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KWR Special Report

Whither (and Whether) a Trans-Pacific Partnership (TPP)?
By Russell L. Smith

WASHINGTON, DC (KWR) August 17, 2010 - In September of 2009, President Obama notified Congress of his intention to participate in negotiations for an expanded Trans-Pacific Partnership ("TPP") agreement. Along with the U.S. National Export Initiative, the TPP represents the Obama Administration's most significant effort in the international trade arena. The TPP provides an opportunity for President Obama to demonstrate a commitment to free trade and also a commitment to an area of the world that some believe has being neglected due to the U.S. focus on Iraq and Afghanistan. A strong trans-Pacific FTA can, in the Obama Administration's view, help offset the rise of China as the dominant regional trade partner and the increasing prevalence of intra-Asia trade arrangements that exclude the United States. Lastly, the TPP allows the Obama Administration to pursue trade initiatives unencumbered with the controversies surrounding those proposed by the George W. Bush Administration.

The TPP is a free trade agreement ("FTA") that came into effect in 2006 among Brunei, Chile, New Zealand, and Singapore. It provides for the virtually complete, phased elimination of tariff lines among the member countries. It also covers rules of origin, trade remedies, sanitary and phytosanitary measures, technical barriers to trade, trade in services, intellectual property, government procurement, and competition policy, and includes binding Environment Cooperation and Labor Cooperation understandings. Investment and financial services were designated for future negotiations.

Expansion negotiations have been ongoing since last March. The parties now include the United States, Australia, Peru, and Vietnam, and Malaysia has announced its wish to join. Canada and South Korea have indicated interest, but taken no formal action to join.

The parties have designated ten official-level negotiating groups for industrial goods, agriculture, sanitary and phytosanitary standards, telecommunications, financial services, customs, rules of origin, government procurement, environment, and trade capacity building. The negotiations to date have focused on issues process and structure, rather than on sectoral issues. Among the key issues to be resolved in this initial phase are:

The accession of new members. Of the four countries that have formally joined TPP negotiations, Vietnam presents the greatest accession challenge. Vietnam has been criticized, including by some in the United States, for labor rights, human rights, and intellectual property rights problems, and for alleged corruption. U.S. industry groups representing the textile and apparel industries have also voiced their concern about the inclusion of Vietnam in the TPP negotiations. Some members of the U.S. Congress have suggested that Vietnam first show that it can live up to certain limited market access commitments before it is granted full membership. The official U.S. government position, despite the critics, is that Vietnam should be able to meet the standards for full TPP membership.

Dealing with existing FTAs between the TPP countries. At present there is a complicated web of often-overlapping FTAs between the TPP countries, and exporters can usually choose the FTA that is most favorable to their interests. As an initial step, the TPP countries have agreed that the TPP will exist side-by-side with existing FTAs, meaning that countries will maintain both their FTA obligations and their TPP commitments.

Of primary concern is whether market access schedules in the existing FTAs will be reopened or whether the TPP will simply entail negotiating market access schedules with those countries not already subject to a bilateral FTA. The alternative of negotiating a common market access schedule for all TPP countries could prove much more difficult, although this approach might realize some gains in terms of efficiencies and cutting down on the "spaghetti bowl" effect. A key issue in the latter situation would be what to do about areas declared "off limits" in existing FTAs, such as sugar in the U.S.-Australia FTA. A third alternative would be to negotiate comprehensive market access provisions, but to delay implementation until after the implementation periods for the existing FTAs have expired. While this approach might work for tariffs, which can be gradually be reduced to zero, it would be far more difficult for provisions such as rules of origin.

The United States, Vietnam, and Chile have taken the position that existing market access schedules should not be revisited, while Australia, New Zealand, and Singapore have argued for the opposite position. The parties have been examining possible compromises with respect to goods, so far without success, but they seem to agree on having one set of rules services, investment, sanitary and phytosanitary ("SPS") measures, technical barriers to trade, government procurement, and intellectual property.

U.S. agriculture groups are especially divided how to deal with existing FTAs and the TPP negotiations generally. Groups representing agricultural producers such as dairy, sugar and, to a more limited extent, meat and livestock want existing FTAs to be kept in place and see limited benefit from the TPP negotiations. Food importers, processors and exporters, on the other hand, favor revisiting the existing FTAs.

SPS barriers and TBTs. The United States is seeking clear requirements for compliance with the Agreement on the Application of Sanitary and Phytosanitary Measures and the Agreement on Technical Barriers to Trade ("TBT"). Two key SPS subjects are beef, especially import restrictions tied to bovine spongiform encephalopathy ("BSE" or "mad cow disease"), and restrictions on U.S. imports of pork, poultry, and some fruit products. One TBT-related issue is mandatory labeling for food products that contain or are derived from biotechnology.

Labor and environment. The parties to the current TPP have pledged to work together to promote sound labor and environmental practices, but the existing understandings allow them to set, administer, and enforce their own laws. The parties also commit not to set or use labor or environmental laws or practices either for trade protection purposes or to weaken such laws or practices to encourage trade and investment. This is generally consistent with the language of U.S. bilateral FTAs, but some members of the U.S. Congress have been pressuring U.S. negotiators to demand additional TPP labor concessions.

U.S. environmental groups have pushed to include language banning the import of wood, wildlife, or products thereof harvested in contravention of the laws of the country of origin. Environmental groups also seek accelerated phase-out of tariffs and non-tariff barriers on environmentally beneficial technologies and services.

Dispute settlement. The important question in this area is whether foreign investors should be able to submit claims that a state has violated the terms of the TPP to an international arbitration body. The U.S.-Australia FTA contains a state-state mechanism in lieu of this investor-state approach, and some advocate this for the TPP. Others propose providing for appeal to an international arbitration body, but only after investors have exhausted available domestic legal remedies.

Intellectual property rights (IPR) protection and government procurement requirements. In both cases the United States has sought protections in bilateral FTA negotiations and is expected to do so in the TPP context, but multilateral agreement in these areas may be much more difficult to achieve.

"Regulatory coherence." It will be difficult to develop a consensus on how to address the parties' different approaches to regulation because U.S. and presumably other TPP member regulatory agencies will be reluctant to cede authority to international agreements. Possible options would be either to negotiate "mutual recognition agreements" (MRAs) of countries' regulatory regimes, to put restrictions on the process for implementing new regulations, or to create a structure that addresses existing regulatory differences over time without establishing uniformity requirements.

The United States has unofficially indicated its desire to conclude TPP negotiations between September 2011 and March 2012. For a TPP agreement to come into force in the United States, the House and Senate must pass implementing legislation. This requirement could be a substantial impediment to the conclusion of an expanded TPP because the President currently lacks "Trade Promotion Authority" that requires "fast track" consideration of trade agreements, restricts possible changes by Congress, and allows only an up-or-down vote on approving an agreement.

The TPP is a key component of the Obama Administration's trade policy agenda, and arguably its only international trade liberalization initiative to date. But because, as most observers agree, the Administration has sent very few signals regarding overall trade policy or its commitment to achieving liberalization, it is unclear whether the President will be willing to expend the necessary personal political capital to get a completed TPP agreement through Congress. At the moment, however, the Administration appears to be satisfied to cite the TPP as a symbol of its commitment to free and fair trade, and as a potential "template" for future FTAs, since its own schedule does not appear anticipate the need to make any of the difficult decisions necessary for substantive progress for what could be another one to two more years.

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Russell Smith is Special Counsel and head of the Government Relations Practice Group in the Washington, DC office of Willkie Farr & Gallagher LLP. The views expressed are solely those of Mr. Smith.

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KWR International Advisor

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

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