# Current Status and Future Prospects of the TPP Negotiations

Date January 31, 2014 Jeffrey J. SCHOTT(Senior Fellow, Peterson Institute for International Economics (PIIE)) URATA Shujiro(Faculty Fellow, RIETI / Professor of Economics, Graduate School of Asia-Pacific Studies, Waseda University) SATO Hitoshi(Fellow, RIETI / Director, Microeconomic Analysis Studies Group, Development Studies Center, Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO))

## Summary

Jeffrey J. Schott

The Trans-Pacific Partnership (TPP) now involves 12 countries that together represent almost 40% of the global gross domestic product (GDP) and 25% of global exports, making it one of the most significant regional trade initiatives in the world and probably the most important in terms of promoting trade and investment. The participants' like-mindedness is demonstrated by their agreement in pursuit of comprehensive liberalization to commit to substantial liberalization of trade in goods and services, and to new rules on investment and competition, labor and environment, and other areas that go beyond those already included in World Trade Organization (WTO) agreements. The participants differ in terms of size, economy, and development status, causing differences in terms of what each country wants to get out of the agreement and the sensitivities they have toward reforms in certain areas of their economies.

Unlike many initiatives negotiated in Asia and agreements signed in the General Agreement on Tariffs and Trade (GATT) and the WTO, TPP rules will apply to all members, with no special exemptions for development status but with some consideration to accommodate different national circumstances. For countries like Vietnam with a low United Nations (UN) human development index, they will have greater development challenges in making the commitments to broad-scale trade liberalization and reform of trade and investment policies, and they will also see challenges in making the economic changes and accommodating them into their political system.

Although some say that the gains for the TPP will not be that great because countries already have trade agreements, those agreements differ substantially in terms of coverage and quality, the depth of the commitments, and the number of exceptions made. Another positive is that the TPP will upgrade those existing pacts so that there will be additional benefits from partner countries with which agreements already exist. For the United States, with Canada and Mexico also participating in the TPP, it will effectively upgrade the North America Free Trade Agreement (NAFTA) which is now 20 years old.

The TPP talks have been underway for almost four years—since March 2010. At the start of 2014, are the talks ready to close? Trade ministers have been engaged in intensive talks to craft a final deal since last August. They have only slowed naturally as the differences have been boiled down to more politically difficult areas which require a higher level of political participation to try to work through.

With the progress made over the past few months including the last meeting of trade ministers in Singapore immediately following the WTO Ministerial Conference in Bali, Indonesia and bilateral meetings of ministers in Davos and elsewhere, there is now the possibility of moving into the real endgame negotiations. Chief TPP negotiators met in Singapore during the week of February 17, 2014, and ministers assembled immediately afterward to work on removing major bottlenecks including the market access negotiations, particularly for agriculture and services. These are the key bottlenecks because it is impossible politically to move toward the final compromise positions unless there is assurance that there will be a big package of market access reforms covering goods and services across the board. For example, the ability of the United States and Japan to commit to substantial liberalization in agriculture is critical for unblocking the rest of the negotiations.

The deal can be made in the spring of 2014 if the bottleneck can be broken. Thanks to ministerial intervention, many earlier problems are nearing resolution with regard to intellectual property, pharmaceutical issues, new digital economy issues, investor state dispute settlement procedures, rules and enforcement on environment and labor provisions, and discipline of state-owned enterprises. Much of the hard work at the technical level is being done by the negotiators. However, there may still need to be political decisions made by ministers or maybe even heads of state to move to closure.

Will the U.S. Congress pass a new Trade Promotion Authority (TPA) for the TPP negotiations, commonly known as "fast track" procedures for implementing trade agreements into U.S. law? The TPA was last passed by the Congress in 2002, with its authority lapsed in the middle of 2007, and there hasn't been such authority since. New legislation to reauthorize the TPA was tabled in the Congress just two weeks ago by leaders of both political parties, and, importantly, it is strongly supported by the core supporters of the pro-trade U.S. trade policy, namely, farm and service sector interests.

While there was bipartisan support by two very powerful and influential members of their parties and the leaders of key committees in each house of Congress in that they issued the legislation together, there are partisan differences with regard to sensitive issues including labor, the environment, intellectual property, and currency manipulation, which could delay passage. U.S. President Barack Obama mentioned support for TPA legislation in his State of the Union Address this week, but his nomination of Senator Max Baucus as the new ambassador to China along with the resistance of the Senate majority leader Harry Reid of the Democratic Party, who opposed the bill and has the power to prevent the legislation from coming up for a vote in the Senate, means that the TPA will not move quickly in the Congress in the coming months.

The clear conclusion is that there will be a delay in Congressional action in the near term on the TPA, but I don't regard this as a major problem. TPA passage is desired but is not required before the TPP deal closes. The draft legislation that was tabled contains provisions that would guarantee that the "fast track" provisions would apply to the TPP retroactively even if the deal closes before the legislation is enacted. If Congress were to object to particular pieces of the final package, it would affect the benefits and concessions among the 12 countries and lead to a massive recalibration of the entire deal which would be equivalent to rejecting the deal, so the scope for Congressional intervention after the deal closes would be quite narrow.

From the United States' and Japan's perspectives, Japanese participation has been very beneficial. Its entry into the talks has complicated the negotiations but has made a big deal more likely. U.S. and Japanese officials had been working very closely together in pushing for strong provisions on investment and intellectual property, and those will be areas of great benefit for both countries. Other TPP countries will benefit from Japanese reforms that liberalize investment, insurance, and some other services and farm trade, and that in turn will create more flexibility in new rule making and investment, intellectual property, and other areas. The risk to the deal is that Japan's attempts to temper farm reforms could cause delays in crafting the final terms.

Japan joined the negotiations for the same reason that all countries participate in international negotiations—to promote the desired domestic growth and political alliances. For Japan, that means reinforcing the efforts to reform domestic economic policies and complementing the lagging third arrow of Abenomics. Other reasons for Japan include adding new free trade agreement (FTA) partners, especially the United States, upgrading existing arrangements with other countries, the strategic interest in strengthening the U.S.-Japan bilateral alliance, and complementing and reinforcing cooperation in other areas including energy security. There's also an economic justification. My colleague, Peter Petri, who is scheduled to speak here, performed analyses for my institute that showed that Japan's GDP growth would be 2% higher in 2025 than in the absence of TPP. In constant dollars, that is over $100 billion in income and substantial growth in Japanese exports to the region. The next question is whether Korea will follow Japan into the TPP. Korea is still in the due diligence phase. If it were to join, the TPP would provide gains of a little over 2% of GDP from a TPP13. It could also help avoid regional political frictions that affect bilateral relations in the region, and it would upgrade their old pacts and also create opportunities for new trading partners, particularly Japan with whom trade agreement talks have been suspended since December 2004. It would also complement Korea's ongoing talks with China, which, from a Korean perspective, are their number-one trade policy priority. There would also be significant costs of non-participation for Korea. The major cost of not being in the TPP would be deferred benefits and also being unable to influence the terms of the final agreement. If the talks conclude in the first half of this year, there would be no window of opportunity for Korea to join the talks. More likely, it will have to look into negotiation in a second tranche of membership. As for China, it has realized that numerous benefits from trade agreements can be gained, but it also now recognizes that it is not ready to accept TPP obligations, particularly in terms of transparency and disciplines on government intervention in the marketplace. However, China can pursue and start preparing for that through domestic reforms and the ongoing negotiations they have in the region—with Korea and the Regional Comprehensive Economic Partnership (RCEP) partners. From a Chinese point of view, not being in the TPP is a short-term cost—very modest losses, but the losses would be a little greater if a second tranche of the TPP goes forward including countries such as Indonesia, Korea, Thailand, and the Philippines. The potential trade diversion and income losses would then be about$100 billion, or about 0.5% of GDP. In a TPP17 scenario including China in which China joins a second tranche of the TPP, Petri estimates that China's losses of $82 billion would turn into gains of$800 billion and generate substantial gains globally and for all other TPP members. For Japan, the TPP16 gains double with China participating in a TPP17.

That leads to the question of prospects for TPP expansion. Several Asian countries are considering joining the negotiations or the agreement in the future. They need to consult with participants to do so, in order to ensure that all are like-minded and that they have the will to resolve specific trade problems.

What are the implications for other initiatives? The TPP and RCEP are moving forward. The TPP is limited to the Asia-Pacific Economic Cooperation (APEC) members, and the RCEP is limited to ASEAN FTA partners. The important consideration is the overlapping membership which shows that countries see a bigger economic payoff from the TPP economic reforms, and they also see the need to avoid the costs of non-participation. Both agreements can go forward, but the trend is clearly a convergence toward the TPP model rather than a harmonization of the TPP and RCEP, which would inevitably mean a dilution of TPP obligations. The TPP is almost finished and the RCEP is just beginning, so they have different time horizons and different standards. The RCEP's major near-term benefit will be its acceleration of the progress of integration of the ASEAN economic community. ASEAN members are committed to deepening their internal integration by the end of 2015, which is the same time period as set for the RCEP. Also important is that it provides China an additional platform to continue incremental reforms that improve China's readiness to move toward more comprehensive regional and global pacts.

To reiterate, the TPP is the most important agreement in economic terms and in terms of the political and strategic relationships that the participating countries will have with their partner countries. Its high standards would complement domestic reforms and thus boost productivity growth across the economy, which is critical for Japan. It would impose binding obligations that would constrain the use of some longstanding policies, which, from an economist's point of view, is a very good thing. It can be very important in terms of regional economic integration and a further move toward a Free Trade Area of the Asia-Pacific (FTAAP).

##### Commentator URATA Shujiro:

First, is it correct to understand that you have to pass TPA legislation in order for the U.S. Congress to pass the TPP? Also, in President Obama's State of the Union Address, he said that having new trade partnerships will help to create jobs in the United States, but he didn't explicitly mention the TPP. This has been interpreted as a lack of eagerness on his part to work on the TPP issue. How do you see that? Also, if the passing requirement I mentioned is correct, what does he have to do to pass the TPA before the TPP is concluded?

Second, what is the minimum that Japan has to do to get U.S. approval on market access? In your book, which I translated, you wrote that rice is a very sensitive product and that the TPP can exclude rice. What the Japanese government offered, according to newspaper reports, was to liberalize 95% of the tariff lines, which means excluding five agriculture products which account for 586 tariff lines. But rice only accounts for maybe 30 or 40 tariff lines. In your view, does Japan have to open up everything except for rice?

Third, considering the midterm elections in the United States, and supposing that an agreement cannot be reached by then, what will happen? The momentum will be lost for sure. Will we not see the reopening of negotiations?

Fourth, China joining the TPP would benefit all TPP members, but that is an outcome to be expected in the long run. Do you think the U.S. Congress would approve of China's joining the TPP considering the obvious short-term costs in terms of lost employment and so on?

Fifth, the EU and the United States began the Transatlantic Trade and Investment Partnership (TTIP) negotiations. What are the U.S. interests in this negotiation? According to some surveys, the United States and the EU would like to set rules/standards which will later become global standards. Is this the most important interest from the U.S. point of view?

Finally, an FTAAP is considered to be the eventual goal of regional integration by APEC members. There are two pathways now toward an FTAAP: RCEP and TPP. You noted that the RCEP might converge into the TPP. Can you explain how these two frameworks will grow to become an FTAAP, or can we expect that the two frameworks will co-exist for many years?

##### Jeffrey J. SCHOTT:

Is President Obama determined to conclude the TPP? From very early on in his first administration, President Obama recognized the importance of deepening economic and political ties in Asia. His first trip to Asia in 2009, including a stop here in Japan, was to talk about the United States participating in the TPP. I think the reason for his wording in his speech was because he was talking to members of Congress, where you have to remove as much jargon as possible. For a general audience in the United States that basically does not follow international developments very much, discussing the Asia-Pacific and Trans-Atlantic as regions is easier than talking about the TPP and the TTIP.

What does Japan have to do? The most important point is that there is a comprehensive agreement. "Comprehensive" doesn't necessarily mean total immediate elimination of every product, but it means a very substantial package that brings substantial benefits in terms of new access and growth potential in both countries. That cannot be measured in terms of tariff lines, as 95% of tariff lines doesn't mean 95% of the value of the deal. Another variable at play is the length of the transition. Some products will see reforms implemented immediately. In the agricultural area, typically, the most sensitive issues receive the longest transition periods before the reforms are implemented. To ensure that the rest of the deal gets put together and is approved and implemented by the 12 governments, it has to be a deal that can survive the ratification process, so the agricultural market access component has to be substantial, but I don't believe that rice is the biggest problem.

As for the United States approving of China's entry, the first thing that needs to be done is to increase trust building. That occurs through the regular consultations that ministers have with each other and the strategic and economic dialogue between the United States and China. It will also improve if China participates constructively in other international initiatives and if progress is made in the U.S.-China bilateral investment treaty. It's important to do a cost-benefit analysis for both countries to support that trust-building initiative over several years.

As for the EU and the United States and the TTIP, it turns out that, in some areas including regulations on financial services, they had very different and incompatible ideas. There is a big gap between them which undercuts the claim that they could set global standards, because, in most respects, trade agreements don't set standards—they set processes for applying international standards. Right now, the United States and Europe account for almost half of the global GDP, but by the time these agreements are fully implemented, the U.S.-EU share of global output will be significantly lower, and Asia's will be significantly higher. China, Japan, and others will not necessarily have to buy into the U.S.-EU approach.

Pathways to an FTAAP are a subject under review this year in the APEC. In my book, I talked about the possibility of a hybrid approach to an FTAAP. The integrity of the TPP and RCEP in coexistence could be maintained, and best practices then could be drawn from both to form a hybrid umbrella agreement that could link all of the APEC countries. Some countries opined that there should only be the TPP, but that would be very difficult for poorer countries and some non-APEC member countries involved in regional economic integration arrangements.

### Q&A

Q1: Recently, in the TTIP, the EU has decided to halt the negotiation process in the investment clause and start the public consultation process on this issue. I would like to hear your view on this, and whether this could possibly affect the TPP negotiations in a negative manner?

Q2: I agree that a good deal in the TPP is in the best interests for Japan. However, there are tradeoffs in the dynamics of the negotiations. The question is whether to start big or small. To what extent would this kind of analysis also apply to the TPP negotiations? Also, it is often said that U.S. negotiators start from a very high negotiation position. What is your view on the extent to which the absence of a TPA affects the circumstances of the U.S. negotiators lowering the level of ambition to making a final deal?

Q3: On the criticisms of the TPP in terms of negative impacts on public health, some public health advocates claim there could be restrictions on anti-smoking efforts and that it may make drugs in Asia as expensive as they are in the United States. Is there any basis for these concerns?

Q4: Communication with the business society and the civil society is becoming increasingly necessary to have successful negotiations. Is the TPP different from past negotiations in that sense in the United States?

Q5: As this is already the endgame, it is very difficult for Korea to join the current negotiations. Should Korea wait to join the established TPP scheme or is there an alternative? Also, what is the meaning of the second tranche negotiations, which you mentioned?

Jeffrey J. SCHOTT:
Environmental groups and others have long worried that the potential for litigation creates a regulatory chill—regulators become more cautious about instituting regulations that will affect economic activity for fear that they will be charged with indirect expropriation of an investor's assets. But the evidence of that is very weak. When there have been cases, even in the instances where there are settlements, they have been very modest. In Europe, particularly given the huge public backlash against the TTIP because of the spying scandal, the European Commission has become very sensitive to public concerns. However, its decision to undergo consultations for three months and conduct more analysis doesn't set back the TTIP negotiations very much because the negotiations are at a very early stage, so negotiators will work on other areas. It only has an impact on the TPP to the extent that U.S. environmental groups and others have revived their previous concerns in light of the publicity in Europe.

With regard to the dynamics of the negotiations, there's a risk when you slow down the pace of talks that you lose momentum and can lose the opportunity for putting a deal together. The absence of the TPA doesn't have a great impact on U.S. positions because Congress' ideal result would be that the United States doesn't change any policy. U.S. officials have been consulting members of Congress for the past year or more on potential changes that might be needed if a comprehensive deal can be put together. This is going to have to happen with or without the TPA.

With regard to public health issues, there has been a lot of controversy about tobacco. The claim in the litigation is that the new packaging requirements deteriorate the trademark and other benefits that tobacco companies have for selling their goods. However, there's a more basic and important concern with regard to access to medicine. Also, there was much attention given to the intellectual property drafts that were leaked by WikiLeaks in November 2013. The documents were a compendium of every proposal that was put together by the negotiators in the course of the negotiations, in an attempt to have one document that could then be the source for refining and revising to reach a final compromise. The draft that was leaked was already several months old and had been changed dramatically since then. It showed that the initial negotiating positions were quite different among the TPP countries and how there was substantial opposition to the position of big pharmaceutical companies from various major industrial countries. This is an area where countries should be able to meet the social imperative of providing medicine to poor countries without doing damage to the innovation process.

In terms of involvement of civil society and business, in a sense, the TPP negotiations are different from the past because of social media and the ability to transmit information to interest groups along with the ability to leak information. But it also has improved the method of cooperation between governments and interest groups. There has been criticism of business dominating the advisory process of the U.S. government, but there are a wide variety of civil society groups offering advice and sometimes criticizing U.S. positions in the advisory process.

If the talks conclude in the first half of this year, there will be no window of opportunity for Korea to join the talks. If the talks drag on, there would be an opportunity. Korea is probably the only country that could squeeze into the talks at this late stage because it is so prepared. There wouldn't be much disruption to the negotiating process. As for the second tranche, the meaning is a little unclear. The TPP will have an accession clause, but that only enters into force when the agreement enters into force. One of the issues being negotiated now is at what stage among the ratification process among the 12 countries does the agreement enter into force. The question is whether there could be action taken between the signature of the agreement and the entry into force. But the current priority is on completing the negotiations.

*This summary was compiled by RIETI Editorial staff.