The Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP”)1 will take effect on December 30, 2018. Australia ratified the agreement on October 31, 2018, joining Mexico, Japan, Singapore, New Zealand and Canada, and triggering the 60-day countdown to entry into force. Five other signatory states have yet to ratify the agreement: Brunei, Chile, Malaysia, Peru and Vietnam.
The CPTPP has important implications for both trade and investment protection among the member states. Its entry into force will create one of the largest free trade and investment protection areas in the world, enhancing trade opportunities for member states and enabling investors from one member state to pursue investment claims before international arbitral tribunals against another member state.
United States’ Future Involvement Uncertain
A successor to the Trans-Pacific Partnership (“TPP”), the CPTPP aims to promote free trade by uniting the Asia-Pacific and Western Hemisphere regions under a single set of trade rules. The future of the TPP looked uncertain early last year when U.S. President Donald Trump withdrew the U.S. from the agreement.
The signatories to the CPTPP have indicated willingness to bring the United States (back) into its fold and President Trump appeared to consider the idea earlier this year. Given the constant fluctuations in the global trade landscape in recent days, the Trump administration’s next move vis-a-vis the CPTPP remains unclear.
However, even if the United States remains a non-party, the CPTPP may have important effects on the global supply chains and foreign investments of U.S. companies active in the Asia-Pacific and Western Hemisphere regions.
CPTPP’s Effect on Trade
The CPTPP will significantly impact global trade by establishing one of the largest free trade areas in the world, covering around 16 percent of global gross domestic product based on countries currently joined. The CPTPP will substantially cut tariffs and remove many other trade barriers (such as restrictions on government contract bidding for foreign companies) among the member states. It also imposes high standards for human rights, labor practices, and the environment.
By establishing more transparent and predictable rules, the CPTPP is expected to encourage businesses to take advantage of open markets and increase cross-border business and investment. Notably, its rules will protect the free flow of information across borders and safeguard privacy, data protection and cybersecurity — crucial for the growing e-commerce sector. It also includes highly detailed protections for intellectual property protection.
CPTPP’s Effect on Investment Protections
The CPTPP extends important protections to investments made by foreign investors from CPTPP member states in other member states and entitles those investors to submit disputes with member states to binding investment arbitration. The CPTPP, upon entry into force, will establish the second largest multilateral area of investment protection backed by arbitration in the world (after the Energy Charter Treaty). Within this area, investments of covered investors will normally be entitled to the following protections:
- National treatment – a host state must treat foreign investments at least as well as it treats those of its own nationals;
- Most favored nation (“MFN”) treatment – a host state must treat foreign investments at least as well as it treats those of other foreign investors;
- Fair and equitable treatment – a host state must treat the foreign investment fairly and equitably, often understood to require respect for legitimate expectations and prohibitions on arbitrary and unreasonable actions as well as denials of justice (with the exception of investments in the form of financial services as the relevant provisions are currently suspended);
- Full protection and security – a host state must provide police protection to foreign investments (with the exception of investment in the form of financial services as the relevant provisions are currently suspended); and
- Expropriation without compensation – a host state must not seize a foreign investment without paying prompt, adequate, and effective compensation.
A limited exception to note is that investors will not be able to bring claims for breaches of investment agreements and investment authorizations under the CPTPP as the relevant provisions are currently suspended. (The suspension may be lifted by the agreement of the CPTPP parties.)
Although the CPTPP’s investment chapter provides wide protections to foreign investments among the state parties, New Zealand entered into several side letters with five other signatories — Australia, Brunei, Malaysia, Peru, and Vietnam — which limit investment arbitration. The side letters are bilateral and only apply between the two states that are party to the letter. Investors from member states that are party to side letters who are investing in the territory of other side letter signatories may still be able to seek protection under other trade agreements.
Proactive Measures to Consider
In the meantime, companies should evaluate the impact of the CPTPP on their global trade operations and foreign investments, and can take the following actions in anticipation of the CPTPP’s entry into force:
- Evaluate the potential impact on their global supply chain and sales operations, including the possibility of shifting country of origin, as CPTPP member states might reduce their reliance on U.S. suppliers in favor of suppliers with preferential market access;
- Assess whether current foreign investments in the CPTPP member states are eligible for investment protection and determine whether it is feasible to modify investment structure to obtain protection under the CPTPP;
- Determine whether there are other investment treaties that extend protection to investments among those pairs of states subject to side letters and, where necessary, consider modifications to investment structure that would ensure protection; and
- Monitor developments in any negotiations for membership of the United States in the CPTPP.