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

References

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

Footnotes

1 This column was written with reference to the preliminary Japanese translation of the Summary of the Trans-Pacific Partnership Agreement and an explanatory summary of the agreement released by the Japanese government (Cabinet Secretariat) as well as the relevant explanatory websites of the governments of Australia, Canada, New Zealand, and the United States.

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 See “TPP Deal Reached: Investment Arbitration Survives,” Herbert Smith Freehills LLP (5 October 2015); Inside U.S. Trade, 9 October 2015, p16.

4 According to the explanatory summary released by the Japanese government (p.16 in the explanatory summary listed in Note 1), the provision prohibiting the application of a transitional safeguard measure more than once on the same good is an element not found in the WTO Safeguard Agreement. However, the explanation is not clear as to whether this limitation applies to those transitional safeguard measures within the TPP region or safeguard measures in general including those under the WTO Safeguard Agreement. Therefore, at this point, the provision cannot be defined as a WTO plus provision.

5 Inside U.S. Trade, 9 October, 2015, pp. 1, 31.

6 Inside U.S. Trade, 9 October, 2015, p. 1.

7 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.

8 Inside U.S. Trade, 16 October, 2015, p. 1.

9 Inside U.S. Trade, 9 October 2015, p. 1. The final negotiated text of the Intellectual Property chapter has been released by WikiLeaks, and an informal translation of controversial patent-related provisions has been made available by a citizens group opposed to the TPP.

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

11 Inside U.S. Trade, 16 October, 2015, pp. 1, 3.

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About Lambert Strether

Lambert Strether has been blogging, managing online communities, and doing system administration 24/7 since 2003, in Drupal and WordPress. Besides political economy and the political scene, he blogs about rhetoric, software engineering, permaculture, history, literature, local politics, international travel, food, and fixing stuff around the house. The nom de plume “Lambert Strether” comes from Henry James’s The Ambassadors: “Live all you can. It’s a mistake not to.” You can follow him on Twitter at @lambertstrether. http://www.correntewire.com

13 comments

  1. digi_owl

    Basically the WTO was dropped as a rubberstamping venue just as it was badgered into letting non-corporate interested to have a say.

  2. Chauncey Gardiner

    Re: …“As the full text of the TPP agreement has not yet been released as of this writing, this is going to be guess work.”

    Bingo!… and especially regarding the Investor-State Dispute Settlement (ISDS) mechanism, as the author observed.

    This “agreement” is designed and intended to run roughshod over sovereign nation, state and local laws. As indicated in the article, it is about assuring free movement of capital globally and shielding it from emergence of effective competition, loss or expropriation regardless of the actions of those who control it. The TPP contains implicitly protectionist measures for favored sectors; and enshrines a status quo that places environmental considerations, public health and safety, labor protections and laws, state and local economic initiatives, and taxation in a perpetual “race to the bottom”. It is no accident that industry and Wall Street lobbyists effectively wrote this agreement.

    Ricardo’s theory of comparative advantage, upon which the author of this article says the TPP is based, is in reality detrimental to our national economy. As usual, this latest so called “trade agreement” is merely another effort to transfer social costs from those who cause them onto the American people.

    We need look no further than the suit for $15 billion in damages initiated last week by TransCanada (and hidden private investors) against the U.S. under NAFTA for failing to approve the Keystone XL pipeline to see what would be in store for us should this agreement be approved by Congress.

    http://journalstar.com/news/state-and-regional/federal-politics/transcanada-files-lawsuit-and-billion-nafta-claim-over-keystone-xl/article_db61b1a8-09b8-5cbf-a482-5dc0d5f8fb9b.html

    The entire framework and body of so called “trade agreements” that have been entered into by the U.S. government need to be revisited IMO, with the primary question (as usual) being, “Who benefits?”.

  3. JTMcPhee

    Yah, purely benign. Just a set of international economic rules. Not SUPRAnational, infra national , post national.

  4. Chauncey Gardiner

    Re: …“As the full text of the TPP agreement has not yet been released as of this writing, this is going to be guess work.”

    Bingo!… especially regarding the Investor-State Dispute Settlement (ISDS) mechanism, as the author observed.

    This “agreement” is designed and intended to run roughshod over sovereign nation, state and local laws. As indicated in the article, it is about assuring free movement of capital globally and shielding it from emergence of effective competition, loss or expropriation regardless of the actions of those who control it. The TPP contains implicitly protectionist measures for favored sectors; and enshrines a status quo that places environmental considerations, public health and safety, labor protections and laws, state and local economic initiatives, and taxation in a perpetual “race to the bottom”. It is no accident that industry and Wall Street lobbyists effectively wrote this agreement.

    Ricardo’s theory of comparative advantage, upon which the author of this article says the TPP is based, is in reality detrimental to our national economy. As usual, this latest so called “trade agreement” is merely another effort to transfer social costs from those who cause them onto the American people.

    We need look no further than the suit for $15 billion in damages initiated last week by TransCanada (and hidden private investors) against the U.S. under NAFTA for failing to approve the Keystone XL pipeline to see what would be in store for us should this agreement be approved by Congress.

    http://journalstar.com/news/state-and-regional/federal-politics/transcanada-files-lawsuit-and-billion-nafta-claim-over-keystone-xl/article_db61b1a8-09b8-5cbf-a482-5dc0d5f8fb9b.html

    The entire framework and body of so called “trade agreements” that have been entered into by the U.S. government need to be revisited IMO, with the primary question (as usual) being, “Who benefits?”.

    1. polecat

      “revisited”……. well,….that’s an understatement !!!….. Maybe rescinded & starting from scratch would be better

    2. flora

      The really extraordinary thing about the $15 billion dollar XL pipeline claim is that there is no way the tar sands can be made profitable at low oil bbl prices, (at prices below, say, $80 – $90 bbl.) With $30-$40 bbl oil the tar sands and the XL pipeline make no economic sense. Obama declaring he would veto it was theater. My opinion is there’s no way the companies would have gone ahead with the pipeline at current low oil prices. Obama’s veto allowed them to save business face and created an opportunity for TransCanada and parties to sue the US govt for the amount they had hoped to make with high oil prices. It’s a beautiful con.

      1. flora

        Although it is possible that Obama nixed XL for purely political reasons, to hurt Koch Industries and thereby financially hurt one of the GOP’s biggest donors.
        (Koch Industries has a refinery in Calary, Alberta and is a major player in the Canadian oil market.) Still, oil needs to sell at somewhere between $45 and $100 bbl for tar sands to be profitable.

        1. John Zelnicker

          IIRC, the Koch brothers also own refineries along the Gulf Coast that can process the tar sands oil and those refineries were the ultimate destination of the Keystone pipeline.

  5. qufuness

    Japan’s postwar economic boom unfolded in the context of the Cold War, when US attempts to “open up” Japanese markets were routinely trumped by “strategic” concerns. Led by its Iron Triangle, Japan took advantageous of the situation, and the nation as a whole benefited. In the last couple decades the benefits have continued but decreased, and their distribution has become much more unequal. In this context what a “21st-century agreement” means is a global regime in which Japan may find it much harder to, say, keep out agricultural imports or manipulate its currency. Will Japan find a way to stay in the game as a central (if not always conspicuous) partner, or will it wake up one morning to find itself in the second tier of economic players, demoted to middleweight? Will its One Percent and their corporate, academic, and bureaucratic servants maintain some sense of the nation’s Common Good, or will they “go international,” selling their services to the highest bidders? In particular, by force of necessity (geopolitics, demography…) will Japan have to play second fiddle to China, taking on the shameful role of errant younger brother in the East Asian family?

    These are issues that Japanese are thinking about nowadays, and Kawase’s analysis reflects these concerns. He seems cautiously hopeful that some aspects of the TPP will be superior to the more parochial aims of bilateral agreements, but in the end he appears to doubt whether TPP is really going to work in practice. After all, US-Japan trade relations went through decades of often ineffective “market-opening measures.” endorsed but not enforced. From this perspective, Kawase’s focus on the ISDS mechanism makes sense. Lambert is right that he doesn’t go very deeply into the issue; I think that’s because he understands its problems too well. How are you going to get the peoples of 12 (or 12+) countries to neglect their sovereign interests and decisions and accept the judgments of international panels with close ties to multinationals? Or, to use Kojeve’s metaphor, how do you get the Chinese to accept the Napoleonic Code?

    Right now the Japanese public, including labor unions, more or less goes along with the TPP as an inevitability because they don’t know what’s in it or the implications. Some of us here in Tokyo are working to change that. Thanks for the link, Lambert!

    1. Lambert Strether Post author

      “How many divisions does the ISDS have?” And if the answer is, “As many as the US Army has,” then it’s hard to see how TPP works as soft power, and I would say that means it doesnt’ work.

      1. Synoia

        “How many divisions does the ISDS have?” And if the answer is, “As many as the US Army has,

        Is is that a deash-ingly effective enforcement mechanism? /s

        Especially as the US Military did not and could not halt the flow of IS is money by destroying a fleet of oild tanker trucks, and the US could not bring its awesome Anti-money laundering powers to bear on the banks financing that trade?

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