Gearing up for the TPP text release

The release will be accompanied by much hyperventilating by a handful of companies and NGOs that believe they have been negatively affected or who believe that the TPP agreement is insufficient in one way or another.  The TPP is a carefully crafted deal that managed the nearly impossible task of making all 12 participating countries equally satisfied (or unsatisfied) with the results.  It cannot be reopened and, I would argue, if it were, some member states risk losing substantial benefits elsewhere in an ultimately futile attempt to make everyone happy.

The best quote of the year, courtesy of New Zealand Trade Minister Tim Grosser, assessed the TPP outcomes this way: “It means both of us are swallowing dead rats on three or four issues to get this deal across the line.”  The art of compromise is critically important to reach an agreement with 12 member states in so many areas.

Firms and sectors (and consumers) that are likely to benefit from the deal will be more muted, particularly because they may actually be trying to read the agreement.  It will run to hundreds of pages of dense legal language accompanied by thousands of pages of various member country schedules.  Decoding it all and sorting out what the TPP might mean for any particular company will take some time and considerable effort. 

Because the TPP is not a standard trade agreement (certainly compared to many in Asia), determining the implications of TPP commitments for companies is tougher than might be expected.

As an example, let me use a firm I met with last week at a YPO event in Jakarta.  This company creates industrial lubricants in Vietnam.  They seem to be enthusiastic users of free trade agreements (FTAs), since tariffs on many of their products can be substantial enough to cut into profits.  But using existing agreements is not straightforward.

To qualify for benefits, firms have to show that goods were manufactured in or use materials from FTA member countries.  Without strict rules of origin (ROOs) in place, companies could import goods from somewhere else, relabel the products, and export using the FTA benefits.  This would be very problematic for competitors that are trying to legitimately use the agreement to support domestic production.

The firm currently has to carefully formulate or reformulate every product in their inventory depending on the final destination of each item.  Products shipping to Japan, for example, require one type of formulation to meet the requirements of the ASEAN-Japan FTA.  The same item going to Australia may need a slightly different set of raw materials or require the items to be sourced from different places to meet the criteria of ASEAN/Australia/New Zealand (AANZFTA). 

To add to the complications, the paperwork needed to track each product is extensive.  The firm has to ensure that it carefully meets each and every rule in different FTAs or it could be subject to substantial fines for non-compliance (and even face retroactive enforcement of past mistakes).

Under the TPP, however, this firm will have just one rule of origin to meet for each item in its inventory that it intends to ship to all 12 TPP member markets.  The exact same product can go to Japan or to Australia without a change.  Just as important for this firm, the paperwork is identical (and the firm might qualify for an additional benefit that obviates the need for special customs paperwork at all). 

If these were the only benefits for the firm, sorting through the TPP texts and associated schedules might not be challenging.  But since the TPP is deep and broad, benefits for the firm could be scattered across multiple chapters.  The company will also have better access to TPP services providers, potentially providing improved legal or accounting services or logistics or distribution services.  Its investment opportunities will expand dramatically.  Other provisions in the agreement could result in fewer tests for products, as the firm might be able to submit test results from one jurisdiction directly into another without retesting.

Figuring this out will take some time.  In addition, savvy firms will also be trying to anticipate what the TPP will do to overall trade flows in their particular sector.  They may be figuring out what the TPP might do (or not) to their competitors.  The impact could vary by market.  In short, it will be complex but for most, the benefits ought to be significant.

For nearly all the other firms that are likely to squeal loudly when the texts get released, the TPP could still represent an improvement off the status quo.

As an example, consider dairy.  There will be deep unhappiness in some export markets about the fact that dairy is not completely opened across TPP member countries.  The academic in me, of course, would like to have seen full access with no exclusions.  But the real world often demands compromises and the final agreement has to be compared with the current status quo.

Compared to now, dairy exporters still come out ahead.  Tariffs will fall over time.  Quotas are expanded.  (Neither, I might add, happen so quickly in some markets that vulnerable domestic firms will not have time to adjust to new market conditions.)  The agreement creates a benchmark for potential improvements at some future negotiation. 

Another complaining industry will be pharmaceuticals who will bang on loudly about renegotiation needed to give further protection to biologic drugs.  This is frankly crazy.  The United States fought for more than five years and nearly derailed the entire agreement with a dogged insistence on moving patent extensions to 12 years. 

Twelve years is a non-starter.  The other TPP member countries refused to budge, no matter what sort of promises and threats the Americans employed. 

Again, compare the TPP to the status quo.  Currently, five member countries do not protect biologics at all.  Four members have five years of protection.  Only two (Canada and Japan) provide eight years of protection now.  The United States law provides 12 years of protection, but the budget covers seven years only. 

This math alone suggests no compromise at 12 years would ever be possible.

Any attempt by disaffected firms to insist that the deal be renegotiated risks opening up a Pandora’s box of changes.  It will not just be one member that wants something else included/excluded. 

This is the deal. 

After we have all poured over the texts and schedules, we can have a discussion about the gains and losses that will actually accrue in implementation.  Enjoy your reading!