FedEx, UPS and the Trans-Pacific Partnership

The Trans-Pacific Partnership (or the TPP) is a revolutionary, new agreement currently being negotiated by twelve countries (Australia, Canada, Japan, Malaysia, Mexico, Peru, U.S., Vietnam, Chile, Brunei, Singapore, and New Zealand) that roughly account for about 40% of the world economy. The deal is probably the most ambitious, and the largest, free trade initiative in history. After almost a decade of deliberations, the partner countries concluded talks earlier this year in October. ^[1] So what implications could this pact have?

As with all trade pacts of this nature, the TPP will abolish about 18,000 taxes (in terms of tariffs) currently levied on U.S. exports. The abolition of tariffs could allow better competition in lucrative partner markets, which would in turn benefit domestic producers in the U.S. It is predicted that the TPP could bring in almost $123.5 billion in economic benefits for the U.S. by 2025. ^[2] Apart from this, the deal is also going to help small and medium businesses (which account for about 40% of all U.S. product exports based on 2012 data). The deal could also curb the wide fluctuations in export numbers. For example, the U.S. exported $1.2 million worth of poultry in 2013 to Brunei which fell to about $44,400 in 2014. ^[3]  Even customers across all partner countries could benefit since they now have access to a wider range of products to choose from. While on the one hand this would exert a downward pressure on prices, it would also encourage producers to improve the quality of the goods that they offer.

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This partnership could potentially bolster the already booming e-commerce industry, as well. Over the past few years, the e-commerce industry has grown many-fold. With internet access increasing, and new companies venturing into the space, online sales have peaked of late. Close to 41% of the world’s internet users used online retailers to purchase products in 2013. Furthermore, this domain is expected to see double-digit growth in the short to medium term. The current size of the global e-commerce industry is estimated at $1.6 trillion, which has grown at a rate of ~20.4% on a year-on-year basis. Furthermore, even at its present estimate, the industry accounts for merely 6.6% of total world-wide retail sales. ^[4] Now, if the TPP is passed, the e-commerce industry could see further growth than what is already predicted. This is because the TPP would essentially mean that businesses would not have to build infrastructure in markets that they wish to operate in. This would bring down costs for businesses, while simultaneously giving them access to a pool of new customers. The upside of the e-commerce boom is that ancillary industries such as courier and delivery services also see growth. Hence, names such as FedEx (NYSE:FDX), and UPS (NYSE:UPS) could see higher package volumes going forward.

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The TPP is still under deliberation in the governments of the partner countries. The U.S. congress has 90 days to “review and debate” the agreement. While there are many upsides to the pact, certain downsides have also been highlighted. For one, while the pact could increase overall incomes, it could lead to larger disparities. This is because a trade agreement of this type would promote the influx of cheaper goods from low-wage countries. This in turn could lead to a stagnation in wages of those who produce similar goods in a country such as the U.S. On the other hand, the TPP protects patents and copyrights. Hence, the higher-wage workers, who would own intellectual property would continue to appropriate more benefits. These two effects could further exacerbate the level of income inequality in the U.S.

In conclusion, the TPP could prove to be advantageous for companies such as FedEx and UPS since it could contribute to high trade volumes, while helping the economies of the partner countries grow. Only time will tell how successful or harmful this partnership turns out. For now, the scale seems to tip towards the positive side.

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1. Trans-Pacific Partnership, www.useconomy.about.com [↩]
2. The TPP Promises More Than Prosperity, www.seattletimes.com [↩]
3. The TPP Could Bring Trade Stability, www.desmoinesregister.com [↩]
4. Just How Big Is The E-commerce Market?, lemonstand.com [↩]