TPP unveiled

Jayant Menon

29 November 2015

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After more than five years of missed deadlines, trade ministers from the 12 participating Asia-Pacific countries meeting in Atlanta finally concluded negotiations surrounding the Trans-Pacific Partnership (TPP) on 5 October 2015. A month later, the much anticipated negotiated text of almost 6,000 pages was finally released to the public on 5 November 2015 (New Zealand Foreign Affairs and Trade 2015).

The public fanfare accompanying the original announcement led many to believe the agreement would soon come into force. Yet, there is a lot that needs to be done before that happens, and there is no certainty that it will. In this note, we examine two inter-related issues:

  • What TPP has achieved on paper and what it has not achieved; and
  • Where we go from here, as in the next steps involved, including the likely fate of TPP itself.

What does TPP look like?

Right from the start of negotiations, TPP had been hailed by its advocates as a high-level, 21st century deal. Now that we have the text, it is clear that in most cases, significant compromises had to be struck in order to conclude negotiations. On the basis that reducing national or global inequality is a worthwhile objective, some of these compromises are welcome, while others simply reflect succumbing to vested interests that limit reforms and reduce consumer welfare. Although TPP is still the most ambitious of all plurilateral free trade agreements (FTAs), it is far from the ‘gold standard’ originally envisaged.

Even when it comes to the most basic of reforms – tariff liberalisation – there are some inordinately long transition periods. For instance, as illustrated by Doonan (2015), the current 2.5% tariff on imported Japanese cars to the US will take 15 years to go down to 2.25% and a further 10 years to go down to zero. Similarly, the 25% tariff on imported Japanese trucks will remain in place for 30 years after the agreement comes into force. But there are variations across members, especially for those still with quite high tariffs on cars, and the impact of TPP on this sector will be determined mainly by how non-tariff barriers are affected (Head and Mayer 2015), although this remains uncertain.

A clear example of the watering down of the agreement lies with intellectual property (IP) rights for pharmaceuticals. The US has 11 side letters on this, second only to the market access issues, and mostly relating to geographical indications. Developing countries have transition periods to implement some pharmaceutical rules that extend up to 18 years in the case of Vietnam. Data exclusivity on biologics has been limited to five years, a lot less than the 12 years pushed by the US pharmaceutical lobby. Different transition periods will also apply to copyright and trademark provisions. Furthermore, some countries even have the option to maintain current domestic rules when implementing TPP obligations. These compromises suggest that the trade-off between preserving access to affordable medicines versus creating the incentives for pharmaceutical firms to continue to invest in research and development to produce these drugs would tend to favour the former.

TPP prides itself as being the most progressive agreement ever because it explicitly deals with social issues such as labour and environment standards. In fact, the signing of TPP by President Obama was in doubt at one point, until the US was able to suddenly upgrade Malaysia’s ranking and therefore remove it from its list of the world’s worst offenders of human trafficking. The concern with these standards such as the setting of minimum wages and allowing freedom to form unions relates to enforcement and implementation (Prokop 2015). The value of the environment chapter has been questioned by its failure to make any attempt to address the pressing issue of climate change, as well as by provisions that are framed only as ‘best endeavour’ efforts (Cosbey 2015).

A unique and important aspect of TPP has been its attempt to try and deal with state-owned enterprises (SOEs), especially in Vietnam and Malaysia but also other countries, including Singapore. This laudable effort has again been overshadowed by the prevalence of exemptions and transition periods. Malaysia, Vietnam, Peru, and Brunei Darussalam have been granted a minimum five-year grace period to reform their state-owned enterprises policies. Sovereign wealth funds such as the Government of Singapore Investment Corporation (GIC) and Temasek Holdings, as well as Malaysia’s Permodalan Nasional Berhad, have received exemptions from some requirements in the investment chapter. In a major concession, Malaysia’s Khazanah is exempted from the investor-state dispute resolution (ISDS) provisions for two years after the deal comes into force.

TPP also deals with the ever-growing digital economy, and sets out rules that enable companies to send data across borders freely. It also bans member governments from requiring companies to house computing facilities such as servers in a country, or the sort of ‘localisation’ rules some authoritarian countries have been imposing in what cloud computing companies and others see as a major trade barrier (Doonan 2015). But as with every chapter, there are caveats here, too. In a somewhat surprising move, the financial services industry is not covered by the cross-border data rules, while Australia has secured an exemption for medical records.

Menon (2014a) warned that TPP was “degenerating into a series of bilateral deals, with a US-Japan agreement at its core…” and to accommodate the differences, we should “…look out for a lot of transition periods and other loopholes.” The text confirms this to be the case. There are a series of ‘side letters’ that are special bilateral arrangements between members. Side letters provide a mechanism by which a series of bilateral deals can be presented to appear as if they were one comprehensive agreement. The US has released a total of 61 such letters and they can be quite potent in what they postulate. For instance, Malaysia has a side letter with the US that allows it to opt out completely from TPP without even attempting to ratify it! Chile, Mexico, and Vietnam also have similar side letters, but their ability to withdraw is somewhat less straightforward.

Next steps

Now that the text is public, the next step is ratification by the respective legislatures of the 12 participating countries. It is generally accepted this should be done within two years. In the case of the US, as President Obama narrowly secured the Trade Promotion Authority (TPA) that prevents changes to the agreement itself, legislators will have until 3 February 2016 (90 days) to study the agreement before Congress votes ‘yes’ or ‘no’. But the International Trade Commission has just announced that it will not be able to present its assessment before 18 May 2016, which suggests Congress will not be voting until some time past that date (World Trade Online 2015b). While the TPA may have helped in successfully concluding negotiations, how it affects congressional passage is less clear. If a majority of legislators find there was too much compromise in the final agreement – and as they can no longer change its details – they could vote ‘no’. Its prospects may have been better without the TPA (Menon 2015). House Republicans, in particular, who will need to support TPP in numbers if it is to pass, may be hard pressed to throw their support behind it if there are too many compromises.

Other countries may also face challenges in getting the agreement passed by their legislatures, or ratifying the agreement without amendment. If the TPP is ratified only after a country ‘cherry picks’ and avoids dealing with the more sensitive areas of reform, the whole process could be further compromised.

What happens if one or more countries fail to ratify TPP? TPP can still survive if at least six original signatories – accounting for at least 85% of the region’s 2013 GDP – complete ratification, preferably but not necessarily within two years (World Trade Online 2015a). This GDP threshold was clearly set to ensure the agreement cannot enter into force without both the US and Japan.

Implementation

The final step, following successful ratification, is implementing the agreement. This is arguably the most crucial step in the process in terms of its impact on the ground. History is littered with examples of trade and other agreements that had little or no impact because of the way in which they were implemented. While the controversial investor-state dispute resolution mechanism – which allows corporations to sue governments – had been touted as a reliable ‘stick’ that would go a long way towards ensuring compliance, the text reveals that the investor-state dispute resolution now has less teeth, with exemptions provided in many areas including state-owned enterprises, laws regulating tobacco use, government procurement, and so on. In any case, while the investor-state dispute resolution may increase the likelihood of compliance, it cannot guarantee comprehensive implementation. In short, we will simply have to wait and see, and that wait will last a minimum of two years, and possibly a lot longer.

Conclusion

TPP is a significantly compromised agreement. Nevertheless, it will have a significant impact on both members and non-members if it comes into force. Available estimates of its impact (e.g. Petri et al. 2014) ignore the watering down of the agreement, and may overstate the benefits in the short to medium term. In the long run, however, TPP will be judged by its ability to attract other nations – such as China – under its umbrella (Menon 2014b). Despite covering more than 40% of the world’s GDP with its current membership, it could result in significant trade and investment diversion, and fracture regional production networks, unless China and other ASEAN countries join, for instance. But first, it has to be ratified. Unfortunately, the chances of this happening continue to remain uncertain.

References

Cosbey, A (2015), “Trans-Pacific Partnership's Environment Chapter: How does it measure up?” International Institute for Sustainable Development, Winnipeg, Canada.

Doonan, S (2015), “Breaking down 5 big sections of the TPP”, The Financial Times, November 5.

Head, K and T Mayer (2015), “The Trans-Pacific Partnership is a trade agreement, and then some”, VoxEU.org, 10 November.

Menon, J (2014a), “TPPing Over?” VoxEU.org, 1 July.

Menon, J (2014b), “From Spaghetti Bowl to Jigsaw Puzzle? Fixing the Mess in Regional and Global Trade”, Asia and the Pacific Policy Studies 1(3): 470–483.

Menon, J (2015), “What next for the Trans-Pacific Partnership?”,  Asia Pathways, October 28.

New Zealand Foreign Affairs and Trade (2015), “Text of the Trans-Pacific Partnership”, Wellington, New Zealand.

Petri, P, M Plummer, and F Zhai (2014), “The TPP, China and the FTAAP: The Case for Convergence”, In New Directions in Asia-Pacific Economic Integration, edited by G. Tang and P. Petri. Honolulu: East-West Center.

Prokop, A (2015), “Why Obama says TPP is historic for workers — and why US labor unions hate it”, vox.com, November 12.

World Trade Online (2015a), “New Zealand Says TPP Offers Three Options For Entry Into Force”, 13 October.

World Trade Online (2015b), “ITC Predicts TPP Economic Assessment Will Not Be Ready Until May 18”, 17 November.

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Topics:  International trade

Tags:  TPP, trade agreements

Lead Economist in the Economic Research and Regional Cooperation Department, Asian Development Bank

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