Gearing Up for the TPP Text Release

The moment trade geeks have been waiting for is nearly here—after close to six years, the texts and schedules of the Trans-Pacific Partnership (TPP) are supposed to be released this week. 

The release will be accompanied by much hyperventilating by a handful of companies and NGOs that believe they have been negatively affected or who believe that the TPP agreement is insufficient in one way or another.  The TPP is a carefully crafted deal that managed the nearly impossible task of making all 12 participating countries equally satisfied (or unsatisfied) with the results.  It cannot be reopened and, I would argue, if it were, some member states risk losing substantial benefits elsewhere in an ultimately futile attempt to make everyone happy.

The best quote of the year, courtesy of New Zealand Trade Minister Tim Grosser, assessed the TPP outcomes this way: “It means both of us are swallowing dead rats on three or four issues to get this deal across the line.”  The art of compromise is critically important to reach an agreement with 12 member states in so many areas.

Firms and sectors (and consumers) that are likely to benefit from the deal will be more muted, particularly because they may actually be trying to read the agreement.  It will run to hundreds of pages of dense legal language accompanied by thousands of pages of various member country schedules.  Decoding it all and sorting out what the TPP might mean for any particular company will take some time and considerable effort. 

Because the TPP is not a standard trade agreement (certainly compared to many in Asia), determining the implications of TPP commitments for companies is tougher than might be expected.

As an example, let me use a firm I met with last week at a YPO event in Jakarta.  This company creates industrial lubricants in Vietnam.  They seem to be enthusiastic users of free trade agreements (FTAs), since tariffs on many of their products can be substantial enough to cut into profits.  But using existing agreements is not straightforward.

To qualify for benefits, firms have to show that goods were manufactured in or use materials from FTA member countries.  Without strict rules of origin (ROOs) in place, companies could import goods from somewhere else, relabel the products, and export using the FTA benefits.  This would be very problematic for competitors that are trying to legitimately use the agreement to support domestic production.

The firm currently has to carefully formulate or reformulate every product in their inventory depending on the final destination of each item.  Products shipping to Japan, for example, require one type of formulation to meet the requirements of the ASEAN-Japan FTA.  The same item going to Australia may need a slightly different set of raw materials or require the items to be sourced from different places to meet the criteria of ASEAN/Australia/New Zealand (AANZFTA). 

To add to the complications, the paperwork needed to track each product is extensive.  The firm has to ensure that it carefully meets each and every rule in different FTAs or it could be subject to substantial fines for non-compliance (and even face retroactive enforcement of past mistakes).

Under the TPP, however, this firm will have just one rule of origin to meet for each item in its inventory that it intends to ship to all 12 TPP member markets.  The exact same product can go to Japan or to Australia without a change.  Just as important for this firm, the paperwork is identical (and the firm might qualify for an additional benefit that obviates the need for special customs paperwork at all). 

If these were the only benefits for the firm, sorting through the TPP texts and associated schedules might not be challenging.  But since the TPP is deep and broad, benefits for the firm could be scattered across multiple chapters.  The company will also have better access to TPP services providers, potentially providing improved legal or accounting services or logistics or distribution services.  Its investment opportunities will expand dramatically.  Other provisions in the agreement could result in fewer tests for products, as the firm might be able to submit test results from one jurisdiction directly into another without retesting.

Figuring this out will take some time.  In addition, savvy firms will also be trying to anticipate what the TPP will do to overall trade flows in their particular sector.  They may be figuring out what the TPP might do (or not) to their competitors.  The impact could vary by market.  In short, it will be complex but for most, the benefits ought to be significant.

For nearly all the other firms that are likely to squeal loudly when the texts get released, the TPP could still represent an improvement off the status quo.

As an example, consider dairy.  There will be deep unhappiness in some export markets about the fact that dairy is not completely opened across TPP member countries.  The academic in me, of course, would like to have seen full access with no exclusions.  But the real world often demands compromises and the final agreement has to be compared with the current status quo.

Compared to now, dairy exporters still come out ahead.  Tariffs will fall over time.  Quotas are expanded.  (Neither, I might add, happen so quickly in some markets that vulnerable domestic firms will not have time to adjust to new market conditions.)  The agreement creates a benchmark for potential improvements at some future negotiation. 

Another complaining industry will be pharmaceuticals who will bang on loudly about renegotiation needed to give further protection to biologic drugs.  This is frankly crazy.  The United States fought for more than five years and nearly derailed the entire agreement with a dogged insistence on moving patent extensions to 12 years. 

Twelve years is a non-starter.  The other TPP member countries refused to budge, no matter what sort of promises and threats the Americans employed. 

Again, compare the TPP to the status quo.  Currently, five member countries do not protect biologics at all.  Four members have five years of protection.  Only two (Canada and Japan) provide eight years of protection now.  The United States law provides 12 years of protection, but the budget covers seven years only. 

This math alone suggests no compromise at 12 years would ever be possible.

Any attempt by disaffected firms to insist that the deal be renegotiated risks opening up a Pandora’s box of changes.  It will not just be one member that wants something else included/excluded. 

This is the deal. 

After we have all poured over the texts and schedules, we can have a discussion about the gains and losses that will actually accrue in implementation.  Enjoy your reading!

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

Dairy Highlights Challenges to TPP Closure

The Trans-Pacific Partnership (TPP) negotiations did not close in Hawaii last month partly due to disagreements over dairy access.  Why did bargaining across 12 countries get so bogged down over milk and cheese market access?  What does the dairy dispute tell us about problems ahead?

Agriculture has historically been protected more than industrial goods, since nearly every country has particularly sensitivities around farming, farmers, and food.  The global trade regime under the GATT/WTO has made only modest inroads into agricultural trade so far, mostly by limiting tariffs in some sectors. 

The protection of agriculture has continued in various free trade agreements (FTAs) signed between WTO members, as Jo-Ann Crawford demonstrated by looking at 162 tariff schedules.  The countries in the sample varied in the extent of market liberalization for agricultural goods; however, overall, agricultural commitments made in trade agreements regularly omitted or excluded tariff lines.  The most frequent products carved out of FTAs include sugar (HS Chapter 17), miscellaneous edible preparations like coffee and tea (Chapter 21), beverages (Chapter 22), cereals (Chapter 10), dairy (Chapter 4), and meat (Chapter 2). 

This strategy for handling sensitive agricultural sectors—by simply excluding the items from market liberalization at all—was not supposed to take place in the TPP.  From the earliest days of discussions, officials took pains to announce that the TPP would contain “no exceptions.” 

Hence, even tough issues like dairy, sugar, meat and cereals (like rice and wheat) have had to be on the table for negotiations.  It will perhaps not surprise anyone to learn that these sectors, however, have been some of the very last items to be dealt with in the TPP. 

Canada apparently did not put forward an offer on dairy until just days ahead of Hawaii.  The original offer appears to have been a liquid milk equivalent tariff quota for all dairy products.  This gets rather complicated, but in short it meant that the partners could have access to a certain portion of Canada’s dairy market at lower tariff rates.  Once the quantitative cap was filled, everything after that would be charged (much) higher tariff rates.

Under a liquid milk equivalent scheme, all products made with milk, including cheeses, butter and all sorts of milk items would be interchangeable—in other words, partners could ship whatever form of dairy added up to the equivalent amount of liquid milk at lower tariffs up to the filling of the cap.  It could be that the entire cap could be filled with butter, leaving no room for cheese exporters, or the reverse. 

This is a deeply problematic outcome, however, for dairy exporters, as it is extremely difficult to determine what sort of outcomes farmers might receive in practice.  Quota systems are widely used in dairy and can sometimes be completely filled within a matter of weeks.  A sort of “blanket” quota would be even harder to judge since there could be no way to determine what portion of the quota other member countries might be able to fill or when.

Canada’s revised offer appears to have split up quotas for major subsectors of dairy.  This is an improvement, but still remains problematic.

The reason for Canadian delay in offering anything at all on dairy relates to specific domestic challenges.  Canada has a long-standing set of policies in place for dairy (and poultry) to protect the market against encroachment by (mostly) American dairy farmers. 

Under supply-management, the government has sheltered the dairy sector behind extremely high tariff walls (more than 300 percent, in some cases) and limited import quotas.  The system also includes complicated marketing boards that determine domestic prices, and controls on supply through the use of quotas per farmer for production. 

The net results of this system are a lucrative source of revenue for dairy farmers and extremely high dairy prices for Canadian consumers.  Efforts to dismantle or dramatically revise the system in the past have been complicated by the fact that the bulk of the 13,000 dairy farms in Canada are geographically concentrated in two important voting provinces.  While consumers would presumably benefit from cheaper products, like consumers worldwide, the average Canadian is not likely to rise up and lobby hard in favor of reduced dairy and poultry prices. 

Despite the soaring rhetoric of the TPP as a new kind of trade agreement better suited to the 21st century, dairy reforms in Canada will likely remain grounded firmly in the past.  Whatever happens, reform is likely to be limited, with changes to dairy phased in slowly over long time horizons.

Canada is not the only country, of course, with complex systems of support in place for dairy production.  Japan’s butter market follows a similar pattern—the government controls import volumes and prices and uses high tariff walls.  The result is that Japanese consumers pay more than triple the international price for butter and even experience shortages.

Like in Canada, however, consumers are not carrying protest signs around the trade ministry begging for lower butter prices. 

In the absence of visible support from consumers, officials are mostly getting an earful now from potentially disadvantaged firms.  It might be expected that industries that rely on dairy as an input, including all sorts of food manufacturers, bakeries, restaurants, and so forth would be working hard to convince governments that cheaper products could also be beneficial.  While some of this is undoubtedly taking place, their efforts are likely modest. 

Even firms that could be clear winners can be withholding visible support.  Many argue that, in the absence of a text that clearly lays out the extent and scope of changes that are coming, they cannot say anything at all. 

But once the agreement is finished and revealed, whatever (likely modest) changes are included for dairy are likely to provoke backlash from entrenched interests that benefit from current schemes.  Expect to hear loud calls for maintaining systems that “benefit small, family farms” and “produce high quality, safe food products” and “ensure adequate domestic supplies of dairy and dairy products.” 

Such complaints will be made even though: domestic farms remain set to continue to dominate markets; many farms could carve out an advantage in exporting; TPP products are of similar or equal quality; and supplies of products like butter, milk powder and cheeses are likely to increase.

Groups that feel under threat will not likely sit quietly.  Simply having the text available will not settle the issues.  

In the face of what can appear to be overwhelming support for the status quo, officials and political leaders can go wobbly.  They can backtrack on commitments for market opening and threaten to undo or torpedo the entire deal. 

A similar scenario will happen in various other sectors of agriculture and elsewhere.  Revealing the specifics of the compromises made in each of the 12 member countries is likely to set off vigorous debates.  Firms and industries that have decided to sit on the sidelines until the text is released may be joining the battle much too late. 

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

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***

Beef, Pork and Butter in Japan: An Update on "Sacreds"

Multiple reports suggest that the United States and Japan are getting closer to resolution of the five "sacred" agricultural items discussed in my last post.  

Not all of the sectors are equally challenging to address.  For example, Japan placed sugar on the "sacred" list.  Given American sensitivities on sugar, it was never very likely that the United States would push Japan particularly hard in this sector.  It's the old "people who live in glass houses should not throw stones" problem for U.S. negotiators.  

Equally, it was never very likely that Japan would be asked to drop rice tariffs from more than 700% to zero in any short timeframe.  Each government can appreciate that doing so would have been economically and politically challenging.  Thus, it was always likely that Japan would be given a long timeline for rice.  In addition, since many Japanese believe deeply and passionately about the quality of domestically produced rice (and, indeed, most agricultural products), even if the rice market were completely tossed open it is highly likely that consumers would still opt to buy Japanese rice.  

The real fights have been over access to Japan's beef and pork markets. These are lucrative and have been highly sheltered in important ways.  Low priced pork items, for example, are assessed duties as high as $4.06 a kilogram (482 yen).  A duty of this magnitude can keep consumers from purchasing foreign pork--especially on lower value items.  Pork prices in Japan are managed by a complicated "gate price" system that the American pork industry has long sought to change.

Reports now suggest that Japan is prepared to slash tariffs on pork dramatically.  The duty on lower value pork products could fall to less than a fifth the current level.  High value pork may see the current 4.3% tariff finally reach zero.  

Beef is currently assessed tariff rates of 38.5% into Japan.  The cut being discussed would drop these rates to 20% and then to 9%.   

Of course, the cuts in both beef and pork are to be phased in over a long period of time.  In the case of beef, the 9% rate will not be in effect until 15 years after the agreement is first implemented.  Even then, the final deal will not lower rates all the way to 0, as many might have expected, given the long-standing discussions in the TPP of a "high quality, no exceptions" agreement that covered all goods.

Tariffs are not the only way of protecting markets either.  It is entirely possible to keep foreign cuts of meat limited in Japan through maneuvers like labeling requirements that make foreign beef and pork appear less savory than locally produced cuts of meat, or stringent health and safety inspections that take so long to complete for imported products that the food spoils.  There are a myriad other ways to use non-tariff barriers (NTBs) like these to limit what would otherwise appear to be more open markets in the future.

This is not to say that the Japanese government will turn to such measures, but simply to highlight that such possibilities exist.

Another potential tool (or NTB, depending on your perspective) being built into the agreement is something called a "snapback" provision.  This is a "safeguard" measure that is designed to give an industry "temporary breathing room" if imports suddenly surge.  In the TPP, the safeguard on beef could allow the government to raise tariffs from 9% all the way back to the current levels of 38.5% if imports of beef do surge after the deal is done.

This is deeply problematic, as it is highly likely that imports of beef (and pork) will, indeed, rise after the agreement is fully implemented.  After all, if foreign cuts of meat are not subjected to painful additional tariffs at the border, prices at the supermarket should fall.  The increase in foreign products could be defined as a "surge" and trigger the sudden imposition of safeguards or the snapback to the original tariff levels that were present prior to the TPP.  

Similar maneuvering can be expected in dairy where Japanese tariffs on various dairy products like butter are significantly higher.  It is certainly likely that a drop in butter tariffs from more than 200% will be met with a surge of imports since consumers will be buying cheaper American or TPP butter.  Shops were already running out of domestic butter at the end of the year as Japanese domestic herd sizes have fallen.  A similar shortage (and emergency lifting of quotas) took place in 2008.  Butter crises struck again in 2011, 2012 and imports were allowed under emergency rules twice in 2014.

The Japan Dairy Industry Association has argued that the domestic industry is set for a catastrophic fall once the TPP comes into effect, with the butter market falling from 83 million yen to less than 13 million yen.

Dairy is also an issue with Canada.  Thus far, the Canadians have been waiting on the resolution of agricultural issues with Japan before they get serious about their own promises to reduce protection to TPP members in dairy and poultry.