No trans-pacific partnership? Good or bad for Mexico?

• Date: 19 June 2017
• Published date: 19 June 2017
• DOI: https://doi.org/10.1108/JITLP-10-2016-0027
• Pages: 106-123
• Author: Gabriela Ortiz Valverde,Maria C. Latorre
• Subject Matter: Strategy,International business,International business law,Economics,International economics,International trade

No trans-pacific partnership?

Good or bad for Mexico?

Gabriela Ortiz Valverde

Facultad de Ciencias Economicas y Empresariales,

Universidad Complutense de Madrid, Madrid, Spain and Facultad de Ciencias Sociales,

Universidad Nacional de Costa Rica, Heredia, Costa Rica, and

Maria C. Latorre

Universidad Complutense de Madrid, Madrid, Spain

Abstract

Purpose –The purpose of this paperis as follows: first, it aims to explain the overall economic implications

of the trans-pacific partnership (TPP). Second, it aims to provide an in-depth analysis of the TPP’s

quantitativeimpact on an upper-middle economy such as Mexico, as well as on the USA.

Design/methodology/approach –The analysis is performed using a computable general equilibrium

(CGE) model.

Findings –The results suggest that in the short run, both Mexico and the USAwould slightly benefit

from the TPP. Tariff reductions would lead to less bilateral trade between Mexico and the USA and

the stronger integration of both countries with the rest of the TPP members. The opposite is true after

a decrease in non-tariff barriers (NTBs). Overall, in terms of the impact on Mexico, trade integration

with the rest of the TPP members prevails. This suggests that a TPP without the USA could still be

beneficial.

Originality/value –Previous studies on the TPP have mainly focusedon its impact for the USA, which is

also analysed in the present study. The effects of the TPP are estimated for a broad set of micro and

macroeconomicvariables, paying particular attention to the reductionsof NTBs.

Keywords Computable general equilibrium (CGE), Mega-regional trade agreements (MRTAs),

Non-tariffs barriers (NTBs), Preferential liberalization

Paper type Research paper

1. Introduction

In his first week in office, President Donald Trump announced that the USA would be

withdrawing from the Trans-Pacific Partnership (TPP) agreement. Some countries

expressed their interest in moving forward without the USA (Wall Street Journal, 2016),

while Canadian officials suggestedthat, given the way the accord was designed, it would be

difficult to do so (Baliño, 2017).

The world trade system has become increasingly complex in recent years. The

uncertainly that now surrounds the TPP is making it more so. In the last decade, an

JEL classification –C68, F14, F15, F17

Gabriela Ortiz Valverde is grateful for a scholarship from Universidad Nacional de Costa Rica. María

C. Latorre gratefully acknowledges that this research has been conducted, thanks to the financial

support of Real Colegio Complutense at the Harvard University and as a Research Fellow of both the

Center for International Development (CID) at the Harvard Kennedy School and of Real Colegio

Complutense. She also gratefully acknowledges the financial support from the Spanish Ministry of

Economy and Competitiveness (Projects: ECO2016-78422-R and ECO2013-41317-R).

JITLP

16,2

106

Received 31 October 2016

Revised 28 March 2017

Accepted 28 April 2017

Journalof International Trade

Lawand Policy

Vol.16 No. 2, 2017

pp. 106-123

© Emerald Publishing Limited

1477-0024

DOI 10.1108/JITLP-10-2016-0027

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1477-0024.htm

increasing the number of mega-regional trade agreements (MRTAs) have been negotiated,

such as the TPP and the Transatlantic Trade and Investment Partnership(TTIP), the latter

of which was considered to be a continuationof the trend in regional cooperation that began,

in the mid-1990s, with the USA and the EU as the driving nations. These regions wantedto

maintain a decisive say in the rules that were applicable to trade and investment in the

twenty-first century.Moreover, these initiatives of the USA and the EU could also have been

responses to the perception of the inefficiency of policymaking, at the multilateral level,

under the World Trade Organisation(WTO); they could also be seen as efforts to temper the

emergence of China (WorldEconomic Forum, 2014,p.7).

MRTAshavespecific characteristics that distinguish them from more traditional

trade agreements (which would only involve tariff elimination). MRTAs imply a deep

integration among countries or regions and cover several topics, such as temporary

entry for businesspersons, state-owned enterprises, cooperation and capacity building,

competitiveness and business facilitation, development, small- and medium-sized

enterprises and regulatory coherence.

The WTO, and its periodic rounds of multilateral negotiations, has served to reduce

import tariffs to relatively low levels. Policymakers have now become interested in the

potential effects of a differenttrade policy instrument, namely, the non-tariff barrier (NTB),

which has become an important issue in trade negotiations. NTBs somehow reflect a

heterogeneous group of requirements, procedures and regulationsthat affect the businesses

environment. In this paper, we pay special attentionto the impact of potential reductions in

NTBs under the TPP.

Only a few previous studies have comprehensively evaluated the effects of the TPP

(Oduncu et al., 2014;Cororaton and Orden, 2015;Lee and Itakura, 2014;Petri et al., 2012;

Petri and Plummer, 2016;Ciuriak et al.,2016;USITC, 2016). However, most focus on the

impact on the USA, and several do not include the effects of NTB reductions(Cheong, 2013;

Cheong and Thongzon, 2013;Narayanan and Sachin, 2014;Xin, 2014;Masudur and

Arjuman, 2015). Thispaper aims to address these gaps in the literature.

We analyse what could havebeen the potential economic impact of the TPP for an upper-

middle income economy, namely Mexico, while also covering the impact for the USA. We

address the following questions: Would the TPP lead to an increase or a drop in overall

production? Which sectors would gain and which would lose? How would the agreement

affect sectoral, aggregate trade flows and macroeconomic aggregate (i.e. for GDP, welfare

and wages)? To this end, we use a computable general equilibrium (CGE) model. This has

become the most commonly used methodology for economic institutions that assess the

impact of trade agreements. It is capable of quantifying the effects of a shock in the

economy, as a whole, and in economic relationships across sectors. Indeed, in a CGE model,

the macroeconomic figuresarise from the aggregation of the outcomes that take place across

sectors (see, Latorre,2013, 2012, for more details). We, thus, offer a rich set of consistent

micro- and macro-economicresults on the impact of the TPP.

The paper is organised as follows. The next section presents an overview of the TPP.

Section 3 provides a description of the model. In Section 4, the data and simulations are

explained. In Section 5, we analyse the micro- and macro-economic effects. Section 6 offers

the main conclusions.An appendix closes the paper with a sensitivityanalysis.

2. The trans-pacific partnership agreement

The TPP was created as an expansion of the Trans-Pacific StrategicEconomic Partnership

and was signed, on October 5, 2015,by 12 countries: Malaysia, Singapore, Brunei, Vietnam,

Japan, Australia,New Zealand, Chile, Peru, the USA, Canada and Mexico.

Good or bad

for Mexico?

107