Could the CPTPP deal pose a threat to NAFTA?

Origin Calculation | | MIC Customs Solutions |

The new CPTPP free trade agreement has come a step closer to reality - but concerns have arisen that it could pose a threat to the future of NAFTA.

In the last few weeks, the 11 remaining members of the free trade pact once known as the Trans-Pacific Partnership (TPP) have been able to achieve a significant milestone by reviving a deal that many had declared as good as dead only a year ago.

Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam have been able to recover from the January 2017 decision by the US to withdraw from the free trade agreement (FTA) it had once spearheaded, reworking the TPP into a new-look deal called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Even without the US involved, it remains one of the world's broadest FTAs - but concerns have started to emerge that the imminent signing of CPTPP could have negative knock-on effects on the North American Free Trade Agreement (NAFTA), another hugely significant FTA with an increasingly uncertain future.

The likely benefits of CPTPP

The revamped CPTPP is set to reduce or eliminate trade tariffs in economies that together account for nearly 13.5 per cent of global GDP, or a total of $10 trillion (€8.13 trillion). This is less than the 40 per cent economic representation that would have resulted from the US remaining part of the deal, but its global impact is still likely to be considerable.

Following the recent publication of the full CPTPP text, the Canadian government has published an assessment of its likely economic impact, noting that bilateral trade between Canada and the other CPTPP countries came to C$105 billion (€67.27 billion) in 2016, or 8.1 per cent of Canada's total trade. The removal of tariffs and other barriers under CPTPP will therefore result in long-term economic gains for Canada totalling C$4.2 billion.

Meanwhile, a similar analysis from New Zealand indicates that the deal could be worth up to NZ$4 billion (€2.37 billion) a year to the New Zealand economy once fully implemented, suggesting these gains are likely to be widespread.

Could NAFTA be damaged by the new deal?

However, Canada's CPTPP analysis prompted concerns that the deal may have a negative impact on the country's trade relationship with the US, which has already been strained due to US President Donald Trump's push to renegotiate the trilateral NAFTA pact with Canada and Mexico to secure terms more favorable to his nation.

It was noted that a decline in imports by Canada from the US is likely to result from the deal's erosion of US NAFTA preferences in the Canadian market, with a total fall of $3.3 billion projected, led by a decline in automotive product imports. Mexico is also likely to see a drop in sales to Canada for similar reasons.

Although the report also pointed out that CPTPP will help to avoid a significant displacement of Canadian exports to the US that would have occurred under TPP, the prospect of the new deal increasing the existing trade deficit between the US and Canada is likely to be received poorly by the Trump administration, creating additional friction during the already-contentious NAFTA renegotiations.

What happens next?

After a difficult 12 months, the future of CPTPP looks to be secure, with a formal signing ceremony set to take place in Chile on March 8th, and the deal itself coming into force at the end of 2018 or the first half of 2019.

The prospects for NAFTA are much less certain, with the seventh round of renegotiation talks taking place this week in Mexico and an eighth round planned in the US a few weeks later. However, President Trump has repeatedly threatened to pull the US out of the FTA completely if the US is not able to secure the concessions it desires, as was the case with the original TPP. 

Colin Robertson, vice president and fellow of the Canadian Global Affairs Institute, said it is likely that the former deal will put pressure on the latter, explaining: "The fact that Canada and Mexico are working closely together and have signed this major, very high-standard free trade agreement that involves Japan and nine other countries as well as Canada and Mexico in the Pacific is a reminder that trade is not static, and that the US has probably fallen behind."