Elliot J. Feldman conducted a webinar for The Knowledge Group on January 8, 2016 on the Trans-Pacific Partnership.  Set out below is the essential text of Dr. Feldman’s presentation for segment 2 of that webinar.  Dr. Feldman’s presentation for Segment 1 was provided in a previous post on this blog titled The Trans-Pacific Partnership – Webinar Segment 1.

Segment 2

The rules that govern international trade remedies today were written into the creation of the World Trade Organization that went into effect on January 1, 1995. They are, of course, a lot older, going back to the General Agreement on Tariffs and Trade, or the “GATT.” Trade agreements subsequent to the WTO have not modified the essential rules.

Countries importing goods they believe are unfairly traded (or surging) and therefore competing unfairly with domestically produced similar goods have three options: they may investigate whether the goods are priced unfairly by being dumped – sold for less than it costs to make them, or less abroad than they are sold at home; they may investigate whether goods they are importing are supported in their manufacture or export by government subsidies that are prohibited by the WTO rules; they may investigate whether foreign goods suddenly are surging into their markets so as to jeopardize the capacity of domestic industries to compete. This last option, called “safeguards,” does not require unfair trade. It requires merely a sudden, unanticipated surge that causes injury to a domestic industry. In each case – dumping, subsidies, safeguards – they must demonstrate that their domestic industries are materially injured or are threatened with imminent material injury. When they reach affirmative conclusions, they may impose offsetting duties or, in the case of safeguards (because of surges), they may also impose, temporarily, quotas or tariff rate quotas. Outside of safeguards, quotas are strictly prohibited.

Nothing in the TPP would change these rules. NAFTA created a unique dispute resolution mechanism for trade remedies, enabling parties to a dispute to avoid domestic courts in favor of binational arbitral panels. When Canadians or Mexicans, for example, want to appeal determinations of the U.S. Department of Commerce or the U.S. International Trade Commission, they may go to the U.S. Court of International Trade, subject to further appeal to the U.S. Court of Appeals for the Federal Circuit, or they may request the formation of a binational panel comprised of Canadian or Mexican and American trade experts (typically trade lawyers), which replaces both the CIT and the CAFC.

This alternative to domestic courts will survive the TPP for NAFTA members – Canada, the United States, and Mexico. However, it is not extended to anyone else. Trade disputes among TPP countries will continue to be resolved as they always have been – within domestic agencies and, on appeal, to domestic courts.

The TPP is an international trade agreement. Its primary purpose is to reduce and eliminate tariffs, to liberalize trade. The President’s Export Council, a leading champion of the deal, promotes it in the following glowing terms:

“An agreement that will immediately eliminate 98 percent of duties on industrial goods exports to Brunei Darussalam, Japan, Malaysia, New Zealand and Vietnam, that offers substantial tariff cuts on key agricultural exports, that lifts complex restrictions on U.S. services exports, and that establishes new disciplines to facilitate the growth of digital commerce among economies that together represent almost 40 percent of the global economy, offers the greatest potential to create meaningful new opportunities for expanding exports across all sectors of the American economy.”

So what’s not to like for free traders? The uncomfortable answer is that many duties are not immediately eliminated, and the deal is not only about tariffs. It is also about intellectual property disciplines and extended phase-outs and compromises. Different interests inevitably have different views of the benefits.

Signatories to the TPP are trying to overcome disagreements among themselves through side letters. Here is the ultimate exercise in finding the devil in the details. While United States Trade Representative Michael Froman is promising new side letters to pacify various stakeholders and congressmen (almost sounding like an App salesman—“there’s an App for that, and it comes with a side letter”), there already are many in play.  The informal total count is 120 side letters among the twelve TPP signatories.  Japan already in January had seven, covering 86 pages, for exceptions and safeguards regarding automobiles, agriculture, and quotas. The United States has a 5-page letter restricting foreign mortgage lenders, not surprising following the Recession. The United States has 104 pages of side letters qualifying tariff reductions. Australia and New Zealand have agreed, on the side, not to apply Chapter 9 to each other. Chapter 9, as I will discuss momentarily, enables a foreign investor to sue a government that it may allege is expropriating or otherwise damaging its investment. Investors from other TPP members will be able to sue Australia or New Zealand, but an Australian investor will not have recourse in New Zealand, and vice versa. Such exceptions could lead to investment strategies using third countries.

The United States has a side letter with Australia promising that, should the United States extend to anyone outside the TPP data protection greater than the provision within the TPP (say, the European Union one day), Australia must be extended the same protection. Australia has a 6-page side letter with Japan governing, separately, Australia’s access to Japan’s rice market, and Australia has five side deals with Vietnam as well as protection in government procurement for its own indigenous peoples. And all these examples are drawn from an Australian document. Other TPP signatories have similar if not more separate deals in play. It will never be enough for a company or a lawyer to rely exclusively on the main text of 6000 pages. There may always be lurking a side letter.

An Australian publication, the Financial Review, has considered the major concerns and interests in each of the partners now that each country must decide whether to follow up signature with ratification. It is a useful summary of reasons why each country may, or may not, finalize membership.

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Here are some additional and more specific reasons why completion and approval of the TPP is doubtful, in no particular order:

  • Significant domestic economic interests: In general, intellectual property protection for new pharmaceuticals will last for 8 years throughout the TPP; American pharmaceutical companies are accustomed to and were demanding 12 years of protection. They are not happy about the compromise reduction and do not support the deal. The Japanese are not opening the Japanese market to rice imports, but rice markets more generally are opening, which will mean that American rice producers will not gain much access to Japan, but they will have new competition from Vietnam in Mexico. They do not support the deal.Canadians have made critical concessions on supply management, but for a long phase-out. The new Agriculture Minister has emphasized that his Government remains committed to the Supply Management system. Japan, meanwhile, has agreed to a phase-out that will take 16 years on cheese tariffs and ice cream. Dairy sector representatives of the U.S. industry have reported to the U.S. Government that, “We very much believe this agreement should not be the model for future agreements regarding tariff elimination,” even as they have equivocated as to whether they will oppose it. The United Food and Commercial Workers Union has not equivocated: it opposes the TPP, complaining that it empowers U.S. based companies to move overseas, especially to other TPP members where wages are much lower. Indeed, all the trade unions apparently oppose the deal, which has translated into unanimous opposition among Democratic Party presidential candidates and most Democratic Members of Congress. Although pork producers have endorsed the deal, they also have expressed serious reservations, noting in particular that they have learned that Japan may be introducing domestic measures to offset the intended market effects of the agreement. According to a November 24 report from Reuters, Japan plans to “expand handouts to beef and pork farmers by raising the percentages of losses covered by the government to 90 percent from 80 percent now.”  Tobacco farmers are especially unhappy and, with them, their Members of Congress. Tobacco is specifically and uniquely carved out of investor-state dispute settlement: governments may regulate or restrict tobacco and tobacco investors will not be able to protest, complain, or be compensated. This allowance for public health does not sit well with Senator Mitch McConnell, for example, who represents a tobacco state. He already has said the TPP will not be brought to a vote in the Senate before the November elections, and he largely controls that decision. Although he has not said specifically that the tobacco provision has motivated him, it unquestionably is a factor. Nary an environmental group approves of the TPP, with opposition led by the Sierra Cluband Friends of the Earth. They believe that the investor-state dispute provisions, which I will discuss momentarily, invite companies to block and prevent environmental reforms, preserving a polluting status quo.  Ford Motor Company is in active opposition, complaining that the Rules of Origin deal the United States made with Japan does not open the Japanese market but opens the North American market still more to Japanese cars and automobile parts.
  • Each of these groups, organizations and companies have lobbyists and congressional targets for their opposition to the TPP. Negotiations were highly secretive. Some text was leaked, but generally the contents of the TPP were unknown. Only the trade unions, who deplore free trade because they assume it means transferring jobs abroad, and the environmental groups, familiar with investor-state disputes and cognizant of the difficulty faced by governments to tighten environmental regulations, vigorously opposed the TPP even before its contents were known. But now that the compromises and deals the United States entered to get the deal done have been revealed with the release of text after the Atlanta signing on October 5, each special interest dissatisfied with terms is mobilizing congressional opposition.
  • Congress has been, since the beginning of negotiations, the elephant in the room. Historically, all the way back to the nineteenth century, Presidents have moved toward free trade (especially, it may surprise you, Democratic Presidents), while Congress has opposed. It should not be surprising: Presidents take responsibility for the economy as a whole and see free trade for a developed country as a continuing move up the value chain with a distribution of labor that sheds low wages for higher ones; Members of Congress are responsible for narrow constituencies that house still narrower interests. It may be good for the whole economy to see a low wage assembly plant move offshore, but it does not feel so good at election-time for the Member of Congress representing the workers in the assembly plant that may shut down. The current Congress deviates somewhat from the historical norm. As Norm Ornstein and Tom Mann have observed, it has gravitated the American political paradigm that “all politics is local” to a parliamentary framework of party discipline. Members are more prepared to vote with the ideology of their parties than in the past, and consequently prepared to vote against the particular interests of their constituents. This phenomenon has been especially pronounced in Republican opposition to a health care innovation insuring millions more Americans than ever before. It is also pronounced in international trade. Republicans like being perceived as free traders, conceiving Democrats as protectionists. This image is inaccurate when assessing Presidents, and it has been inaccurate even in assessing the current Congress. There surely are more Republicans supporting the TPP than Democrats, especially because Democrats are aligned with the unions and environmental groups, but there are Republican Conservatives so bitterly opposed to the Obama agenda in all things that they will oppose the TPP because they oppose Obama. After his string of international victories in 2015, they are not likely to give him another signature victory in the waning days of his presidency. This view is manifest in the Republican presidential field. Rand Paul opposed Trade Promotion Authority because, he said, it ceded too much congressional power to the President. But, he wants it known that he favors free trade. That this particular President negotiated a free trade agreement makes him suspicious, so he may or may not support it at some future date. Santorum, Christie, Rubio and Carson all have supported TPP, then raised doubt about their support, declaring positive views of free trade but suspicion and doubt about the President that negotiated this particular deal. These equivocations effectively declare that one day, if President themselves, these candidates might embrace TPP – under their final influence and signature. They do not have to oppose the Agreement outright. They need only stand behind the congressional leadership that promises not to bring it to a vote. House Speaker Paul Ryan and some others have intimated that the TPP could be brought before a lame duck session of Congress when those voting would no longer be candidates having to explain their votes to voters. Here, too, the TPP can be undone, being denied congressional approval, without open opposition. The Freedom Caucus, for example, counting around 40 Conservative Republican Members in the House, does not have to oppose the deal. It needs only to oppose the notion of a lame duck Congress voting on it, invoking the right of a new President to decide whether to embrace the deal as written. Senate leaders – McConnell and Orrin Hatch especially – already have said they will not bring the TPP to a vote prior to the November election (virtually all politicians in the United States know that international trade is sufficiently controversial as to pose a threat to an incumbent’s candidacy if she has to vote on a trade deal during an election campaign – and Republicans, in control of both Houses, have the most incumbents and therefore the most at stake). That leaves the lame duck session. So, the Freedom Caucus is already positioning itself on the lame duck session, which would then deny Obama this last international agenda item before the end of his presidency.
  • Elections – The November elections in the United States are not the only ones that could impact the TPP outcome. Already the Canadian elections, exactly two weeks after the deal was signed by the Harper Government, dealt a blow, with the new Liberal Government declining to reaffirm what Harper had wrought. The Obama Administration had been counting on Canada, even as it had never gotten along with Harper. Prime Minister Abe had held back in the negotiations until Congress approvedTrade Promotion Authority (or, “TPA”) for the President. Abe was not prepared to make offers for Japan until he could believe that the President’s word had at least the value of an up-or-down vote in Congress.  Since October 5, Abe has urged quick ratification in Congress, not only because he would like to present to the Diet a deal effectively done in the United States. Elections for the Upper House in Japan must be held no later than July 2016, when national elections may be called. Elections for the Lower House must be held by December 2016, within a month of the U.S. elections. Abe believes the TPP will be evidence, going into new elections, that Abenomics will deliver economic results for Japan. Without TPP, he will enter elections in a more perilous state. Already he has become unpopular in Japan, not least because of his revision of the Constitution and growing militarization. He needs TPP, and he needs the United States to have confirmed the deal. It now appears he will not have what he needs. If Abe were defeated in the elections, Japan may well walk away from the TPP. And, as we have seen, without Japan, Congress is even less likely – the present Congress or the new one in January 2016 – to ratify it. Peru will hold a general election in April. The results remain beyond prediction, as do the implications for the TPP. Vietnam has elections scheduled in May, 2016, but these are not likely to change Vietnam’s position. First, the Communist controlled state’s direction does not change with elections. Second, there is consensus that the net winner in the TPP, by far, is Vietnam. It has won long phase-ins for difficult adjustments, including environmental and labor standards (it will allow independent unions, but there is skepticism about implementation). It has won major concessions for its textiles that will enable it to continue using Chinese yarn to finish and sell products to other TPP members as products of Vietnam. With support from Malaysia, it appears to have won concessions for state-owned enterprises.

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Investor-State Disputes

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Foreign investment regulated by domestic rules normally means more money for economic development. Most countries actively seek it. However, investors want assurances that their investments will be protected from capricious government actions that might effectively expropriate or diminish the value of an investment. To protect investors, governments around the world have entered some 3200 bilateral investment treaties. More recently, perhaps beginning with NAFTA, state-investor dispute systems that might normally be found in a bilateral investment treaty, or “BIT,” may be found as a Chapter in a bilateral or multilateral trade agreement. The TPP contains such a chapter, Chapter 9.

Environmental groups, especially, as I mentioned a moment ago, particularly dislike investor-state dispute mechanisms. They believe they accord to foreign investors advantages over domestic companies: domestic companies must take their grievances with governments to domestic courts, whereas foreign investors may choose between domestic courts and international tribunals. Domestic investors must accept changes in laws and regulations. Foreign investors may claim that they made their investments under particular terms and that governments are not free to change those terms to the investors’ detriment. As long as governments want to attract foreign investors, they will have to accommodate them in some fashion. NAFTA incorporated protections for investors primarily because, in the early 1980s, Mexico expropriated American petroleum investments. As Canada and the United States wanted foreign investment encouraged, they insisted that Mexico would have to permit foreign investors to bypass Mexican courts when articulating a grievance over a government expropriation or other unfair treatment.

Consistent with NAFTA, the TPP contains provisions for a foreign investor to bypass domestic courts when challenging a government action that the investor claims expropriates or diminishes the value of an investment, particularly as compared to a domestic company. The TPP includes what is now considered the “standard suite” of protections – for a minimum standard of treatment as recognized in international law; for a most-favored-nation or “national treatment” guaranteeing treatment for the foreign investor indistinguishable from treatment accorded domestic companies; guarantees for the free transfer of funds so that profits may be repatriated. But the TPP also has some elements that are not yet “standard” in BITs, even though they generally are reflected in the “Model BIT” that was introduced in 2012. In general, even as the criticism of these agreements is that they give advantages to foreign investors and make it too easy for them to challenge governments, the terms in the TPP are being touted as “state of the art,” worthy of a twenty-first century agreement, and they generally enhance protections for foreign investors while according governments a swift mechanism for dismissing “frivolous” claims.

The major TPP innovations include a new code of conduct for arbitrators that should protect investors from conflicts of interest that arbitrators sometimes mask, especially those who regularly are chosen as arbitrators by governments. A core difficulty with international arbitration is that a small community of arbitrators makes their living doing little else and their repeat business comes through government appointments. Indeed, the ICSID list of arbitrators is comprised entirely of government nominees. The TPP also introduces a Commission that will oversee arbitrations and is intended to protect against conflicts of interest. The TPP contains a provision to expedite potential disputes over jurisdiction. Parties will be able to comment on draft awards so that there remains room for adjustment and change after what used to be the end of the arbitral process.

The United States, despite having bilateral trade agreements with most of the TPP countries, does not have BITs with six of them. The TPP would cure that deficiency in one stroke, most conspicuously with Japan, but also with Australia (no such provision was included in the bilateral free trade agreement) and with Vietnam.

Notwithstanding that the United States brought Canada and Mexico along when entering the TPP talks seriously itself, envisioning a successor agreement to NAFTA, NAFTA fully survives the TPP. There are provisions in NAFTA’s Chapter 11 that may be more helpful to some foreign investors than the provisions in the TPP. For example, tobacco companies cannot challenge foreign government actions under the TPP, but they can among the NAFTA members. An investor will have to choose: it would not be permissible to make a claim under both NAFTA and the TPP. But tobacco companies, for example, may want to be incorporated in a NAFTA country in order to have and investor-state dispute mechanism available.             

What Happens If The Deal Fails?

The last question I am asking is what happens if the TPP were still to fail, now that the twelve potential member states signed an agreement on October 5, released text a month later, and signed final text on February 4 in New Zealand with the intent to ratify. Although we have been remiss in maintaining our China-US Trade Law Blog at BakerHostetler, introducing new commentary very little over the last twelve months or so, we were warning more than two years ago that the United States, in our view, was staking too much on the TPP. It had become the cornerstone of the non-security, non-military pivot to Asia, and it carried enormous risk that it would fail – whether because of Congress, or the trade partners, or for some other reason. We believed the United States was over-invested in the TPP, and we still think that problem and risk remain.

The Obama Administration has taken to selling the TPP as even more than the cornerstone, the lynchpin, of Asian policy. It now is selling it as the model for future trade agreements. That view has obliged the European Union to take notice, not only of the elements, but of the prospects for passage. The other major trade negotiation underway is TTIP, the Trans-Atlantic Trade and Investment Partnership (there remains disagreement, after recent meetings in Nairobi, as to whether there is still any life in the Doha Round). TTIP will not move forward before all issues regarding the TPP are settled, and should the TPP fail, the future of TTIP surely would also be at risk. Note, too, that TPP does not take on standards and regulations, but they are the central concern of TTIP. It is much easier to reduce tariffs than to change rules and standards.

There are four major economies in Asia. Three of them (China, South Korea, and India) are not parties to the TPP. South Korea, with a newly-won bilateral agreement with the United States, opted to stay out while holding the possibility of joining later on. Japan gratuitously volunteered, after the October 5 signing, that it hoped China one day would join. Meanwhile, however, China consummated an expansive new agreement with Japan and South Korea, including trade and a whole lot else (including initial steps for a Japanese reconciliation with its former principal enemies in the region from World War II; an agreement between Japan and South Korea over “comfort women” followed very quickly). China launched an Asian Development Bank that Europeans and Asians quickly joined, but the United States effectively boycotted, along with Japan.

These developments, instead of unifying Asia with the United States for the future of world trade and cooperation, are dividing Asia between an orbit defined by the United States and Japan, on the one hand, and another orbit revolving around China, on the other. The divide has been amplified by American military and security accommodations for Abe.

It is virtually certain that the United States Congress, despite urging from the Obama Administration, will not have taken up the TPP before elections in Japan (summer 2016), nor before elections in the United States in November. Without the TPP in hand, Abe may be in even deeper political trouble than polling already shows him to be. And were Abe to lose, Japanese sentiment in the Diet for the TPP may diminish.

Without Japan, even in the diluted deal (incomplete commitments in agriculture; uncomfortable compromises on automobiles and automobile parts), Congress will become even less likely to ratify. Many in Congress believe the TPP may be subject to renegotiation with a new President, but this agreement is not like the three bilateral agreements carried over from the Bush Administration and renegotiated by Obama. This agreement is multilateral, with eleven partners. The new Australian Government already has signaled that the deal cannot and will not be renegotiated. USTR Michael Froman is proposing bilateral side letters to resolve concerns among American stakeholders, but there is no assurance that the other TPP countries will agree to side letter adjustments and amendments. As the calendar turned into 2016, leading American business organizations that had been consulted all through the negotiations and have been champions of the deal – the U.S. Chamber of Commerce, the National Association of Manufacturers – still have not endorsed the agreement whose final text they have been studying for two months.

The Administration has warned that the U.S. could lose a great deal of face, and credibility, if it were not to complete an agreement signed after a decade of negotiations. Of course, that indication of time is exaggerated. It was a decade for the first four countries. For the United States, it has been less than half that time.

Presented finally as a challenge to China, China will have consummated a deal with Asia’s most important economic powers, while the United States would have failed in a deal in which it was unquestionably and, alone, the dominant power. Nothing would remain of an American economic initiative in the region, and the United States would have played its strategic cards on behalf of Japan while China continues to grow in strength and stature.

We are left with a dilemma. To fail to bring the TPP to a successful conclusion is to short out American credibility and policy in Asia, and potentially with Europe as well. To succeed is to confirm a strategy China has identified as containment, in China’s neighborhood where China is not likely to be contained. The Administration has forced a position in which no outcome is good.

We have been skeptical about the TPP. We have thought it unsound as the cornerstone of a larger strategy in Asia. It has seemed, since the Japanese entry into the talks in July 2013, to be unnecessarily and unproductively confrontational with China. It has seemed overcharged, with too many uncertainties to have a full geo-strategy dependent on it. And while, in our view, there is no good outcome here, it may be better to start over, rethinking the role and place of China in Asia and the American relationship to China, rather than to finalize a deal built primarily around Japan. We think the architecture of the deal, as it evolved to exclude China, may have played well in Congress, but probably not enough to overcome congressional antipathy toward Obama and therefore not enough to justify the longer term implications of unnecessary antagonisms with Asia’s leading power.

Senator McConnell says there will be no Senate vote before the November elections. House Speaker Ryan has alluded to a lame duck vote, but significant segments of the Republican caucus already have objected to that suggestion, and it would inevitably be difficult with an incoming President opposed to an international agreement that could box in a new Administration as it seeks its own foreign policy in Asia. I think it safe to predict that no presidential candidate who has not yet endorsed the TPP will do so between now and November, and those who may appear to have endorsed may change their minds before the election.

The U.S. International Trade Commission is to report in May on whether the TPP appears to provide net benefits to the United States. Its report ought to matter. It may not.

For American business, the TPP seems to be forcing an undesirable choice between Japan and China. There is a long history of trying with limited success to penetrate the Japanese market. For both strategic and economic reasons, we think the time may have come to prefer focusing on China.

Businesses must plan. Many critics and pundits are urging to plan now. We are not. The history of prior trade agreements indicates that, were the TPP to encounter gentle breezes and calm seas, it would not likely bring about consequential change before 2019. A lot may happen between now and then.

As we have forecast on our blog and as I suggested in a Knowledge Group Webinar in May 2014, we doubt there will be a TPP. We are reasonably confident it will not happen during an Obama Administration, and doubt that it could be confirmed any time soon under a new President. American elections may decide the question, but elections in Japan will matter, too, and other TPP countries may yet have more to say on a final deal. But should it come to pass – read the side letters.