The Trans-Pacific Partnership: Core negotiation issues
Manufacturers Alliance for Productivity and Innovation | 14 November 2014
The Trans-Pacific Partnership: Core negotiation issues
Yingying Xu, Ph.D., MAPI Foundation
The Trans-Pacific Partnership is a high-standard, comprehensive free trade agreement that is being negotiated by seven countries from the west side of the Pacific (Australia, Brunei, Japan, Malaysia, New Zealand, Singapore, and Vietnam) and five countries from the eastern fringes (the U.S., Canada, Mexico, Chile, and Peru).
Since 2009, when the Obama administration first embraced TPP as an important element of its regional economic integration strategy, TPP negotiators from the 12 countries have held 19 formal rounds of talks. The involved parties remain deeply divided on a number of contentious issues, however, and have been unable to reach a final agreement. No new timetable has been set to conclude the deal after the December 2013 deadline was missed.
This report, the second in a MAPI Foundation series on the Trans-Pacific Partnership, is composed of two parts. The first section discusses the main obstacles to the negotiations’ conclusion. The second summarizes the results of a survey gauging member companies’ understanding of the major negotiation issues and expectations about the agreement’s potential economic impact.
Part I: Obstacles to the Deal’s Conclusion
The TPP is envisioned as a 21st-century trade agreement in the world’s fastest-growing region. The expectation is that it will deal with traditional free trade measures such as market access for goods, services, and investment, but also break ground on new and cross-cutting trade issues presented by a globalized economy. Officials are busy crafting new rules to push boundaries in areas not previously committed.
The highly ambitious agenda, combined with a geographically and economically diverse group of members, makes it difficult for the 12 countries to find commonality during negotiations. Only 6 of the agreement’s 29 chapters have been identified as closed thus far, and significant differences linger on contentious issues.
Market Access for Goods and Services
Agricultural and Food Products: The U.S. seeks to secure additional market access, especially in Japan, Malaysia, and Vietnam, countries with which it does not yet have FTAs. The most problematic sectors have been sugar and dairy, thanks mainly to the long history of protections. The addition of Japan at the table has further complicated negotiations since it is willing to make only limited compromises on tariff rates for rice, wheat, beef, and pork in addition to sugar and dairy, which are extremely politically sensitive in the country. Substantial disparities still exist among negotiators over the use of geographical indicators and the mechanism to address disputes arising from sanitary and phytosanitary barriers associated with trade in agricultural products.
Textiles, Apparel, and Footwear: Differences in this category arise between developed and some developing countries over tariff eliminations/phase-outs and relaxing rules of origin. The U.S. has relatively high tariff rates on these labor-intensive products, and existing U.S. FTAs have very strict “yarn-forward” rules requiring apparel products to be eligible for preferential treatment only if everything from the yarn stage on is produced from within the FTA region. This rule could disadvantage Vietnam, whose apparel industry accounts for a large share of the country’s exports and imports, with the majority of raw materials from China and South Korea. While Vietnamese and U.S. apparel and footwear retailers are advocating for a “cut and sew” rule that allows textiles imported from third countries to receive duty-free treatment, Mexican and U.S. producers are against this position and support more stringent rules of origin, reflecting their concern about unfair competition from Asian manufacturers.
Automobiles: The U.S. and Japan remain divided over market access for auto companies. Japan would like the U.S. to drop tariffs on Japanese vehicles—2.5% on cars and 25% on trucks—while in return, the U.S. demands concessions from Japan on non-tariff measures such as stricter safety standards and higher taxes on larger cars and trucks, in which American companies have comparative advantage. Also under discussion are a special safeguard mechanism that would allow the U.S. auto tariff to snap back to its previous level if auto imports from Japan surge after the tariff phase-out and a tariff delay mechanism that would permit the U.S. to delay the tariff phase-out when Japan imposes new non-tariff barriers on imports from the U.S.
Trade in Services: Developed countries have pushed for greater market access for services, but developing countries have been more cautious on service trade liberalization, uneasy about the impact on employment from foreign competition as well as domestic objections from politically powerful interest groups, which often control sensitive sectors. One sticking point involves provisions on financial services, where the U.S. is pushing for the right to 100% ownership and the ability to provide cross-border services without a commercial presence requirement. The U.S. has proposed new obligations to prevent countries from limiting cross-border data transfers or mandating that companies locate servers in a particular location; other countries have expressed apprehension about the abuse of privacy rights and prefer to give governments greater leeway in regulations to protect personal data.
Government Procurement: The U.S. has already exchanged procurement commitments under FTAs with six TPP nations, and is seeking to include similar provisions with other partner countries, including Malaysia, which is sensitive in this area. Under this provision, countries are obligated to provide national treatment on a reciprocal basis to foreign suppliers of goods and services for government procurements above a certain dollar threshold. Members of Congress have signaled opposition to the commitments, with concerns about limiting the application of Buy American provisions and “U.S. tax dollars being offshored and invested to strengthen many other countries’ manufacturing sectors.” In response, the Office of the U.S. Trade Representative made it clear that the TPP will not include any new commitments for U.S. state or local authorities to open up government procurement to foreign suppliers. This position could raise the ire of Canada, which is seeking greater access to the U.S. government procurement market by ensuring that U.S. federal money provided to state and local projects is not subject to Buy American requirements.
Issues Related to Rules
Intellectual Property Protection: The TPP negotiations attempt to go well beyond the WTO commitment across all areas of IP, but countries differ greatly on the appropriate level of obligations in many areas. The most challenging issues include decisions regarding balance between sufficient patent protections for pharmaceutical products and the ability of developing countries to access low-cost generics; the term for copyright protection to ensure enforcement protects the rights of creators but does not become a barrier to technological innovation and legitimate trade; regulation and exceptions for the “new digital economy,” such as the liabilities of internet service providers for infringement of content by their users; and how to treat temporary reproductions of copyrighted works without authorization.
Labor and Environmental Standards: The U.S. has been facing almost unified opposition from other parties to its demand that the obligations under the labor and environmental chapters are subject to the same dispute settlement mechanism as other TPP chapters. The leaked text of the environmental draft chapter published by WikiLeaks in January 2014 shows that different parties managed to agree only on providing consultation at the official and ministerial levels in the case of obligation violations. An arbitral tribunal and a plan of action can be followed, but there is no recourse or penalty if the action plan is not fully implemented.
Foreign Investment: One of the most contentious topics in the investment chapter is whether to include investor-state dispute settlement provisions, which would allow private foreign investors to circumvent domestic legal processes and initiate dispute settlement proceedings directly against a host government for unfair or discriminatory treatment through international arbitration tribunals. Since the signing of NAFTA, the U.S. has included these provisions in all its trade agreements except the Australia–U.S. FTA. Australia is the only country in the TPP negotiations opposing the provisions, arguing that they exceed “national treatment” obligations, giving foreign investors greater protection than domestic investors, and can infringe on the sovereignty of the host government.
State-Owned Enterprises: SOEs play a significant role in the economies of several participating countries, including Vietnam (telecommunications), Chile (copper), Singapore (investment), and Japan (financial and insurance). Since SOEs can receive preferential treatment from governments, such as subsidies and low-cost financing, some countries have advocated strong provisions on SOEs in order to level the playing field between private companies and SOEs. Although there is a sense that some form of SOE disciplines will be included in the agreement, the negotiating parties are still working on the details and actively debating exceptions to the rules, formally known as “non-conforming measures.” Although U.S. trade representatives would prefer to limit exceptions to those completely necessary in order to avoid setting an example for other countries to seek broad exceptions, they will likely face strong internal pressure to make certain SOEs exempt.
Political Difficulties
All 12 countries are facing tremendous political obstacles at home. In the U.S. there is renewed uncertainty related to the passage of Trade Promotion Authority (TPA). This power gives a president the ability to negotiate and conclude trade agreements that Congress then approves or rejects—without the opportunity to make changes or filibuster. It can be very helpful in simplifying and streamlining the ratification process and the implementation of trade agreements, and is therefore widely construed as signaling serious congressional support for moving ahead with negotiations. Receiving TPA from Congress is looking especially difficult for Obama, who faces major resistance from his own party. This could cause even more delays for the TPP negotiations, since other partners might be reluctant to make early commitments on sensitive issues.
Part II: MAPI Foundation Survey Results
Summary
– More than half of responding members report no knowledge of the Trans-Pacific Partnership, while only 6% claimed to be very knowledgeable.
– The three countries in the agreement considered most important to MAPI members are, not surprisingly, Canada, Mexico, and Japan.
– Vietnam, Malaysia, and Brunei are the three partner countries reported by respondents as the most difficult for their companies to operate in. Poor physical infrastructure is considered the biggest impediment, followed by customs inefficiency and workforce quality.
– If the TPP agreement is concluded, MAPI members expect to see the greatest increase in their companies’ trade and investment with Mexico. Japan and Vietnam are expected to show somewhat less significant increases, while Peru and Brunei ranked last.
– More than half of responding members are uncertain how TPP will influence their companies’ operations and 32% anticipate moderate benefits. No respondent expects negative effects.
– Among the 10 core negotiation issues listed in the survey, respondents deemed intellectual property rights the most important, followed by tariff elimination/reduction, matters affecting global supply chains, and non-tariff barriers elimination.
References
1. "TPP Negotiators In Hanoi; Japan Auto Talks; INTA, LAC Meetings," World Trade Online, September 2, 2014.
2. Australia, Canada, Chile, Mexico, Peru, and Singapore.
3. "USTR Says Sub-Federal Government Procurement Off The Table In TPP," World Trade Online, August 1, 2014.
4. "Business Foresees Mixed Approach On Structuring SOE Exceptions In TPP," World Trade Online, August 8, 2014.
5. Ed O’Keefe, "The Trans Pacific Partnership is in trouble on Capitol Hill. Here’s why," Washington Post, February 19, 2014, www.washingtonpost.com/blogs/the-fix/wp/2014/02/19/why-the-trans-pacific-partnership-is-in-trouble-on-capitol-hill.
