IMF Economist Says Colombia and Guatemala Could Gain from Joining TPP

IMF Economist Says Colombia and Guatemala Could Gain from Joining TPP

On May 23, 2016, International Monetary Fund economist Diego Cerdeiro published a new Working Paper entitled: Estimating the Effects of the Trans-Pacific Partnership (TPP) on Latin America and the Caribbean (LAC). Cerdeiro finds that some of the LAC countries, particularly Colombia and Guatemala, could experience the largest gains in the region from potential inclusion in the TPP. Cerdeiro is in the midst of studying the effects of the TPP on all LAC countries as a whole, looking at potential gains and losses for the countries both currently participating and not participating in the TPP. He writes:

While there are several estimates of the likely effects of the TPP, there is no systematic study on the effects on all Latin American countries. The aim of the present study to provide a first set of estimates to start filling this gap.

Similar to other studies on the TPP, Cerdeiro posits that Asian TPP participants, such as Vietnam and Malaysia, will see the most economic gains under the agreement. Among the LAC countries that are participants, he estimates that Mexico will have more economic gains than Chile or Peru.

As of 2014, Chile, Mexico and Peru already faced very low tariffs when exporting to TPP partners. TPP members that belong to LAC all face average tariffs of less than 5 percent when exporting to TPP partners, and even lower than 1 percent for most sectors in which they have significant exports.

Cerdeiro writes that the effects of the TPP on non-participating LAC countries will be minimal, with limited trade diversion. He notes that, due to “relatively liberal rules of origin” in the TPP, all countries may still be able to participate through global value chains. The analysis looks broadly at gains for each country overall, rather than breaking down specific sectors, as several studies have noted the strict ROO for textiles and apparel in the TPP

Openness is estimated to increase for all members as a result of the TPP, with limited trade diversion in general and no significant diversion away from LAC non-TPP members.

Negative spillovers to non-TPP LAC countries appear to be of a different order of magnitude than the gains of members. As an indication, in our estimates the largest real income gain within the TPP is more than 50 times larger than the absolute value of the largest negative spillover within LAC. In general, economies that are more open and have stronger existing trade with TPP members (especially with the U.S., such as many Central America and Caribbean countries) tend to face larger negative spillovers. However, given the TPP’s relatively liberal rules of origin, non-members participating in global value chains integrated with TPP partners may actually be able to reap some benefits from the agreement. Non-preferential reductions in non-tariff barriers may also produce positive spillovers to LAC nonmembers

Cerdeiro concludes that there is a great deal of uncertainty in the economic outcomes used in his paper, since different models will sometimes produce different responses. The size of the TPP is also a mitigating factor in any predictive economic study. He writes:

There is arguably very large uncertainty as to the potential gains from TPP for current members. Quantitative estimates of the effects of the TPP differ partly because they rely on different models that emphasize different channels affecting real income. Moreover, translating the trade pact into equivalent reductions in NTBs has led to diverse sets of assumptions across studies. More broadly, the TPP is a very innovative pact, and no existing model may be able to fully capture all its aspects. The uncertainty on the potential effects of the TPP is reflected in the wide range of estimates found across different studies.

The IMF notes in a disclaimer that working papers do not necessarily represent IMF positions and are solely the opinion of the author. Further, they are works-in-progress meant to generate comments and debate.

Source: International Development Systems