Trans Pacific Trade Agreement moves closer to the finish line

Blog Post
During an Association of Southeast Asian Nations (ASEAN) gathering this past weekend in Kuala Lumpur, U.S. Trade Representative Michael Froman took the opportunity to meet on the sidelines with ministers from Australia, Brunei, Malaysia, and New Zealand to discuss the Trans-Pacific Partnership (TPP) trade deal.

The last full-scale TPP talks, involving all 12 participating nations—Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam—were held at the end of July. Various participants in the talks have stated that the deal is very close to being complete, with “only a small handful of issues that remain unresolved—obviously the most difficult and politically sensitive ones.” Among these issues are the automobile rules of origin, dairy, and sugar market access, dispute resolution mechanisms, intellectual property protections for pharmaceuticals, currency controls, and labor protections, among others.

Rules of origin
These rules, which determine whether imported vehicles and automobile parts can get tariff cuts or duty-free treatment based on how much of their contents come from TPP participating states, have been among the most contentious. Japan is hoping to continue to rely on existing supply chains in non-TPP countries, like Thailand, while still receiving the benefits of reduced auto tariffs for sales into TPP countries. Therefore, it came to an initial agreement with the U.S. that only 30 percent of automobile parts and 45 percent of light-duty vehicles must originate in a participating country. However, Mexico and Canada have objected on the grounds that such liberal rules would overly favor non-TPP auto parts suppliers. Under the North American Free Trade Agreement (NAFTA) rules of origin, to which both countries are currently subject, 62.5 percent of a passenger car or light truck’s net cost must originate in North America to be considered tariff free under the agreement. The head of the Mexican automakers association has recently indicated that its domestic industry would accept a 50 percent rule of origin.

Canada and New Zealand have faced off over the issue of dairy market access. New Zealand, the world's top dairy exporter, has aggressively demanded additional access to the U.S., Australian, and Canadian markets. However, each of these countries, particularly Canada, has been reluctant to dismantle restrictions on trade that protect domestic dairy producers.

Australia has been pushing for approximately five times as many metric tons of sugar to be permitted to be imported into the U.S. under the existing quota system, leading to pushback from U.S. sugar producers who insist the U.S. has already granted extensive market access to Australia and other countries in past trade agreements. As a result of existing trade protections, the price of sugar in the U.S. is almost 150 percent of the world market price.

Intellectual property and pharmaceuticals
The U.S. has faced pushback on its demands to protect its pharmaceutical industry by requiring that test data be off limits to companies that want to create generic versions of drugs for 12 years. In the face of opposition from Australia, which seeks to limit the freeze period to five years for biological medicines, it appears likely that the countries will compromise, permitting somewhere in the neighborhood of seven to eight years of protection.

Currency manipulation and labor protection
The AFL-CIO has asked Congress to push for provisions in the TPP that would prohibit, or at least punish, currency manipulation. The request follows the recent devaluations of currency by China and Vietnam, which many fear encourage other TPP participants—such as Japan, Singapore, and Malaysia—to similarly devalue their currencies. Given the nuances of monetary exchange finance, many commentators suggest the most that can be expected would be a side agreement containing limited restrictions on currency.

Despite the significance of the issues yet to be finalized, National Foreign Trade Council Chairman Alan Wolff, like many, sees the trade deal as inevitable:

“I see this as the ‘transcontinental railway.’ We’ve come 98 percent of the way. Well, if you think of the transcontinental railway, if we’re 2 percent apart, we’ve got about 60 miles, and there [are] some swamps and ravines, but in fact no one is going to abandon the railroad. This is going to happen.”

Why is the TPP so important?

According to the Peterson Institute for International Economics, a U.S.-based think tank, the trade pact could potentially raise regional economic output by $285 billion in 10 years. The agreement would represent the world’s biggest trade deal in more than a decade, affecting more than 40 percent of the world’s gross domestic products and a quarter of global exports. In fact, U.S. exports of goods to TPP countries totaled $698 billion in 2013, representing 44 percent of total U.S. goods exports.

The aim of the agreement is to create important new export opportunities, encourage inflows of foreign direct investment, and promote more competition and investment in services, which in turn would spur productivity growth across the economy. At the same time, the agreement would constrain political policies that provide preferences to domestic firms and restrictions on import competition. The rulemaking obligations would limit the use of industrial policy measures—such as subsidies and government procurement preferences—that discriminate against foreign suppliers and investors. Among other things, the TPP is intended to ensure:
  • Effective implementation and enforcement of international obligations in areas such as labor, environment, intellectual property rights, and competition policy, whose enforcement will likely depend on binding dispute settlement procedures implemented by non-member state arbitration panels
  • The elimination of tariffs and streamlining of nontariff measures—such as sanitary and phytosanitary standards—on agricultural goods (with exemptions for sensitive products, such as dairy and sugar)
  • A liberalization of tariff and nontariff trade restrictions for substantially all other goods and services to ensure nondiscriminatory treatment
  • The provision of security and protection to foreign investors by measures such as the removal or reduction of limitations on foreign ownership and giving foreign individuals and firms the right to provide cross-border services without the requirement to establish a domestic commercial presence
But lessening trade barriers do not necessarily mean a corresponding relaxation in applicable export control laws, the rules that govern where U.S. goods, services, technology, and software can be sent, and whether licenses and other restrictions may apply to their transfer and shipment abroad. Significant export control reforms over the past three years have reduced some of the regulatory requirements applicable to trade with the countries involved in TPP negotiations, but many requirements still apply.

Those interested in learning more about the impact of the trade deal and the export control rules applicable to trade with TPP countries are encouraged to attend the event “The Trans Pacific Partnership: What does it mean for your business?,” this coming Tuesday, Sept. 1, to hear more from government officials and international trade attorneys.
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