How the Trans-Pacific Partnership lost its way

The TPP has the potential to usher in a new peak for Pacific trade, but it could be a flop if negotiators don't get their act together.

A deputy of the United States Trade Representative was in Santiago this week to discuss the Trans-Pacific Partnership deliberations with Chilean trade officials, marking one of the first meetings in what promises to be the final year of a long and controversy-ridden negotiation.




















The 11 countries participating in the Trans-Pacific Partnership, or TPP, which span North America, South America, and the Asia-Pacific region, have spent considerable time and resources on fifteen negotiating rounds since 2010. Their goal is a comprehensive, “state of the art” trade agreement that would eliminate nearly all tariffs among participating countries and commit governments to unprecedented regulatory reforms on a number of domestic policy issues. In addition to lowering tariffs, member countries must also agree to strong protections for foreign investors, enhanced safeguards for patent holders, and limitations on subsidies to domestic state-owned enterprises, to give a few examples.

Unfortunately, the insistence on achieving so-called “deep integration,” primarily of interest to U.S. negotiators, is undermining negotiations and obscuring what should be the ultimate goal of the TPP process: easier movement of goods and services across the Pacific.

Despite its central role in the current negotiations, the United States is in fact a late-comer to the TPP. The agreement’s origins can be traced to the Trans-Pacific Strategic Economic Partnership (also called the P-4), signed in 2005 by the governments of Chile, Singapore, New Zealand and Brunei Darussalam. The objectives of this unlikely cohort were threefold: first, to create a free-trade area with unprecedented market access by agreeing to eliminate all tariffs by 2017; secondly, to forge the first free-trade link between the Asia-Pacific region and the Americas; and finally, to create a template for the expansion of free trade throughout the two regions by allowing additional countries to adhere to the agreement.

The P-4 became a reality when an agreement on goods entered into force in 2006. In 2008, the U.S. joined negotiations when the original P-4 parties began talks on an investment chapter. U.S. officials insisted that instead of joining the existing P-4, the new negotiations, which later expanded to include Australia, Peru, Vietnam, Malaysia, Mexico and Canada, would be towards a separate agreement – the TPP.

The TPP process has stoked controversy at every turn. One reason is the high level of secrecy surrounding the talks: negotiators have refused to make public any of the agreement's draft text. Based on leaked documents and the sparse comments of negotiators, however, it is clear that another major source of controversy comes from U.S. proposals in areas such as investor protection, intellectual property rights and competition policy that would limit member countries’ use of an array of policy levers commonly deployed by developing countries to regulate their economies and promote the competitiveness of domestic firms.

Take the proposed investment measures being pushed by U.S. negotiators. Under these rules member countries must allow foreign investors to move capital “freely and without delay” into and out of their territory. This language would seem to preclude the use of capital controls, a policy tool successfully implemented by many developing countries, especially after the Asian Financial Crisis in the late 1990s. Generally taking the form of taxes or requirements that investors hold assets for a certain period of time, capital controls protect countries from the financial instability and currency fluctuations that result from rapid inflows or outflows of capital.

The TPP investment chapter casts doubt on countries’ ability to deploy capital controls, and, critically, allows foreign firms to bring legal action against governments if they feel their protections have been violated.

Intellectual property rights represent another area where TPP’s developing country members are being asked to accept significant policy constraints. The U.S. proposal would require TPP partners to automatically grant strong patent protections for pharmaceuticals within a certain time period after they have been granted patents in another TPP country. This so-called “access window” goes beyond the requirements of the WTO and existing bilateral agreements, and would limit the availability of generic drugs and likely raise the price of medicines in TPP countries. On this issue in particular, Chile has proven hesitant. Lead negotiator Rodrigo Contreras indicated after the December 2012 round in New Zealand that the intellectual property issue was especially contentious and that he would consider introducing alternatives to the U.S. proposal.

But despite clear and at times unanimous objections, the U.S. has yet to revise its proposals in this and other controversial areas, nor has it indicated whether it would do so. Not surprisingly, there remains serious space between the parties as they enter 2013 with a self-imposed October deadline looming. The arguments over investment protection, intellectual property, and other deep integration issues, in addition to fouling the politics of the agreement, obscures the real opportunities to make the TPP valuable for member countries – especially for a country like Chile that already has free trade agreements in place with each of the TPP members. As a result, Chile would see only small gains from the TPP, as it already enjoys preferential market access to every TPP country.

A recent analysis of the agreement by economists from the East-West Center and the OECD estimated that the TPP (without Mexico and Canada, who had yet to join when the study was conducted) would increase Chile’s GDP by 0.28 percent, above its projected baseline level by 2015. While not insignificant, This gain, which amounts to around $600 million, seems much less impressive when compared to the expected increases of other developing countries such as Peru at 1.36 percent, Malaysia at 1.43 percent and Vietnam with a whopping 6.37 percent. However, under an expanded TPP that included Korea and Japan as well as Canada and Mexico, Chile’s GDP gains by 2020 would nearly triple to $1.6 billion. The largest windfall by far, both for Chile and other members, would come from a broader Asia-Pacific free trade agreement that added China and the rest of Southeast Asia to the expanded TPP scenario.

Of course, these figures are based on a number assumptions that may not materialize and therefore must be interpreted as broad indicators rather than hard and fast predictions. Still, one message rings clear: the benefits to Chile and other TPP member states increase exponentially as more Asian countries join the agreement.

What was compelling about the original P-4 agreement was not the economic firepower of its members (which was, after all, quite negligible). Instead, it was the vision of establishing a framework for broader Asia-Pacific free trade that other countries could easily join. Likewise, the TPP must be able to bring on new members, especially in Asia, relatively easily in order to fulfill its aspiration to be a powerful mechanism for trans-Pacific economic integration. As the study cited above indicates, the bloc as currently constituted simply does not encompass enough of Asia’s dynamic economies to make the gains of participation for Chile worth the costs. The addition of Japan, which has expressed interest in the TPP, would certainly help, but a new government and upcoming legislative elections make Japanese participation unlikely for the time being.

By giving ground on deep integration issues, the U.S. would not only make TPP membership more enticing to other Asian economies, it would also give current members a fighting chance of concluding the agreement by the October 2013 target. In addition, the time, effort, and political capital that would be saved could be devoted to more critical issues, such as liberalizing rules of origin. Rules of origin determine products’ country of origin and therefore their ability to be traded under preferential trade agreements (PTA). Generally, a certain amount of value added or transformation of a product must take place in the exporting country for it to be considered under the PTA. The idea is to avoid transshipment, whereby a product is produced in a non-PTA country then shipped to a PTA country in order to be exported under favorable terms.

For the purposes of the TPP, however, rules of origin should be lenient; in other words, they should allow a significant amount of non-originating content to be exported under the agreement. The reason is that production in Asia is highly fragmented among various countries. Especially in high-technology sectors, goods often cross borders several times during the production process. Strict rule of origin requirements would thus hamper the integration of TPP members in these dynamic Asian production chains by, for example, excluding a Malaysian semiconductor with Taiwanese content from preferential treatment. By the same reasoning, the agreement should also facilitate cumulation of origin, which allows a product that undergoes processing or value added in one member country to still be exported from a second member country under preferential tariffs.

For Chile, the value of the TPP hinges critically on whether the agreement brings closer integration with Asia. The government sees the TPP, along with the Pacific Alliance initiative among Chile, Colombia, Mexico, and Peru, as a way to position Chile as Latin America’s trade and investment hub – the Western Hemisphere’s answer to Singapore. In order to realize this vision, the agreement must be flexible enough to attract additional Asian members and accommodate the continent’s dynamic, fragmented production chains. If the U.S. continues to insist on deep integration above all else, however, the added value for Chile will not justify the costs in terms of policy flexibility.

T.A. Kahn is an international trade and investment consultant and freelance writer based in Washington D.C. The opinions expressed in this article are his own.

By T,A. Kahn (editor@santiagotimes.cl)
Copyright 2013 - The Santiago Times