Trans-Pacific Partnership,12 Pacific Rim Nations To Set Up A Free-trade Zone » Business


Trans-Pacific Partnership,12 Pacific Rim Nations to set up a free-trade zone



welve nations, including Canada, have reached a tentative deal on a massive Pacific Rim trading bloc billed as the largest-ever deal of its kind



Japanese auto makers and some of its electronics firms, as well as apparel makers with factories in Vietnam, stand to benefit from the sweeping trade deal reached this week to cut tariffs among 12 Pacific nations, including the U.S.

But auto makers and car-parts suppliers in South Korea and China—countries that didn’t sign up to the Trans-Pacific Partnership—stand to lose, with some of their shares slumping Tuesday on concerns over the impact of the historic accord.

The Japanese auto industry hailed the trade agreement, which would phase out the 2.5% U.S. duty on imported cars over 25 years, benefiting companies such as Toyota Motor Corp. and Subaru, part of Fuji Heavy Industries Ltd.

The deal would also scrap the 2.5% levy on many auto parts when it takes effect, giving them a more immediate benefit. Negotiators from the U.S., Japan and 10 other countries struck the deal Monday in Atlanta after a weekend of round-the-clock negotiations. The TPP isn’t yet a done deal. Each country must have the accord formally ratified by its legislatures and the path is thorny for some signatories, including the U.S.

The deal “would build a framework for economic partnership with very important markets for the automotive industry that were not covered by Japan’s existing economic partnerships, such as the U.S. and Canada,” Fumihiko Ike, chairman of the Japan Automobile Manufacturers Association lobbying group, said Tuesday.

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While U.S. auto-industry competitors such as Ford Motor Co. object to the agreement, analysts said it won’t be a windfall for Japanese car makers as U.S. tariffs on cars and parts were already relatively low, and the phase-out period for the duty on cars is long. A 25% U.S. tax on imported trucks, including pickups and commercial vans, will remain in place for 30 years, according to a senior U.S. official.

Japanese auto makers have already shifted production aggressively, seeking to avoid tariffs, protect themselves from currency fluctuations and shorten supply chains. As of last December, Japanese auto makers owned 26 assembly plants in the U.S., according to the manufacturers’ association, which says more than 70% of Japanese-branded vehicles sold in the U.S. are built in North America.

Japan’s Canon Inc., a major manufacturer of digital cameras and office printers, said it expects to benefit from TPP as the latest deal will eliminate tariffs on more of its products not covered by an existing international trade agreement.

Companies with production bases in Vietnam, such as apparel and textile makers, will likely benefit from low trade barriers to their goods, analysts said. Shares of some apparel and textile makers soared Tuesday on expectations they will benefit from either a removal or lowering of tariffs.

Korea-based Hansae Co., whose plants in Vietnam account for 60% of its total output, rose 4.1%. Pan-Pacific Co., which relies on half of its apparel production from factories in Vietnam rose 4.3%. A Hansae spokeswoman declined to comment on the potential impact on the company’s operations. Officials at Pan-Pacific weren’t immediately available for comment.

Shares of Korean auto makers and auto-parts suppliers, meanwhile, slumped in Tuesday trade as investors were concerned that South Korea’s exclusion from the trade deal would hurt companies’ competitiveness while benefiting rivals in Japan.

“This is bad news for Korean companies,” said Kiwoom Securities analyst Ma Ju-ok. “Korean auto makers have enjoyed tariff advantages when they export cars to the U.S. through a bilateral trade agreement. The TPP deal means Japanese auto makers now will have the same or similar tariff rates with their exports to the U.S.”

Hyundai Motor Co. shares finished down 3.7% at a three-week low, while Kia Motors Corp. fell 3.2%. Auto-parts maker Hyundai Mobis declined 0.9%.

South Korea, an export-reliant economy, has free-trade agreements with 10 of the 12 TPP founding members, including the U.S. While Seoul has expressed interest in TPP in the past, it has prioritized bilateral free-trade talks, including a deal last year for a free-trade agreement with China.

South Korea’s technology heavyweights such as Samsung Electronics Co. and LG Electronics Inc. have been exporting their consumer goods and electronics parts to key markets without many tariff barriers thanks to free-trade agreements with respective countries, which will mitigate any negative impact from the country’s initial exclusion from the TPP, analysts said.

In China, auto-parts makers could be hurt by the deal, said Zhang Junyi, a partner at Roland Berger Strategy Consultants. Over the long term, the trade deal could affect China’s exports of labor-intensive parts such as tires and glass. With slashed tariffs between TPP members, Chinese auto-parts companies may be forced to relocate manufacturing facilities to lower-cost areas of Southeast Asia like Vietnam, Mr. Zhang said. It could also encourage more auto-parts makers to set up manufacturing operations in the U.S.

But Chen Yang, spokesman for Ningbo Joyson Electronic Corp., which makes driver and climate controls, said the TPP deal won’t affect the company’s business because it already produces auto parts outside China. “Our overseas operations contribute to nearly 70% of the company’s revenue. China-made parts are mainly sold within China,” he said.

For industries from pharmaceuticals to heavy equipment, the impact of the TPP agreement on Chinese companies will likely be muted in the near term, but could force ambitious Chinese firms to step up investment overseas to ensure access to global trade dollars.

Chinese machinery makers including Sany Group and Zoomlion Co. have been targeting greater business overseas, including in Australia, the U.S. and elsewhere. The companies didn’t respond to requests for comment on the TPP agreement.

“If you are going to see a regionwide trade agreement that makes it much easier or cheaper to trade within the region, then one solution for China—or anyone else for that matter — is to just relocate some assets or production facilities within that region,” said John Zhu, an economist at HSBC in Hong Kong.

Chinese drug makers are less active in many TPP markets than global industry leaders, said Asa Cox, founding partner at TPP Healthcare, an advisory firm. Yet down the road, not joining TPP could serve as a barrier to the U.S. and other rich markets.

“If they do stay out the agreement, then maybe that will hinder the future of the pharmaceutical industry because they do have ambitions to grow a much larger global footprint,” he said.

By Yoko Kubota and Eric Pfanner


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