Trade Ministers from 12 Pacific-rim nations yesterday announced the biggest free trade agreement in a generation – the Trans-Pacific Partnership (TPP).
Chapman Tripp looks at what is known of the final deal, and what it will mean for New Zealand.
Key talking points
- Significant market access gains for most agricultural exports, but only limited gains for dairy, with the deal failing to eliminate tariffs to the US, Canada, Japan and Mexico.
- No increase to the cost of pharmaceuticals, as intellectual property protection for biologics remains (essentially) unchanged at five years.
- PHARMAC retained, with some additional disciplines on its procurement decisions and an increased exposure to challenge.
- An increase in copyright protection from 50 to 70 years, which will be phased in.
- Investor-state dispute settlement (ISDS) provisions, with states expressly permitted to bar ISDS claims challenging tobacco control measures.
How big a deal?
The Government estimates the TPP will lead to at least a $2.7 billion increase in New Zealand’s GDP by 2030. The only significant cost identified comes from extending copyright protection to 70 years, which will increase gradually over 20 years, and will cost around $55 million a year over the longer-term.
During negotiations, the Government had claimed a potential export gain of $4.1 billion by 2025, but had to modify its expectations. This experience was not unique to New Zealand. US Senator Orrin Hatch, a senior Republican, denounced the deal as appearing to fall “woefully short”. Grumbling from different sides of the table is often a sign that a deal is the best available compromise. Certainly, there is little doubt that the New Zealand negotiating team pushed its case hard.
Looking at the bigger picture, Canadian Prime Minister Stephen Harper called the TPP:
a once-in-a-lifetime agreement, a once-in-a-lifetime moment of decision. You are either in or out, and we chose to be in because there is simply too much to gain for Canada.
This has been New Zealand Trade Minister Tim Groser’s consistent message – New Zealand cannot afford to be left out of the new regional trading architecture (or, as he says, left off the TPP bus), which will define Asia Pacific, and global, trade flows for decades to come. While no country will be perfectly satisfied, all – in the final analysis – could see the benefit of choosing a future of participation over isolation.
The next steps are legal verification to confirm exact drafting, and signature. It will then need to be ratified by member states before coming into force. This process is likely to take up to two years. All eyes will now turn to the United States, where Congress is required, even under President Obama’s fast-track authority, to approve the TPP in an ‘up or down’ vote. It remains to be seen whether that vote can be held before next year’s Presidential elections and, if so, whether sufficient support will be found.
Trade Ministers released a summary of the deal late last night. Chapman Tripp will provide further commentary once the full text of the Agreement is available. The analysis below is based upon our understanding of the information made public to date.
Increased goods and services access, but limited access for dairy
The real promise of the TPP for New Zealand was in improving market access for our agricultural exports to major markets, including the US, Canada, Japan and Mexico (with which New Zealand has no free trade agreements).
Aside from dairy, significant gains for agriculture, including beef exports, appear to have been made. The Government has identified overall tariff savings of $259 million a year, once the TPP is fully implemented. It appears that the deal eliminates tariffs on most New Zealand exports to TPP countries. It does not, however, eliminate tariffs on:
- dairy exports to the US, Canada, Japan and Mexico (however, New Zealand dairy exporters will have preferential access to new quotas into those countries), or
- beef exports to Japan (although tariffs will reduce from 38.5% to 9%).
The Government has calculated tariff gains for dairy at just $102 million a year. Fonterra chairman John Wilson, who was in Atlanta this week, has said he is "very disappointed that the deal falls far short of TPP's original ambition to eliminate all tariffs"although there would be "some useful gains for New Zealand dairy exporters in key TPP markets".
Dairy access was the final element of the trade agreement to be agreed. New Zealand came up against what Mr Groser described as “massive resistance” from US, Canada, Japan and Mexico in attempting to eliminate tariffs on meat and dairy, and the deal that was eventually struck was “the best we could get”.
No increase to pharmaceutical costs as IP protection for biologics unchanged
The Government has reported no change to the five year period of protection for biologics, which means no increase to the cost of pharmaceuticals. There is a degree of uncertainty, however, with some reports stating that protection, in some countries, could be extended for up to eight years. In any case, Mr Groser has indicated that New Zealand’s existing policy settings and practices comply with the agreement reached and that consumers will not pay more for subsidised medicines.
The US had sought a 12 year period of protection for biologics to incentivise investment in expensive biological treatments. The failure to achieve more on pharmaceuticals is the reason for Senator Hatch’s disappointed reaction to the deal announcement. Similarly, New Zealand’s standard 20-year patent period is unaffected, but patent extensions can be required due to unreasonable delays in obtaining a patent or regulatory approval. The Government considers that, in view of New Zealand’s efficient processes, very few patent extensions are expected.
The TPP includes an annex specifically requiring “transparency and procedural fairness” with respect to “listing and reimbursement for pharmaceutical products or medical devices”. This will expose PHARMAC's decisions to a greater risk of challenge (through New Zealand courts, not ISDS) and is likely to affect how PHARMAC operates in practice. The Government has estimated one-off administrative costs of $4.5 million, plus $2.2 million a year.
Increase in the length of copyright from 50 to 70 years
Under the new Agreement, New Zealand will be required to increase the length of copyright protection from 50 to 70 years, in line with rules in other TPP and OECD countries.
This is a significant concession from New Zealand. The agreement enables New Zealand to make this transition over time. The benefits of this change for New Zealand owners of IP are likely to be modest, and there will be a cost, estimated at $55m over the very long term, with works remaining under copyright for longer. Aside from this change, the TPP does not affect what is, or is not, subject to copyright. Nor does it require New Zealand to change its laws on parallel importing, or on software patents.
Investor state dispute settlement
New Zealand has already provided ISDS rights in its free trade agreements with China, the ASEAN countries, Malaysia and Korea.
As expected, the TPP investment chapter includes the same type of investment protections found in those agreements. From a review of the summary, no significant deviation in the nature of the protections seems likely.
A key question for the public has been how the TPP will protect the right to regulate in the public interest. It remains to be seen precisely how the final drafting of the investment chapter preserves this ability (the TPP Ministerial Statement refers generally to “strong safeguards to…ensure the right of governments to regulate in the public interest, including on health, safety, and environmental protection”).
Notably, although the TPP incorporates the general exceptions provided for in Article XX of the GATT Agreement and Article XIV of the GATS Agreement, these appear to apply only to the goods and services chapters respectively. If this understanding is correct, it means that the US held firm on its historic resistance to qualifying ISDS protections with broad WTO-style exceptions. Such a result would remove a safeguard which has featured in New Zealand’s ISDS agreements with China and the ASEAN countries.
Aside from this, a general (and self-judging) exception will exist for measures considered necessary to protect a Party’s essential security interests. The TPP also includes a specific provision “preserving the pre-eminence of the Treaty of Waitangi in New Zealand” and the Crown’s interpretation of the Treaty is not subject to the ISDS provisions.
In response to political pressure arising out of the Philip Morris case against Australia, it has been agreed that Parties may elect to deny the benefits of ISDS with respect to a claim challenging a tobacco control measure of the Party.
Finally, it seems that the investment chapter will, like the NZ Korea FTA, apply subject to non-confirming measures annexes. The Government has stated that existing regulations inconsistent with TPP obligations, such as screening foreign purchases of “sensitive land” under the Overseas Investment Act (OIA), are not subject to the investment chapter. This may leave open the question, which arose during this year’s Select Committee hearing on the NZ Korea FTA, of whether New Zealand has retained the flexibility to expand the definition of sensitive land to include, for example, residential property in Auckland.
Investments in significant business assets will still require consent under the OIA but the threshold for investors from TPP countries will be raised from $100 million to $200 million (except for Australians who are subject to a higher threshold).
The TPP is notable, even among increasingly lengthy free trade agreements, in spanning 30 chapters. The summary above addresses only a handful of those chapters. We look at some of the others below.
- Rules of origin (Chapter 4), which are defined so as to simplify the process of, and assist TPP located-companies in, forming regional supply and value chains with and through other TPP located-companies. This is a key benefit to New Zealand exporters of being inside, rather than outside, the TPP tent.
- SPS and TBT measures (Chapters 6 and 7). These specify the basis upon which a party may restrict or inhibit trade flows based upon health and biosecurity concerns, and technical regulations, respectively. The TPP is likely to build upon WTO disciplines by further requiring Parties to justify SPS measures by reference to science (an argument Australia recently lost against New Zealand in the WTO over apple imports), and TBT measures by reference to conformity assessment bodies. The TPP will also go further than the WTO in seeking to promote common regulatory approaches to specific sectors, including cosmetics, medical devices, pharmaceuticals and organic agricultural products, among others.
- Trade remedies (Chapter 8). As with the WTO, the TPP will permit parties to impose temporary safeguard measures to protect against serious injury to domestic industry, including transitional safeguard measures of up to two years (with a one year extension) if such injury is the result of the tariff liberalisation required by the TPP itself.
- Trade in services and financial services (Chapter 10). Flying under the radar during the TPP negotiations is a potentially significant liberalisation of market access for cross-border service providers, for instance in the education, banking and insurance sectors. The Ministerial Summary states that TPP parties may not, unless they have included sectors on a “negative list”, condition the right to provide services on a commercial presence in the host state. This is in keeping with the objective of the electronic commerce chapter (Chapter 14), which specifies various measures seeking to promote the free flow of digital information, including by agreeing that companies from TPP parties may not be required to build data centres to store data as a condition for operating in a TPP market. There are also specific chapters on telecommunications (Chapter 13) and competition policy (Chapter 16).
- Government procurement (Chapter 15). This chapter builds on the optional WTO Government Procurement Agreement, and seeks to subject, but only on a positive list basis, government procurement decisions to “core disciplines” of national treatment and non-discrimination. In light of the Government’s 2013 Principles and Rules of Sourcing, no changes to New Zealand laws or policies will likely be required.
- SOEs and designated monopolies (Chapter 17). This chapter is intended to ensure that entities such as New Zealand’s Zespri operate with transparency on the basis of commercial considerations. New Zealand will likely already consider itself in compliance with these rules.
- Labour and environment (Chapters 19 and 20). These chapters appear to require parties to adopt, maintain and enforce laws to protect minimum labour and environmental standards. There is also a specific commitment to sustainable fisheries management, including by prohibiting certain types of fisheries subsidies which contribute to illegal, unreported and unregulated fishing.
- Regulatory coherence (Chapter 25). This chapter is intended to incentivise countries to streamline and coordinate their regulatory measures so that cross-border economic actors are not required to navigate unnecessary and duplicative red tape. It does this partly by promoting the value of impact assessments for proposed regulatory measures, as well as by encouraging interagency consultation and coordination.
- Measures to support SMEs (Chapter 24). The TPP countries all have an interest in extending the benefits of the TPP throughout their economy. That means providing accessible opportunities for SMEs. This chapter is mostly directed at making information about the TPP easy to access and practically useful. It is also designed to complement other chapters intended to reduce the paperwork and administrative burden of engaging in cross-border economic activity. One such chapter is Chapter 12, designed to ease temporary entry requirements for business persons. This will hopefully provide a platform for business travel throughout TPP countries to be streamlined over time.
- Transparency and anti-corruption (Chapter 26). This chapter is consistent with OECD and UN obligations New Zealand has already accepted to combat transnational bribery, including by enacting domestic offences for bribery of foreign public officials. New legislation to further tighten New Zealand’s anti-bribery laws, which will allow New Zealand to ratify the 2005 UN Convention Against Corruption, has already passed its second reading in Parliament and is expected to be enacted by the end of 2015.
The twelve countries in the TPP are: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.
TPP countries have a combined population of 800 million. The other eleven countries account for over 40% of New Zealand’s overall exports: $20 billion of goods exports, and $8 billion of services exports.