Will the TPP facilitate or disrupt supply chains?

Author: Sourabh Gupta, Samuels International, Washington

The Trans-Pacific Partnership (TPP) negotiations, like the Doha Round, appears always to be concluded next year.

An end-2012 deadline to ‘finish a legal text’ that was laid out at the 2011 Honolulu APEC Summit passed without incident or accomplishment. Murmurs abound that the October 2013 timeline for completion will also slip, given the lack of measurable progress in key issue areas — intellectual property rights (IPR), electronic commerce and cross-border data flow, state-owned enterprises (SOEs), and textiles market access — at the December 2012 Auckland round.

A good deal of the difficulty in wrapping up the negotiations can be chalked down to the TPP’s uniquely ambitious goals and format. The US approach, both procedurally and substantively, has not made matters any easier.

In the goods chapter, the United States Trade Representative (USTR) takes the position that it will make market access offers to only those countries with which it either does not have an FTA (Malaysia, Brunei, Vietnam and New Zealand) or has one that has been fully implemented (Canada, Mexico). Countries with FTAs under implementation (Australia, Singapore, Chile and Peru) will not be accorded additional access. Thus, Canada is pressed for significant dairy sector access (which had been off the table during NAFTA) while Australian sugar is denied the same to the US market. How such ‘grandfathering’ of past exceptions will — or can — be reconciled into a common market access schedule to be produced at the tail-end of the negotiation is anybody’s guess. Singapore and Peru, meantime, are asked to entertain fresh SOE and IPR-related provisions which exceed that in their respective FTA’s with Washington.

In the SOE chapter, the United States seeks stiff ‘competitive neutrality’ disciplines to check the trade-distorting practices of such enterprises yet remains unwilling to submit its own to such disciplines. USTR takes the position that, as a matter of policy, it does not include subsidy disciplines in bilateral/preferential trade accords. Conveniently, the federal government-owned-and-operated enterprise within the U.S. Department of Agriculture, which administers the food aid and farm export credit guarantee programs, is exempted. The program has already been found to be a prohibited export subsidy by the WTO. The US dairy industry too enjoys certain statutory anti-trust exemptions that confer the ability (and advantage) to coordinate domestic and international sales prices. More broadly, it is only with the aid of subsidies that a substantial fraction of US agricultural production is viable — the most heavily subsidised commodities (save milk) also being the United States’ largest farm exports.

In the textiles chapter, straightforward protectionism has since morphed into mercantilism. In recent years, US textile manufacturers have posted trade surpluses in fabrics and yarns wholly on the back of strict rules of origin barriers with its NAFTA and Central American free trade partners. Behind a similarly strict yarn-forward rule, albeit with derogations, this exercise in trade diversion is now sought to be replicated vis-à-vis Vietnam (and Malaysia) — displacing existing Chinese and Taiwanese yarn and fabric inputs as well as depriving Hanoi the opportunity to develop a significant domestic fibre and fabric production capability. Unsurprisingly, Vietnam has refused to kowtow to such rules of origin stipulations.

The disruption of the existing East Asian textile/apparel supply chain points to a more serious design fault that afflicts the negotiation as well as the US’ key sponsoring role.

First, as a general rule, the institutional architecture of trade regionalism in Asia has tended to follow, not precede, the exchange of goods on the ground. Markets and geography, not top-down trade agreements, has been the driver of the region’s production-sharing arrangements wherein MNC affiliates typically import a substantial share of their intermediates and similarly export a substantial share of output. This ‘networked trade-cum-investment’ set-up bears little in common with prevailing US production patterns.

The use of imported intermediate inputs is not extensively embodied in US exports, intra-firm trade constitutes a small and declining share of US imports, and US overseas affiliates tend to be far more local market-oriented than their Japanese, Korean and German counterparts. Further, if it so desired, USTR could have catalysed such practices in its own hemisphere-wide trading arrangements with countries (Canada, Mexico, Chile, Colombia, Peru, CAFTA) that are at various stages of industrial development. That it has not done so makes USTR a poor advocate of supply chain-based trade liberalisation in East Asia and the discriminatory architecture of TPP membership which fails to adequate capture the intra-Asian character of regional production-sharing reflects this shortcoming.

Second, consistent with the notion of countries supplying value added to foreign markets (and not necessarily to final goods or gross exports), trade in low-cost scalable production of technology-intensive goods remains an integral part of regional supply chain arrangements.

China’s role is instructive here. It absorbs more imports, much of it in parts and components, and runs a larger trade deficit with the ASEAN+6 (Indonesia, Malaysia, Philippines, Thailand, Singapore and Vietnam) countries than it does with even Japan. Since the finalisation of NAFTA in the mid-1990s, the United States by contrast has failed to strike up an FTA with a significant labour-abundant developing country with scalable, technology-intensive production capability. A key political motive on USTR’s part to favour the bilateral/preferential liberalisation track — and downgrade the single undertaking-based multilateral approach — has in fact been to excuse such labour intensive (and related sunset or subsidised, politically-sensitive) sectors from liberalisation commitments.

To realise its aspiration to be a high-standard 21st century trade agreement that ‘facilitates … the development of regional production and supply chains holistically’, the TPP must include — and integrate — a broader membership of dynamic, cost-efficient Asian exporters. If inclusiveness partially trumps depth of integration, so be it. Protection to goods, services, information and tangible and intangible property rights along the entire supply chain must be accorded. Rules of origin should be leniently written and in key technology-related tariff sub-headings that manifest the most vertically specialised production sharing processes, a liberal value rule that accommodates non-originating Chinese content should be instituted. In the case of textiles, such rules should incline towards full, time-bound progressivity (single transformation rule), eliminating the need for an unholy goulash of varying product-specific rules that have temporary or permanent short-supply provisions grafted atop.

Alongside, a far greater consensus-based push to developing non-binding codes of conduct on behind-the-border issues, backed by a substantial down payment in capacity-building dollars, needs to be established. The United States’ own E3 Initiative with ASEAN provides a good template.

Ultimately, though, the preferential/coalition-of-the-willing track is not a substitute for multilateral liberalisation. USTR’s approach of pitching ever more aggressive demands to fulfil the wishes of powerful domestic lobbies while keeping any-and-all significant US trade-distorting policies off the table will drive any negotiation — be it multilateral or regional — to the point of collapse.

Sourabh Gupta is Senior Research Associate at Samuels International Associates, Washington, DC. He is an EAF Distinguished Fellow for 2012.