The TPP Deal: Not Closed but Close to Closure

August 3, 2015 10:00 AM

Completing the Trans-Pacific Partnership (TPP) trade accord at the Maui meeting of trade ministers last week was a very ambitious and difficult goal. It didn’t get done, despite resolution of key chapters on the environment and other issues. But the time in paradise was well spent: All the pieces of the TPP puzzle are now on the table for the political leaders of the 12 participating countries to pull together into an ambitious accord before the end of the summer.

Trade ministers expect a quick return to the negotiating table once they brief their leaders and legislatures. Indeed, many of their negotiators stayed over in Maui to iron out the details of the numerous areas where agreement is nearly at hand—areas such as state-owned enterprises (SOEs) and antidumping and countervailing duties.

In the coming weeks, look for ministers to meet bilaterally or in small groups to resolve the most contentious outstanding issues. What is still in play? It is hard to compile a comprehensive list of issues, but it is clear that the TPP will succeed only if solutions are found to the disputes in four politically sensitive areas:

  • Market access. At least partial opening of markets for imported dairy products, rice, and sugar. This means inter alia that New Zealand can sell more dairy products in TPP markets, that Australia can sell more sugar to the United States, and that US producers can ship more dairy and rice to Japan. How much more is at issue. US officials want to limit additional US imports of sugar and dairy products to levels that could be accommodated under existing US farm programs. Canadians want to do the same under their supply management programs. Final Japanese concessions on dairy and rice will be influenced by the size of the US and Canadian market opening commitments.
  • Exceptions to SOE obligations. While the TPP countries have largely agreed to bar special subsidies and other types of preferential treatment for SOEs with the aim of establishing a level playing field for private sector firms to compete with SOEs, major differences remain on whether countries can exempt specific entities from the new disciplines. No doubt Malaysia, Singapore, and Vietnam would like to shield some of their SOEs from TPP rules, but extensive carve-outs would dilute the value of this innovative area of trade discipline.
  • Rules of origin for autos. The concern here is sourcing of components from non-TPP countries like Thailand. Some countries want a permissive rule that extends TPP tariff preferences to inputs from non-TPP sources so long as the parts and labor account for 50 percent or less of total production costs. Other TPP countries, including the United States, want stricter rules that limit content from non-TPP sources.
  • Intellectual property protection. The time period of data exclusivity for biologics test data is perhaps the most contentious issue at the negotiating table and in public debate over the TPP throughout the region. Some countries like Australia limit data exclusivity to 5 years; US negotiators have sought 12 years. The dispute also involves long-run concerns about drug costs by countries that maintain single-payer healthcare systems. In my view, finding a middle ground between the interests of Big Pharma, firms that do not want to disclose data from their costly research, and generic manufacturers, firms that want access to existing test data so they can market their own drugs without costly new tests, will be the lynchpin of the ultimate TPP deal. The data exclusivity time period already is being discussed among the heads of state of several TPP countries.

These four sets of issues share a common characteristic: commitments to reform by one or more countries depend on trade reforms on another issue or product by other TPP countries. Linking these issues is the stuff of “end game” negotiations like those held in Maui last week. But ministers couldn’t pull the trigger on a deal until they got the okay from political leaders to make the final reform commitments on the hard issues noted above.

Therefore, expect TPP ministers to recalibrate their demands on their negotiating partners and their offers to reform their own policies. This process will involve accepting more reform in some areas and pulling back reform ambitions in others—in other words, compromise.

What is likely to be achieved? My sense is that reform commitments will be incomplete but still yield important economic benefits. Access to Japanese and North American dairy markets will likely be increased for all TPP countries in sufficient quantities to satisfy the basic demands of New Zealand and Australia (with benefits for US exporters as well); so too will import quotas for rice in Japan and Australian sugar shipments to the United States. Origin rules for autos probably will be set lower than the restrictive North American standard of more than 60 percent, though not as low as Japan (or most trade economists) would prefer. And TPP countries will agree to exempt a few specific SOEs from the new TPP obligations.

On the most sensitive issue of all, biologics, the prospective outcome is harder to predict. Agreement will require almost all TPP countries to modify their current positions; Senator Orrin Hatch has warned US negotiators not to do so. But that would be a formula for failure, so I expect the TPP countries will agree to modify their national laws to meet a common standard for data exclusivity around seven to eight years.

Would such compromises, coupled with existing reform commitments in other areas, qualify as a gold standard agreement? Like any metal standard, the content is not pure gold; it contains some impurities. In the TPP case, the flaws in an eventual agreement likely would be primarily in the continued existence of some import quotas, albeit at increased levels, on dairy, rice, and sugar in the richer countries (including the United States, Canada, and Japan) instead of complete liberalization of import barriers. In addition, restrictive origin rules for autos and textiles are also unfortunately likely to remain, though with some modest new flexibility to source from non-TPP countries—again due to political pressure from Congress. And specific albeit narrow exceptions to liberalization rules on SOEs and other areas, as well as long phase-in periods for some tariff and other reforms on sensitive products, will diminish to some limited extent the economic payoff from the deal.

But these flaws are minor compared to the overall benefits waiting to be harvested if and when a deal is done. According to PIIE estimates by my colleague Peter Petri, for the United States alone, TPP could boost GDP by 0.4 percent after the TPP reforms are fully implemented—and that is a very big number. From that standpoint, the TPP countries should move quickly to close the deal and then expeditiously ratify it in national legislatures.

The good news is that all of the TPP ministers could reconvene as soon as late August or early September to close the deal. Under that timetable, and given the requirement that President Obama notify Congress at least 90 days before he signs a trade pact, the TPP could still be signed before Christmas. That would mean, however, that US congressional deliberations on TPP implementing legislation would be pushed back until the first quarter of 2016 at the earliest. I believe that the TPP bill can still pass Congress in that time frame. However, elected officials don’t like to vote on trade bills too close to polling dates, so the deeper one goes into the 2016 election campaign, the less likely Congress will vote on TPP implementing legislation.

One final note: The above timetable poses a particular challenge for Canadian Prime Minister Stephen Harper, who has called parliamentary elections for October 19. The proximity of the election has not pushed Canadian officials to the sidelines but has led them to minimize their offers to reform Canada’s supply management farm programs, primarily affecting dairy producers. However, in the coming weeks, Canada will have to improve its dairy offer; it can’t afford to stay out of the TPP. Besides the broader costs of fissures in North American integration if Canada stays out while the United States and Mexico move forward with TPP, Harper would face heavy criticism from Canadian beef and pork producers as well as Canadian industrial and service firms seeking more export opportunities in TPP markets. He also would be criticized for diminishing Canada’s profile on the world stage. Moreover, Canadian public opinion, as evidenced in polls, strongly favor reform of Canada’s supply management system. In sum, I don’t think the Canadian election on October 19 will be a substantial constraint on closing the deal in September and signing it in December.

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Jeffrey J. Schott Senior Research Staff

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