Talking Trade blog
Initial TPP impressions: Trade in services
Published 10 November 2015
While market access for goods in the Trans-Pacific Partnership (TPP) remains subject to some exceptions and complications, the TPP exceeds my expectations for the quality of the services commitments.
TPP member states might have been expected to exclude some services subsectors, but generally this did not happen. The services elements of the TPP may turn out to be the most ambitious aspect overall.
Services are increasingly important to today’s globalized economy. Our research shows that even for manufacturing firms, services account for somewhere between 30-70 percent of the total value embedded in supply chains. Failure to provide market access with minimal conditions attached would have strangled the efforts of many firms trying to compete across the TPP.
Services are also a critical mechanism for smaller firms or companies in more remote, geographically distant locations to plug into larger supply chains. Even micro enterprises can deliver services via e-commerce platforms.
Trade in services is divided into 12 sectors and approximately 160 subsectors, ranging from business services to construction to travel to retail. In many Asian free trade agreements (FTAs), services commitments are woeful. Members have opted to keep many sectors and subsectors closed to foreign participation or have opened only areas with limited or even zero commercial importance.
The TPP does not take the same approach. Companies should find it easier to deliver services across member states, particularly because the TPP does not allow, for example, quantitative limits to be placed on services. In other FTAs, members frequently allow in foreign medical clinics, but may limit the total number of such clinics to one or two facilities. Or caps may be placed on the total number of employees or boards of directors.
In the TPP, by contrast, foreign companies can deliver services without having to have a representative office or be a resident to serve the market. The TPP requires that members treat foreign service suppliers just like local service suppliers.
To understand TPP commitments, it is necessary to do two things. First, the text of Chapter 10 applies to all TPP members. This section lays out the rules and regulations that member states agree to follow for services. Note that services and investment provisions are often bound together, particularly in the annex schedules, as some services are difficult to deliver without a presence locally.
Second, in cases where members know that they are not in compliance with these sweeping rules and have no aspirations to change the domestic situation to come into compliance, members can schedule, in their annex, any areas where they are out of line with the incoming rules. This is called a list of non-conforming measures (NCMs) and they are subject to negotiation among all 12 parties.
Reading these schedules to help determine what services can actually be supplied to any TPP market from another TPP market is trickier than it appears. If your subsector is NOT listed, then it is opened for foreign competition from TPP partners.
This mechanism for scheduling TPP openness is actually a far more progressive method than the one used in most other FTAs. Under the “negative list” approach, members are obligated to open everything, unless they specifically note their objections in the annex at the outset.
Using a negative list does two important things. First, it ensures that new services are automatically opened for TPP competition without the necessity of tedious negotiations that might take years to conclude. Second, it helps governments be more ambitious, since every exception to the rule has to be noted in full and new barriers cannot be easily created later.
Negotiating on a negative list can be intimidating the first time officials try to use this approach. The automatic response is to simply list all 160 subsectors as closed and then slowly, slowly peel off subsectors from the initial list as negotiations progress.
Note that, mirroring World Trade Organization (WTO) handling of services, financial services and telecommunications have their own chapters in the TPP. Both have long been regarded as “backbone” service sectors which warrants special handling.
Some TPP countries appear to have been extremely cautious in their scheduling and to hedge against potential problems and gain future policy space by claiming a broad NCM. Note that, for some TPP members, these exceptions may not ever be used.
In other countries, the NCM may not matter overly much, as they are taken in areas of likely limited interest to other members. For instance, Japan requires that persons in the motor vehicle disassembling repair business must have a business in Japan. Assuming that electronic repairs do not count, it could be hard to imagine how a person might disassemble a car from overseas. Individuals engaged in specifying measurement instruments have a host of rules to continue to follow in Japan.
For countries like Vietnam and Malaysia that have never used a negative list before, I would have expected that the peeling off restrictions exercise would have still left an extremely long NCM list. However, a glance at Annex 1 shows that both members largely matched the ambition levels of other partners.
For example, Vietnam (like many other TPP member countries) will continue to have some restrictions in place on foreign lawyers. Tour guides continues to be a sensitive area for some members, with limited (or no) foreign access.
But an examination of the schedules also throws up some surprises. Vietnam has an odd rule that appears to make it more difficult to open up a second (or more) retail establishment, although the measure is meant to expire within five years after the agreement takes effect. Services attached to agriculture, hunting and forestry still require a local partner. Major anniversaries in Vietnam must be marked with local film screenings only. Canada has a surprising number of rules around owning duty free shops.
My personal favorite—so far—is a rule that allows amusement park investors to come into Vietnam, but only if they invest more than US$1 billion. Less than that and you are subject to onerous criteria that will likely to make it impossible to build the amusement park of your dreams.
Other restrictions across TPP members could be more problematic, including a host of rules around broadcasting rights, some restrictions on services and investment in energy or mining, and rules on internal land and sea transport that can prevent TPP parties from delivering these services.
Over time, it is possible that some of these restrictions will be relaxed. In the meantime, if a country did not schedule a NCM, it cannot easily create a new one to block market access to TPP member countries in the future.
In short, like other elements of the agreement, the basic texts have to be read carefully with the country-specific annexes. While the TPP may appear to have extensive carve-outs or broad exceptions in some specific areas, these are actually significantly fewer in number and cover a handful of subsectors that may be viewed as commercially meaningful to some TPP members. Certainly, compared to other agreements on services, the TPP may be setting the standard for high quality in this area.
[Note that Japan’s market access schedule for goods is now fixed—it no longer ends, as noted in my last post, at chapter 65 but includes all industrial goods.]
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