Konark Sikka, MPP, Staff Writer, Brief Policy Perspectives
Earlier this year, the Trans-Pacific Partnership (TPP) agreement was hammered out in secrecy. Negotiations began in 2008 and updates have been reported over the past seven years, but its profile was elevated this year as the negotiations neared a conclusion. The full text of the TPP was released on November 5. Below is an assessment on its key roles and implications on businesses.
The Trans-Pacific Partnership Agreement Reached
The TPP is a trade deal between 12 countries along the Pacific Rim. Its signatory nations span four continents, and include the United States, Canada, Mexico, Brunei, Singapore, Japan, Malaysia, Vietnam, Chile, Peru, Australia, and New Zealand.
TPP signatory countries will lower trade barriers in their countries for fellow TPP partners by reducing tariffs with the goal of strengthening economic ties as well as foreign investment and trade. The TPP also aims to improve and streamline regulatory guidelines for trade in those countries to facilitate trade. This will help developing countries within the TPP adapting regulatory and labor standards similar to the ones developed nations have. For instance, rules such as increased cooperation in dealing with emissions and the requirement of all TPP nations to pass laws against child labor and employment discrimination, and for minimum wages, and work and health and safety.
However, the details of the TPP are not without contention, with the chapters on intellectual property and dispute settlement being the most controversial, due to their legal implications. Other TPP topics include: guidelines on textile and agricultural trade, e-commerce and small and medium businesses.
The Push Behind The TPP
Economic incentives and geopolitical ramifications led to the accelerated legislative process to adopt the TPP. The TPP opens up new markets mostly in Asia for American businesses in a process known as liberalization. In the early 1990s, India underwent the process of liberalization, and over the next two decades, the Indian service sector grew as businesses in the United States and the West offered their services to the Indian populace. This resulted in increased per capita income and economic growth. Additionally,multinational companies benefited from the opening of such a large new market.
The case of India also serves as an example of geopolitical implications resulting from increased trade. India was never a close ally of the West or the U.S. post Indian Independence through the 1980s, but since the late 1990s, Indo-US ties have strengthened due to trade. The TPP, through the goal of helping the local economy of signatory countries, would also serve the purpose of similarly increasing diplomatic ties with countries such as Vietnam, Malaysia, and Brunei. All those nations are close to China and the South China Sea, which has been a contentious region of the world in recent year. The United States having stronger diplomatic and economic ties and hence soft power with Vietnam, Malaysia and Brunei, would help counter Chinese influence in the region.
Major effects of the TPP: Provisions impacting Multinational Corporations
Footwear manufacturer Nike, a supporter of the TPP, stated they would create 10,000 manufacturing and engineering jobs in the United States if the deal went through. However, Nike already manufactures products in Vietnam and the removal of tariffs will lead to cheaper production there. As a result, Nike will have a greater incentive to outsource production to Vietnam. There is an argument to be made that the TPP boosts development and economic growth in TPP partner countries. However, with an already sluggish U.S. economy, when companies follow Nike’s lead of outsourcing more jobs from the manufacturing sector, the negative impact would be felt hard, given that the manufacturing sector makes up 8.8% of US employment.
Perhaps the most alarming and Important point when it comes to multinational corporations (MNCs) and the TPP is Chapter 9 : Investment, which addresses Investor State Dispute Settlement (ISDS). These provisions set up a system where companies or corporations could press charges against other countries on lost profit, when laws (such as regulatory laws) are found to have an impact on a company’s revenue.
ISDS is not a new concept and has been in place to protect foreign investors in cases of dispute. The World Bank’s International Center for Settlement of Investment Disputes (ICSID) and the United Nations Commission on Trade Law (UNCITRAL) have set rules and facilitated arbitration between parties in the past. However, ISDS is increasingly used by companies to challenge government laws and regulations for money, representing an unnecessary stress on government and taxpayer money.
Another industrial group benefitting from the TPP are large drug manufacturers. The TPP has provisions for biologics drug data protection for a minimum of 5-8 years, depending on the country. Data protection is proprietary data generating during pre-clinical and clinical trials. The 5-8 year data protection period would be a new regulation for Peru, Vietnam, Malaysia and Mexico, who don’t have data protection at the moment, which could increase drug prices which people in those countries could not afford – something Doctors Without Borders has expressed concerns about.
What about Small and Medium Enterprises?
The TPP chapter to small and medium enterprises states two main goals. The first is the creation of a website by the founding partners to outline the regulatory conditions of their nations. The second is a creation of a committee on Small and Medium Enterprises (SMEs), which would have a representative from each country, to facilitate the functioning of SMEs. President Obama chose eBay’s policy hub to talk about the TPP, perhaps because a majority of small businesses that are on eBay export goods. The President touted the looser trade barriers and streamlined regulations that TPP would offer to SMEs.
However, according to the US International Trade Commission’s report on Small and Medium Enterprises, MNCs generally beat SMEs in the share of export of services in most service sector areas and export far more goods. Despite more opportunities to trade in newer markets, given the extra resources that MNCs have, SMEs will always get beat by them. Furthermore, as is the case in India and China, indigenous companies rise when foreign investment pours into the market, which would pose further competition for SMEs.
The TPP is an ambitious undertaking but the expansive trade agreement isn’t without defects. The positive qualities include the relative streamlining of regulations for each nation, easing of trade barriers, and increased economic and diplomatic ties with nations such as Vietnam, giving the US a stronger presence in Eastern Asia. Like any omnibus bill, there are plenty of special interest additions, many that favor large companies. The ISDS sets up a system that would have potential to get governments entangled in disputes with corporations that could cause them to lose revenue over perfectly legal government regulations.Additionally. the TPP threatens higher losses of American jobs to foreign nations, and coupled with the lack of potential for SMEs to branch out into the foreign markets, the TPP isn’t as strong as it could have been.
One way to make the TPP more palatable is the removal of the ISDS provisions and modification of the drug protections. An alternative to the TPP meanwhile would be bilateral trade deals with countries in the region, enabling more efficient management for international trade and empower SMEs as part of the negotiations.
The TPP has yet to pass through Congress, and a vote on it won’t be held until next year. The President announced an intention to sign the TPP on November 5. That triggered a 90 day waiting period during which the White House can send any legislation to Congress that would implement the TPP, and Congress will get additional time to discuss the bill. This timeline means that the TPP would be up for the vote in February/March 2016, which happens to coincide with the start of primary season. Stay tuned!