The Trans-Pacific Saga

By Philip Sutter: Director, Strategic Analysis

A free trade agreement that economically unites countries on both sides of the Pacific Ocean has been a long sought goal of free-traders. The withdrawal of the US from Trans-Pacific Partnership (TPP) in February appeared to dash that hope. However, at the November Asia-Pacific Economic Cooperation (APEC) Trade Ministerial Meeting, the eleven remaining TPP Party countries symbolically rebranded it as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The optimistic outlook is that they may seal the deal sometime in 2018.

The implementation of CPTPP could bring forth critical international trade ramifications such as impacting US trade policy, subduing the anti-multilateral movement, and influencing the economic position of China.

The notion of a Pacific-spanning free trade agreement dates back several decades. However, it became a formal idea when an ambitious Free Trade Area of the Asia-Pacific (FTAAP) proposal was floated at the annual APEC Summit of 2006. While the FTAAP “dream” remains alive, that is to someday unite all Pacific countries including the US and China in a multilateral FTA, the process began smaller.

Back in 2006, the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP) also known as the “P4” entered into force between Brunei, Chile, Singapore, and New Zealand. TPSEP was used as a building block as Australia, Vietnam, and Peru joined with the P4 in expansion negotiations for a larger FTA. Things were looking up as the US came into the talks in 2009 and the name Trans-Pacific Partnership was born. The momentum continued with the additions of Malaysia in 2010, Canada and Mexico in 2012, and Japan in 2013. This rounded out the TPP field at 12 countries representing about 40% of the world’s gross domestic product.

With much fanfare, the TPP negotiators came to agreement and finalized the text in November 2015. The TPP was declared the “gold standard” and model of modern trade agreements. All that stood in the way was ratification. As the largest members, US and Japan ratification was required along with at least four others.

Success seemed imminent. However, in the US, despite clearing away several hurdles (e.g., upgrading Malaysia’s status regarding human trafficking and approving fast-track legislation), the political events of 2016 saw the TPP fall short. Just days after taking office on January 23rd, President Trump issued an executive order to formally withdraw the US.

Severely wounded by the exit of the US, the remaining TPP countries regrouped. They resolutely envisaged a “US-less” TPP11. The APEC Ministerial now confirms that the eleven countries are focused on a united path forward.

Trans-Pacific Partnership
The TPP was between Australia, Canada, Japan, Malaysia, Mexico, Peru, United States, Vietnam, Chile, Brunei, Singapore, and New Zealand. TPP was a comprehensive agreement with lofty goals including extensive duty reductions. It also promised to foster economic growth, create new opportunities for workers and businesses, and contribute to higher living standards.

In all, it encompassed 30 chapters with over five thousand pages of text. Its various chapters dealt with eliminating non-tariff barriers such as conforming regulatory standards for labor laws, environmental protections, intellectual property, and government procurement. The TPP text was accompanied by many “side letters” between two or more Parties to the agreement (the US had 58 of them) that address or clarify certain issues that were either not fully or adequately addressed in the main agreement.

TPP kept the vision of FTAAP alive through the inclusion of accession provisions targeting all the remaining nine APEC countries not already in TPP. While not immediately courting China, there was thought that China may someday join. In the meantime, US proponents of TPP saw it as a counter-weight to defend against the economic advances of China. But in the end, President Trump and the US electorate saw TPP as further disadvantaging domestic industry.

Comprehensive and Progressive Trans-Pacific Partnership
Swinging the pendulum back the other way, at this year’s APEC Ministerial, CPTPP members issued a joint statement announcing that they have agreed to the “core elements” of the FTA. The obvious and substantive difference between TPP and CPTPP is the latter does not include the United States. Without the US, the combined GDP of CPTPP Parties, while still significant, falls to less than 14% of the global economy.

Like its predecessor though, CPTPP could grow quickly with the accession of additional members. Prior to the demise of TPP, six APEC members (Korea, Colombia, Philippines, Thailand, Taiwan, and Indonesia) expressed interest in membership.

CPTPP will suspend twenty of the provisions that the US had insisted upon such as certain ones relating to e-commerce, biologics, intellectual property rights, investment, telecommunications, and medical devices. Also, with the exception of the US, all TPP‎ side letters signed among the 11 countries will be maintained unless the relevant Parties decide otherwise.

As with TPP, the positivity of negotiators may not materialize into entry into force by a predictable timeline. Prime Minister Abe of Japan had hoped to preside over a CPTPP signing ceremony at the conclusion of the meeting and move on to the ratification stage. However, Prime Minister Trudeau of Canada had last minute concerns and did not attend. Apparently, approaching elections in Quebec and lenient automotive rules of origin gave him pause.

Still, negotiators left the Ministerial in a positive mood reporting that there are four issues needing resolution: state-owned enterprises related to Malaysia; commitment on coal affecting Brunei; dispute settlement provision involving sanctions with Vietnam; and a cultural exception issue related to Canada. Beyond that the Parties must scour the text for any further “technical adjustments” like Canada may yet require on automobiles. The expectant trade world will be watching for the negotiators to iron out a sign able agreement in the coming months.

If the entry into force provision remains the same as TPP, it means that at least six countries comprising 85% of their combined GDP must ratify. For CPTPP, it means that Japan and Canada must ratify along with at least Australia or Mexico plus other countries to achieve the minimum percentage and country count. When that is in place, CPTPP will enter into force sixty-days later.

Once in force, most duties among the Parties will be eliminated immediately. Some duties will be staged out over several years depending on complex country-specific staging schedules. Achieving preferential duty status will be based on product-specific tariff shift and content-based rules. This include a hybrid type rule called focused-value which only require that certain subcomponents or finished goods must originate.

The Grand Scheme of Things
In the topsy-turvy trade environment of 2017, CPTPP could join the Comprehensive Economic and Trade Agreement between Canada and the European Union to oppose the anti-multilateralism trend evidenced by the US TPP withdrawal, NAFTA renegotiation, and Brexit.

At least in the near-term, a scenario where the US rejoins its old TPP members is wishful thinking. For one thing, a top reason the US left the TPP was over its much more liberal automotive rules of origin when compared to NAFTA – which is a controversial target of the NAFTA renegotiations.

China will continue to pursue its larger Regional Comprehensive Economic Partnership (RCEP) agreement (almost 49% of world GDP) that includes the ASEAN countries plus Australia, India, Japan, South Korea and New Zealand. Negotiations that have been under way since 2012 must overcome disputes over tariff reductions especially between the heavy weights India and China. There are overlapping countries between CPTPP and RCEP so a larger China led Asia-Pacific pact is possible.

The US, which once promoted the multilateral Pacific trade movement, is now on the outside. President Trump’s administration is banking on its strategic preference for bilateral trade agreements to pay off in reducing the US trade deficit. Although no talks have begun yet, the US has expressed a willingness to consider one on one negotiations with Japan, New Zealand, Philippines, and other APEC nations – not to mention seeking separate agreements with Canada and Mexico.

If the US approach fails, it could be due in large part from the future actions of its closest neighbors; Canada and Mexico. Facing possible NAFTA dissolution, the two countries may forge ahead with CPTPP and other export partners for goods such as autos, textiles, and agricultural goods. Meanwhile, China may further accelerate its economic ascension to more quickly displace the US as the go to strategic trade partner. This could exacerbate the US trade imbalance bringing about a major policy rethink.