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The [CP] Trans-Pacific Partnership

Gary N Horlick

Law Offices of Gary N Horlick

Thursday 15 August 2019


The Trans-Pacific Partnership, or TPP, is a trade agreement signed on 4 February 2016 involving 12 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. The text was released on 26 January 2016, in ‘scrubbed’ form. 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. The other TPP countries met in Santiago, Chile in March 2017 and decided to redraft it without the US (essentially, by ‘suspending’ the obligations the US most sought). The resulting Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) was signed in late 2017 and ratified by sufficient countries in time to enter into force (with initial tariff cuts) on 30 December 2018.

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 negotiations that year in a way that did not lead the Obama administration to drop it as a Bush initiative.

The Obama administration, after considerable debate, decided to make the TPP its main trade policy initiative in its first term. Trade is a divisive issue within the Democratic Party, and some in the new administration had hoped to avoid trade issues during the first year in office in 2009, while focusing on the enormous challenges of the global financial crisis.

Even before the 2008 election, the Obama administration had wanted to focus on Asia (at least in part to match increasing Chinese influence), while at the same time some thought the TPP was ‘too small’ to bother the unions. Whatever the reasons, in November 2009, President Barack Obama at the Asia-Pacific Economic Cooperation summit in Japan announced that the US would engage with the TPP. Although ‘engage’ sounds to some like a euphemism for a half¬-hearted commitment, it turned out to be a more legalistic choice of words − even before obtaining formal negotiating authority (trade promotion authority – TPA) through legislation, the Obama administration had decided to follow the domestic formalities of the TPA legislation that had expired in 2008. One part of that legislation was that ‘negotiations’ could not start until 90 days after the president had notified Congress of the intention to enter into negotiations.

There are two key aspects of the CPTPP agreement.

Size

The original P4 was an extraordinarily successful lobbying exercise in which, by setting up a high-quality free trade agreement (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 CPTPP countries form a market of more than 400 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, could join. Colombia has also indicated an interest in joining, which logically would pressure Central American countries to join as well. If the UK joins (in the event of Brexit), the TPP could include more than 30 per cent of world GDP. That by itself inevitably means a great deal of impact on international trade. Not least, it forces other World Trade Organization (WTO) members to think about what, if anything, they wish to multilateralise from the TPP. It has already contributed to the eventual negotiation of a US–EU FTA, the completion of an EU FTA with Japan, and USMCA, the renegotiated NAFTA.

If CPTPP reaches its ambitious goals, however, it seems unlikely in the shorter to medium term to include China, India, the EU, the Middle East or Africa. So it will 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 cost of qualifying for lower FTA rates).

There was a raging debate during the negotiation about the TPP’s ‘transparency’, with a lot to be said on both sides. The original purpose of opacity in trade negotiations was to protect the civil servants negotiating tariff reductions, which would help prevent consumers from being pressured by protectionists’ local interests out to sabotage those tariff cuts. However, even the original US negotiating structure under the frequently renewed negotiating authority from 1934 onwards required precise identification of the tariff lines (and sometimes principal suppliers) involved, allowing the protected local industries to guess pretty well what was going on and react accordingly. The ‘cleared adviser’ or ‘advisory committee’ structure put in place after 1974 in the US (and subsequently in Canada, Australia and other countries) gives local industries far greater access to information than consumers and citizens at large (especially as many consumers’ NGOs have lost interest in the possible benefits of trade to consumers).

Market liberalisation

The US approach after the North American Free Trade Agreement (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 US has achieved this in all post-NAFTA FTAs with two significant exceptions. In the US–Canada and the US–Australia FTAs, the US refused to increase market access for sugar (and, not coincidentally, Australia refused to allow investor–state arbitration in the investment chapter). The tables were turned in the US–Korea FTA, where Korea refused to liberalise access to the rice market. There were other less public exclusions, some achieved by attaching conditions (thus, the US insisted on Singapore opening its market to imports of chewing gum, but allowed Singapore to retain the right to require sales to be based solely on a doctor’s prescription). There has, of course, been one big exception − effectively excluding footwear and clothing from liberalisation even if tariffs were cut to zero, by imposing unreachable rules-of-origin limits. This posed an obstacle to the TPP negotiations with Vietnam, whose current exports to the US are largely footwear and clothing. The irony, of course, is that the amount of footwear produced in the US may not even reach 1 per cent of total demand, and clothing is estimated at 2 per cent or less of demand, but one should never underestimate the power of entrenched US lobbies. The problem, as one would expect, is that Vietnam made clear that if it got only part of the full market access it would like for its exports of footwear and clothing to the US (especially where there is no significant local production), then the US would only get the same degree of market access for what the US wants out of Vietnam. The TPP deal with Vietnam balanced partial (but very beneficial) access for Vietnam to US clothing and footwear markets in return for less than full access to Vietnam for US exporters of other goods and services. Similar deals in the TPP meant that there were some notable exceptions to the complete elimination of tariffs, in particular, agricultural products in Japan (although reductions were substantial, for example, from 38.5 per cent to 9 per cent on beef). What seems likely is that the pursuit of one of the original goals − simplifying existing US FTAs with TPP countries into a single schedule − will instead lead to an even greater mass of tariff complexity (at least in the first years). It is hard to see how a series of bilateral US FTAs post-TPP withdrawal will open markets as much as the TPP deals (see ‘Agriculture’ below).

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 in 2008 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 deal worthwhile for it, even if there is eventually slightly greater access by New Zealand to US (and other) markets. 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. Even larger in dollar terms − the largest single trade barrier to US exports − are the various BSE restrictions that continue to apply to US beef exports in various WTO member states and candidate members despite OIE classification of the US as a ‘negligible’ risk based on the measures that have been taken. Powerful agricultural exporting interests in the US, Australia, Canada 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 negotiation (perhaps because of resistance by each country’s local regulators).

The supply chains

As with SPS, the business community’s ambition may have exceeded the willingness of governments to change in this area. Certainly, 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 discussion can occur of anti-dumping or countervailing duty rules (and decreasingly limited) changes to safeguard law. That barrier was symbolically broken by Deputy US Trade Representative Karan Bhatia in the US–Korea FTA, which required pre-initiation consultations in anti-dumping cases between the two countries − something not required by WTO rules. The US, Canada and Australia are all in very protectionist modes in the trade remedy area, publicly aimed at China, but in practice hitting imports from all sources, so no binding change could occur in TPP (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). The final CPTPP continued this progress without the US.

Internet

The TPP was 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 and the Protect IP Act (SOPA and 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 ‘free flow of data’, banning data localisation (except for financial services) and encouraging limitations and exceptions to copyrights.

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). This was suspended in CPTPP, originally to lure the US back in, but now it makes it easier for other countries to join CPTPP.

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 ICSID cases and a few challenges to trade remedy cases under Chapter 19 of NAFTA, which will not be replicated in the TPP at US insistence). There has been one dispute between non-US parties in CAFTA-DR. All other disputes among parties to those agreements instead go to the WTO − even though the WTO can only enforce WTO obligations, and not other obligations under the relevant FTAs. 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 renewed CPTPP to see if the CPTPP governments make the efforts necessary to make the new dispute system work.

There are also 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 ‘rent-a-plaintiff’ WTO case against Australia by 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 lobbies decided to take their gains from the TPP and leave the tobacco lobby out in the rain.

Ratification

There are several theoretical paths to final completion of the agreement now that the US has pulled out. The US will eventually need to move toward TPP because the EU FTAs with Vietnam, Singapore, Chile, Peru, Canada, Mexico and Japan, and the recent Australian FTA with Japan, means that US exporters are already losing sales at an alarming rate (the US lost $100 million in beef exports in Japan to Australia just in the one month of January 2016). CPTPP means that the US (and other non-CPTPP countries) now face competition in, for example, Japan, with CPTPP countries benefitting from three rounds of CPTPP tariff cuts (30 December 2018; 1 January 2019; and 1 April 2019).

Conclusion

The world is awash with trade deals and litigation already. The CPTPP will provide new ideas in at least some areas, and could soon provide a trade agreement covering than 30 per cent or more of the world economy. Either of those facts would have the effect of increasing interest in other deals (notably the US–EU), and, with luck, a multilateral agreement within the WTO that can 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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