Mexico, Vietnam could be key trade hubs under TPP

Representatives at the ministerial-level talks on the Trans-Pacific Partnership attend a joint press conference in Sydney on Oct. 27. © Kyodo

TOKYO -- Of the 12 countries hoping to sign the Trans-Pacific Partnership agreement, Japan and the U.S. account for around 80% of total gross domestic product, so the negotiations between Japan and the U.S. naturally draw the most international attention.

     Participants in the October ministerial-level talks on the TPP in Sydney expressed concern about the standoff between Tokyo and Washington, which are still wrangling over liberalizing trade in their key exports. But focusing too much on the talks between Japan and the U.S. risks missing the bigger picture, particularly for Japan, as two other TPP members -- Mexico and Vietnam -- have the potential to transform Japan's trade relations with countries in the Asia-Pacific.

      "Please invest more in Japan as well," Prime Minister Shinzo Abe half-jokingly told Nissan Motor Vice Chairman Toshiyuki Shiga when they met during their visit to Mexico in July.

     Within two years, Nissan expects to make 1 million cars a year in Mexico; Japan will by then have fallen to No. 3 in terms of output for the Japanese carmaker, behind China and Mexico. Shiga, who was hobnobbing with Mexican business leaders, could do little but smile wryly.

Mexico makes it

Nissan's Mexican plants will become much more important to Nissan when the TPP takes effect, thanks to the country's low production costs. Twenty years after the North American Free Trade Agreement, or Nafta, welded the economies of Mexico, Canada and the U.S. together, the TPP promises to flatten trade barriers between Mexico and the rest of the Pacific Rim.

     One likely destination for Mexican exports is Vietnam, a potentially lucrative market with a population of 91.7 million, more and more of whom are entering the middle class. If Vietnam scraps its 50% import tariff on cars, Japanese automakers will find it easy to export to the country, both from Japan and Mexico.

     Meanwhile, the Association of Southeast Asian Nations is working to create a single market for its members by 2015. Once that is done, the 10 members could strengthen their trade links to Nafta via Vietnam and Malaysia, which are part of the TPP.

Traders against free trade

Japan is digging in its heels in its negotiations with the U.S. to protect key agricultural products including rice, meat, dairy and sugar, but it is unclear in what it wants from Washington in return. There has been much talk about the U.S. auto market, but the levy on imported cars is just 2.5% in the U.S., an amount that is often swamped by changes in foreign exchange rates.

     This raises the question why Japan is not making more of a fuss over Vietnam's much steeper tariff on autos. The answer has to do with the greater competition the TPP will help create: If Mexico and Vietnam embrace free trade, non-Japanese automakers will also benefit. Germany's Volkswagen manufactures in Mexico, as do automakers from the U.S. and South Korea. Companies whose home countries are not TPP signatories thus also expect to boost sales to Vietnam. 

     Several Japanese carmakers set up operations in Vietnam ahead of their U.S. and European rivals. Toyota Motor builds 35,000 cars a year there and Honda Motor turns out roughly 10,000. These companies may prefer to shelter behind high tariff walls. It is not yet clear how long Vietnam will be allowed to retain its tariffs under the TPP.

     The outcome of the TPP talks could also affect competition among Japanese automakers. The location of factories and when to start selling where will become even more critical. The ability to come up with creative supply and sales strategies will take on greater importance as the countries involved in the TPP talks move closer to an agreement.

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