HIGHLIGHTS:

  • As part of the notification process for the Trans-Pacific Partnership (TPP), the Office of the United States Trade Representative (USTR) recently released the full text of the TPP agreement, which is nearly 5,500 pages.
  • Since the conclusion of negotiations on TPP, additional countries, including South Korea, Indonesia and the Philippines, have expressed interest on joining the agreement.
  • Under the Trade Promotion Act, which provides the framework for congressional approval of trade agreements, the United States can formally enter TPP 90 days after the President provides Congress formal notice. Since that formal notice took place on Nov. 5, 2015, formal signing of TPP by all parties, including the U.S., can take place at the Asia-Pacific Economic Cooperation ministerial meeting, which will be held in New Zealand on Feb. 4, 2016.

The Obama Administration formally notified Congress on Nov. 5, 2015, of its intent to sign the Trans-Pacific Partnership (TPP), a significant free trade agreement involving some of the U.S.’ largest economic partners, including Canada, Mexico, Japan, and Australia (see Holland & Knight's alert, "Trans-Pacific Partnership Has Challenges, Opportunities for U.S. Companies," Oct. 26, 2015). As part of the notification process, the Office of the United States Trade Representative (USTR) recently released the full text of the TPP agreement, which is nearly 5,500 pages. In addition to reducing tariffs on a wide range of goods, TPP is a significant step in promoting cross-border investment and liberalizing trade in services. Below, we provide commentary and analysis on a few of the agreement's key issues.

Scope of Protection for Investments

A prominent issue during negotiations was the scope of protection that TPP would provide to foreign investments. The ability of foreign investors to use (and potentially abuse) arbitration, especially regarding regulatory disputes with the host country, provided fodder to opponents of TPP and similar agreements. The essential principles are "national treatment" (also termed "non-discrimination") and "minimum standard of treatment." 

TPP Article 9.4 requires that each party accord to investors and investments from another party "treatment no less favorable than that it accords, in like circumstances" to investors and investments of its own nationals. This language is identical to language found in the North American Free Trade Agreement (NAFTA).

Similarly, Article 9.6 requires that each party accord to investments of another party "treatment in accordance with applicable customary international law principles, including fair and equitable treatment and full protection and security." Although this is very similar to the language in NAFTA, a number of important differences clarify and, in some measures, weaken its protections.

For example, Article 9.6(2) clarifies that Article 9.6 "prescribes the customary international law minimum standard of treatment of aliens as the standard of treatment to be afforded [emphasis added]." Additionally, the concepts of "fair and equal treatment" and "full protection and security" do not require treatment "in addition to or beyond that which is required by that standard." Finally, a determination that there has been a breach of another TPP provision or other international agreement does not establish that there has been a violation of the minimum standard of treatment.

TPP also contains a most favored-nation clause that requires each party to accord to investors and investment from another party "treatment no less favorable than that it accords, in like circumstances," to investors and investments of any other party or of a non-party.

The Drafter's Notes to TPP provide some useful interpretation to TPP's scope of protection for investments. In particular, "in like circumstances" means that "comparisons are made only with respect to investors or investments on the basis of relevant characteristics." It is a "fact-specific inquiry requiring consideration of the totality of the circumstances." These circumstances "include not only competition in the relevant business or economic sectors, but also such circumstances as the applicable legal and regulatory frameworks and whether the differential treatment is based on legitimate public welfare objectives."

Finally, we note that TPP does not contain a requirement found in NAFTA, which requires that a party accord to investors of another party the "better of the treatment" required under either "national treatment" or "most favored-nation treatment." During TPP negotiations, one of the most frequently used lines of attack on the agreement was the possibility that foreign investors could receive more favorable treatment than domestic ones.

Trade in Services

As the world's largest exporter of services, the U.S. has pursued a trade policy geared towards lowering barriers to the provision of cross-border services, especially in areas in which U.S. companies are international leaders, including the financial, legal and insurance sectors. In 2014, for example, the U.S. exported $710 billion worth of services. The U.S. also imported $477 billion worth of services, for a surplus of $233 billion. In comparison, the U.S. had a negative trade balance in goods totaling $741 billion.

In order to promote an expansion of cross-border trade in services, TPP adopted a negative list approach towards liberalization. Under this approach, protective measures on cross-border services will reduced unless a party specifically exempts a protective measure related to a particular industry, sector or activity. These exempted protective measures will be listed under one of two annexes. The first contains protective measures already in place, and which cannot be extended (and with any future liberalization binding). The second contains sectors and activities which a party may restrict without limitation in the future.

Although the U.S. generally has been a major proponent of opening trade in services, there are still a number of politically and strategically sensitive sectors and industries that the U.S. government will continue to shield, including:

  • domestic maritime transportation (Jones Act)
  • nuclear power
  • oil and gas exploration on public lands
  • domestic commercial air service
  • airport operation services
  • customs brokering
  • radio license ownership
  • private law enforcement and correctional services

Financial services are addressed in a separate chapter, which also includes an annex for non-conforming measures. The chapter includes exceptions to preserve broad discretion for TPP financial regulators to take measures to promote financial stability and the integrity of the financial system.

Future Developments

Since the conclusion of negotiations on TPP, additional countries, including South Korea, Indonesia and the Philippines, have expressed interest on joining the agreement. South Korea, the world's 13th-largest economy as well as an important U.S. ally, would appear to be a logical participant in TPP. It did not originally participate because South Korea already had bilateral free trade agreements with both the U.S. and the European Union, and was in the process of negotiating another trade agreement with China. However, President Park Geun-hye has stated that South Korea is a "natural partner" of the TPP and is keen to begin talks.

Indonesia's interest is a surprising development, as it has traditionally been cool to free trade agreements because its exports, primarily raw materials, ordinarily do not face high tariffs. Additionally, its protected domestic industries, which benefit from a large internal market, are not known to be internationally competitive and have been reluctant to explore overseas opportunities.

Under the Trade Promotion Act, which provides the framework for congressional approval of trade agreements, the U.S. can formally enter TPP 90 days after the President provides Congress formal notice. Since that formal notice took place on Nov. 5, formal signing of TPP by all parties, including the U.S., can take place at the Asia-Pacific Economic Cooperation ministerial meeting, to be held in New Zealand on Feb. 4, 2016.

Additionally, the Obama Administration has urged the International Trade Commission (ITC) to prepare "as soon as possible" a required report on the economic impact of TPP. The ITC will hold a public hearing in connection with its report on Jan. 13, 2016. Written submissions for the record can be filed until Feb. 15, 2016.