Canada Weighs In - Peter Clark on the TPP
As the latest nine day round of the Trans Pacific Partnership (TPP) negotiations begins in Auckland today, Canada will be a full-blown participant for the first time. For a fresh perspective, here is a comprehensive paper on the TPP published late last week by Canadian trade specialist Peter Clark, of the multinational consultancy firm Gray, Clark, Shih and Associates, based in Ottawa. Clark will be arriving in Auckland on Tuesday. His article is very rewarding, either as an introduction to the TPP, or for other trade analysts.
– Gordon Campbell (And there’s more on the subject in the latest edition of Werewolf
The following is the executive summary of Peter Clark's paper. An overview of the negotiations, analysis, and country-by-country breakdown, is available in the full version [PDF].
Trans-Pacific Partnership: NAFTA 2.0 or Doha Revisited?by Peter Clark
“Rules? In a knife fight? No Rules.”
– Harvey Logan to Butch Cassidy, Butch Cassidy and the Sundance Kid.
Next week in Auckland, Canada and Mexico will, at long last, join the Trans-Pacific Partnership (TPP) as full partners.
Will the TPP live up to its impressive advance billing or will the cracks and crevices in its façade and its foundation – which are becoming more apparent with every new leak, press report and counterproposal -- shunt the TPP express onto the Doha track?
The TPP will be far from comprehensive. Public reports reveal that there are already exclusions, exceptions and reservations, varying in importance from the picayune to the colossal. The wholesale exemption of U.S. states from many of the important proposals currently on the table is clearly colossal.
Many reservations and exclusions are from the U.S., which has been driving the negotiations to date. We should expect many more, from all parties. At the end of the day, like most trade deals, the final product will end up being decided by a balance of exclusions.
The TPP is built on the Trans-Pacific Strategic Economic Partnership (P-4) agreement concluded in 2006 among Brunei, Chile, New Zealand and Singapore. The P-4 was a flexible agreement that accommodated differences among the Parties. It is a so-called living agreement which others willing to accept its terms could join.1
In 2008, President Bush asked if the U.S. could join. The big fish was welcomed into a rather tiny pond.
Colombia applied in 2010 – but its application was rejected presumably because it was not a member of APEC. Or was it because the US-Colombia deal had not been completed? It is still possible that Japan, Korea, Thailand and the Philippines will join the negotiations at a later stage.
President Obama committed to the negotiations on November 14, 2009 at the APEC summit in Honolulu. That was the eighth anniversary to the day of the launch of the Doha Round in Qatar. Ominous?
The P-4 has been hijacked. The present deal has become a U.S. initiative. Not only did the U.S. re-decorate the P-4, they restructured the building, added wings and took charge.
The United States is hell-bent on re-making its trading partners in its own image.
Two target end dates have been set – tied to APEC Leaders summits in 2011 and 2012. Both dates were missed. Now President Obama and about half of the TPP country leaders are aiming, fingers and toes crossed, for October 2013. Linking end dates to the Annual APEC bodies’ photo-op is not a great idea. Could the TPP be headed for the Never Never Land where the Doha Round lies resting?2
Our research suggests that the TPP was never what it was advertised to be. There has been little progress to date and some of the more adventurous U.S. initiatives have been stalled by the underwhelming response of its trading partners.
There are many sensitive issues that TPP participants have addressed by way of exclusion or reservation in their trade regimes and in other bilateral and regional negotiations. (Many are identified in this report.) Notwithstanding the Americans’ rush to achieve a comprehensive gold standard deal – which is more likely to turn out to be 10 karat gold-plated – movement on these sensitivities will not willingly be conceded to the U.S.
The sketchy reports and strategic leaks available to the public suggest the TPP does not offer enough balance and mutual benefits necessary to attract broad support.
Differences in levels of economic development and a general lack of willingness by other countries to adopt U.S. laws and regulations are very problematic.
It appears that Washington has begun to recognize that its over-reaching approach and over-management of the process is leading to a level of resistance which could kill the negotiations.3
We expect to see some flexibility from the U.S. at Auckland.4 This will be welcome. Very likely it will only be a cautious start. It will need to be further developed – more deeply and more broadly – before others will engage in meaningful negotiations.
The negotiations are not nearly as completed as the principal promoters suggest. “Nearly complete”, when no one expects the deal to be done until at least a year from now, sounds like the WTO mantra that the negotiations are 80% complete (and have been for years) and only 20% remains to be completed.
In fact, new trade negotiations are built on previous agreements – which provide the agreed basis for the next effort. As such, they begin with at least 75% agreed.
The measurement should be that 20-25% of the issues are new – and when 20% of TPP issues are left to be decided – this really means that 80% of the core negotiating issues are unresolved.
This is why the Comprehensive Economic and Trade signatories with Europe have taken so long to close. Because no one will blink until late in the eleventh hour.
After more than a decade of stagnation and frustration with the Doha Development Agenda, it is fair to ask “is the TPP NAFTA 2.0 or Doha revisited?”
The U.S appears to be treating the TPP as a hub and spoke negotiation. It is a series of separate bilateral negotiations on market access under a single umbrella with each of the other 10 partners.
The market access negotiations are an unstructured mess – a spaghetti bowl of FTAs with different coverage, schedules and origin rules. The U.S. is, in effect, re-selling access to its markets by trying to impose on the other participants its own agenda for the so-called 21st Century issues.
There are 26 chapters in the agreement. These range from the usual market access negotiations in goods, services, and agriculture, to intellectual property rights, services, government procurement, investment, rules of origin, competition, labor, and environmental standards and other disciplines.
Suggestions that the TPP is not a trade agreement emerge from an overly simplistic focus on a few chapters. In fact, the scope is not much different than NAFTA and most of the issues have been addressed in the WTO as dealing with trade related aspects of, say, investment or intellectual property.
Some “behind the border” topics such as disciplines on state-owned enterprises, regulatory coherence and supply chain competitiveness break new ground in FTA negotiations. In many cases, the rules being negotiated are more rigorous than comparable rules found in the WTO’s Uruguay Round Agreement.
The Agreement texts will be very detailed. The differences and problems are in the details. In trade agreements, the devil is always in the details – and when it comes to the TPP, the devils travel in packs.
Inside U.S. Trade reports that the Auckland Round (December 3-12), will focus on chapters covering intellectual property (IP), labor and environmental protections, legal and institutional issues, market access and rules of origin, investment, sanitary and phytosanitary (SPS) issues, and issues related to technical barriers to trade (TBT).5 This is pretty much the full range of the deal.
Copyright issues such as liability for Internet service providers, and Internet retransmission, enforcement and limitations and exceptions for acts of infringement will be an important focus. Canadians who can now be fined up to $5,000 for non-commercial infringement know what negotiations on this mean.6
It is not surprising that after fourteen rounds of negotiations, only three relatively minor chapters have been concluded. These address Co-operation; Small and Medium sized Enterprises; and Administration. Rather underwhelming for three years of work since the U.S. joined in.
If and when these negotiations are completed and implemented, the TPP could eliminate tariff and non-tariff barriers to trade and investment among the parties and could become a template for expanding free trade on both sides of the Pacific.
However, the TPP is not likely to be concluded any time soon. The smart money says sometime in 2014. And we all know what target dates mean in trade negotiations – even when they go well.
The TPP will not be Comprehensive
In fact no trade agreement is ever truly comprehensive. The easy stuff is not controversial. But the hype is focused on universality. Everything is on the table at the start. It never finishes that way – and the more countries involved the less comprehensive the deal will be.
The TPP is no exception. This report examines the issues country by country and in detail but let’s first consider how the U.S. fails this test.
The U.S. is not leading by good example. Here is what we see flowing from U.S. positioning:
- Exclusion of Investor state arbitration at the sub-national level (the states do not want to be subject to it);
- Transparency on Medicaid procurement will be limited to central governments;
- State governments are resisting additional protection on pharmaceutical patents which could delay the introduction of generic medicines;
- Limited coverage of government procurement;
- Intellectual property proposals do not include the protections that U.S. citizens and residents enjoy under U.S. law.
In addition, the U.S. will likely perpetuate regressive yarn forward or double and triple transformation rules of origin for textiles and apparel.
What else can we expect from the U.S.?
- it will not likely provide additional access for sugar, cotton and beef; 7
- it will not discipline production and export enhancing subsidies like export credits and food aid (unless Australia’s diversionary ploy in the Competition/SOE negotiations actually works);
- it is not proposing to discipline locational subsidies which steal Canadian jobs. If Governor Romney can say that China steals U.S. jobs, can we not say that Canadian jobs at Caterpillar, Electrolux and other Canadian factories were stolen with the help of U.S. state subsides? The workers who have been displaced would not disagree;
- the TPP does not anticipate disciplines and further reductions on domestic agricultural support.
Roadblocks in the way of a high quality comprehensive TPP Agreement
Government Procurement is a mess. Here, too, sub-national commitments, thresholds and retainers for minority groups and gender-based ownership will detract from the goals. All politics are local; so, it appears, is trade.
The state-owned enterprises section of the Competition Chapter is an orphan. Aimed at Vietnam – and at China, there is really no way that other countries will agree first to have their state-owned companies treated less favorably than privately-owned competitors.
There needs to be a vigorous debate over disciplining sanitary and phytosanitary measures (SPS). Australia and New Zealand will be the targets. Geographic isolation is not a sufficient defence. The U.S. appears finally to be shifting to the side of the angels on this – that is, to support farmers.
There has already been movement by the U.S. to modify its position on medical or pharmaceutical patents. Could it be that U.S. state concerns about medicare/pharmacare costs were a factor?
The U.S. needs to be more motivated. It wants a deal for more than just trade reasons – and now it has competition in the form of the recently-launched Regional Comprehensive Economic Partnership (which includes China, India and Japan, among others -- see paragraph 92 for more on RCEP). Time is on the side of those who are not driven by geopolitical goals.
The U.S. needs to reconsider its proposals – including the gaping hole in coverage created by the exclusion of sub-national SOEs. It is time for Washington and the U.S. states to walk the walk on this.
Restrictions on regulation of capital flows are a non-starter for several parties. For example, Malaysia is concerned and Chile has specific reservations in all of their FTAs.
Nor will others be keen on importing the United States’ unsupervised approach to financial services regulation which contributed so much to uncertainty and instability around the world.
Many aspects of the U.S. initiatives to harmonize and globalize corporate operating environments will be non-starters. Less developed members will resist and reject attempts to re-shape them in America’s image.
Rice will be an issue, particularly with the ASEAN countries. The U.S. cannot grow rice without irrigation – which involves very cheap water – and cheap power to make the systems function. Yet the U.S. rice producers push to open Asian markets.8
Rules of origin: this is a mess. Vietnam and Malaysia don’t like having special trade inhibiting rules for clothing and footwear. Nor should Canada. Any change in our special NAFTA rule would be devastating to what is left of Canada’s apparel exports.
Australia has already made it clear that Investor State Dispute Settlement is not welcome in the land of OZ. Meantime, there has been a recent surge of actions in Canada – seriously testing not only Canada’s right to regulate, but also court decisions.
The U.S. will avoid improved access for sugar. Sugar will be an issue for Australia, Rules of Origin on sugar will be important for Mexico. A cumulative rule of origin is the only sensible approach in an eleven party deal. Canada could use Australian “raws”, to refine sugar to be used in confectionary and baked goods exported throughout North America.
Market access is a hodge podge, a dog’s breakfast – pick your description. This part of the negotiations is comprised of numerous bilateral FTAs among the members which may defy common linkages.
Draft intellectual property texts have been leaked. By and large they appear to try to export the disciplines of U.S. law, but not the flexibilities, safe havens and/or user protections available to U.S. citizens and residents.
This has been resisted, and if the U.S. does not change its approach, the IP initiative -- which is already fragile and battered -- will crash and burn. The U.S. is expected to continue reworking its initial proposal to try to garner more support.
The U.S. will table new language making SPS disciplines which go beyond the WTO enforceable. This is an important shift off the fence for the USA, where farm groups have apparently prevailed over scrutiny-averse regulators.
The U.S. and Australia are still at odds on how to approach e-commerce, especially as Australia is worried that the privacy of its citizens could be compromised.
What is in the TPP for Canada?
Gordon Ritchie, who was so pivotal in negotiating Canada-U.S. Free Trade, suggests the TPP will not be worth much to Canada. I agree. On the economic issues, the near-term prospects are, frankly, underwhelming.
The Trans-Pacific Partnership may be more important for what it can become than for benefits that can be expected from the current membership. Canada has FTAs with four participants; the others, except for Vietnam, are rather small and some are quite distant geographically.
Participation in the TPP raises more questions for Canada than it answers.
Canada has negative trade balances with all members of the current TPP group other than the U.S. and Australia. Chile and Canada recently updated and enriched their 1997 FTA, adding financial services and updating numerous other provisions.
With Japan as a participant there could be very real and very important gains for Canada. Without Japan, TPP as currently envisaged would more likely be a gift to Washington with benefits to Canada being marginal and illusory.
Will Japan join the negotiations any time soon? Prime Minister Noda opened the TPP window a crack late in 2011, and followed up with additional teasers before dissolving the Diet for election, making it an election issue in Japan.
There has been support for TPP from Japan’s opposition leader Shinzo Abe, and a recent survey in Japan found 48% in favour of TPP and only 27% opposed.9 Japanese media reports suggest the 27% opposed are a very noisy minority. The TPP is particularly important for Japan because it would include Tokyo’s biggest trade partner – the United States. The Japanese economy desperately needs revitalization.
Canada is in the TPP largely for defensive reasons. In a nutshell, it is better to be inside the tent, sharing preferences than outside losing markets to the preferences enjoyed by others.
Every time the United States negotiates another FTA, Canada’s preferences in our most important export market are eroded. Because resources have become a much greater part of our declining exports, the impact is concentrated in manufacturing jobs.
For Mexico, Chile, Peru and Singapore, the TPP is also a defensive exercise insofar as the U.S. is concerned
Canada needs free trade agreements to expand its exports of manufactured goods and services. Canada does not need free trade to export rocks and logs. Raw or semi-processed raw materials are largely duty free in the markets of our major trading partners. And if export controls are removed in TPP, there will be a lot more log exports.
There is little new market access that Canada can gain from Chile, Peru and Mexico. The U.S. has made it clear that market access discussions with Canada will be one way – South.
Canadians do not own a lot of intellectual property – and investment has been addressed in Canada’s extensive network of FIPAs.
If the TPP works, it will be a platform to expand trade in Asia. That is its principal value to Canada.
There are different motivations among the TPP Parties. These could change as the possible outcome becomes clear, but the following points examine some of the current motivations.
New Zealand, Brunei, Vietnam and Malaysia do not have FTAs with the USA. This is their chance to catch the brass ring on the free trade carousel. Perhaps their only chance. These countries want to be on the inside. But will they resist excessive U.S. demands?
New Zealand, preparing to host Round XV, has declared that they will walk away from TPP if dairy markets are not opened and their Pharmac is not excluded from provisions on state-owned enterprises and access to medicines.
New Zealand has been very concerned about possible anti-China optics of the TPP. Are Prime Minister Key’s demands an ultimatum or is New Zealand preparing an exit ramp to avoid friction with China?
Those countries with FTAs with the USA -- Chile, Peru and Australia -- will gain little on market access, except with those countries currently outside their FTA networks.
Mexico and Canada have different interests than the others because NAFTA goes further than FTAs among the parties and the North American economy is so integrated.
NAFTA would benefit from revisions in the regulatory chapters without quantum changes in market access. Canada and Mexico – who are well integrated in the Eastern Pacific – will have to focus their market access gains on the Western Pacific, New Zealand and Australia.
It is far from clear how tariff schedules and rules of origin will be integrated and harmonized. The U.S. appears to be too focused on its own bilaterals to be concerned with this.
Chile has FTAs in place with all other TPP members. Chile and Vietnam concluded their FTA while the TPP was being negotiated.
Chile’s trade policies are built on an impressive network of FTAs. Chile, together with Peru, Colombia and Mexico, has formed the Pacific Alliance to improve Latin American trade ties with Asia. Canada prudently requested observer status to the Pacific alliance and has been accepted.
Will the TPP protect Canadian Jobs?
The answer is no. NAFTA did not. And there is nothing in the TPP to discipline or limit domestic subsidies in the U.S. to agriculture and to manufacturing.
The U.S. offers generous locational subsidies that often take the form of financing of plant construction and training through tax-free revenue bonds. This is cheap money to attract investors and jobs.
Why did Hyundai and Kia locate in Georgia and Alabama? Because local governments contributed over $650 million towards the companies’ $3 billion investment in creating what was expected to be more than 5,000 jobs.12 Why consider Ontario?
The State of Tennessee paid Electrolux $188 million to build a $190 million plant which moved jobs from L’Assomption, Quebec to Memphis.13 A very sweet deal for Electrolux. How does Quebec compete with this?
Electrolux didn’t move because they were Elvis fans who wanted to be closer to Graceland, or because they enjoyed evenings on Beale Street. Tennessee showed Electrolux the money and it was au revoir.
This is not free trade. It is not fair trade. These are trade related investment measures which should be condemned. U.S. states argue they are competing with each other, which is true. It explains the race for the bottom. It does not make the subsidy battle less distorting, nor less injurious to Canada. These are investment incentives that should be banned or at least strictly disciplined.
Nothing is likely to happen to these subsidies. The “fair” in “fair trade” is only for optics. There are no rules in a knife fight. There are no rules in a trade negotiation. It is not about right and wrong. It is about big and little.
The issues listed above do not reflect all U.S. exclusions from a compressive TPP. There will be further exclusions and reservations by all parties.
The TPP and the “Pivot” in the Asia-Pacific Region
The Congressional Research Service 14 reports TPP is tied to President Obama’s “pivot to Asia”. The perception that the center of gravity of U.S. foreign, economic, and military policy is shifting to the Asia-Pacific region is an important counterweight to the rising economic and military influence of China. The TPP is an important element in the U.S. “rebalancing” toward Asia.
China is not standing idly by while the prodigal son returns to its neglected extended Asian family. Beijing considers the TPP to be designed to exclude and isolate China.
China’s counterpunch is support for the Regional Comprehensive Economic Partnership (RCEP), also known as ASEAN Plus 6, recently launched at Phnom Penh, among Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, plus China, India, Japan, Korea, Australia and New Zealand.15
In true ASEAN fashion, the RCEP will be more flexible and responsive to individual differences than the TPP. Some ASEAN members not having FTA access to the USA (Malaysia, Vietnam, Thailand and Brunei) will test the waters in both negotiations.
For those frustrated with inflexible U.S. demands in the TPP, the RCEP is an option. Given China’s involvement and India’s, RCEP would cover nearly five times the GDP that the TPP could.
Critical mass is very important to TPP. The TPP of nine seriously fell far short of critical mass. It was underwhelming.16 Canada and Mexico have helped on this and the TPP desperately needs Japan to join. The U.S. cannot afford to lose any of the existing eleven.
Did Canada make advance concessions to the USA to get to the table?
The official answer is no. And as was the case with CETA, everything is on the table.
While Canada has made a number of concessions to the U.S. on items on the ever-present U.S. shopping list, we will never know in this nearly totally opaque process whether the timing of any moves that could be viewed as concessions were related to expediting Canada’s invitation to join the talks.
On July 1, 2012, Canada’s tourist exemptions were harmonized on the U.S. exemptions. The maximum exemption available after two days away has been doubled to $800. This gift to Washington was a pleasant surprise to many Canadian consumers, and was undoubtedly welcomed by American merchants.
The losers in this harmonization are Canadian merchants, particularly those located close to the border. They have been and will continue to be hurt by increased cross border shopping encouraged by the strong Canadian dollar. Estimates of $5 billion Black Friday spending this year by Canadians crossing the border show the generosity of this gift. This concession resolving – a long time U.S. irritant – appears to have been made with little adverse political impact.
The budget also increased the scope for foreign ownership of cellular telephone service providers – a gift to Canadian consumers.
Another example is the decision to harmonize container sizes for processed food products.17 U.S.-based and owned food companies will now find it easier to serve Canada from their U.S. plants. The great sucking sound from the South will be Canadian plants and jobs migrating to the U.S. as if this technical barrier is removed. This proposal seems to have been put on the back burner for further consideration.18
Is the U.S. making TPP more of a gamble than a negotiation?
The TPP negotiations are based on a shaky foundation. Congress has not granted Trade Promotion Authority (TPA) for the TPP.19 Without TPA, trade agreement negotiations are fraught with risk and uncertainty. It is folly.
Without TPA, the TPP negotiations are a crapshoot for other countries. Without TPA, all Trans-Pacific partners are exposed to the virtual certainty of having to re-negotiate with Congress a hard fought, done deal.
The TPP is nowhere near finished. On several important issues, it appears to be stuck in neutral. It will, like all other free trade negotiations, be about hard fought exclusions. In Asia, there are alternatives to the TPP for ASEAN members. The RCEP will be much more user friendly and flexible. This will feed dissent and objections to U.S. demands. In the Americas, all participants already have FTAs with Washington.
Will TPP be Doha revisited? The United States cannot afford this. U.S. stakeholders are questioning the extent of the focus on SOEs and its effects. They are openly pressing for flexibility to keep the other parties at the table.
The Americans are skilled and generally very pragmatic negotiators. They understand the art of the possible and the art of the deal. They should recognize and try to rebalance their approach.
If not, President Obama’s decision to join the TPP on the 8th anniversary of the Doha declaration could lead the TPP to the same fate.
1 [back] P-4 Article 20.6
1. This Agreement is open to accession on terms to be agreed among the Parties, by any APEC Economy or other State. The terms of such accession shall take into account the circumstances of that APEC Economy or other State, in particular with respect to timetables for liberalisation.
2. The agreement on the terms of accession shall enter into force 30 days following the date of deposit with the depositary of an Instrument of Accession which indicates acceptance or approval of such terms.
2 [back] Notwithstanding the hype and propaganda, the leaders did not include Chile, Peru, Mexico and Canada.
3 [back] “Breakthroughs Not Likely On Sensitive Products At Auckland TPP Round, Inside U.S. Trade”, November 21, 2012
4 [back] Ibid.
5 [back] “Negotiators to cover full range of issues during TPP Auckland Round”, Inside U.S. Trade, November 15, 2012
6 [back] “Canadian company collecting info on millions of habitual illegal downloaders”, Daily Brew, by Steve Mertl, November 27, 2012
7 [back] I will not dash Kiwi hopes by discussing the real problems of their gaining free access to the U.S. dairy market.
8 [back] “WTO council defers decision on PHL request to extend rice import restriction”, GMA News, November 28, 2012
9 [back] “The Kamikaze election”, The Economist, November 17, 2012
10 [back] “Chilean Trade Officials Question #TPP Benefits at Seminar in Santiago”, InfoJustice.org, April 16, 2012; “Direcon reconoce opción de no suscribir TPP si el acuerdo no favorece a Chile” “Chile Threatens to Pull out of TPP because of U.S. IP demands”, InfoJustice.org, May 10, 2012
11 [back] “Coping with multiple uncertainties: Latin America in the TPP negotiations”, by Sebastián Herreros, Geneva, September 24, 2012, firstname.lastname@example.org
12 [back] “‘Transplant’” Automakers Get Over $3.6 Billion in Subsidies; More Unions, Ralph Nader Comment”, Huff Post – Business, December 13, 2008 – and – “Kia’s Impact Wide in West Georgia”, GPB news, by Jeanne Bonner, November 30, 2011
13 [back] “Memphis Electrolux hiring goes through Workforce Investment Network”, The Commercial Appeal, by Thomas Bailey Jr., October 12, 2012
14 [back] “Pivot to the Pacific? The Obama Administration’s “Rebalancing” Toward Asia”, CRS Report R42448, March 28, 2012
15 [back] “Obama’s Asia Trip, Congress Out, Colombia FTA Meeting, Ex-Im Impact Policy”, Inside U.S. Trade, November 19, 2012
16 [back] “TPP negotiations present far more questions than answers”, iPolitics, by Peter Clark, October 12, 2012
17 [back] “A food fight worth having”, Financial Post, Terence Corcoran, November 22 2012
18 [back] “Keep container sizes the same say processors”, Better Farming, November 9, 2012
19 [back] “Pivot to the Pacific? The Obama Administration’s “Rebalancing” Toward Asia”, CRS Report R42448, March 28, 2012