The Trans-Pacific Partnership as a set of international economic rules

May 2016

The Trans-Pacific Partnership (TPP) Agreement was finally signed in February 2016 in Auckland, New Zealand. The negotiations involved only 12 countries, but had to go through many twists and turns because of a crisscross of confrontational relationships — large advanced economies versus emerging economies; exporters (“Cairns group”) versus importers (“G-10”) in agricultural trade; and market economy countries versus state capitalist countries. Despite such difficulties, at a time with no evident signs of hope for the Doha Round of negotiations under the World Trade Organization (WTO), the successful conclusion of the TPP negotiation, an ambitious trade liberalisation initiative, is surely an event worthy of celebration.

About half a year after the release of the full text of the TPP Agreement, we have been gradually “deciphering” what the tons of documents all really mean, but most of the task remains to be done. In this short piece, I would like to attempt to outline, offer a perspective on, and share my brief impression of this new set of rules.

What is a 21st century FTA?

At the conclusion of the TPP Agreement, leading figures, including Akira Amari, Japan’s then state minister in charge of the TPP, repeatedly called it a “21st century agreement.” By this definition, the TPP is an agreement that facilitates trade in parts and intermediate goods, as well as the accompanying international movement of services, capital, data, people, and know-how, going beyond trade in finished products predicated on the division of labour based on the theory of comparative advantage. Trade in parts and intermediate goods has been growing with the advancement of information and communications technologies (ICTs), prompting more companies to unbundle their production processes and leading to the development of international supply chains. Richard Baldwin calls this chain of factors a “trade-investment-services-intellectual property nexus,” and an agreement designed to facilitate the formation of such nexuses is what is meant by a “21st century agreement.”

The WTO Agreement has critical shortcomings in provisions for facilitating the development of business operations in overseas markets that accompany the unbundling of production processes. As it stands today, it does not cover the liberalisation and protection of direct and indirect investments, fair competition in host countries, or the smooth cross-border deployment of human resources, for example. The liberalisation of services has been achieved only to a limited extent because the General Agreement on Trade in Services (GATS) takes a positive list approach. In order to foster the cross-border outsourcing and international mobility of intermediate goods and parts, the provision of simple and transparent customs clearance procedures is now becoming all the more important, which is another area of weakness for the WTO.

The TPP Agreement includes a series of provisions that are necessary for the development of supply chains but which are not provided for in the WTO agreements, such as those governing investment, competition, state-owned enterprises (SOEs), electronic commerce, cross-border mobility of business persons, and regulatory coherence. It also calls for establishing a uniform set of standards for intellectual property protection at the highest possible level. Furthermore, in line with the requirements under the General Agreement on Tariffs and Trade (GATT) and the GATS, the TPP Agreement sets out rules governing market access for goods and services as a way to liberalise “substantially all trade” within the affected region.

Is the TPP a 21st century agreement or just an expansion of a US-style FTA?

Can we call the TPP a 21st century agreement? After reviewing the full text over the past few months, I find that the agreement surely has some innovative aspects in it, while my initial impression that it might be a bit of an overstatement still has some truth to it.

First, from the viewpoint of supporting and promoting the development of supply chains, some chapters successfully facilitate trans-border logistics across the TPP region. For example, the National Treatment and Market Access for Goods chapter (Ch.2) not only eliminates almost all tariffs in trade in goods, but also ensures free movement of goods after repair and alteration, commercial samples, and remanufactured goods. The Customs Administration and Trade Facilitation chapter (Ch.5) also provides for the expeditious release of imported goods, within 48 hours of arrival for normal shipments and within six hours in the case of express shipments. Service trade will be liberalised through a positive list approach, where each Party in principle must open up its service sector to foreign players with some reservations.

On the other hand, the TPP Agreement falls short in terms of enhancing the formation of global supply chains by eliminating regulatory impediments. The Regulatory Coherence chapter (Ch.25) simply calls for “cooperation” and “efforts” to introduce best regulatory practices in terms of their coherence and impact assessments, meaning that whatever commitments made under this chapter are not subject to any dispute settlement procedure. The same holds true for the Competitiveness and Business Facilitation chapter (Ch.22) and the Small and Medium-Sized Enterprises chapter (Ch.24), both of which are intended to support enterprises of TPP Parties to take part in global supply chains.

Second, my impression is that the TPP Agreement, in terms of its structure and items included, is an expanded and improved 12-country version of FTAs and investment treaties recently concluded by the US (in particular, FTAs with Australia, South Korea, and Singapore). Those bilateral FTAs are quite ambitious in their own right, and there are some areas in which the TPP Agreement surpasses them in the level of ambition. However, in the basic framework for rules, there is no significant difference between the TPP Agreement and the existing US FTAs. A chapter-by-chapter comparison reveals the great number of similarities that the TPP Agreement has with some of them. The substantive standards for the liberalisation and protection of investments in the Investment chapter (Ch.9) generally follow those set forth in the 2012 US Model Bilateral Investment Treaty, except for certain elements in prohibition on “performance requirements.” The State-Owned Enterprises (SOEs) and Designated Monopolies chapter (Ch.17) also follows the recent FTAs of the US in requiring SOEs to ensure non-discrimination and act on the basis of commercial considerations in their conduct of business. In addition, the TPP Agreement architects successfully developed a set of very detailed provisions to regulate the adverse effects of non-commercial assistance to SOEs. Yet, the SOE chapter is still less ambitious in that it adopted a narrow definition of SOE and failed to mandate a gradual reduction in government ownership and involvement in SOEs. In these respects, the SOE provisions of the TPP hardly match up to those of the US-Singapore FTA. The chapter also includes various sorts of exceptions.

Third, some major chapters of the TPP Agreement are substantially WTO equivalents. The Sanitary and Phytosanitary (SPS) Measures chapter (Ch.7) and the Technical Barriers to Trade (TBT) chapter (Ch.8) include some WTO-plus elements in the procedural and transparency aspects. However, in terms of substantive provisions for preventing SPS measures and technical standards from turning into trade barriers, these chapters merely incorporated or referred to the relevant obligations set out in the WTO Agreement. The Trade Remedies chapter (Ch.6) also failed to include binding WTO-plus provisions such as those requiring notification to initiate, and consultations prior to initiating, an antidumping investigation included in the US-South Korea FTA and Japan’s economic partnership agreement (EPA) with India. Indeed, for Australia and New Zealand, which had long abolished antidumping duties between them, the 12-country TPP Agreement is a backward step in this regard.

However, the significance of the TPP as a 21st century agreement should be found in the fact that an agreement designed to support and promote the formation of supply chains has expanded its membership to cover an extensive geographic area including major economies such as the US and Japan, rather than in the level of ambition and the substance of specific provisions. For instance, suppose that Japan is to conclude a bilateral agreement separately with each of the other 11 TPP countries. Automobiles, which are deemed to be of Australian or Japanese origin and exempted from import duties under the Japan-Australia EPA, would continue to be subject to import duties in the US. Likewise, a Japanese auto parts manufacturer as a covered investment under an EPA would be entitled to different levels of protection depending on where it constructs a factory, for instance, whether in Vietnam or Australia. The conclusion of the TPP Agreement is meant to significantly reduce such constraints affecting the choice of how and where to form supply chains within the scope of the 12 countries.

Seen under a different light, the TPP Agreement has some noteworthy novel aspects in non-economic issues. The Labour chapter (Ch.19) is supplemented with three bilateral side letters agreed between the United States and Brunei, Malaysia, and Vietnam respectively, thereby securing specific commitments from the latter three countries to safeguard fundamental labour rights — such as the right to organize a union and the right to collective bargaining — as well as to eliminate child labour. All of those bilateral commitments are subject to the bilateral review mechanism as well as the dispute settlement mechanism under Chapter 28.

Also, it is notable that the TPP Agreement sheds a light on some human right issues. The aforesaid bilateral labour letter between the US and Malaysia addresses anti-human trafficking policy. The Development chapter (Ch.23) calls for gender equality in economic activities, referring to the enhancement of women’s inclusion as a means to fully access and benefit from the opportunities created by the TPP Agreement.

The comprehensive Environment chapter (Ch.20) is groundbreaking as well. It imposes — albeit to a limited extent — disciplines on fisheries subsidies, an issue listed on the agenda of the WTO Doha Round negotiations but not yet agreed upon. Furthermore, non-compliance with this chapter is referred to the dispute settlement procedure in Chapter 28, and, to that extent, the implementation of the chapter is guaranteed by means of trade retaliation such as the suspension of tariff concessions. The TPP Agreement can be defined as a 21st century agreement in the sense that it has made a full-fledged attempt to solve global issues with trade linkages that have been discussed over the past quarter century.

Significance of the dispute settlement procedure: Blowing life into the 21st century agreement

Undoubtedly, the TPP Agreement as a whole is a highly ambitious agreement that includes areas left unaddressed by WTO disciplines. The TPP Agreement is highly complex, including not only rules but also complicated schedules of concessions that list product-specific tariff elimination schedules and country-specific low-tariff quotas, accompanied by product-specific rules of origin. In particular with respect to textiles, automobiles, and agricultural products, these market access commitments comprise various exceptions and special rules.

As exemplified by the WTO, a dispute settlement procedure is what guarantees the effectiveness of a highly ambitious trade agreement. However, those under FTAs including the North American Free Trade Agreement (NAFTA) have hardly been used. This is probably the result of various factors such as: 1) bilateral FTAs by necessity prioritise consultations; 2) an alternative dispute resolution (ADR) mechanism, such as a business environment improvement mechanism included in most of Japan’s EPAs (e.g., Ch.12 of the Japan-India EPA), has been utilised; and 3) some bilateral FTAs do not include ambitious WTO-plus rules as their emphasis is more on the expansion of market access. However, as the TPP Agreement differs greatly from those conventional FTAs, the role of its dispute settlement procedure is far more important.

Moreover, circumstances surrounding the conclusion of the TPP Agreement spell the possibility of its dispute settlement procedure becoming all the more important. First, after the final agreement was reached in October 2015, there was only a limited period to complete the “legal scrub” of the TPP Agreement, a process to clean up the text to ensure consistency of terms and resolve any inconsistencies between the chapters and clauses therein, and certain defects in the finalised legal text may remain. Second, as exemplified by the patent protection of biological drugs (Art.18.51), an issue that posed a major bottleneck in the final stage of the TPP negotiations, there are some areas that were left ambiguous on purpose. These suggest that the exact content of the TPP Agreement must be left to ex post facto interpretation by third parties.

The current US political climate surrounding the presidential and congressional elections and the ratification of the TPP Agreement also portends the possibility of disputes in the future. The conclusion of the TPP Agreement has been greeted with criticisms from a series of leading politicians for what they consider unsatisfactory outcomes in some key areas including biological patents, as discussed later. Under the NAFTA, controversial issues that had posed an obstacle to the ratification of the treaty later evolved into two major US-Mexico disputes, one over the cross-border trucking services and the other over access to the sugar market. Similar disputes may arise under the TPP Agreement, and, if so, the success or failure of this 12-country pact rests ultimately on the dispute settlement procedure.

The TPP Agreement is indeed a 21st century FTA. However, unless the dispute settlement procedure functions properly, it would be like ploughing the field and forgetting to sow the seeds. How will things turn out for the TPP Agreement? The dispute settlement procedure under Chapter 28 will be applicable to almost all of the other chapters, with only limited exceptions. Taking lessons from the NAFTA, under which a refusal to nominate a panelist could prevent the proceeding of the dispute settlement process (as seen in the sugar market dispute), the TPP procedure was expected to ensure the automatic composition of a dispute settlement panel. It might be premature to predict the effectiveness of the dispute settlement procedure at this stage, when the TPP Agreement has not yet entered into force. However, given the extreme complexity and ambiguity of the panel composition process, my impression at this point is that it is questionable whether the process will be as automatic as it is supposed to be. Weak institutional support for the panel process including the absence of a permanent secretariat and legal officers therein could be another obstacle to effective and prompt dispute settlement.

Quo vadis, TPP Agreement?: A rocky road ahead in ratification

While being subject to much public attention and heated debates, the TPP Agreement as it stands today is merely a humongous pile of words and paper, not a legally binding document. The ratification process is still in the pipeline in all of the 12 signatory countries and appears to have hit a snag in Japan and the US.

In Japan, the ruling coalition of the Liberal Democratic Party (LDP) and Komeito holds a majority in both chambers of the Diet (a two-thirds majority in the lower house, in particular). Despite such strong representation in the national parliament, the coalition decided to postpone a TPP vote to an extraordinary session expected to be held in autumn 2016. TPP foes believe that Japan conceded too much, particularly in agriculture market access, in achieving what they suspect to be an uneven deal. And their voices are getting louder. The revelation of a bribery scandal involving the former TPP minister’s staff, the government’s refusal to reveal negotiation documents, and the attempted publication of a tell-all memoir of the TPP negotiations by the chairman of the Lower House’s Special Committee on the TPP fueled their anger, and then came the disastrous earthquakes in Kumamoto. Also, as it appears, the government and the ruling coalition might have avoided forcible voting out of concern for the possible impact on the forthcoming upper house election in July, as the TPP involves some controversial market access issues, in particular, those regarding agricultural products. However, despite all of these twists and turns, the TPP ratification bill will pass the Diet eventually, unless the July election turns out to be a fiasco for the majority coalition.

In the US, the process is tougher going with election year politics at play. Whether a Democrat or a Republican, none of the major presidential candidates — Hillary Clinton, Bernie Sanders, or Donald Trump — support the TPP deal as is. Even key congressional leaders of pro-free trade GOP, including Senate Majority Leader Mitch McConnell, Senate Finance Committee Chairman Orrin Hatch, and House Ways and Means Trade Subcommittee Chairman Dave Reichert, reserve their support due to some controversial aspects of the final deal, such as patent exclusivity for biologics, failure to ban local server requirements in financial services, and the carve-out of tobacco from the ISDS. The administration of President Barack Obama, which originally aimed to obtain congressional approval in spring 2016, now acknowledges that it is unrealistic to expect the pre-lame duck TPP vote. The key congressional members and the presidential candidates have been repeatedly floating the possibility of seeking to renegotiate the final deal or exchange additional bilateral letters to fix the problems. Those who have looked at the US history of FTA negotiations for the NAFTA and thereafter would know that this is a fairly likely scenario, in which case it may be quite a long time — possibly three or five years — before ratification. It should also be noted that twists and turns in the past FTA ratifications occurred in connection with presidential and/or congressional elections and the resulting regime change and/or congressional power shift.

Article 30.5 of the TPP Agreement precludes the possibility of its entry into force without both the US and Japan ratifying it. Given the current political circumstances especially in the US, it seems that we still have a long ride home.

Original and previously revised versions of this column were posted on Research Institute of Economy, Trade and Industry (RIETI) in October 2015, and VoxEU and World Economic Forum in January 2016, respectively.

Tsuyoshi Kawase is a Professor, Faculty of Law, Sophia University/Faculty Fellow at the Research Institute of Economy, Trade and Industry (RIETI). He is a member of the E15 Task Force on Subsidies.

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