The terms of the Trans-Pacific Partnership (TPP) trade pact, which member governments covering about 40% of the world economy agreed to on 5 October, would set important precedents for the future development of international trade and investment if ratified, says Fitch Ratings.

The TPP will be a significant contributor to economic integration over the long term for member states. However, it is unlikely to be a game-changer for members’ economic prospects in the short term.

The TPP covers 12 countries – Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam in the Asia-Pacific region as well as the United States, Canada, Mexico, Peru and Chile.

The terms of the agreement must now be ratified by member-state legislatures before coming into effect. Should the TPP be ratified, the most significant consequence will be in setting the rules and guidelines under which economic integration deepens around much of the Pacific Rim. This will, in turn, set a powerful precedent for other global trade and investment protocols.

The pact includes provisions to lower barriers to trade in services and remove foreign investment barriers, in addition to lowering tariffs on goods trade. Provisions setting common minimum standards on labour markets and environmental protections as well as international dispute resolution regimes also set important foundations for future economic integration in the region.

The agreement may have more significant long-term implications for some countries than others. One academic study by Petri and Plummer modelled gains in GDP by 2025 attributable to the pact ranging from 0.4% for the US to 13.6% for Vietnam. For Japan, the TPP is significant and marks a major structural reform.

This is especially notable as it comes at a time when the potential for Abenomics policies to generate higher rates of GDP growth sustainably is increasingly being questioned. For example, reforming Japan’s agricultural sector has been among the most politically difficult for Prime Minister Shinzo Abe and previous administrations, but the TPP would immediately end tariffs on 32% of the country’s agricultural imports while reducing others over a multi-year time horizon.

While the TPP would likely be positive to varying degrees for those within the pact, it may divert trade and investment from non-participating countries. The net impact on global activity may be small as increased trade within the TPP is offset by trade diverted from countries outside the bloc. One study estimated a gain in global GDP of about 0.3% relative to a baseline without the deal by 2025.

Within APAC, China, Thailand, Philippines, Korea and Indonesia are notable non-participants for now. Countries such as Thailand and Indonesia, which have been looking to boost foreign investment and exports, may come under pressure to join TPP should FDI and trade flows from Japan and the US shift to member countries such as Vietnam and Malaysia.

Passage of the TPP agreement by member-state legislatures, including the US Congress, is not guaranteed. Some provisions, such as those regarding investor-state dispute resolution that enable companies to contest national government policies at supra-national courts, are controversial and likely to generate political opposition. Furthermore, some of the provisions to lower tariff barriers will only take effect over many years, so the broad-based effects of the TPP may only manifest over the long term.