The Collapse of the TPP: Unpacking the Disaster

No deal.  

What happened?  I was so optimistic that they would get things done for the Trans-Pacific Partnership (TPP) negotiations this week in Hawaii.  I ignored the (excellent) advice of my professor and issued predictions of success on a fast-moving target.  We even had a booklet ready to go on the benefits of the agreement for businesses.  My planned blog post for this week had us drinking champagne by now. 

But no champagne (or sparkling wine) is going to be popped open for most people after the collapse of negotiations in Hawaii.  The bottles will go back on ice for a very long time—at least early 2017.

Why?  Because Hawaii really did represent the last, best chance for a deal in the near term.  Ministers have apparently decided to reconvene on the sidelines of APEC in November to try again. 

The cold logic of deadlines, however, shows that a deal reached in November is not going to be helpful.  Recall that once the officials agree on a draft text, this is not the end.  Instead, internal procedures in the United States (and others) means a delay of at least 90 days prior to final signatures on the agreement.  Entry into force is even further off.

Even if ministers solve the current impasse in the TPP in November, then, the deal would be ready (best case) in February or March for presentation to Congress.  Congress has to agree under new TPA rules before the President can sign the agreement.  Congress will also be voting on all the implementing legislation necessary for the agreement to come into force for the United States. 

There is no way that Congress will want to take a politically suicidal vote in favor of trade in March 2016 with an election looming.  Hence, the deal is stuck until after the elections (November 2016) or even until after the new president is installed in January 2017.  Even then, passage cannot be assured.

So what happened on the ground in Hawaii?  There will be much finger pointing and recriminations in the wake of the talks.

If I had to put my own finger on it, the immediate cause of collapse can be traced to Canada’s refusal to discuss dairy in any meaningful way until the final 3 days of negotiations.  This was, as I have previously noted, a high risk strategy. 

I assume officials gambled that, if they waited until the bitter end, everyone else would be so willing to get a deal done that they would take whatever poor offer Canada made on dairy liberalization. 

The gamble could be taken, in part, because negotiations over dairy are infinitely more complex and time-consuming than equivalent difficulties in other sectors.  For instance, another problematic issue for ministers in Hawaii concerned the patent length for biologic medicines.  But the fight over patent length, while serious for participants, could at least be sorted quickly.  The number was gong to be 12, 8, 7 or 5 years of protection.  The choice might be hard, but once made, the final figure could be quickly slotted into the waiting text.

Dairy, by contrast, is not just the tariff concessions or tariff rate quotas (even more complicated) for fresh milk.  The number of lines of dairy products runs into the hundreds or thousands.  It includes all sorts of varieties of milk—fresh, powdered, canned, UHT, etc.  It includes milk products of all sorts.  Plus butter and cheese.  Cheese is, of course, not just one kind of cheese, but cheddar and Swiss and creamed. 

In short, getting an agreement on dairy is not simple and, logistically, cannot be sorted in 3 days or even a week. 

It is not like this was a new or unexpected problem either.  Canada was originally prevented from joining the negotiations in 2010 over concerns by the other TPP members that Canada would not be willing to discuss dairy or anything related to their domestic supply management system.  However, Canadian officials insisted they were prepared to move ahead with meaningful changes. 

In Hawaii, Canada apparently offered a flat quota for liquid milk equivalents—ie, anything that could be made (including fresh milk) with a certain quantity of milk would qualify.  Once the quota was filled, no additional access at TPP tariff rates would be granted.

There is not enough room in this blog post to detail all the reasons this is a horrible plan for anyone hoping to obtain meaningful access the Canadian dairy market.  Perhaps a future post will go into dairy in greater detail.

For now, accept that once the Americans saw the Canadian plan, they promptly withdrew their own offers to partners for additional dairy access into the United States.  After all, American dairy farmers were presumed to be willing to support the TPP if—and only if—any potential losses could be offset by greater sales elsewhere and particularly into Canada.  If Canada was not going to be a new, important market, then it was not worthwhile to offer up concessions to others to access the American market either.

I can only imagine the reaction in New Zealand.  Their primary interest in the entire agreement has been to receive additional dairy access.  Although the Kiwi market is dynamic and competitive in many areas, more than 30 percent of their economy remains tied to milk and dairy exports.  With these markets effectively shutting before their eyes in Hawaii, officials must have watched in total disbelief. 

In addition, Australia also had troubles with the dairy offer (and American offers on sugar).  With the U.S. dairy deal off the table, the Aussies promptly withdrew any support for changing the patent length protections on biologics (a key deliverable for the Americans). 

Mexico, which has been defending its special access to the NAFTA markets all along in various sectors, suddenly came forward to object to rules of origin (ROOs) around autos.  The current NAFTA provisions call for 65 percent content from NAFTA countries.  These rules have helped make Mexico into an automotive powerhouse and the possibility of lowering the percentage of content required in the TPP led to strong Mexican objections.  

With the unraveling of autos and the contested dairy elements of the agreement, various other complaints from different TPP members must have risen to a crescendo.   Reconciling these interests has always been a heavy lift.  But once officials realized that key outcomes were being pulled off the table by others in the end, the stampede to protect your own markets and not be left exposed must have been unstoppable. 

I thought they would delay the finish for another 24 hours.  Instead, with everything in such flux, officials just called off the whole thing to fight another day.  I would bet that many said—with domestic elections in Canada finished in October—the dairy stuff could be addressed by the next meeting.

The key problem with such a strategy, as I just pointed out, is that this delay is not simply from July to November.  It could be a delay of 18 months or more.  People in the coming days will undoubtedly be pointing to the global trade talks that have dragged on for more than a decade with no agreement (despite their own deadline of July 31) to even get a plan in place to discuss a path forward. 

The TPP now finds itself in very uncertain territory.  The only salvation I can imagine is to finally invite the South Koreans to join the talks.  If you aren’t going to be done for ages, you might as well expand the party.  If Korea comes in, perhaps Taiwan will also make a renewed push for entry. 

At least then officials have new excuse for delays in closing a trade agreement that has been underway for what frankly feels like forever.

***Talking Trade is a blog post written by (a deeply depressed) Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Defending the Indefensible in TPP

As the Trans-Pacific Partnership (TPP) trade negotiations head towards conclusion, I am increasingly fielding questions from people about the challenging final issues that remain.  This post covers a range of topics that stem largely from officials trying to defend policies that appear indefensible to outsiders.  Most are rooted in specific local politics or interpretations of domestic conditions that may be under threat in the TPP.

Why is Japan fighting so hard for rice protections?  My interviewer on CNBC this week asked again why Japan’s government is ready to fight to the finish over issues of rice.  After all, the agricultural sector in Japan contributes a tiny sliver to overall economic output.  The average age of Japan’s farmers is heading towards 70 and very few farm full-time.  In exchange for historical protections that include a rice tariff of 777 percent to keep out foreign polished rice, Japanese consumers pay extraordinarily high prices for rice and agricultural products of all sorts.

This situation is not unique to Japan.  Like many countries, the political system has been stacked in favor of rural voters, who are overweighted in the parliament relative to their population size. 

Mansur Olsen, the Nobel-prize winning economist, highlighted problems of collective action several decades ago.  While it is true that consumers as a whole would benefit from lower rice and agricultural prices, the problems of collective action mean that these diffuse interests rarely result in activity by large groups that would receive modest benefits.  By contrast, Japanese rice farmers clearly grasp the competitive challenges that they will face from the removal of barriers to trade.  They have every incentive to make their unhappiness known in loud and clear terms to political leaders.

In Japan, these concentrated agricultural producer interests can be further funneled to politicians and bureaucrats through a strong and entrenched bureaucracy of their own.  Japanese farmers are also brought together by JA Zenchu, an agricultural cooperative that (for the moment) comes with large numbers of staff and considerable economic strength.  They can mobilize significant numbers of voters and ensure that their supporters make it to the polls on election day.

Why are the Americans fighting so hard on auto tariff reductions?  The United States currently levies a 2.5% tariff on imported passenger cars.  In the TPP, Japan is pushing hard to get this tariff eliminated as soon as possible.  Like all TPP rules, it would apply to TPP member firms only and would not be extended (through the TPP) to other country companies.

What makes American opposition to tariff reductions so puzzling is that much of Japan’s auto production now takes place inside the United States and the rest of North America.  As a result of the rules set down more than 20 years ago in the North American Free Trade Agreement (NAFTA), auto producers that want to take advantage of the agreement must produce a substantial percentage of the final vehicles in NAFTA countries.  Hence, few Japanese autos are likely to benefit from a lowering of tariffs on autos in the TPP since most are already created inside the American domestic marketplace where they have never paid tariffs on the final products.

For more than 30 years, the U.S. auto industry has been uncomfortable with Japan’s access to the American market.  Maintaining a minor tariff for a substantial length of time is one way to help encourage wavering members of Congress to avoid blocking the TPP agreement on behalf of the domestic auto industry. 

Why can’t Canada change the supply management system for dairy and poultry?  The TPP is supposed to be a high quality, 21st century trade agreement that includes all products with no exceptions and a goal of lowering tariffs to zero.  In this context, the myriad system of supports that Canada uses to protect domestic dairy and poultry farmers from competition (primarily from the Americans) ought to be phased out over time.

But Canada faces the same sort of collective action problems on agricultural reform that Japan confronts.  Although Canada’s consumers would clearly benefit from lower prices on a wider range of dairy and egg products, the industry is much better organized and can mobilize significant resources to fight change.  So far, the industry has been impressively successful in keeping supply management off the negotiating table, including (so far) in the TPP talks.

Why won’t the Americans open up the domestic sugar market to Australian sugar?  This question stems from an odd quirk in the current negotiating environment in the TPP.  Although officials are aiming for a high quality result, negotiators have to operate in a world of existing, overlapping trade agreements from the past.  These previous deals will not go away once the TPP is signed.

In an existing bilateral trade agreement between the United States and Australia, sugar was carved out or excluded from the deal.  At the time, it was part of a “grand bargain” of sorts that let Australia carve out investor-state dispute settlement while the Americans protected their sugar industry.  If Australia gets better access to the American sugar market in the TPP, it will undermine the provisions of the past deal.

The sugar industry in the United States has been amazingly well protected since WWII.  Production of sugar cane is highly concentrated in a handful of farmers.  But production of sugar beets is spread much more widely.  Large numbers of members of the U.S. Congress represent states or districts that grow sugar across diverse and politically important parts of the country.   These representatives have always responded to the money and influence of the domestic sugar lobby and the TPP is no exception.  Sugar changes in the TPP that would allow greater imports of Australian sugar have been vigorously fought off.

Why don’t American union groups support the TPP?  This question came to me with great puzzlement at a meeting of ASEAN trade union leaders this week in Kuala Lumpur.  From their perspective, any agreement that raises economic growth is likely to result in additional jobs.  With new markets opening up that were previously closed or difficult and expensive to penetrate, firms have new opportunities for expansion and job creation.

Yet American labor leaders have come out loudly and vocally against the TPP.  Union membership in the United States has been falling for some time.   Labor leaders fear that TPP changes will exacerbate the loss of union jobs in the United States, since many union members are blue-collar workers. 

What is especially strange about the objection to the TPP by labor leaders is that most union members are actually government employees of all stripes, including teachers or public health care employees, who are unlikely to be affected by this trade agreement.  The fastest growing segment of unionization is taking place among services employees.  If the TPP leads to economic growth, the service sector is also likely to expand.  Many of these jobs, like hotel and restaurant workers, are not going to be outsourced.  In fact, it could certainly be argued that easier movement of people across the TPP for business travel and tourism should bring additional jobs to American services union workers. 

We can argue about the quality of such jobs and the appropriate pay scales for workers, but the TPP should not affect either of these elements of service sector union jobs.

Why are some TPP members fighting over specific rules changes for one class of medicines?  One of the most hotly contested arguments in the entire TPP agreement has been about appropriate patent length protections for a class of pharmaceutical medicines.  Should biologic drugs receive 5, 8 or 12 years of coverage before going off patent and becoming available to generic drug manufacturers? 

What is strange about this fight is that biologic drugs like the flu vaccines are extremely hard to manufacture.  They cannot be easily reverse engineered.  Each dose can be unique, as biologic drugs are not simple copies of one another. 

Most TPP members do not have (and may never have) the capabilities to manufacturing pharmaceutical products.  Even fewer will be able to create biologic medicines.  Thus, the fight over patent length protection does not make sense for most members.  However, many countries appear to have seized on this issue as a tool for achieving their negotiating objectives elsewhere in the agreement.  It is more of a bargaining chip than a serious point of disagreement.

Closing a deal is hard.  Given the nature of trade negotiations, the most difficult, politically sensitive issues are left to the very end of discussions.  It is only after the broadest balance of interests is largely hammered out that leaders can make a clear-eyed assessment of their total gains and losses throughout a complex negotiation.  Given the determination of benefits and challenges, countries will decide whether they will continue to defend largely economically indefensible policies or whether such programs will be adjusted in the wake of the TPP.  The time for sorting out such decisions and making appropriate calculations is now.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***