of regional trade agreements (RTAs) has risen from around 70 in 1990 to more than 270 today.

Of these 270, the Trans-Pacific Partnership (TPP) is probably the most extensive. It was agreed in October 2015 following several years of negotiations. Its comprehensive reach and estimated financial impact involves promises that most businesses can and should take advantage of.

Trans-Pacific Partnership: a blessing for Asian manufacturers

In terms of trade agreements, I would say that there are probably few that can match the Trans-Pacific Partnership (TPP) for scale. The 12-nation agreement is expected to cover over 40% of the world’s economy and includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. It is one of two international trade deals that are expected to transform the global trade environment (the other one being TTIP – you can read more that by my colleague Steffen here).

For many Asian companies, TPP promises increased market access into existing markets and for some, it also offers excellent opportunities to enter new markets. In 2012, even before TPP’s details were finalized, major export and import flows already amounted to more than US$872.4 billion, and US$734.1 billion respectively among member countries, as reported by TODAY.

Considering TPP’s aims to cut trade tariffs and set common standards in trade among the 12 member countries, I think the volume of exports and imports is set to surge past these figures in the future.

The Singapore Ministry of Trade and Industry (SMTI) is expecting TPP to lead to increased market access, lower costs in getting products to market, and more opportunities for Asian businesses to trade with and invest in participating economies. This is emphasized by the fact that TPP includes Singapore’s biggest trading partners such as Malaysia, the United States, Japan, Australia, and Vietnam.

In 2013, trade with TPP countries accounted for 30% – or S$300 billion – of the total trade volume in Singapore. Foreign direct investments in Singapore from TPP nations also reflected 30%, which equals S$240 billion. The SMTI hopes that these figures will continue to grow once TPP has been ratified.

TPP region
TPP region

Expected benefits from different angles

  • In Singapore, some companies have already expressed hopes to leverage TPP to ramp-up exports to South American member countries. Singaporean food manufacturers, for example, are hoping that non-tariff barriers will be lowered there once the deal is ratified, as reported on THESTRAITSTIMES.
  • In Japan, manufacturers look forward to making use of the “place-of-origin rules” to source components and materials from Southeast Asian member countries while exporting high-value goods such as automobiles and electronics to North America on duty-free basis. Japanese car manufacturers such as Toyota and Honda can be extra optimistic: they will benefit from cheaper access to their biggest export market – the US – and at the same time they may be able to manufacture US-bound cars including parts from elsewhere in Asia.
  • In Vietnam, businesses expect to derive one of the greatest benefits from the TPP: analysts predict that the deal will boost growth in Vietnam by 11% in the next 10 years as more and more companies move their factories to this country due to relatively low production costs.

Are you ready to take advantage?

All this sound very promising, but I wonder if companies in Asia are ready to seize these boundless opportunities that TPP presents.

Take Vietnam, for example: as part of its commitment, Vietnam will have about 18,000 tariff barriers removed and expects to greatly benefit from increased trade volumes and higher levels of investment – at a national level. However, I have a feeling that local businesses that are currently unprepared to compete against (or partner with) international players might not be capable to fully reap the benefits.

Why is that? A report by the World Bank has identified, for example, that supply chain unpredictability is the main contributor to logistics costs in Vietnam: an estimated $100 million in avoidable inventory costs is incurred by local companies annually and one third of domestic truck trips return empty, both of which negatively impacts cash flow, productivity, and efficiency.

The same report also suggests that investing in transportation and logistics will become a new source of productivity growth as the benefits of automating manufacturing processes are gaining maturity. World Bank published an insightful infographic with more details on the topic.

Upgrade to remain competitive

Modernizing systems for logistics tasks such as customs clearance, warehouse management, transport management, and compliance is crucial as part of this development. Without this, local companies have much to lose when pitted against larger, more international players that rely on such systems to integrate all business areas and manage global distribution.

As highlighted before, not investing in IT solutions for these areas truly holds a company back from becoming part of a global network, or even becoming export-ready.

You can read more about how successful players leverage their transport and logistics capabilities with software solutions in examples given by EPCOS or Infineon. Such companies expect potential partners like material suppliers, component manufacturers, or distributors to be able to integrate themselves into their IT platform.

SMTI has predicted that the TPP will enter into force within the next three years. Will your business be ready by then?

For updates on TPP developments and to learn how IT supported trade compliance helps you gear up for it, just keep an eye on our newsletters and LinkedIn pages.