The TPP as a set of international economic rules

Tsuyoshi Kawase

An agreement on the Trans-Pacific Partnership has finally been reached, after many twists and turns. This column examines the new set of rules comprising the agreement, and asks whether the TPP is, as claimed, a 21st century agreement or just an expanded version of a US-style FTA. While the TPP is undoubtedly a highly ambitious agreement that includes areas unaddressed by WTO disciplines, its success rests ultimately on the dispute settlement procedures.

Editor's Note, Erratum: The original version, which was published here on January 10, 2016, was written in October 2015, before the full text of the TPP agreement was released. This is the revised version, rewritten after the release, and posted on 13 January 2016.

An agreement on the Trans-Pacific Partnership (TPP) was reached finally. The TPP negotiations involved only 12 countries, but had to go through lots of twists and turns because of a crisscross of confrontational relationships – large advanced economies versus emerging economies, exporters versus importers in agricultural trade, and market economy countries versus state capitalist countries. Achieved despite such difficulties and coming at a time with no evident signs of hope for the Doha Round of negotiations under the WTO, the successful conclusion of the TPP agreement, an ambitious trade liberalisation initiative, is surely an event worthy of celebration. One month and a half after the release of the full text of the TPP agreement, even top-notch lawyers in Washington are still struggling to ‘decipher’ what the tonnes of documents all really mean, a task that is almost impossible to be done in such a short period. But I would like to attempt to outline, offer a perspective on, and share my ‘first impression’ of this new set of rules based on the disclosed text supplemented by the summaries of the agreement and explanatory notes released by the governments of the TPP member countries,1 and other information from media reports.

What is a 21st century FTA?

At the conclusion of the TPP agreement, leading figures including Akira Amari, Japan's 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, 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" (Baldwin 20012), and an agreement designed to facilitate the formation of such nexuses is what is meant by a "21st century agreement”.

The WTO agreements have critical shortcomings in provisions for facilitating the development of business operations in overseas markets that accompany the unbundling of production processes. For instance, the WTO as it stands today is unable to ensure the liberalisation and protection of direct and indirect investments, fair competition in host countries, or the smooth deployment of executive officers and engineers from headquarters in home countries – all of which are crucial factors for successful overseas operations. The liberalisation of services (e.g. financial services, logistics) needed for supply chain development has taken place only to a limited extent because the General Agreements on Trade in Services (GATS) takes a positive list approach, which is to liberalise only those areas and modes of supply listed as specifically agreed upon by and among the WTO members. In order to foster the international mobility of intermediate goods and the cross-border outsourcing of parts, trade facilitation – i.e. the provision of simple and transparent customs clearance procedures – is now becoming all the more important, but this is another area of weakness for the WTO.2

The TPP agreement includes those 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), trade facilitation, 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 in a way to liberalise "substantially all trade" within the affected region.

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

Can we call the TPP agreement a 21st century agreement? My initial answer to this question, based on the summary of the agreement released in early October, was: "Is that overstating it?" After reviewing the full text over the past few weeks, my impression basically remains the same, while I have found some innovative aspects in it.

First, from the viewpoint of supporting and promoting the development of supply chains, the Regulatory Coherence chapter (Ch.25) attempted but failed to introduce best regulatory practices in terms of their coherence and impact assessments, ending up calling for cooperation and efforts to do so, whereby whatever commitments made under this chapter are not subject to dispute settlement procedures. The same holds true for the Competitiveness and Business Facilitation chapter (Ch.22) and the Small and Medium-sized Enterprises chapter (Ch.24).

Second, I have an impression that the TPP, 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). Of course, those bilateral FTAs are quite ambitious in their own right, and there are some areas in which the TPP exceeds them in the level of ambition. However, the TPP is no different from existing FTAs in its basic framework for rules. For instance, the Investment chapter (Ch.9) would achieve greater procedural transparency, but the substantive standards set forth therein for the liberalisation and protection of investments – as seen in the granting of a "minimum standard of treatment" for investments in accordance with customary international law principles and the prohibition of expropriations – generally follow the 2012 US Model Bilateral Investment Treaty (U.S. Model BIT 2012), except for certain elements in prohibition on "performance requirements" (e.g. prohibition of restrictions or limits on royalties charged by foreign investors for licensing their technologies and other services to local companies).3 The State-owned Enterprise chapter (Ch.17) also follows the recent FTAs of the US in embracing the principle of non-discrimination in SOEs' conduct of business on the basis of commercial considerations. The parties successfully developed a set of very detailed and innovative provisions to regulate the adverse effects of non-commercial assistance to SOEs. Yet, the SOE chapter is still less ambitious in that it has failed to adopt a broad definition of ‘SOE’ which would include those under less and indirect state ownership as defined in the US-Singapore FTA, and that it would not make it mandatory to gradually reduce government ownership and involvement in SOEs. The SOE provisions also include various sorts of exceptions.

Third, some major chapters remain 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' technical standards from turning into trade barriers, they are generally no more than what has been agreed upon in the WTO. The Trade Remedies chapter (Ch.6) provides for a transitional safeguard mechanism that allows a TPP member to raise a TPP tariff rate to the most-favoured nation (MFN) rate (snapback tariff provisions) in order to counter a sudden surge in imports. However, it is unlikely that the chapter would include binding WTO-plus provisions such as those requiring notification to and consultations prior to initiating an antidumping investigation included in the US-South Korea FTA and Japan's economic partnership agreement (EPA) with India. To begin with, Australia and New Zealand had long abolished antidumping duties between them, and the 12-country TPP is no match.

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 substance of specific provisions. For instance, suppose that Japan is to conclude a bilateral agreement separately with each of the other 11 TPP countries. Japanese automobiles, which are to be 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 investment covered by an EPA would be entitled to different levels of protection depending on whether it constructs a factory in Vietnam or Australia. The conclusion of the TPP 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 has some noteworthy novel aspects. The Labour chapter (Ch.19) is supplemented with bilateral side letters between the United States and individually with Brunei, Malaysia, and Vietnam, thereby securing specific commitments from the latter three countries to safeguard fundamental labour rights – such as the right to organise 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 of the TPP. In particular, the implementation of Vietnamese commitments has been assured by the US retaining the right to withhold or suspend its tariff reduction commitments in the event of Vietnamese non-compliance with its commitments.

Also, it is notable that the TPP 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 ability as a means to fully access and benefit from the opportunities created by the TPP.

The comprehensive Environment chapter is ground breaking 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 can be defined as a 21st century agreement in the sense that it has made a full-fledged attempt to solve those global issues whose linkage with trade has been discussed over the past quarter century.

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

Undoubtedly, the TPP as a whole is a highly ambitious agreement that includes areas unaddressed by WTO disciplines. The TPP is highly complex, including not only rules but also complicated schedules of concessions that list country-specific, low-tariff quotas and item-specific tariff elimination schedules, in particular with respect to textile, automobiles, and agricultural products, with the rules of origin providing for various exceptions and special provisions.

As exemplified by the WTO, dispute settlement procedures are what guarantee the effectiveness of a highly ambitious trade agreement. However, those under FTAs including the North American Free Trade Agreement (NAFTA) have been hardly used.4 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 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 differs greatly from those conventional FTAs, the role of its dispute settlement procedures is far more important.

Moreover, circumstances surrounding the conclusion of the TPP spell the possibility of its dispute settlement procedures becoming all the more important. First, there were only a couple of months since the final agreement reached in October to complete the ‘legal scrub’ of the TPP, a process to clean up the text to ensure consistency of terms and resolve any inconsistencies between the chapters and clauses therein,5 and certain defects in the finalised legal text may remain. Second, as exemplified by the patent protection of biological drugs by means of allowing companies to keep test and other data on new drugs undisclosed for a designated period of time, 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.6 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 also portends the possibility of disputes in the future. The conclusion of the TPP has been greeted with criticisms from a series of leading politicians, including Senate Finance Committee Chairman Orrin Hatch and former Secretary of State Hillary Clinton, a Democratic candidate for the 2016 presidential election.7 As such, it is expected that Congressional ratification of the TPP will find it tough going. Indeed, Senate Majority Leader Mitch McConnell signalled that the TPP had better be submitted to the Congress only after the November 2016 elections, so that the candidates can avoid political controversy over the TPP in the course of the forthcoming elections.8 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. Likewise, if similar disputes are to arise under the TPP, the success or failure of the 12-country pact rests ultimately on the dispute settlement procedures.

The main dispute settlement procedures under the TPP would be applicable to almost all of the chapters, with limited exceptions such as the Regulatory Coherence and other several chapters. Taking lessons from the NAFTA, under which a refusal to nominate a panellist could prevent the proceeding of the dispute settlement process (as seen in the sugar market dispute), the TPP Dispute Settlement chapter (Ch.28) attempts to ensure the automatic formation of a dispute settlement panel. In addition to this, the TPP provides for area-specific alternative dispute settlement procedures, such as the investor-state dispute settlement (ISDS) procedure under the Investment chapter (Ch.9), the special dispute settlement procedures applicable specifically to Japan-US and Japan-Canada disputes over motor vehicle trade, and the Cooperative Technical Consultations (CTC) under the SPS chapter (Ch.7).

The TPP is indeed a 21st century FTA. However, unless the dispute settlement procedures function properly, it would be like ploughing the field and forgetting to sow the seeds. Have the negotiators managed to prepare dispute settlement procedures and blow life into the TPP, based on the full awareness and understanding of the significance of this agreement? Before its entry into force, it is premature for us to predict whether the TPP Agreement can be in fact effectively implemented. However, the panel composing process, which is excessively complicated and less clear, questionably assures automaticity of the procedure.9 Weak institutional support for the panel process including lack of a permanent secretariat and legal officers therein could be another obstacle to effective and prompt dispute settlement. I would like to share with my readers a detailed analysis of this Chapter 28 procedure on another occasion, and revisit this question after the Agreement enters into force and several cases actually arise in the future.

Editor’s note: This column was reproduced with permission from the Research Institute of Economy, Trade and Industry (RIETI).

References

Baldwin, R (2012), "21st Century Trade and the 21st Century WTO" in RIETI's Perspectives from Around the World column, 14 June.

Footnotes

The TPP full text is available at New Zealand's Ministry of Foreign Affairs and Trade website. The other references are as following: preliminary Japanese translation of the Summary of the Trans-Pacific Partnership Agreement; an explanatory summary of the agreement released by the Japanese government (Cabinet Secretariat); and the relevant explanatory websites of the governments of Australia, Canada, New Zealand, and the US.

2 However, in 2014, WTO members adopted an Agreement on Trade Facilitation, which is now waiting for the completion of the domestic ratification process at member countries.

3 "TPP Deal Reached: Investment Arbitration Survives," Herbert Smith Freehills LLP (Oct. 5, 2015); "TPP Deal Includes Tobacco Carveout, Teeing Up Fight with Congress," Inside U.S. Trade, 9 October 2015, p16.

4 As an exception, the panel review procedure under Chapter 19 of NAFTA is highly utilised. However, in substance, this is more of a substitute for a judicial review of trade remedy measure under domestic law.

5 According to a news report, the task is supposed to be completed during the first week of December 2015 in Wellington, NZ. "TPP Countries Aim to Finish Legal Scrub at December Meeting in New Zealand," Inside U.S. Trade, Nov. 20, 2015, p. 3.

6 "Australia, Chile Say TPP Biologics Deal Will Not Require Them to Change," Inside U.S. Trade, 9 October 2015, pp. 1, 28-29.

7 Wall Street Journal, 7 October 2015, A.1, A.14.

8 "McConnell Downbeat on Pre-Election TPP Vote, Ryan Punts on Timing," Inside U.S. Trade, 18 December 2015, pp.1-2; "McConnell Throws Cold Water On TPP Consideration Before 2016 Election," Daily News, World Trade Online, 11 Decdember 2015.

9 Simon Lester, "The TPP Process for Composing Dispute Settlement Panels," International Economic Law and Policy Blog, posted on Nov. 13, 2015.