Early in the morning of October 5th, negotiators in Atlanta were busy ironing out the final creases of contention between the 12 parties to the Trans-Pacific Partnership (TPP) – an ambitious deal that will help liberalize trade, increase market access, open up government procurement processes and facilitate the movement of business people across the Asia-Pacific region. The ability of governments representing 40 per cent of the total world economy to come to an agreement is a huge achievement, particularly when juxtaposed with the calcification of trade negotiations at the WTO.
We all know that with complex agreements like the TPP the “devil is in the details,” and one of the biggest challenges analysts are facing is that the text of the agreement has yet to be published. Nevertheless, we have had a peak behind the curtain – enough to know that Canada has more to gain from being in the partnership than being excluded. Yes, some constituencies will not be happy, most notably dairy and poultry farmers and auto part producers who may have to make some adjustments in order to become more efficient and globally competitive. But producers of a whole range of goods and providers of a wide selection of services should be celebrating in the knowledge that they will be facing a level playing field when competing in Asian markets. Equally, they should be pleased that we are at the table and have had a voice in shaping some of the new rules of the road that govern international free trade, particularly at a time when supply chains are becoming more integrated, the digital economy is booming and globalization permeates virtually all aspects of economic exchange.
There will be much more information and commentary over the coming weeks, but below are 10 things that we think Canadians need to pay attention to.
1. China and India were not invited to the party . . .
While the TPP is being heralded as a first-class, gold standard agreement when it comes to Asia Pacific economic integration, China and India – the world’s two future economic powers – are conspicuously absent from the new Asia Pacific trading bloc. Although China and India were never truly excluded from the deal and the door remains open for them to join, the extensive reforms required to accede to the TPP may serve as an impediment.
This is a missed opportunity. The Organization for Economic Co-operation and Development estimates that in 2030 China and India combined will represent 39 per cent of global GDP, and that in 2060 the mighty pair will account for nearly half of global GDP, at 46 per cent. Much of this increase will coincide with a greater demand for goods and services – China and India’s combined middle class will grow from 200 million people in 2014 to an estimated 1.5 billion consumers in 2030.
While the completion of the TPP assures Canada and the other 11 members have preferential access to each other’s markets, it is important to note that China has become the largest trading partner for 124 global economies. Put simply, China will remain the driving force of economic relations in the region.
2. Who is next in line?
Other countries are now scrambling to determine the value of joining an agreement that they did not negotiate. The major interested parties include South Korea, Taiwan, the Philippines, and Thailand.
South Korea first showed interest in joining the TPP in November 2013 and has just recently reiterated this interest. South Korea has free trade agreements (FTAs) with 10 of the 12 TPP founding members. According to the Financial Times, Yeo Han-Koo, deputy chief of the trade ministry’s TPP office, has expressed Seoul’s willingness to join the agreement. South Korea is worried that the TPP will give an advantage to Japan in many of the export sectors the two countries compete in, such as cars and electronics, as well as limit the use of South Korean parts for exports among the agreement’s members.
Taiwan has also shown a desire to participate in the TPP. Since 2014, task teams have been revising laws and regulations to prepare Taiwan for membership in the TPP. Regulations in sectors such as medical devices and e-commerce must be modified to meet TPP standards before Taiwan can consider being a part of the regional agreement. A study cited by the China Post by Taiwan’s Ministry of Economic Affairs shows that if it joined the TPP, Taiwan’s real GDP could grow 19.5 per cent; however, if not part of the trading bloc the economy’s GDP could fall by 0.27 per cent. According to numbers provided by the Taipei Times, last year, one-third of Taiwan’s exports, or US$103B, went to the 12 countries of the TPP.
The Philippines and Thailand have expressed interest in joining the TPP as well, but have not been as vocal as South Korea and Taiwan. In June, The Diplomat reported that the Philippine trade secretary Gregory Domingo announced that the Philippines wanted to “clearly and irrevocably . . . join the TPP.” Joining the TPP could mean an amendment of the Philippines’ constitution and a number of other sensitive issues and hurdles could arise, such as state-owned enterprises. In Thailand, the government has been analyzing the costs and benefits of joining the TPP for around three years.
3. The winding road to Canadian ratification
With elections fast approaching in Canada, experts have been weighing in on the political gains and losses from the signing of the TPP. On the one hand, the Conservatives have lauded the completion of TPP negotiations and how this novel free trade agreement will push Canada into a new era of prosperity. The NDP, however, has clearly stated that if victorious on October 19, it will “not be bound by the TPP” and will hastily get rid of it. The Liberals, while supporting free trade, have said that they would hold a full and open public debate so all Canadians could weigh in.
Practically speaking, in order for the TPP to become fully ratified, Cabinet must prepare an Order in Council authorizing the Minister of Foreign Affairs to sign an Instrument of Ratification. At this stage the TPP is ratified but not yet enforceable on a national level. Due to the fact that Canada follows a dualist model, the TPP will still need to be incorporated into domestic law. This means that an Implementation Bill will need to be drafted and, after receiving Cabinet approval, be tabled in Parliament and go through the parliamentary legislative process. Should the coming election yield a minority government, one can already predict a prickly ratification process.
4. Overcoming the hurdle of implementation
The TPP includes economies that are at different points in the economic development spectrum. For developing countries, like Vietnam and Malaysia, this may result in difficulties in implementing measures in the agreement compared to TPP’s developed economies.
Both Vietnam and Malaysia must overcome internal barriers to implementing the terms of the TPP – Vietnam will have to reform its state-owned enterprises and labour laws and Malaysia will have to fix its system of preferential economic treatment for ethnic Malays, among other things.
The good news is that Vietnam and Malaysia have experience in liberalizing their markets through being part of previous free trade initiatives as members of the Association of Southeast Asian Nations (ASEAN). While these initiatives are not of the same scope as the TPP, some, like the ASEAN Economic Community, are paving the way for the developed and developing ASEAN economies of TPP to achieve the greater regional economic integration required in the Trans-pacific trading bloc.
Ultimately, this matters to Canada because these reforms are necessary to achieve the full benefits of greater access to these markets.
5. The beginning of the end of supply management?
Canada’s protection of domestic dairy and poultry industries is eroding. True, Canada has emerged from TPP negotiations with the three pillars of supply management still intact, conceding only to open market shares of 3.23 (dairy) and 2.3 (poultry) per cent. However, these slim market shares belie a potentially significant shift in the strength of Canada’s dairy and poultry industries. When combined with Canada’s recent EU trade agreement, a total of five per cent of Canada’s dairy market is expected to be taken by foreign competition. Accompanying Canada’s TPP dairy concession is the federal government’s promise to dairy and poultry farmers to invest $2.4B to guarantee 100 per cent income protection for the next 10 years and $1.5B to compensate for any reduction in the value of a farmer’s production quota if they wish to sell their production quota. These carrot-and-stick incentives may prove just the mix that will lead to an exodus of small/inefficient farmers from the dairy/poultry industry and provide the needed catalyst for Canada to become a much larger player in markets globally.
6. New competition for Canadian auto and auto part producers
The rules of origin (ROO) chapter in free trade agreements are often the most complex. It is within this chapter that the country of origin of products is determined based on the percentage of content from FTA partners. In Canada, where the auto industry contributes close to C$20B to GDP and employs 120,000 people, it is easy to understand why any change in the rules makes people nervous.
During the course of the negotiations, it seemed that the fate of Canada’s auto industry would be determined through U.S.-Japan bilateral talks. When reports leaked that the U.S. and Japan had agreed to 45 per cent of TPP member content in imported vehicles and as little as 30 per cent for automobile parts, it appeared the TPP would deliver a major blow to Canada’s auto industry. With lower requirements for TPP member content, Japan could source more parts from cheaper manufactures in China and Thailand, making it difficult for Canadian and Mexican auto and auto part producers to compete.
The deal on the table has made many in the Canadian auto industry question whether it is even worth joining the TPP. However, in weighing this option, we need to imagine the alternative future: a TPP without Canada. In this scenario, our auto industry would have to struggle to compete with countries that have greater preferential access to U.S. markets.
With a compromise on ROO being reached – 45 per cent for vehicles and certain auto parts and 40 per cent for other auto parts – the Canadian auto industry enters a brave new world in supplying the U.S. market amidst new competition with Japan. This is much better than the alternative.
7. Maintaining the status quo on investment-state disputes
The arbitration mechanism by which foreign investors can challenge a state’s regulations (Investor-State Dispute Settlements, or ISDS) has received a fair share of negative press during the TPP negotiations. One major concern is that ISDS could expand the number of investor claims brought against a member state. From a Canadian perspective, we do not have any existing agreements with investor-protection mechanisms with Australia, Brunei, Japan, Malaysia, New Zealand, Singapore or Vietnam, but with TPP, legal claims from these countries are now possible. It is important to note that while this fact is true, the future is far from bleak. One need only take a look at Canada’s history with NAFTA arbitration. Although, as a nation, we are the most sued country in the context of NAFTA, it is important to note that according to legal scholar Charles-Emmanuel Côté, total damages awarded or agreed to in settlement stands at a total of US$147.5M, equivalent to only 0.05 per cent of all U.S. investment into Canada since the agreement came into force.
Another concern put forward is that the inclusion of a dispute settlement mechanism will allow for the overturn of important government policies by special tribunals, as was seen in the Philip Morris case. Philip Morris decided to challenge plain packaging laws in Australia using an old ISDS provision. Subsequently, a number of countries refrained from adopting anti-tobacco policies fearing that they too would be sued by tobacco companies and leading to what was called, “the regulatory chill.” The TPP includes a specific carve out for tobacco products in the ISDS chapter, meaning that the tobacco industry cannot use the investment chapter’s dispute settlement mechanism to launch a claim. This development in ISDS, along with other currently undisclosed “safeguards,” has allegedly been the game changer that has helped convince countries like Australia to join the bandwagon.
8. A new era of Canadian FTAs
The TPP addresses some new and emerging issues that are particularly pertinent to Canadian interests: benefits for small and medium-sized enterprises (SMEs), the digital economy, and the regulation of state-owned enterprises.
The TPP ensures all levels of the economy can benefit from cross-border trade, but especially focuses on SMEs. Each TPP party is expected to facilitate SME access to TPP opportunities and benefits, such as customs regulations and procedures for goods, intellectual property rights, business registration, taxation, and employment, among others. Additionally, an SME Committee will be established to ensure SMEs have access to information on TPP and its benefits. Considering SMEs are the backbone of the Canadian economy, representing more than 90 per cent of all businesses, this commitment to SMEs could prove extremely beneficial to Canadian SMEs in the future.
In the modern world, electronic commerce is increasingly becoming a part of our daily lives. Through the TPP, e-commerce between the 12 economies will flourish as companies are provided with the tools and knowledge to trade in the digital economy, while simultaneously protecting the privacy of e-commerce businesses and consumers. Only 18 per cent of Canadian SMEs engage in e-commerce today, but thanks to the TPP’s advancement towards a vibrant digital economy, some of the hurdles Canadian SMEs face when engaging in cross-border e-commerce will be addressed.
The TPP also looks at state-owned enterprises (SOEs) and the role they play within the TPP market. Mostly pinpointing SOEs that are engaged in commercial activities, fair competition within the market will be emphasized by ensuring state ownership of an enterprise does not lead to distortion of the market, trade, or investment through unfair market activities such as preferential financing, discrimination, and selective regulation. The judicial handling of foreign SOEs operating in a TPP country’s territory, limits to non-commercial assistance to SOEs, and information-sharing of TPP members’ SOEs have also been dealt with to ensure a fair TPP market. In a 2014 poll by the Asia Pacific Foundation of Canada, Canadians appear wary of Asian SOEs controlling a major stake in a Canadian company. With a chapter on SOEs imbedded into the TPP, greater transparency regarding member SOEs operating in Canada may assuage some of these worries.
9. Why understanding the links between acronyms of the Asia Pacific (TPP, RCEP, FTAAP, ASEAN and APEC) is so important
Over the past decade, the 21 members of APEC (the Asia Pacific Economic Cooperation) have been pushing for the development of a Free Trade Area of the Asia Pacific (FTAPP), which would allow free and open trade and investment across the region. Studies conducted by the Pacific Economic Cooperation Council have suggested that such an agreement would lead to gains of $2T by 2025, eight times the projected gains from the TPP. Now with the TPP making headway, the real questions are:
- Will TPP prepare the ground for a more ambitious agreement which includes China and India, among others?
- How will other initiatives like the China-led Regional Comprehensive Economic Partnership (RCEP) bringing together the 10 countries of ASEAN (Association of Southeast Asian Nations) and their six FTA partners (Australian, China, India, Japan, South Korea and New Zealand) fit into the picture?
10. Asian geopolitics in the 21st century
While we need to monitor the impact of the TPP on our economy, we also need to be paying attention to how the geopolitics of the agreement evolve. As we have seen already in the public debate, experts suggest TPP can go in one of two ways. It can either emerge as the economic foundation of U.S. attempts to reassert its power in Asia through strengthening the economy of traditional allies like Japan and excluding a rising China, or it can serve as a desperately needed catalyst for deepening global integration by updating multilateral rules on trade and investment, overcoming barriers encountered in the WTO, and including China and India under its umbrella. Canada has little to gain from a bifurcated trading world which pits its first and second largest trading partners against each other, and we should be doing everything in our power to discourage this from happening.
About the Authors: Eva Busza is APF Canada's Vice-President, Research and Programs; Justin Elavathil is APF Canada's Program Manager, Trade, Investment, and Innovation. With contributions from APF Canada researchers Pauline Stern, Serena Ko, and Valentine Ostaszewski.