The Trans-Pacific Partnership (the "TPP") is the major free trade agreement currently being negotiated between the United States, Canada, Australia, New Zealand, Japan, Singapore, Malaysia, Vietnam, Mexico, Chile, Peru and Brunei.  

If successfully concluded, the TPP is expected to have huge implications for global trade dynamics, creating a trade bloc constituting over 40% of global GDP and around 20% of global trade volume, which is second only to the European Union in its scale, and potentially a significant change for East-West trade relations.

Covering the major economies of the Pacific Rim, it is expected to result in the elimination of the vast majority of tariffs and trade barriers around the Pacific, as well as containing significant measures to harmonise regulation on a substantial range of trade-related issues, including investment protection mechanisms, labour and environmental standards, and rules to regulate the behaviour of state-owned enterprises. The negotiations have not been made public; however, the TPP is anticipated to have a significant impact on trade flows in the global energy sector, with particular emphasis on the potential for enhanced access to North American shale gas by the Asian gas markets.

1. The scope of the TPP

The TPP is thought to be nearing signature after three and a half years of secret negotiations. Ministerial meetings have been recently held between the states involved, potentially bringing the parties closer to a final agreement. While the content of the TPP has not yet been published, the significance of the negotiating parties and the exceptionally broad scope of the agreement have made it the subject of great speculation.

The commitments expected to be included in the TPP go well beyond the liberalisation of market access regimes, with far-reaching obligations in relation to intellectual property, financial and environmental regulation, investment protection mechanisms, government procurement regimes and labour standards. Particular impacts are expected to be felt by the energy, agribusiness, TMT, consumer products and automotive sectors. Four draft chapters of the TPP have been leaked through Wikileaks during the negotiations, fuelling heated debate about the scope of the commitments required by the parties.

2. Possible implications of the TPP

If the negotiations are successful and the TPP is ultimately signed, a number of important developments may arise from its implementation. One key area of development would be the application geographically of any investment protection mechanisms: such provisions may be of particular interest in certain signatory states, where obtaining adequate protections can be a critical consideration for investors looking to guard against the risk of adverse state actions. It is also worth noting that the investment-related dispute resolution procedures are thought to have been one of the most contentious elements of the negotiations. To read more about this, please click here.

Another important potential impact would be in relation to the LNG trade in Asia. LNG plays a key role in the Asian energy market, not least due to limitations on pipeline capacity combined with a regional emphasis on gas-fired power stations in industry, which have led to the emergence of Singapore as an LNG trading hub and a new focus for global LNG trading.

The LNG trade in Asia has been shaped in recent years by the spike in Japanese demand for LNG following the Fukushima nuclear disaster, which has led to a significant increase in investment in LNG projects by Japanese trading houses as well as significant growth in the conclusion of LNG supply contracts in an effort to secure the medium-term energy needs of Japan. The use of LNG as a marine fuel from 2015 is likely to further increase the importance of this resource in a region heavily reliant on shipping.

The sudden abundance of North American shale gas and other unconventional gas resources in the last few years has resulted in the expectation of a flood of cheaper gas in the global market, much of which will be exported in the form of LNG. Since Asian gas prices have generally been indexed to oil prices due to historical contract price mechanisms, many Asian buyers have had difficulty in getting the benefit of the cheap spot prices for shale gas, making gas prices up to eight times higher in the Asian gas market than North American gas prices. Globally we have seen an increase in purchasers seeking to invoke price review mechanisms to renegotiate the prices in their LNG supply contracts on this basis.

North American unconventional gas exports would seem to be a good match for the high demand in Asian gas markets, but energy security concerns in the US have meant that there are restrictions on exports in the form of congressional control over export licences. Currently the US Department of Energy has to assess whether exports are in the public interest (including environmental and economic impacts) before granting approval. Intense lobbying by various industry groups concerned about the impact of LNG exports on US domestic gas prices has resulted in an effective moratorium on such export licences in the recent past (with a small number of exceptions). However, such oversight of LNG export licences is currently not permitted where the exports are destined for a trading partner with which the US has a free trade agreement ("FTA"). An FTA like the TPP between the US and any Asian states could open up a possible access channel for US shale gas to the Asian market. It has been speculated that Japan acceded to the negotiations in significant part as a result of its desire to facilitate this access to US shale gas.

There is no guarantee that such access to US shale gas exports will be possible under the TPP: the scope of the obligations in the agreement in relation to the removal of export controls has not yet been disclosed. Indeed, some commentators are sceptical that the TPP will even reach the point of signature at all. Nevertheless, there is much speculation around the opportunities that the TPP may present for LNG buyers in Asia.

3. The view ahead

Even if the TPP is signed by the negotiating parties, it will need to be ratified domestically in many of these jurisdictions in order to come into force. The extent to which the TPP is ratified in the signatory states will impact on its ultimate effectiveness.

In the US, President Obama has been seeking fast track negotiation authority from Congress for the ratification of the TPP, a method of ratifying international agreements under the Trade Act 2002 in the US that seeks to restrict the extent to which international agreements can be re-negotiated at a domestic level. If granted, Congress can approve or disapprove the TPP, but will be unable to amend or filibuster the same. At present, it is not clear that the fast track authority will be granted as there is substantial bi-partisan opposition from members of Congress to the fast track authority and the TPP itself (partly on the grounds that the TPP may weaken American controls over gas exports). Prominent opponents of the fast track procedure in the US include both Republican and Democrat politicians, notably the Senate Majority Leader, Harry Reid.

Similar barriers to ratification may be encountered in other negotiating states, many of which have significant domestic movements opposing the TPP. However, commentators have observed that Japan was the first country to ratify the Anti-Counterfeiting Trade Agreement, and believe it is possible that Japan will be one of the first signatories to ratify the TPP.