Talking Trade blog
Living with the Trans-Pacific Partnership (TPP)
Published 06 April 2015
The standard response to many questions about possible shortcomings in the Trans-Pacific Partnership (TPP) negotiations is likely to be some variation of the following, “Don’t worry—your concerns will be addressed later, because the TPP is a living agreement.”
This sounds great. Who doesn’t want an agreement to remain living? But, in practice, the idea is going to be very difficult to implement, particularly if it is not tied to a Secretariat to carefully monitor the agreement. Several key issues need to be considered as well, particularly the extent to which change will be allowed in the future.
The TPP, a 12 party trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam, has been under negotiation for more than 5 years. As deep and broad as the coverage will be in this deal, officials have not been able to resolve every possible issue satisfactorily for every member.
Even if officials were amazingly capable of nailing down every possible point of concern, trade agreements can still become out of date relatively quickly as technology changes and markets shift. New issues are constantly being added to the agenda of each ambitious deal.
Existing trade agreements, however, are relatively hard to amend. Most require a “protocol of amendment” to be negotiated with the parties for each requested change. Even if the parties agree to let the deal be amended, it does not guarantee that all sides will agree to incorporate specific changes.
The mechanism for considering amendments in most standard trade agreements is also challenging to use. Most preferential trade agreements (PTAs) are structured with a set of committees that are meant to meet from time to time to discuss the deal. For example, a PTA may specify that the trade in goods committee will meet every year while a committee on services may be scheduled every two years.
We can’t be sure yet, as the explosion in PTA numbers is a relatively recent phenomenon. But for many agreements, it is highly likely that the required committees will not meet or will meet only intermittently. Even if they do meet, officials are not likely to put their best efforts into the review meetings. For a government like Singapore, with more than 20 active preferential trade agreements with bilateral and regional partners, just scheduling times for officials to meet during each review is likely to be a challenge.
Thus, counting on the standing committees to resolve issues may provide false comfort. Other than serious or significant obstacles and major or minor disasters, very few changes are likely to result from the standard operating procedures in trade agreements.
We do have experience with the downsides to having agreements that cannot be easily amended. The most obvious example comes from the World Trade Organization (WTO) where officials have been wrestling for years with how to alter an existing agreement for electronic goods.
The Information Technology Agreement (ITA) at the WTO is an agreement that lowered tariffs to zero on a wide range of IT products. The reduction in tariffs for electronic goods helped stimulate the growth of “factory Asia,” in particular, as companies found it easier to break apart supply chains for these types of products and to disperse production of different elements of complex products into different WTO member states.
The problem is that the agreement was negotiated on the basis of a “positive list.” Under this method of liberalization, any product that appeared on the list was covered, with tariffs scheduled to drop. But any product that did not appear on the list was not covered—tariffs would remain unchanged. The idea was most definitely to amend the list as required over the years to reflect changing technology. After all, IT cycles quite rapidly.
But the list proved impossible to revise. Hence the ITA might lower tariffs to zero on record players but still does not cover smart phones or tablets at all. Members of the ITA agreement at the WTO continue to labor over creating new lists of items eligible for tariff cuts in an “ITA2.”
By contrast, the TPP would not face similar issues. In addition to using a different method of market opening for services and investment (the so-called “negative list” where everything not listed is automatically opened for competition including new sectors), the TPP would become a “living agreement” that would never go out of date. It could be simply and easily altered in the future. Finally, any incomplete or insufficiently developed ideas, rules or coverage could be addressed without the major hassle of convening new negotiations or complicated committee meetings.
This sounds great. Surely a living agreement beats a dead one? But the devil, as happens so often, lies in the details. How, precisely, can an agreement be brought to life?
Remember that the TPP has the same committee structure (at the moment, at least) as every other PTA. Why would any committee member suggest an amendment in its area of purview? (At least for items that do not rise quite to the level of catastrophe.) The negotiating teams will have been disbanded and the institutional memories of the agreement are likely to vanish with retirements and promotions.
Sensitive issues will likely need political engagement to adjust or negotiate. If it turns out to be difficult to amend the TPP, then this automatically negates the idea of a “living agreement” which was intended to be continuously revised and updated as events on the ground change.
Essentially, the TPP will face the same challenges as the WTO members in amending the ITA—the practical consequence will be to force a renegotiation of the agreement or of a portion of the deal.
My solution, as regular readers may recall, is to create a TPP Secretariat. This would not entirely fix the problem, but would at least keep changes out of the hands of indifferent trade officials racing from PTA review to PTA review. It would put someone in charge of getting people together to consider possible amendments. It would, most likely, have a built-in mechanism for engaging political leaders to sort out sensitive issues.
The Secretariat staff would be most familiar with the agreement and the obligations of members. They could serve as neutral brokers and help members manage necessary changes to the texts and commitments.
A Secretariat does not solve all the problems associated with a living agreement, of course. But the right institutional structure is needed in general and certainly represents a huge improvement over the traditional committee mechanisms. Such a complicated trade deal requires the best possible institutional structure to run effectively.
One issue that will have to be considered by members directly in a living agreement is the extent of renegotiation that is allowed as part of the living deal before it triggers some sort of re-ratification or new approval process by members. There must be, surely, some baseline level of change that is acceptable as part of the continual upgrading needed in a rapidly changing economic environment.
But at a certain point, member governments will surely argue that they should be consulted again or give direct approval for changes. What is the appropriate trigger point? Is it the percentage of the text that is altered? Officials on the ground can change one percent of the texts without a problem, but when they reach, say, 10 percent, this is the trip wire?
Is the trigger the economic impact of changes? In this scenario, officials can make minor adjustments to the texts, but if the result is more than $50 million, this is a problem?
For some TPP members (now and into the future), it is possible to imagine that no changes at all will be allowed without re-ratification of the deal.
What if a member wanted to scale back commitments? In a “21st century, high quality” deal, such a thing will likely not be countenanced. But the idea of a living agreement, at least, suggests that alterations should be allowed both forward and backwards. All adjustments, of course, would be subject to negotiation and not simply allowed to take place unilaterally.
It is possible to imagine a scenario under which a member might want to retreat from some element of the deal in the future. Many people will strongly disagree here, but recall that one of the selling points for a living agreement is the ability of the agreement to handle a range of concerns after the TPP comes into force. If a living agreement only allows upward ratchets on the level of commitment in the deal, it will not really allow for continual adjustment to meet the needs of members.
An additional benefit of an effective living agreement is that it could also create a mechanism for new members to adjust the text of the agreement. Given that new entrants into the TPP are likely to be allowed limited (or even no) room for altering texts, a living agreement provision could provide a “back door” mechanism for alterations. Such flexibility may be critical in getting new entrants to join.
Finally, if the living agreement idea is not made a reality, it is likely that the TPP will become just as difficult to amend as existing trade deals. It may get out of date and become less and less relevant. Getting the structure right for “living” is a necessary element of making sure that the final agreement does not rapidly become dead.
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