Down to the wire on the Trans-Pacific Partnership

Author: Peter Drysdale, East Asia Forum

Officials and ministers from around the Pacific are descending on Hawaii this week for what should be the final round in the negotiation of the terms of the Trans-Pacific Partnership (TPP). The big two in the arrangement — Japan and the United States — appear to have settled, and this bilateral between the two largest parties to the negotiation will be by far its most significant outcome. But there is still uncertainty about whether the agreement will be put to bed within the week and what its shape will finally be.

The rush to the wire is important. It is ordered around the legislative imperatives that President Obama faces in trying to stitch this part of his pivot toward Asia together before his term expires.

US Trade Representative Michael Froman shakes hands with his Japanese counterpart Akira Amari prior to their talks over deadlocked Trans-Pacific Partnership (TPP) negotiations, at Amari's office in Tokyo on 19 April 2015. (Photo: AAP)

If the TPP deal is not concluded within the first two weeks of August, as Rick Katz of the Oriental Economist points out, it will be legally impossible to bring the TPP to a Congressional ratification vote during the 2015 calendar year and that means it would likely spin out into the next US presidency. If the agreement cannot be done by the end of the month, there will be a sense of failure and loss of momentum. The Japanese know, for example, that the United States needs to ratify the TPP during 2015; otherwise, it will be hard to get it ratified until the next presidential term and that could spill over into 2018, not 2017, and possibly not be done at all. If the agreement is to be signed at all it has to be signed very soon otherwise governmental energy in the region will ebb away. This way thinking about where things are at has clearly helped persuade Japanese negotiators to get over the line.

The TPP is the most important free-trade agreement to be negotiated in many years. If completed, it will cover a larger part of world trade than any such preferential deal before it, with its members accounting for nearly 40 per cent of the world economy. Its aim is to set a new standard for what trade agreements should cover. So far there have been five years of negotiations among the twelve partners, over the 29 chapters of dense rules and tariff details that will comprise the arrangement.

One problem remains the TPP’s complexity. Even in respect of commodity trade, it will incorporate a morass of regulations, such as content rules specifying how much of a product must be made from local inputs and inputs from partner countries to qualify for entry to partner markets. Moreover, these ‘rules of origin’ have been negotiated bilaterally so when the deal is done, it is likely to have some of the characteristics of a series of bilateral arrangements rather than a genuinely common set of regional rules. This is far from ideal or platinum-standard in terms of economic efficiency since it will protect suppliers within the arrangement against lower cost suppliers outside it, such as China, Indonesia or Europe for instance, diverting trade away from them rather than creating it within the TPP.

Yet, after failure to seal a big global WTO deal, the TPP offers the chance of some success. The Japan–US component of the TPP should deliver substantial agricultural trade liberalisation, although not, it seems, the zero option that would have completely opened up Japanese agricultural markets to international competition and symbolised real progress with the Abe government’s structural reform agenda. The prospect of dairy market liberalisation in North America would also bring substantial trade and income gains although political resistance to liberalisation of dairy in the middle of a Canadian election cycle is threatening to scuttle that, with uncertain consequences.

Canada has still apparently to put an offer on the table for dairy and poultry, prompting talk in Washington late last week that the TPP might go ahead this time without the participation of Canada, New Zealand and Malaysia (for unrelated human rights violation reasons). Leaving Canada out, or getting it to agree that it will have to join late, could have repercussions for New Zealand’s participation. The US dairy industry has argued that the United States should not open its dairy market to New Zealand and others unless it was counterbalanced by Japanese and Canadian dairy market opening. Remarkable though that turn of events might seem, the final straight up and down vote on TPP in the US Congress might depend on negotiators’ taking the threat seriously. Canada’s trade minister, Ed Fast, dismissed the threat as ‘another tactic to negotiate through the media’ and declared that Canada would ‘negotiate at the negotiating table’, and would not ‘be bullied into negotiating this through the media’. So there’s still a way to go.

Excluding dairy would be a sorry outcome for the value of the agreement. Dairy accounts for one-third of New Zealand’s total exports; New Zealand alone produces one-third of total global exports of dairy products. If Canada does not deliver, New Zealand — one of the original members of TPP when it was called the Pacific-4 — might not be able to sign on. As Katz reports an Asian analyst remarking: ‘What kind of agreement is it that keeps out the most efficient dairy producer in the world? So much for a “21st-century, high-quality” agreement that is the “gold standard” for future agreements’!

In this week’s lead, Shiro Armstrong scrutinises other aspects of the TPP likely to occupy a lot on negotiating time later this week. He argues that these issues, though vexed and still difficult to resolve, are trivial compared to the ability to get a straight up-or-down vote in the US Congress — now secured through TPA or fast-track authority, without which the deal would be a non-starter. The remaining issues, he says, can be easily horse-traded at the political level and compromises can be made in order to complete the deal.

Armstrong identifies the principal flaws in the TPP that may well overwhelm the positives in any agreement. ‘The first is that the core of the new rules involves aspects that further private (read: large multinationals) interests at the expense of general welfare in member countries. The most egregious of these is stronger intellectual property (IP) rights protections, which are anti-development and simply transfer wealth to US pharmaceutical companies and Hollywood’. Twelve-year or even seven-year data protection for biologics is, as one Asian negotiator has put it, ‘outrageous’. Other issues are the exclusion of China, India and Indonesia from membership any time soon, with hurdles to entry that are unreasonably high; the investor -state dispute settlement provision; and the trade diversionary structure of trade rules.

‘The temptation’, writes Armstrong, ‘will be strong to rush across the finish line for what will be a major political trophy — but the risk is that the TPP will be an agreement that does more harm than good for economic and political relations in the Asia Pacific’.

An agreement on the TPP this week is not the final destination. If it’s to be more than a surrogate bilateral agreement between Japan and the United States it will need to expand its membership, to include China and the rest of Asia. And if it’s not mainly about commodity trade liberalisation but about setting new rules for global commerce, the rules that are proposed had better be thoroughly scrutinised by all partners to the agreement before they finally sign on, not just by the US Congress.

Peter Drysdale is Editor of the East Asia Forum.

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