On Monday, October 5, 2015, the United States and 11 other countries – Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam – announced they have reached a monumental trade agreement impacting more than 40 percent of the world’s economy and a third of global trade. Once ratified by the participating countries, the Trans-Pacific Partnership (TPP) will supersede the North American Free Trade Agreement (NAFTA) and fundamentally alter the North American, Latin American, and Southeast Asian markets for imported and exported goods and services across the board.
WHAT DOES THE DEAL MEAN FOR AMERICAN BUSINESS?
The White House is trumpeting that more than 18,000 tariffs (read “taxes”) have been cut on American exports to participating countries, but which ones exactly? The text of the deal has not yet been publically released, but certain elements of the agreement have been leaked to the media. In particular:
Automobile rules of origin — Rules of origin determine which products can, and cannot, enter a member state tariff-free. Under NAFTA, a car can enter Canada, Mexico, or the United States without paying the normal custom duty, provided that 62.5 percent of its content (e.g., parts, labor, etc.) comes from within the NAFTA region. Under the TPP, this percentage would drop, as cars and trucks would be required to have 45 percent of their content originate from TPP countries to get tariff cuts under the deal. Auto parts and components would be subject to slightly more complex standards, which have yet to be fully disclosed. According to media sources, approximately 42 percent of parts, likely the more complex components like gearboxes and transmissions, would be subject to a 45 percent rule of origin, while approximately 41 percent of parts would be subject to a 40 percent local content rule. The remaining parts and components would only be required to contain 35 percent TPP content to get tariff benefits under the deal. Separately, the U.S. Trade Representative (USTR) has disclosed that non-tariff barriers that have kept U.S.-made autos, trucks, and parts out of Japan will be removed, and Vietnam’s 70 percent tariff and Malaysia’s 30 percent tariff on foreign vehicles would be eliminated. Further, according to the USTR, under the terms of the agreement, tariff rates of up to 55 percent for U.S. manufactured car engines and 30 percent for U.S. manufactured dump trucks “will drop to zero” in TPP countries.
Labor requirements — The TPP has faced strong opposition from unions and human rights advocates, arguing that the deal will undermine basic labor rights. The White House contends the final deal contains historically strong labor protections, including: requirements that Vietnam permit the creation of independent labor unions or face the suspension of tariff cuts; Malaysia tackle forced labor and human trafficking concerns or be subject to possible trade sanctions; and that all participating TPP nations abide by core International Labor Organization standards, including the elimination of forced labor, abolition of child labor, and the elimination of employment discrimination.
Sugar — U.S. sugar producers were especially concerned that the TPP would permit additional importation of sugar from Australia, which had been pushing hard for such privileges, resulting in a downward pressure on sugar prices. While the U.S. did reportedly agree to increase Australia's tariff rate quota for sugar by 65,000 tons, this may not mean an overall increase in foreign sugar imports. A provision in the agreement reportedly allows the U.S. to subtract commitments, such as an additional amount coming in from Australia, from the so-called "export limit" on Mexico, thereby limiting trade to the status quo.
Dairy — Increased access to heavily protected domestic dairy markets was one of the major stumbling blocks in the final months of negotiation of the TPP. Ultimately, while foreign producers were able to achieve some market opening, it was relatively minor. Japan reportedly agreed to open its markets to 60,000 tons in powdered skim milk and butter from the U.S. in the first year of the TPP, and to 70,000 tons after six years of the agreement being in force. In addition, Japan will eliminate its current 40 percent tariff on U.S. cheese. Canada, for its part, has reportedly agreed to open its markets to the equivalent of 3.25 percent of its 2016 domestic milk production forecast.
Biologics and pharmaceuticals — Under the TPP, countries would be required to provide at least five years of data protection for biologic drugs against generic imitators, and then face a decision on two different systems of potentially providing additional protection for up to eight years. The deal represented a compromise between Australia and the U.S., which currently provides up to 12 years of protection. In the view of Australia’s trade minister, Australia would nevertheless provide "comparable level of protection" to that of the U.S., partly because it takes an average of seven to eight years to win Australian regulatory approval of "biosimilars," even after biologic test data is available.
Investor-state dispute settlement — The TPP, like thousands of international treaties, contains a dispute settlement mechanism, which permits corporations to bring a suit against a government under the TPP before an ad-hoc tribunal. This provision has been controversial, in part because of the power given to investors to sue sovereign states, a right that not all TPP countries currently recognize and which some fear would chill regulatory efforts. However, the final deal incorporates certain reforms to the draft provision, as it places the burden on investors to prove all elements of their damage claims, and makes the dismissal of frivolous claims easier. New language also underscores that countries retain the right to regulate matters in the public interest, including health, safety, and environmental protection issues.
Currency — The TPP agreement does not contain provisions specifically addressing currency manipulation, but a side agreement is being negotiated to tackle that issue. Rumor has it that any such deal would not directly punish currency manipulators by withdrawing their benefits under the TPP or subject the monetary decisions of member states to dispute settlement. Media reports indicate that the goals of the agreement would include the establishment of common exchange rate commitments, the institution of yearly meetings on currency matters, and the creation of a transparent system for reporting monetary policy decisions.
THE PATH TO CONGRESSIONAL APPROVAL
Although a final deal has been negotiated by the parties, it still remains to be approved by each of the TPP nations’ legislatures. Once the legal text is finalized, which is expected to occur in the next several weeks, President Barack Obama is required to notify the U.S. Congress of his intent to sign the agreement. That notification starts a 90-day waiting period, during which the deal will become publically reviewable, after which point the president could sign the agreement. The president’s signature would not complete the process, however. No sooner than 30 days after signing the agreement, the White House would need to submit legislation implementing the TPP to Congress. Comments from members of Congress indicate that the deal may face stiff opposition there from both parties.
Given the fast-track authority already granted to the president by Congress, the White House could present the legislature with a deal for a simple majority vote, with no possibility of amendments. However, House and Senate committees still retain the power to slow the approval process down by suggesting changes to the implementing legislation before it is submitted for a final vote. Alternatively, if sufficient pressure is applied by interested trade groups, members of Congress may push for much quicker pro-forma review of the legislation. Given all of the factors at play, the timeline for a final decision on the TPP could range anywhere from February 2016 to after the November 2016 elections.