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A Model for Twenty-First-Century Trade Agreements?
View related content: International Economics
No. 2, June 2011
With the World Trade Organization (WTO) Doha Round of negotiations facing stalemate or collapse, the Trans-Pacific Partnership Agreement (TPP) will become the single most important US trade initiative after Congress passes the Korea, Colombia, and Panama free trade agreements (FTAs). Enjoying bipartisan support, the current nine-member TPP is seen as a potential building block for a larger Free Trade Area of the Asia-Pacific Agreement (FTAAP). The Asia-Pacific constitutes the most dynamic economic region in the world, accounting for about 60 percent of global gross domestic product and 50 percent of international trade. The TPP has overwhelming importance–not only for the United States but also for the Asia-Pacific. This Outlook assesses the progress of TPP negotiations, tracing the history and current status of the TPP and describing the substantive and structural issues that have emerged during the negotiations.
Key points in this Outlook:
When the full history of the TPP is written, a prominent place will be reserved for former US trade representative (USTR) Susan Schwab (2006-2009). Though she could not control events beyond the 2008 presidential election, Schwab forced the TPP onto the trade agenda by throwing a trade policy dart to the incoming Obama dministration.
The original TPP (then known as the Pacific-4, or P-4), negotiated by Chile, New Zealand, Brunei, and Singapore, came into effect in 2006. In September 2008, after prodding by Schwab, the Bush administration formally notified Congress of its intention to begin negotiations with the original TPP countries and Australia, Peru, and Vietnam, which had signaled their desire to join the agreement. (The United States had already concluded FTAs with four of the proposed TPP members: Australia, Chile, Peru, and Singapore.) Malaysia joined the agreement in October 2010, bringing the total negotiating partners to nine (see the table).
In retrospect, given US trade politics after the 2008 presidential election, Schwab’s preemptive launch of the TPP was crucial. Because of the global financial crisis and, more importantly, deep divisions within the Democratic Party over trade and globalization issues, the Obama administration in effect had no trade policy during its first year. It certainly would not have initiated a new trade negotiation on its own. But Schwab’s gambit placed the TPP on the agenda. At some point (as with the pending FTAs with Korea, Colombia, and Panama), Obama and his team would have to make a decision.
After more than eleven months, the action-forcing event for the TPP was the November 2009 Asia-Pacific Economic Cooperation (APEC) leaders’ summit, where the lack of an announcement regarding regional trade negotiations would have badly undercut the administration’s evolving theme that the United States was “back” in Asia and ready to assume a forward-looking leadership role. Thus, on November 14, Obama committed the United States to engage with the TPP countries with the goal of shaping a regional agreement that would have broad-based membership and high standards.
Negotiating Structure and Baseline Documents
Once the negotiating process had begun, the Obama administration and other TPP partners established a very ambitious agenda and schedule: they nominally committed to the goal of completing negotiations on the TPP by the time the United States hosted the APEC summit in Hawaii in November 2011. Pursuant to that goal, TPP members held four negotiating sessions in 2010 (in Melbourne, Australia; San Francisco, California; Brunei; and Auckland, New Zealand).
At the first meeting in Melbourne in March 2010, the negotiators established ten negotiating groups, including industrial goods, agriculture, sanitary and phytosanitary standards, telecommunications, financial services, customs rules of origin (ROOs), government procurement, environment, and trade capacity building. By the third session in Brunei in October 2010, areas were added and subdivided, with the addition of textiles, technical barriers to trade, investment, and intellectual property (IP).
In addition, cross-cutting issues emerged as high-priority areas, including supply-chain management, competitiveness, transparency, regulatory coherence, labor and the environment, development, and small and medium businesses. Pushed by the United States, though strongly supported by Australia and New Zealand, these proposed cross-cutting rules, largely aimed at behind-the-border regulatory barriers, became the basis for proclaiming that the TPP would become the new model for a twenty-first-century FTA. All told, the TPP will consist of more than twenty-five individual chapters.
Five rounds of negotiations are scheduled for 2011, beginning in Santiago, Chile, and then moving to Singapore and Vietnam by midyear. At the April session in Singapore, TPP members began developing legal texts and exchanging market-access offers. Countries put forward partial draft texts on industrial goods, sanitary and phytosanitary issues, the environment, technical barriers to trade, and regulatory coherence.
The TPP negotiations are new territory for trade negotiations, as they must combine existing negotiated texts (the P-4 and bilateral agreements) with new or more advanced bilateral or TPP-wide (unified) texts. The negotiators will have to take into account the legal obligations of existing FTAs; particularly, for the United States, this means building on or integrating newly negotiated texts with existing bilateral agreements with Singapore, Chile, Australia, and Peru.
The original P-4 agreement was a comprehensive FTA. It encompassed some twenty chapters, including trade in goods (total free trade by 2015), trade in services, IP, ROOs, sanitary and phytosanitary measures, technical barriers to trade, government procurement, and competition policy. It also contained dispute-settlement provisions. Observers have noted that it closely resembled the template established by the United States in its bilateral FTA negotiations.
Central Negotiating Issues and Flashpoints
Several significant issues have emerged during the negotiations. It is uncertain which will be the greatest challenge to the successful completion of the negotiations–but several clearly will be difficult to work through. The emphasis will be on US negotiating objectives, both offensive and defensive.
Membership. The original P-4 agreement provided for future expansion to other countries through a consensus process. Indeed, from the outset the ultimate objective of the negotiations was to provide the building blocks for an area-wide Asia-Pacific FTA. In 2006, the idea became linked to the APEC, with the summit leaders’ endorsement (long term) of an FTAAP. At present, all nine TPP members have endorsed the idea that at a minimum all APEC countries are eligible for TPP membership.
Carrying over from the P-4 decisions, it was envisaged that new members would enter in successive tranches, either individually or as a group; through this process, the United States, Australia, Peru, Vietnam, and Malaysia were added to the original four members. Inevitably, however, US membership, and subsequently the desire to complete TPP negotiations by November 2011, complicated further membership additions. With four in-depth negotiating sessions in 2010, and five already underway in 2011, the question remains whether it is possible to add new members without reopening decisions already made. In spring 2011, the door seems closed to additional members before the November deadline. Longer term, the drive for relatively quick decision making, with an endpoint this year, may make the goal of a future area-wide FTA more difficult. To wit, large Asian economies with important national interests–Korea, Japan, and Indonesia–may not be willing to join the TPP if the major negotiating issues have already been decided without their interests represented.
At the beginning of 2011, attention was focused on the possibility that Canada and Japan might press for inclusion by midyear. In both cases, that no longer seems likely. Though Japanese prime minister Naoto Kan promised a decision by June, the devastating earthquake and tsunami have left the Japanese government in disarray. Major industrial groups and some in the government are still pushing for a decision, but that possibility is remote. As for Canada, the situation may change in coming months as a result of Prime Minister Stephen Harper’s clearcut victory in national elections in early May. With a decisive majority in the Canadian parliament, Harper has the opportunity, if he has the will, to reform Canada’s system of price controls for grains and dairy products–a precondition for TPP negotiations. In addition, when Congress passes the high-standard US-Korea FTA, there will be no major impediments to Korea’s membership in the TPP should it choose to apply.
Architecture: Bilateral, Regional, or Hybrid? A second issue still unresolved concerns the market-access architecture of the TPP: oversimplifying, whether the negotiators should aim for common market-access rules among all members or whether existing bilateral market schedules should remain in place, with some additional common schedules to be added later in the negotiations. The United States has strongly urged that existing FTA market-access schedules be maintained. It has both defensive and offensive reasons for this position. Defensively, US bilateral agreements often provide carve outs, phased tariff reductions, and product-specific ROOs that the United States does not want to open for negotiation. Offensively, these agreements also contain WTO-plus provisions (namely, IP and services) that the United States wants to preserve and not have whittled away in TPP negotiations. Under this scenario, the United States would have to negotiate new market-access schedules only with TPP partners without US FTAs: New Zealand, Brunei, Malaysia, and Vietnam.
According to reports, Australia, Brunei, and New Zealand favor negotiating a common market-access schedule that would apply to all TPP members. They argue that this approach would reduce or even eliminate the so-called spaghetti bowl effect caused by differing and potentially conflicting obligations.
In October 2009, a hybrid approach was adopted at Brunei (a near-term win for the United States). Under this compromise, countries will be allowed to make offers on a bilateral basis or to the TPP membership as a whole. This compromise allows bilateral market-access offers to be multilateralized later in the negotiations. This messy solution will have to be resolved before a final agreement is reached.
In late January 2010, the United States tabled a preliminary market-access proposal on a bilateral basis. It was structured so all tariff lines would come under one of four baskets. Those in the first basket would go to zero immediately; those in the second and third baskets would be phased out over five and ten years, respectively; and finally, those in the fourth basket would remain in place, or be phased out, over an unspecified period. Given existing US tariff commitments in the WTO and under existing FTAs, all but a small (though crucial) percentage of tariffs would go to zero almost immediately.
At the April 2011 meeting in Singapore, architectural issues remained unresolved; thus, by default a two-track process has become more entrenched. The United States has made bilateral offers to Malaysia, Vietnam, Brunei, and New Zealand, while Australia and Singapore have taken a plurilateral approach and tabled single offers to all TPP countries simultaneously. No solution has been achieved on how to consolidate various bilateral and plurilateral agreements at the end of the process.
Agriculture. The bilateral versus regional divisions carry over into agriculture negotiations. Major US agricultural groups, particularly in sensitive sectors such as sugar and dairy, are pushing the Obama administration to keep in place existing FTA market-access provisions. They see little export gain from liberalizing tariff rates and quotas among TPP countries, and they have urged the USTR to concentrate on sanitary and phytosanitary issues, technical barriers to trade, and nontariff barriers as agriculture trade priorities. There is some division within the US agriculture ranks, as major agricultural processing companies (which have less political clout) have pressed the administration to reopen sections of existing FTAs. At a minimum, they argue that the USTR should use US agriculture restrictions as bargaining points to advance US interests in other areas.
Demonstrating the larger political influence of the agricultural producers, however, in March 2010 a bipartisan group of thirty US senators warned against additional market access for New Zealand dairy products, which, they claim, would produce losses of $20 billion to US dairy farmers over ten years. The National Milk Producers Federation also demanded that the United States exclude dairy products from TPP negotiations. USTR Ron Kirk turned down this request.
New Zealand, which has long sought a bilateral FTA with the United States, has actively attempted to refute the dire claims of US milk producers, arguing that its dairy sector is too small to have a big impact on the huge US market (US total merchandise imports from New Zealand in 2009 amounted to $2.5 billion). Whether dairy, sugar, grain, or meat, these agricultural negotiations are likely to be contentious right down to the conclusion of the talks.
As the April 2011 Singapore talks concluded, there were still large undefined “baskets” in which liberalization commitments were vague or nonexistent. This was particularly the case in the contentious sugar and dairy sectors.
Rules of Origin. Closely entwined with market-access issues relating to both industrial and agricultural products are the complex ROO negotiations. The United States, beginning with the North American Free Trade Agreement negotiations, has always pressed for strict (that is, more protectionist) ROOs for its “sensitive” products: textiles, apparel, and dairy products. In the current TPP negotiations, US negotiators are pushing for narrow, product-specific ROOs, with high threshold levels (percentages) for determining eligibility. In addition, for textiles, the United States is demanding that the so-called yarn-forward rule be incorporated into the agreement. In effect, this rule would mandate that the material (cotton or synthetic fiber) for a textile product be sourced either in the home country or in an FTA partner country (and possibly even sourced in the United States). There is, however, some division on ROOs within the US business community. Importing and retail firms support much more liberal ROOs, as do numerous trade associations composed of large US multinational firms.
By and large, other TPP countries support more liberal ROOs. They oppose product- or country-specific ROOs, pushing instead for region-wide rules. Regional rules (“cumulation” in the trade jargon) allow products that have obtained originating status in one partner country to be further processed in another partner country as if they had originated there.
In recent meetings, regional cumulation has been actively discussed. Rather than folding ROOs into general market-access talks, however, a separate negotiation group is handling them, which increases the likelihood that opponents of true liberalization can prevail or demand major compromises. The United States continues to press for separate ROOs for textiles and apparel.
Intellectual Property. Here, as in other areas, the key questions revolve around whether and how far the TPP will move beyond the existing WTO rules in the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. In addition, division among US interest groups has delayed the Obama administration’s final position on IP and the TPP.
The United States has shifted its position on so-called WTO-plus IP provisions several times. The most important differences are related to patents, particularly pharmaceutical patents. All the major business associations have pressed both the Bush and Obama administrations to go beyond the terms of existing WTO-plus IP agreements in earlier FTAs. Specifically, this means new provisions for increased data exclusivity during pharmaceutical patent terms, rules for patent extension, and other provisions that make it more difficult for generic manufacturers to quickly compete against expiring patents. In addition, in several FTAs, the United States has demanded language that attempts to limit FTA partners’ use of the TRIPS health exceptions. When the Democrats took over Congress in 2007, they forced the Bush administration to retreat in the patent area. For the Peru and Colombia agreements, language that previously strengthened pharmaceutical patent protection, as well as language regarding the TRIPS public-health exception, was weakened in response to demands from nongovernmental organizations (NGOs). This battle has carried over into the TPP negotiations. The resolution of these internal US divisions is as yet unclear, though in early February 2011 the Obama administration indicated that it might be receptive to business demands for stronger IP language.
Beyond internal US deliberations, IP is also a divisive issue for other national negotiators. In January 2011, New Zealand tabled a paper that directly challenges key fundamental assumptions behind US arguments for a strong IP patent system. New Zealand argued that overly strong protection beyond TRIPS could impede innovation in developed countries and would harm economic development in developing TPP countries. The paper emphatically recommends that TPP negotiations not go beyond the TRIPS provisions in the WTO. (In addition, both Australia and New Zealand allow some price controls on pharmaceuticals, a policy opposed by the US pharmaceutical industry.) It is not clear how forcefully New Zealand negotiators will defend this position, or how much support they will receive from other TPP countries. Certainly, it represents a flashpoint for the US business coalition supporting the TPP.
In spring 2011, the United States upped the ante on IP, with more detailed proposals regarding copyrights, the Internet, and geographic indicators (GIs). On GIs, the United States is attempting to undermine the European Union push for stricter regulations on domestic local or regional products such as wines and cheeses. Under the US proposal, the use of generic names would be expanded and legally protected. Regarding copyrights, the United States is seeking the right to stop imported products that have allegedly violated a copyright holder’s rights. In addition, it would limit the so-called fair-use doctrine. Finally, the United States seeks to introduce a legally enforceable “secondary liability” provision that would hold Internet providers responsible for carrying copyrighted material over the Internet. This last provision is very controversial, even within the United States, where Internet companies such as Google vigorously oppose this exposure to costly lawsuits.
Investment. Across the board, recent FTAs around the world have included ever more detailed rules regarding foreign direct investment. US negotiators hope to build on this foundation to negotiate a more comprehensive investment chapter in the TPP. A number of the FTAs already negotiated by TPP members contain many of the provisions the United States is advocating, including national treatment and most-favored-nation treatment for investment, rules governing expropriation, free transfer of capital, no performance requirements, and (in more recent FTAs) special provisions for financial services.
The key sticking point, both within the United States and among TPP partners, is a section related to investor-state dispute resolution. Among US interest groups, labor unions, consumer groups, and Ralph Nader-affiliated antiglobalization organizations are pitted against business associations in the industrial and service sectors. Many of the NGOs–and certainly the labor unions–have close ties to the Obama administration. Undaunted, US investors are pressing the administration to use the TPP to write even stronger language guaranteeing independent international arbitration and judicial proceedings for investor-state disputes. In addition, a top priority is to write rules that will reduce and ultimately eliminate foreign-equity limitations.
Australia and New Zealand have expressed reservations about some of the US investment demands. Australia resisted adding an investor-state dispute-resolution chapter to the US-Australia FTA (though it has agreed to a modified version of such a chapter in other FTAs). Labor unions and other advocacy groups in Australia and New Zealand have petitioned their governments to continue to resist US proposals in this area. They also would roll back a number of consultation and right-to-comment provisions in existing FTAs.
Finally, in a wide-ranging trade policy statement in April 2011, the new Gillard administration in Australia raised important questions concerning investor-state dispute-resolution procedures, announcing that in the future it would discontinue them in FTAs with developing countries. It remains to be seen how this policy change will be reflected in TPP negotiations.
Labor and the Environment. For the United States, labor and environment issues may emerge as the thorniest and most difficult to resolve internally. This is particularly true with Republican control of the US House of Representatives. In 2007 the House Democratic majority forced the Bush administration to accept new language on labor rights and the environment for pending FTAs (Colombia, Peru, and Panama). The new provisions made demands on US bilateral trading partners that went far beyond existing FTA labor and environ-ment chapters.
For labor, the 2007 agreement provides that signatories to US bilateral FTAs must adopt and enforce five basic international labor standards as set forth in the 1998 International Labor Organization (ILO) Declaration on Fundamental Principles and Rights at Work: freedom of association, collective bargaining, elimination of all forms of forced labor, abolition of child labor, and elimination of discrimination in employment. It also stipulated that lack of resources would be no defense against implementation in future trade disputes. For the TPP, labor unions and many NGOs, along with a majority of House Democrats, are urging the administration to go beyond the 2007 labor agreement and mandate that bilateral partners pass and implement the enforceable ILO labor conventions themselves (as opposed to the declaration, which is hortatory). This would force a change in US law as the United States has adopted only two of the eight relevant ILO conventions. Republicans in the House will fiercely resist such a provision. The Obama administration has put off a decision on labor rights for the past year. It promised to make its position known before the next TPP negotiation in June but now seems likely to postpone the controversial decisions until the fall.
For the environment, the 2007 agreement mandated that US bilateral trading partners pass and implement a group of multilateral environmental agreements: ozone depletion, endangered species, marine pollution, wetlands, whaling, and Antarctic marine. The Obama administration will certainly fight to hold on to these mandates for the TPP, though it is unclear what the Republican House majority will accept in this area.
A number of FTAs already negotiated by TPP partners contain chapters on labor and the environment. But none match the highly legalistic and restrictive language of recent US FTAs. It is almost certain that developing TPP countries–Vietnam, Brunei, Peru, and Chile–will oppose the draconian mandates of recent US FTAs. Even Australia and New Zealand are likely to resist entrapment in a tortuous US legal framework for labor and environmental disputes. Both countries are also wary of seeming to bully developing economies.
While there were further discussions of the labor and environment chapters in early 2011, the Obama administration is holding back more detailed proposals until the political situation on pending FTAs with Korea, Colombia, and Panama is clarified. It is caught between demands from its labor constituencies and skepticism and hostility toward binding labor-rights provisions from the Republican House.
Twenty-First-Century FTA Issues
At the core of a twenty-first-century FTA are several issues that have become a central priority for the US business community–as well as the corporate heads of companies in developed TPP countries such as Australia, New Zealand, and Singapore. These issues vary in concreteness and novelty. Some, such as supply-chain encouragement and management, would entail customs reform, infrastructure, and trade-facilitation measures. Similarly, measures to strengthen small and medium businesses in trade would involve domestic programs such as limiting onerous regulation and fostering export initiatives. There is general agreement that these new rules should be negotiated on a region-wide basis.
The most concrete trade policy proposals arise in the area of regulatory coherence. The overarching goal of regulatory coherence is the harmonization (or at least mutual recognition) of regulatory measures that exert a major influence on international trade. Among the tentative proposals discussed in the negotiating sessions are pro-cedural rules for transparency (public notice and consultation for new regulations); elimination of duplicative and overlapping regulations; rules against anticompetitive practices, particularly for government monopolies and enterprises; greater use of mutual-recognition agreements for services and health and safety regulation; and clear lines of administrative and judicial appeal. At the outer reach, the United States has suggested that TPP members be required to establish an internal regulatory coordinating body that would act to limit duplication and conflicting regulatory actions. Both civil society groups and some TPP members seem wary of such proposals. This has led to some discussion that negotiators should settle for a set of regulatory principles that would act as a nonbinding guide to individual TPP members. Little has been decided regarding the potential text in a TPP regulatory chapter.
Finally, since January, pushed by some corporate groups and labor unions, the United States has raised the issue of more regulatory discipline for state-owned enterprises (SOEs). In a February 2011 private-sector paper, since leaked to the press, a detailed set of proposals was presented, including a number of provisions to ensure “competitive neutrality” by TPP member governments between SOEs and private-sector corporations. The issue has important implications for TPP members Vietnam and Malaysia, where SOEs occupy an important economic position, and, of greater significance, it sets down markers for China, if and when it applies for TPP membership.
Considering the substantive and political complexity of the issues described above–and the lack of agreement to date on many issues–the November deadline for concluding the TPP negotiations is off the table. The negotiators will have to settle for statements of principles or frameworks in key areas. For countries standing at the gates for TPP entrance (Canada, Korea, and Japan), this may result in renewed possibilities for joining the negotiations before all final decisions have been made.
This analysis has been narrowly focused on trade and investment issues. But the TPP, as the potential vehicle for a trans-Pacific regional vision, transcends trade in its implications and reach–with strong overtones for Asian political and security relations. Thus, the White House should expand its horizons, more fully integrating the State Department and the Defense Department in internal deliberations.
One of the current dangers is that the United States will overreach in its demands on trade issues–understandably, the business community and USTR negotiators will push US economic interests (as they see them) to the fullest. But this zeal should be tempered with strategic judgments that focus on the long-range goal of a trans-Pacific architecture that encompasses not just economic structures, but also political and security structures.
Claude Barfield ([email protected]) is a resident scholar at AEI.
Claude Barfield and Philip I. Levy, “Tales of the South Pacific: President Obama and the Trans-Pacific Partnership,” AEI International Economic Outlook (December 2009), www.aei.org/outlook/100927.
Wendy Dobson and Diana Kuzmanovic, “Differentiating Canada: The Future of the Canadian-US Relationship” (research paper, University of Calgary, School of Public Policy, Calgary, Canada, November 2010).
Ian F. Ferguson and Bruce Vaughan, “The Trans-Pacific Agreement,” Congressional Research Service, R40502, January 10, 2011.
Additional background information was provided by the following websites: Office of the US Trade Representative (www.ustr.gov); Singapore (http://app.mti.gov.sg), Australia (www.dfat.gov.au), and New Zealand (www.mfat.govt.nz) trade departments; AFL-CIO (www.aflcio.org); Public Citizen (www.citizen.org); and EastAsiaForum.org; the following publications: Inside US Trade, International Trade Reporter, Financial Post (Canada), Wall Street Journal, New York Times, Washington Post, and Financial Times; the US Business Coalition for the TPP; and interviews with stakeholders, academics, and trade staff.
1. It should be noted that there are some differences among the US bilateral agreements.
2. This is true for the bilateral agreements of other TPP countries as well.
3. In FTAs, these rules are used to determine eligibility for tariff preferences, in most cases dependent on the percentage of a good produced by an FTA partner as opposed to non-member country.
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