Trade and investment agreements such as TPP are agents for domestic reform: Trade negotiations press countries to make changes in policy for their own good

October 2015

Domestic politics often block economic reforms that only international agreements can make possible.

The example that has gotten the most public attention during the Trans Pacific Partnership (TPP) negotiations has been agricultural protection in Japan. Prime Minister Abe was elected on a pro-growth, economic reform agenda. It is true that Japan has become far more open to foreign trade and investment over the last three decades. The remaining areas of higher protection in Japan are in mainly in agriculture.

Immediately upon his recent re-election as head of the Liberal Democratic Party, Mr. Abe announced his determination to implement the necessary reforms. This is an imperative for Japan’s trading partners as well. A keystone in putting the twelve-nation TPP agreement together is Mr. Abe’s ability to deliver agricultural liberalisation. Canada, Australia, New Zealand, and the United States have a keen interest in exporting agricultural products to Japan.

Domestic political opposition is not just a factor for the largest countries in these trade talks.  Malaysia is facing one of the toughest issues of any party to the negotiations. Its preference scheme, deeply imbedded in its legal system, is designed to benefit native Malays over other domestic ethnic groups. Malaysia’s TPP negotiating partners are unwilling to acquiesce to a system under which Malaysia has carte blanche to discriminate against foreign investors and trade.

Vietnam is being asked to subject its state-owned enterprises to international disciplines when these companies compete in commercial markets.  And even harder for Vietnam, it is asked to commit to international labor standards that are common in other TPP countries.  To its credit, Vietnam is engaging fully in working with its trading partners to consider making needed reforms. These are essential to Vietnam if it is to stimulate its economic growth, and just as necessary to making its participation in TPP acceptable to the other parties.

Singapore, a city-state historically in the vanguard of promoting free trade, also has an area of sensitivity that has slowed the wrap-up of TPP.  The question is the degree of transparency and obligations that are to apply to commercial ventures of sovereign wealth funds.  One of the important features of TPP is the commitment of all parties that state-owned enterprises buy and sell on the basis of commercial considerations (price, quality, etc.) and not act as an instrument of government policy to the detriment of private competitors.  As TPP is an agreement open to accession by others countries in the future, it is imperative that no precedent be set in the treatment of Singapore that could undermine the establishment of meaningful generally applicable disciplines over state-owned enterprises that engage in commercial competition with private companies.

Closer to home are the deeply imbedded protections Canada applies to dairy, poultry, and eggs.  Canada’s supply management system is not an easy one to change. Farmers have built their businesses and taken out mortgages based on that system of protection staying in place. The Canadian and Mexican auto sectors also benefit from preferences accorded under the North American Free Trade Agreement (NAFTA).  So a key question for these countries’ negotiators is how much liberalisation they will accept in return for their companies’ access to a broad range of new export opportunities through others’ TPP commitments.  Prime Minister Harper, up for election on October 19, has stated that Canada will do what is necessary to join TPP, even if it means reducing protection for agriculture, autos, and auto parts.

For all the TPP negotiating parties, upgrading the protection of intellectual property is a fundamental issue. Patent and copyright protections are not uniform in the Pacific Rim countries, and the protection of trade secrets is a new subject being addressed. The central question posed is what is necessary for innovation.

The United States, of course, is not immune to political challenges arising from requests for more access to the US market: for dairy (from New Zealand), sugar (from Australia), and footwear and apparel (from Vietnam).  Wherever there is imbedded protection, change poses challenges.

In order to benefit fully from TPP, each of the parties must embrace domestic reforms – which arguably are in fact in their own interests and a spur to their economic growth, but simply would not happen without the impetus of international trade negotiations. Moreover, getting TPP right is essential if it is to serve as a template for even broader future trade agreements – agreements that can establish better rules for international trade and open further the markets of a wide range of different national economies.

Alan Wm. Wolff is a member of the E15 Expert Group on Innovation. A former U.S. Deputy Trade Representative, he is Chairman of the (U.S.) National Foreign Trade Council and practices law with the international firm, Dentons.

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