By Martin Khor, Executive Director of the South Centre, Geneva. Cross posted from TripleCrisis

The nature and effects of free trade agreements has become a topic of public discussion, especially with the round of talks of the Trans-Pacific Partnership Agreement (TPPA) about to take place in Malaysia.

Not much is known about the TPPA drafts. But with some of its chapters leaked and available on the internet, and since much of the TPPA is likely to be similar to bilateral FTAs that the United States has already signed, we can have a good idea of its main points.

As can be expected, there are many contentious issues to consider, especially for developing countries like Malaysia.

Actually, only a small part of the TPPA is about trade as such. Most chapters are on other issues, like services, investment, government procurement, disciplines on state-owned enterprises and intellectual property.

Joining the TPPA or similar FTAs will mean the country having to make often drastic changes to existing policies, laws and regulations, which will in turn affect the domestic economy and society.

On trade itself, the TPPA countries will have to remove tariffs on almost all products coming from one another. Perhaps only one or two products can still be protected.

The main implication is that local producers and farmers would have to compete with tariff-free imports from other TPP countries. This may lead to loss of market share or closure of some sectors.

Ironically, agricultural subsidies, which is the main trade-distorting practice of developed countries like the US, have been kept out of the agenda of the TPPA or other FTAs involving Europe.

The developed countries are clever not to include what would be damaging to them. Thus the developing countries are deprived from what would have been the major trade gain for them.

On services and investments, we can expect that TPP countries will have to open all their services and investment sectors to the entry and establishment of companies, in manufacturing as well as services including finance, commerce, telecoms, utilities, professional and business services.

If a country wants to exclude any sector, it will have to list this in a table of exceptions, and this will also be subject to negotiations. Future new services cannot be excluded as they are not even known yet today.

In the investment chapter, the country will have to commit not only to liberalise the entry of foreign companies, but also to protect the foreign investors’ rights in an extreme way that goes far beyond what is recognised in national laws and courts.

For example, the foreign investor includes any person or company who has an asset (factory, land, shares, contract, franchise, intellectual property, etc). “Fair and equitable treatment” to be given to them has been interpreted in past cases to include a standstill on (no changes in) regulation.

Thus, any new laws or changes in laws and regulations that the foreign investor claims will affect its future revenues can be challenged in an international tribunal for monetary compensation.

The regulations could be economic (for example, terms in contracts, type of or ratios on foreign ownership, financial regulation including in a crisis), health-related (food safety, tobacco control, provision of cheaper medicines), environment-related (ban on chemicals, policies on rivers, forest, climate change) and social (for example, affirmative action for disadvantaged groups or communities).

TPP countries have agreed to allow foreign companies to sue governments in an international court (usually ICSID, based in Washington) for compensation for expropriation, or for not giving them fair treatment.

Expropriation is defined not only as confiscation of property or breaking of contracts, but also as reduction of revenues due to a change in policies and regulations.

These investor-to-state disputes can cost countries a lot. A court awarded an American oil company US$ 2.3 billion against Ecuador’s government in 2012. Indonesia is being sued US$2 billion for withdrawing a contract that a state government made with a UK-based company.

The TPP will also open up government procurement, with foreigners allowed to bid on similar terms as locals for goods, services and projects of the federal government (and possibly also state and municipal governments) above a threshold value.

Existing preferences in government procurement for local companies will be affected, as will be the ability of government to use its spending and procurement policy to boost the domestic economy and as a major social and economic policy instrument.

Since government procurement contracts are considered investments, the foreign supplier can sue the government at an international tribunal by claiming unfair treatment including a renegotiation of contract.

There is also a sub-chapter on state-owned enterprises (SOEs). The USA and Australia are proposing disciplines on the operations of SOEs, including commercial companies in which the government has a share.

This would restrict the state’ ability to govern or manage government-linked companies, or provide them with incentives and preferences. This would have serious implications for many a developing country whose success is based on the role of the state in the economy, and on public-private sector partnerships.

The chapter on intellectual property has generated public debate because it obliges the TPP countries to have IP laws far beyond the WTO rules.

Longer patent terms and restrictions on the state’s policy freedom to promote generic medicines are expected to raise the prices of medicines. Tighter copyright rules would also affect access to knowledge, including books, journals and digital information.

Local producers in industry may also find it more difficult to upgrade their technologies and local farmers could have less access to agricultural inputs including seeds.

These are the specific issues that are or should be in the centre of the negotiations. There are many benefits to the foreign investors or companies, as contrasted to the local, as can be seen from the above. Local companies would lose a lot of their present advantages or preferences, they cannot stake a claim to “fair and equitable treatment” nor sue the government in a foreign court, unlike the foreign.

Naturally, there are pros and cons to any agreement. Any potential gain for a country in exports or investments should be weighed against potential losses to domestic producers and consumers, and especially the loss to the government in policy space and potential pay-outs to companies claiming compensation.