The United States and 11 other Pacific Rim trading partners recently announced that they have come to a provisional agreement on the wide-ranging trade agreement known as the Trans-Pacific Partnership (“TPP”), which, over time, will eliminate customs duties on qualifying goods between member parties. Once it is ratified by the 12 member countries, the TPP will overhaul import regulations and will create an international enforcement mechanism. It will also have an effect on issues ranging from intellectual property protection to electronic data transfer, and even on employment practices and environmental regulations. Here is what you should know now.
What is it?
The TPP is first and foremost a trade agreement among 12 nations with increasing economic ties that share the Pacific basin. Along with the United States, it includes NAFTA-member nations Canada and Mexico, and also Peru, Chile, New Zealand, Australia, Singapore, Malaysia, Brunei, Vietnam, and Japan. It will also reach beyond trade issues to address such issues as labor practices, environmental regulation, and intellectual property protection.
A primary purpose of the agreement is to eliminate many thousands of tariffs and quotas that protect various national interests but which also serve as a barrier to free trade. If ratified, the TPP will create a new network of regulations and country-of-origin rules to prevent through-shipping and otherwise to ensure that the purposes of the agreement are upheld.
Importantly, China will not be an initial signatory to the agreement. This reflects another purpose of the TPP: to counterbalance China’s still-growing power in the region by creating an international framework for trade among major economic players. China may eventually join the trade group, but would do so in a framework established by others, most notably the U.S. and Japan.
Which particular industries are affected?
While the TPP will have broad applicability, certain industries have been a focus of the lengthy negotiations leading to the deal, including the automobile industry, pharmaceuticals (particularly biopharmaceuticals), dairy, tobacco, sweeteners, fashion, the Internet, and data-based industries such as video games. Following is a discussion of some of the provisions that have been the subject of some of the most difficult negotiations.
Automobiles and auto parts:
The TPP will affect auto parts more drastically than completed automobiles, for example by removing roughly 80 percent of U.S. auto part tariffs when the agreement goes into effect. Automotive heavyweights Japan and the U.S. reached a more measured deal regarding completed cars and trucks, wherein U.S. tariffs applicable to Japan will remain for 25 and 30 years for cars and trucks respectively, and tariff reductions are back-weighted to phase out slowly. Meanwhile, Malaysia’s and Vietnam’s steep tariffs on automobiles will be eliminated after the TPP goes into effect.
Rules of origin for finished vehicles will necessitate 45 percent regional value added, calculated under the net cost method. Auto parts will necessitate 35-45 percent of regional value added.
Removal of tariffs in the dairy industry has proven particularly thorny, and the TPP appears to strike a multination compromise in this regard. Canada has agreed to open its highly protected dairy market to TPP partners partially, with a new tariff-rate quota of 3.25 percent of Canadian dairy production. Japan has also agreed to increase dairy imports. These concessions will likely benefit U.S., New Zealand, and Peruvian farmers. The overall effects are hard to predict, as the U.S. market will also accept more dairy from countries like New Zealand, which benefits from a partial reduction of the U.S. dairy tariff.
The TPP’s compromise on protections for pharmaceuticals appears to be a standard-based system, rather than a strict intellectual property regime. Countries reportedly must provide exclusive protection to biologics for at least eight years, or for five years with additional regulations that will effectively extend the exclusivity period. This is far less than the period demanded by industry representatives, who were hoping for the 12 years of protection that U.S. law currently provides. However, the negotiators had to accommodate intellectual property regimes of countries such as Canada, and also wanted to account for the widespread need for cheaper biologics, particularly in developing countries.
The U.S. has opened its market to approximately 65,000 more metric tons of sugar imports from Australia, and 19,200 more metric tons of sugar and sugar-containing products from Canada.
Intellectual property and technology issues
Some of the most significant issues facing worldwide trade participants at present and in the future are technology issues, in particular data transfer and Internet rights. Just this month, the European Court of Justice struck down an international data transfer agreement, throwing into disarray the operations of some multinationals and threatening the business models of information-based companies such as Google, Facebook, and Apple. Meanwhile, Internet service providers are increasingly concerned about safe harbors to protect them if they unwittingly host copyright-infringing materials.
The TPP addresses many of these issues, leaning notably toward the industry interests in protecting copyright and free movement of data. The agreement includes provisions prohibiting data localization (the requirement to keep data in a particular jurisdiction, meaning the TPP favors cloud-type systems); prohibiting data tariffs; protecting data transfers (with certain personal information safeguards); and barring forced technology transfers (of information such as source codes). Some provisions, such as maintaining strong copyright protection, appear to favor old-style media content creators over new-style technology data providers. Other provisions, such as the protection of encryption devices, favor the technology industry as a whole over the objections of some consumer rights groups.
The TPP aims to protect the rights of certain workers – and to level the playing field for companies in those countries already providing such rights – by standardizing labor laws. Minimum standards are created for minimum wage, hours of work, and occupational safety and health laws. The Office of the U.S. Trade Representative indicates that binding obligations would eliminate child labor and forced labor, and would protect against employment discrimination. Unionizing and collective bargaining are protected. Some worker mobility will be increased.
The TPP aims to use trade as a mechanism to increase environmental protections, including provisions addressing marine fisheries, logging, and the production of ozone-depleting substances. The agreement seeks to strengthen existing laws, such as the Convention on International Trade in Endangered Species, by threatening trade sanctions for violations of those laws. The TPP also hopes for a race-to-the-top effect by removing tariffs on certain environmentally friendly technologies such as solar panels, wind turbines, and air-pollution analysis and control equipment.
Streamlining and transparency
The TPP hopes to improve trade among the parties not only by removing tariffs, but also by removing bureaucratic impediments. To this end, the agreement calls for customs laws and regulations to be published on the Internet, and in English, where possible. It seeks to reduce the time goods spend in customs before release, and to create expedited customs procedures for shipments falling under a certain monetary threshold.
Will this actually happen?
The TPP has been agreed upon in principle by negotiators from the 12 nations, but it cannot go into effect until each nation ratifies or implements it. The negotiations have been long and complex, so despite the secrecy of the process, many interested parties have weighed in and will push for final approval. Domestic politics will play an important role, particularly in countries such as the U.S. and Canada, both of which must get approval in an election year for this agreement with broad and varied policy implications.
In the U.S., Congress has already agreed to give the TPP fast-track consideration: a yes-or-no vote with no amendments. However, this will follow a 60-day public review period followed by a lengthy but limited analysis period in Congress likely to last weeks or perhaps months. The implementing legislation is unlikely to be signed before spring 2016, and probably even later than that.
How will the TPP be enforced?
As with any international agreement, enforcement mechanisms are several and varied, ranging from private dispute resolution to use of courts to governmental action. The TPP includes a particular dispute resolution mechanism, not uncommon in such treaties, known as investor-state dispute settlement tribunals. These ad hoc tribunals would give private actors the right to challenge a sovereign’s laws that may impinge on rights under the TPP. They are essentially arbitration panels, operating outside of any particular government’s ambit and, for better or for worse, largely insulated from national interests.
The investor-state dispute settlement procedures in the TPP have some industry-specific features. For example, tobacco companies are prohibited from using the process, and the auto industry has some accelerated dispute resolution mechanisms.
After roughly a decade of often-intense negotiation, a comprehensive deal has finally been struck. Now it is the hands of the several states’ national politicians to implement the agreement or strike it down. Debate has already begun, even before many legislators have seen the text of the agreement. The final result, if passed, will open economic borders and may accelerate the 21st century into the Pacific Century many have predicted it will become.