The TPP as a Set of International Economic Rules

Lambert here: I like the (re)framing that TPP, rather then being a “trade deal” is designed to optimize global supply chains (though who those chains enchain is another matter). However, I’m wondering if the claim in the summary that “the success or failure of the 12-country pact rests ultimately on the dispute settlement procedures” is over-sold, or not, and I thought the ISDS discussion lacked depth. Then again, given that the author is Japanese, there may be something unstated, though obvious, that I’m missing. Readers?

By Tsuyoshi Kawase, Professor, Faculty of Law, Sophia University, Tokyo; RIETI Faculty Fellow. Originally published at VoxEU.

An agreement on the Trans-Pacific Partnership has finally been reached, but the full text of the agreement has not been released yet. This column looks at the new set of rules comprising the TPP and whether it deserves to be called a ‘21st century free trade agreement’. It argues that the success or failure of the 12-country pact rests ultimately on the dispute settlement procedures.

An agreement on the Trans-Pacific Partnership (TPP) has finally been reached. The TPP negotiations involved only 12 countries, but had to go through lots of twists and turns because of a criss-cross of confrontational relationships, i.e. large advanced economies versus emerging economies, exporters versus importers in agricultural trade, and market economy countries versus state capitalist countries. The successful conclusion of the TPP agreement, an ambitious trade liberalisation initiative, is surely an event worthy of celebration. It has been achieved despite various difficulties and came at a time with no evident signs of hope for the Doha Round of negotiations under the WTO. As the full text of the TPP agreement has not yet been released as of this writing, this is going to be guess work. But I would like to attempt to outline and share my ‘first impression’ of this new set of rules based on the summaries of the agreement and explanatory notes released by the governments of the TPP member countries and supplementary information from media reports.¹

The TPP and Shortcomings of the WTO

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 “21^st 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. It goes beyond trade in finished products predicated on the division of labour and 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 the “trade-investment-services-intellectual property nexus” (Baldwin 2012) and an agreement designed to facilitate the formation of such nexuses is what is meant by a 21^st 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 where the WTO has weaknesses.²

The TPP agreement includes those provisions that are necessary for the development of supply chains but not provided 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 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 21^st Century Agreement or Just an Expanded Version of a US-style FTA?

Can we call the TPP agreement a 21st century agreement? It may be a little too harsh, but I would dare to say “no” based on the summary of the agreement and point to some areas that would require improvements.

• First, the Regulatory Coherence chapter attempted but failed to introduce best regulatory practices in terms of their coherence and impact assessments.

Instead, it ends 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 and the Small and Medium-sized Enterprises chapter.

• Second, judging from the summary of the agreement, I have an impression that the TPP, in terms of its structure and items included, is little more than an expanded, 15-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 could 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 and the prohibition of expropriations—generally follow the 2012 US Model Bilateral Investment Treaty (US Model BIT 2012). The few exceptions are 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 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. Or rather, it is less ambitious in that it has failed to adopt a broad definition of ‘SOE’ which would include those under 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.

• Third, some major chapters remain substantially WTO equivalents.

The Technical Barriers to Trade (TBT) chapter and the Sanitary and Phytosanitary (SPS) Measures chapter include some WTO-plus elements in the procedural aspect. 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 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.⁴ To begin with, Australia and New Zealand—both of which are parties to the original TPP or the Pacific Four (P4) agreement—had long-abolished antidumping duties between them, and the 12-country TPP is no match.

Noteworthy Novel Aspects of the TPP

However, the significance of the TPP as a 21^st century agreement should be found in the fact that an agreement designed to support and promote the formation of supply chains has been expanded in 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 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 seems to have secured specific commitments from Brunei, Malaysia, and Vietnam 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, with the implementation of such commitments in Vietnam seemingly assured by the US’ postponing of the completion of tariff elimination.⁵ Also, the Environment chapter would impose—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 would be referred to the dispute settlement procedure designated in the TPP, and to that extent, the implementation of the chapter would be guaranteed by means of countervailing trade measures such as the suspension of tariff concessions. The TPP can be defined as a 21^st century agreement in the sense that it has made a fully-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 21^st Century Agreement

Undoubtedly, the TPP as a whole is a highly ambitious agreement that includes areas unaddressed by WTO disciplines. It has been reported that 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, it includes rules with respect to textile, automobiles, and agricultural products, with the rules of origin providing for various exceptions and special provisions.⁶

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.⁷ This is probably the result of various factors such as: bilateral FTAs by necessity prioritise consultations; an alternative dispute resolution (ADR) mechanism, such as the one included in most of Japan’s EPAs as a tool to improve business environments, has been utilised; and 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 is only a month and a half 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 clauses therein and with other agreements, and certain defects in the finalised legal text may remain.⁸ Second, as exemplified by the patent protection of biopharmaceutical drugs by means of allowing companies to keep clinical data on new drugs hidden 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.⁹ 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 election 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.¹⁰ As such, it is expected that Congressional ratification of the TPP will have a tough going. 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.

According to the summary of the agreement, the general dispute settlement procedures under the TPP would be applicable to almost all of the chapters, with limited exceptions such as the Regulatory Coherence chapter. 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 seems to have ensured 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, 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.¹¹

Conclusion

The TPP is a 21^st 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? I would like to reconsider this question when the full text of the TPP is released to the public.

References

Baldwin, R (2012), “21^st Century Trade and the 21^st Century WTO,” RIETI Perspectives from Around the World, 14 June.