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Getting The Deal Through

(CP)Trans-Pacific Partnership

Gary N Horlick

Law Offices of Gary N Horlick

Wednesday 22 August 2018


Introduction

The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), is a trade agreement signed on 8 March 2018 involving 11 countries – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam – with nearly 400 million people and 13 per cent of world GDP.

The importance of the CPTPP is that it is specifically designed for rapid expansion, has a clear goal of the US rejoining, and in the meanwhile is widely expected soon to add Colombia, South Korea and perhaps Thailand, the Philippines and even Taiwan – and possibly the game-changer: a post-Brexit UK.

TPP

The CPTPP was preceded by the Trans-Pacific Partnership (TPP), signed on 4 February 2016 by the same 11 countries plus the US. The US, under the new Trump administration, formally withdrew its signature (so there would be no lingering legal obligations as a signatory) in late January 2017. What happened in between? Electoral politics in the US, not dissimilar from what the US complained of that moved India to kill the World Trade Organization (WTO) Doha Round in 2008. President Trump, despite his early 1970s protectionist views, had no real problem with TPP. His leading economic adviser during the campaign, Wilbur Ross, an investment banker who had fought for protection for uncompetitive steel mills he owned and was vice chairman of the Russian oligarch-controlled Bank of Cyprus, had publicly endorsed the TPP soon before joining the campaign. But Trump saw a bloc of voters who had been convinced by labour unions and left-of-centre think tanks and academics that trade agreements had cost the US net jobs and income. Those voters suspected that Secretary Hillary Clinton would permit the TPP to be passed by a lame-duck Republican Congress just after the 2016 election, despite her stated opposition to the TPP. The TPP publicly opposed by both Trump and Clinton was a very well-negotiated agreement among the 12 countries. Each one got enough to be happy. The complaints from Trump and his advisers were not very clear. The labour provisions and the provisions on investor-state dispute settlement (ISDS) were modified to meet labour objections, and even had an exclusion from ISDS challenges for regulation of tobacco products, a first in trade agreements (now found in the CPTPP and the revised Australia–Singapore free trade agreement (FTA)). Obviously, the TPP (along with the North American Free Trade Agreement (NAFTA)) had become a symbol – a punching bag – for all the ills of an economy that was only just recovering from the 2008 financial crash. The big US winners in TPP were agricultural exports (because of market access gains in Japan), concentrated in states that Trump won, while the potential losers were especially the few remaining producers of clothing (about 2 per cent of US consumption) and shoes (about 1 per cent of consumption), which were mollified by carefully negotiated carveouts from the market access gains for Vietnam, which had opened to many US goods and services (the TPP negotiations by US Trade Representative Michsel Froman and his team are a useful case study for future US trade negotiators).

Background

The origins of the TPP began with the P4 formed in the middle of the last decade by Brunei, Chile, New Zealand and Singapore. By 2008, Australia and Peru had joined, and Vietnam was in the process of joining. Ambassador Susan Schwab, then US Trade Representative for the Bush administration, took the US into the negotiation that year in a way that did not lead the Obama administration to drop it as a Bush initiative.

Even before the 2008 election, the Obama administration had wanted to focus on Asia, at least in part to match increasing Chinese influence. China initially reacted with caution, but seemed to have reached the view that the TPP, including the US, was a possible negotiating partner in the future. A CPTPP, especially with the UK, could be equally interesting to China.

There were two key aspects of the TPP agreement.

Size

The original P4 was an extraordinarily successful lobbying exercise in which, by setting up a high-quality FTA, the four countries created an attractive target to which others then signed up. The P4 itself comprised fewer than 30 million people, but the 12 countries formed a market of more than 600 million people. With Vietnam in the TPP negotiation, Malaysia had to join, because otherwise many of Malaysia’s key exports of consumer electronics and, to some extent, garments would be placed at a decided disadvantage. That was likely to mean that the Philippines, Indonesia, Korea and eventually Taiwan and Thailand, and so on, would join. Colombia had indicated an interest in joining, which logically would pressure Central American countries to join as well. If the US rejoins, the CPTPP could include more than 40 per cent of world GDP. That by itself inevitably means a great deal of impact on international trade. Not least, it would force other WTO members to think about what, if anything, they would want to multi-lateralise from the TPP. It has already affected the EU talks with Japan and other TPP countries, and looks likely to contribute to a renegotiated NAFTA.

If the CPTPP reaches its ambitious goals, however, it seems unlikely in the shorter to medium term to include as full members China, India, the EU, the Middle East or Africa. So it would probably accelerate the pace of bilateral and plurilateral deals among the countries in those regions and around the world. It will be interesting to see whether this leads to greater trade liberalisation, or whether the added complexity of the resulting ‘spaghetti bowl’ creates too much paperwork (at present, a huge percentage of the trade preferences negotiated on paper are never in fact used, as economic actors prefer to go with the simplicity of the alternative, though higher, WTO-negotiated most-favoured nation rates to avoid the added costs of qualifying for lower FTA rates).

Market liberalisation

The US approach after NAFTA had been for full liberalisation on goods, meaning the removal of all tariffs, tariff-rate quotas and so on, although often with very long phase-outs (as much as 20 years).

The CPTPP retains the nearly full market liberalisation in the TPP, in part to bring the US back into the deal. There were some notable exceptions to the complete elimination of tariffs in the TPP, in particular, agricultural products in Japan (although the reductions are substantial, for example, from 38.5 per cent to 9 per cent on beef). This in effect provides an incentive for the US to rejoin. For example, the Japanese tariff on US beef under the CPTPP will remain at 38.5 per cent while it drops to 9 per cent for competitors Australia, Canada and New Zealand.

Services

Because progress in the WTO on services has been so slow, there was considerable pent-up demand within the TPP countries for further liberalisation, which led to useful openings through detailed item-by-item ‘schedules’, although complete liberalisation remains far away. The services area is buttressed by a more general (and not very binding) chapter on regulatory coherence.

Agriculture

With Japan added, there was more than enough market access available to sort out most of the necessary deals. That may continue without the US. For example, the initial headlines included ‘US dairy Industry resistance to Imports from New Zealand’, but the US dairy industry is now a major exporter and the opening of markets in Vietnam, Malaysia, Canada and Japan made the original TPP deal well worthwhile for it, even with greater access by New Zealand to US (and other) markets. US dairy exporters will now lose out to their CPTPP competitors in Japan. As noted, there were large cuts in Japanese agricultural tariffs, down to single digits (and possibly some exotic tariff-rate quotas), but not the zero tariffs demanded for all other products.

Just as important in the agricultural area is the SPS area (sanitary and phytosanitary measures taken by governments in the name of food and animal safety, but often disguised forms of protectionism). Progress was made in the SPS area beyond the WTO rules, which have proven to be quite weak in their enforceability, as countries take advantage of the slowness of WTO dispute resolution to impose barriers that are blatantly unjustified, such as the notable ban by 80 WTO members on imports of pork from Mexico, Canada and the US during the swine flu episode, even though it is completely certain that no one can get swine flu from eating pork. Agricultural exporting interests in the US, Australia, Canada, Chile and New Zealand pressed successfully for at least an improved and much faster dispute resolution or ‘rapid response’ to go with the relatively limited but enforceable improvements and interpretations of WTO terminology, which is all that seemed to be within the ambition of the negotiators (perhaps because of resistance by each country’s local regulators). The CPTPP will provide useful experience with that mechanism (which is also currently included in the NAFTA 2.0 under negotiation between Canada, Mexico and the US).

The supply chain

As with SPS, the business community’s ambition may have exceeded the willingness of governments to change in this area. Major improvements in trade facilitation and other obstacles will be made, but, as one senior business executive pointed out, ‘If you don’t fix all the links in the chain, the (supply) chain won’t work’.

Trade remedy law and state owned enterprises

The US has taken such a hard line in its FTAs since NAFTA that no important discussion occurred on anti-dumping or countervailing duty rules (and decreasingly limited) changes to safeguard law. The US, Canada and Australia are all in very protectionist modes in the trade remedy area, both publicly aimed at China but in practice hitting imports from all sources, so no binding change could occur (although some push to use US ‘best practices’), despite pressures from other TPP countries generally. The US successfully pushed a complex mix of strict and lax rules on ‘state-owned enterprises’ (with disciplines on companies majority-owned by central governments – but excluding some US government-owned companies and all sub-central government state-owned enterprises). All of those remain in the CPTPP (except, of course, all of the US participation in the rules it sought).

Internet

The TPP is billed as a ‘21st Century Trade Agreement’, but surprisingly little thought was given to the internet at the outset of the negotiations, beyond the usual list of proposals by IP holders to further limit the internet in favour of protecting rights holders. The political debacle of proposed legislation with similar ideas in the US (the Stop Online Piracy Act (SOPA) and the Protect IP Act (PIPA)) and the similar popular revolt against the Anti-Counterfeiting Trade Agreement (ACTA) in Europe, Mexico and Australia, created the scary possibility that a similar rebellion could occur against the TPP, with the claim that the TPP, in effect, is SOPA or ACTA, and the whole agreement be dragged down. As a result, some progress was made on improving the free flow of data, banning data localisation (except for financial services) and encouraging limitations and exceptions to copyrights. All of those remain in the CPTPP.

Intellectual property

The US pushed hard for improved protection, in particular for pharmaceuticals. But this is political dynamite in most TPP countries and a huge cash cost for the many countries with government healthcare systems. The US got some increased protection, notably a smaller than requested increase in protection for biologics (eight years, not 12, although the pharmaceutical industry is still fighting). The CPTPP members very publicly suspended the parts the US wanted most, to try to bring the US back in.

The suspended IP provisions include the following:

  • patentable subject matter: that patents be made available for new uses of a known product, for new methods of using a known product or new processes of using a known product, and for inventions derived from plants;
  • patent term adjustments: to adjust, upon request, a patent’s term of protection if there are unreasonable delays by a patent office, or as a result of delays in national regulatory approval for a patented pharmaceutical product;
  • data protection: for the protection of test or other data submitted to a regulatory authority for the purposes of obtaining regulatory approval to market pharmaceutical products (five years) or biological pharmaceutical products (eight years, or five years plus ‘other measures’);
  • term of copyright: for a copyright term of life of the author plus 70 years; and
  • internet service provider liability: for a legal liability and ‘safe harbour’ framework incentivising online service providers to cooperate with rights holders in deterring online copyright infringement.

US businesses reliant on IP rights will be denied the benefits associated with strengthened and harmonised IP rights across CPTPP countries.

Dispute settlement

Perhaps the greatest challenge for the TPP negotiators was the creation of a dispute settlement system with enough credibility that private sector actors would push governments to use it. Astoundingly, there have been zero disputes raised under any of the trade provisions of any US FTA signed after NAFTA (and no such disputes within NAFTA since 2001, with the exception of a few International Centre for the Settlement of Investment Disputes cases and a few challenges to trade remedy cases under Chapter 19 of NAFTA, which was not replicated in the TPP or CPTPP). There has been one dispute between non-US parties in the Dominican Republic-Central America FTA. All other disputes among parties to those agreements instead go to the WTO – even though the WTO can only enforce WTO obligations and no other obligations under the relevant FTAs, and in any event this WTO dispute settlement process is under attack by the Trump administration. A major effort was made by the very high-quality government lawyers working on the TPP to fix the problems in prior FTAs. It will be a major test of the CPTPP to see whether the CPTPP governments make the efforts necessary to make the new dispute system work.

There are also possible disputes under the investor-state mechanisms in the investment chapters. One interesting aspect of this negotiation was the adoption of a proposal by several countries to preclude investor–state dispute settlement cases against regulation of the sale of tobacco products, in the wake of the US loss of a WTO case (Clove Cigarettes); and the pending ‘rent-a-plaintiff’ WTO case against Australia by (the prior government of) Ukraine, and the ‘rent-a-forum’ investor–state cases against tobacco regulation in Australia and Uruguay. No politician (or CEO, for that matter) is willing to admit to being in favour of teenage smoking, of course, but powerful economic interests linked to tobacco mobilised major business lobbies and their allies against such proposals until the very end, when those groups decided to take their gains from the TPP and leave the tobacco lobby out in the rain. This exclusion remains in the CPTPP.

Ratification

There are several theoretical paths to final completion of the agreement now that the US has pulled out. The CPTPP ratification process is well under way in all 11 countries. After entry into force (probably in 2019), the US will need to move towards the CPTPP because the EU FTAs with Vietnam, Singapore, Chile, Peru, Canada and Mexico, and soon Japan, Australia and New Zealand, and the recent Australian FTA with Japan, mean that US exporters are already losing sales at an alarming rate (the US lost $100 million in beef exports in Japan to Australia in January 2016 alone).

Conclusion

The world is awash with trade deals. The CPTPP will provide new ideas in at least some areas, and will provide a trade agreement covering initially 13 per cent of the world economy. Either of those facts would have the effect of increasing interest in other deals, and, with luck, a multilateral agreement within the WTO that could replace some or all of the current patchwork of bilateral and regional deals. One way or another, there is an enormous amount of work to be done by lawyers, governments, companies, law firms, universities, public interest groups and any number of other bodies.


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