Creating The TPP Secretariat

As the chief negotiators meet again this week in Hawaii, one issue needs to move quickly up the list of priorities—setting up the right institutional framework for the Trans-Pacific Partnership (TPP).  The TPP requires a robust Secretariat to ensure the long-term health and success of this trade agreement.

This is not a topic that excites very many people.  Everyone is much more interested in discussing what is or is not included in the agreement, getting the deal done, and discussing the timing of it all. Yet if the right framework is not chosen for the TPP as a whole, the entire agreement will swiftly fade into irrelevance.  More than 5 years worth of hard bargaining could be lost along with most of the promises of future benefits.

Oddly, this is one area where people outside the trade and diplomatic universe have a much better grasp of the issue than officials.  Whenever I describe the implementation and enforcement challenges to business leaders or the general public, people immediately understand that it is not possible to keep track of an agreement that binds together 12 members in three continents at diverse levels of economic development without some sort of robust management system.

The option currently on the table in the TPP consists of a set of standing committees, similar to what has been used in different bilateral trade agreements in the past. 

Yet anyone who has ever worked in a large business or volunteer organization immediately grasps the problem of leaving important tasks to a committee.  Not all committees are hopeless, of course.  But the success of many committees relies on finding committed and determined individuals who have (or create) the time to focus relentlessly on committee tasks.

This single-minded attention to detail is unlikely to be found among the mostly overworked desk officers of the current TPP members.  Dumping implementation monitoring and future tasks on the shoulders of the Asia desk trade officials is more likely to be a recipe for drift. 

The first phase of TPP implementation will stretch to more than a decade, with constantly shifting commitments every year for each member.  Just keeping an eye on the promises made by different countries and ensuring that these commitments are properly implemented across 29 different chapters is not going to be easy.

Under most trade agreements, changes and monitoring are set to take place in various committees—for goods, services, etc. as well as an overall coordinating committee group.  But even in most regular deals, the committee structure rarely works as promised.  The groups do not meet as originally planned.  National level trade desk officers in charge of attending the committees do not really have time to pay attention to the agreement in between review periods at all.   

The reality is that very little change ever happens in the review sessions.  To even get members in a bilateral agreement to make a change often requires parties to agree on a protocol of amendment in the first place.   No good bureaucrat is likely to argue for drafting a new protocol of amendment unless the issue under discussion is extremely critical.

So existing agreements quickly get out of date.  This is not supposed to happen in the TPP, because it is meant to be a “living agreement.” (More on this idea in a future post.)  But without a dedicated group of people monitoring the deal, it is not at all likely that the TPP will actually be amended as necessary over time. 

For these reasons alone, the TPP needs a standing Secretariat to keep track of the agreement. 

But the argument for a specialized set of experts to manage the agreement gets even more compelling when you realize the TPP is supposed to expand again in the near-term.  The current teams of negotiators are likely to be disbanded as soon as the TPP agreement is concluded.  Many of these folks will be heading off to a well-earned retirement or new careers entirely after five grueling years of continual travel and hard bargaining.

There are already a number of countries like South Korea, Taiwan, Columbia and the Philippines that have expressed interest in joining the TPP as soon as possible.  By 2018, the TPP could have 19 countries working together to craft accession terms and market access commitments.  Managing all these diverse interests will require a dedicated Secretariat.

There have been some muted calls to let the current APEC Secretariat handle the task.  The TPP is officially one of the pathways to the Free Trade Area of the Asia Pacific (FTAAP) that will bring together all 21 APEC economies.  But the current APEC Secretariat is not in a position to manage the legally binding TPP commitments very well among a subset of its members and still manage to complete its own full slate of activities. 

It seems clear that the TPP requires a dedicated Secretariat.  Current negotiating members are not enthusiastic about this idea, as it requires deciding on budgets, staffing and the identification of a suitable host.  But in the absence of a Secretariat, it is likely that many of the benefits of the TPP will be lost or will not be fully exploited.  It would be a shame to finally get a deep, broad and important agreement completed and watch it crumble for want of a decent institutional framework.

*******Talking Trade is a blog series by Deborah Elms, Executive Director, Asian Trade Centre, Singapore******

WTO: Why It Does Matter That The Global Trade Regime Stays Healthy

My Feb 27 post noted the difficulties experienced by the World Trade Organization (WTO).  After such a bleak assessment, readers might be left wondering why they should care about the stumbling fate of the multilateral trade regime?

The answer, in brief, is that the multilateral system does matter.  This post argues that a healthy global trade regime matters for at least three broad reasons: for businesses struggling to operate in an increasingly complex environment, for resolving disputes around trade, and for the smallest and most vulnerable countries in the global system.

To address the first issue, consider a question posed to me by my chiropractor.  He wanted to know whether or not trade agreements have made it easier for him to operate a chiropractic clinic in South Korea and Taiwan and whether it is possible to train people to deliver this service in both places. 

This sounds like a relatively straightforward question.  But answering it took me several hours and highlighted the difficulties that companies (and individuals) have in using the existing system of trade agreements. 

To begin with, as I noted in my earlier post, services like chiropractic care were barely opened in the last, Uruguay round of multilateral trade talks.  Since medical services are often considered a sensitive sector, few governments made any commitments at all.  Chiropractic services do not appear to have been opened for foreign trade by most governments in the WTO.

This means that determining if these markets are open requires examining various preferential trade agreements (PTAs) to see if they have different rules.  South Korea has dozens of agreements currently covering a wide range of partners. 

Taiwan, thus far, has only two PTAs with New Zealand and with Singapore. The text of the latter has not yet been released, so it is not possible to be certain whether or not my chiropractor might use this agreement to open a clinic in Taiwan or a school.  However, a check on the provisions negotiated with New Zealand suggests it may not be possible, since Taiwan seemed to take broad exceptions (or keep the market closed) for medical services and adult education.  If the same rules were applied to both Kiwis and Singaporeans, my chiropractor may be out of luck for the moment in Taipei.

To determine the situation for certain in South Korea would have taken longer time.  This is because there are multiple ways to take advantage of some agreements.  South Korea and Singapore are covered by the ASEAN + Korea agreement, which does not appear to open up chiropractic care.   

The most comprehensive agreements signed by Korea have been with the European Union and another bilateral with the United States.  So determining whether the sector is likely to have been opened anywhere is made easier by starting with the most likely suspects.

But the situation remains quite complicated.  The Europeans and the Americans negotiate services differently.  Understanding whether or not chiropractic care is open depends on knowing which approach has been used to schedule (or open) sectors. 

For the European agreement, if chiropractic care is listed, it means it might be opened for foreign competition from EU firms.  However, determining the extent of the openness requires both knowing and understanding four different modes of supply, as different methods for delivering the service might be differently opened.  Then, it requires knowledge of the apparently backwards use of terminology to determine if what appears to mean that the market is open really does mean that the sector is open.  (If it says “none” it means it is NOT opened, while the word “unbound” means it is totally opened.)

In the American bilateral, if chiropractic care is NOT listed, it IS opened for foreign competition from American doctors.  Thus, my doctor would have had to find this agreement online, found the relevant annexes for services in the bilateral, and searched for his sector.   However, having not seen the service listed, he might have assumed it would be closed.  But this does not appear to be true in the case of chiropractic care into South Korea.  American chiropractors appear to be free to practice (subject to whatever relevant local regulations and immigration rules might apply) in Korea.  This situation is, to put it mildly, confusing for a company to sort out.

This takes us back to the need for robust agreements at the multilateral, system level.  A deal that includes 160 countries is infinitely easier to use for companies than a thicket of sometimes overlapping bilateral or regional deals.  It would have been far better for my chiropractor to only have to visit one place to discover the commitments for this service across every WTO member.  (This would be true even if not every member had identical pledges, since they would all at least be in one place with one method of understanding the outcome.)

A second good reason for wanting the global trading system to remain healthy has to do with what is often called the “crown jewel” of the system—the dispute settlement mechanism (DSU).  One thing the WTO has continued to do for the past 20 years while the negotiating function has been stuck is to adjudicate disputes over trade. 

The DSU allows one government to sue another if the rules outlined in the agreement have not been properly followed.  There is plenty to say about this system, but for now, the key point is that the rules and commitments that member states must follow at the global system are getting increasingly archaic.  A government can only sue in areas where a rule actually exists.

As larger and larger segments of the modern economy, including vast swathes of services, new goods, investment and other important aspects of economic life are outside the existing rulebook, the DSU will also become less and less relevant to companies and governments.  It is not possible to use the WTO DSU to argue about provisions contained in preferential trade agreements (unless a violation of the PTA rules is also mirrored by a violation in global rules). 

Finally, while countries are increasingly finding it necessary to open up areas like chiropractic care in bilateral or regional settings, this stampede is deeply problematic to the smaller and poorer countries in the international system.  Not all WTO members make attractive PTA partners.  For some countries, there is just not enough trade between parties to make it worthwhile to negotiate a PTA.  For the excluded parties, they are increasingly stuck with the older, out-of-date rulebook at the WTO and without the preferences that most of their potential rivals might receive into various trading partners.   This puts them further and further at a disadvantage, making it more likely that they remain stuck on the periphery. 

For at least three reasons then—ease of use by companies, increasing challenges in managing disputes and marginalization of the smallest and poorest—it is important that the global trading system continue to function.  Unfortunately, fixing what ails the WTO is a challenging task.

******Talking Trade is written by Dr. Deborah Elms, Asian Trade Centre, Singapore********

ISDS: A Little Bit of Knowledge is a Dangerous Thing

I was preparing to write a different blog post when I came across a news article that got me so fired up that I have switched topics for today.  

There is an article in The Guardian that quotes Michael Moore, of the Public Health Association, at length.  He argues that a provision in the upcoming Trans-Pacific Partnership (TPP) negotiations will wreck the Australian government’s ability to protect public health.

This provision, known as Investor-State Dispute Settlement (ISDS), has gotten an astonishing amount of airtime lately.  Nearly all of the commentary around what ISDS does and what it does not do is, frankly, wrong.

So, let’s see if we can straighten out the record somewhat, using the misguided statements attributed to Mr. Moore, written by Gabrielle Chan, as our guideposts.

First, the article suggests that Australia’s efforts to change labeling laws to include clear provisions on country-of-origin could be undermined by the TPP.  The Australian government wants to change the way it labels produce to help eliminate problems like a recent hepatitis A outbreak related to imported frozen berries.  (We will skip over, for now, the issue of whether such labeling would, in fact, reduce the risks of hepatitis or the fact that better product testing might be a more sensible response to such a risk.)

The Australian government, like every government, has always had the right to regulate in the interest of public health, as well as animal and plant health.  This right is enshrined in the multilateral trading system under the World Trade Organization (WTO) and has been carried through in every single preferential trade agreement since then.  There is nothing in the TPP or any other trade agreement that will fundamentally undermine the government’s sovereign right to ensure the safety of its citizens.

No government would ever agree to an agreement that would abrogate this right either.  Thus, the argument that somehow the TPP has forced governments like Australia to take decisions that violate their own rights to regulate simply does not make any sense.  Government officials are just not that stupid.

Second, the TPP’s investor state dispute settlement (ISDS) clause does not give companies the right to sue governments over being given an “unfair advantage” as Mr. Moore claims.  The ISDS provisions of this agreement run to over 60 pages and spell out, as specifically as possible, exactly what constitutes an example of government expropriation of rights under which a foreign investor could consider launching an ISDS suit.

The basic issue that ISDS is trying to address is the following.  Governments sometimes seize property (expropriate) for the public interest.  The clearest example is when the government decides to build a road through your shop.  In many countries, the rules that govern what happens in this situation are murky.  Investors may suddenly find their property seized without warning or without receiving fair compensation for their loss of the shop.

ISDS is designed to make the provisions around expropriation much more clear.  A good clause explains in detail what sort of conditions must be in place when a government decides to act.  Note that ISDS does not prevent the government from acting—if the road must be built through my shop, the government has the right to do so.  Instead, the rules spell out how I am to be notified about this decision, how I will be compensated, and what I can do if I want to appeal what I think is an arbitrary decision or an unfair amount of compensation.

The reason why I, as a foreign investor, might want to use an outside arbitrator to resolve my potential dispute with the government is that I am not always confident that the court system in the other country will rule fairly on my dispute.  Remember that the issue here is whether or not the government has followed the proper procedures.  Not every judge in every country will be willing to find against its own government.

But what I cannot do as an investor is simply claim that I am losing revenue somehow because other products get an “unfair advantage.”  ISDS does not say anything about making or losing money. 

Globally, there are more than 3,000 different bilateral investment treaties (BITS) as well as hundreds of free trade agreements.  Of these, more than 90 percent contain ISDS provisions.  The total number of disputes using ISDS is amazingly small, particularly given the volume of foreign investment covered by this welter of treaties.

What makes this relatively small number of disputes even more impressive is that the earlier versions of ISDS were much broader than later versions.  In other words, the earlier ISDS rules were quite expansive, allowing investors to use the arbitration system relatively easily.  Yet, most businesses do not resort to an outside system but continue to use the domestic court procedures to resolve disputes. 

In part this stems from a lack of certainty about how any given arbitration case will be resolved which adds an element of risk to a decision to sue.  Plus, most investors would prefer to remain in their host country and recognize the chilling effect that suing the government tends to have on their business operations.  Hence, few investors are likely to sue, even if their case would likely be ruled in their favor. 

The case that has made ISDS internationally famous actually highlights the changes underway in newer ISDS provisions.  Philip Morris sued the Australian government using a BIT between Hong Kong and Australia.  The specific issue was Australia’s new regulations on packaging for cigarettes.  Under the rules, it was not just that the cigarette manufacturers had to put graphic photos of damage done to smokers and others or carry large-size warnings about the dangers of smoking.  Instead, the government required every carton, packet and even every cigarette, to look exactly identical to one another.  Manufacturers were required to use exactly the same courier font, same colors, and same information on every single product. 

As a result, it is not possible to tell one manufacturers product apart from another.  For Philip Morris, this represented more than just a change in labeling.  The company argued it would invalidate the intellectual property (IP) contained in their products—particularly the value of their brands and trademarks since consumers could no longer see at a glance which cigarette was which.

We can argue about whether the result is appropriate or not.  The bottom line is that the BIT used by Philip Morris gave investors the right to sue over expropriation of intellectual property rights, as well as other kinds of rights. 

Recent trade agreements have not been so expansive.  Instead, deals like the TPP have much more narrowly defined the scope of potential lawsuits and many have explicitly set aside IP.  This is the main reason why ISDS provisions have grown in length over time, as governments have tried to strike a more appropriate balance between their right to regulate and the right of investors to ensure that their investments are not unfairly seized.

Elizabeth Warren, an American senator, wrote an op-ed this week in the Washington Post that was also problematic.  She argued that there is no point in including an ISDS provision in the TPP because the domestic court structure in countries like the United States, Japan and Australia can be used to resolve these sorts of disputes fairly. 

There are two reasons to continue to push for ISDS in the TPP that Warren overlooks.  First, although it might be true that the American or New Zealand court systems can handle investor disputes, not every TPP member is equally capable.  The current TPP membership includes 12 countries at diverse levels of development and government capacity.  For example, Mexico is rated 79 out of 99 by the World Justice Project Rule of Law ranking project.  Vietnam is 65 on the same scale and Peru is 62.  

Second, the TPP is also intended to expand further.  Even if all current members are able to handle investment disputes, future members might be less able to do so.  Adding in ISDS at a later date will likely be impossible.

Finally, once governments start to cut out ISDS from some agreements, it might be more difficult to include the provisions in other deals.  Thus, if the United States (in particular) wants to include ISDS in a future trade or bilateral investment treaties (like the one currently under negotiation with China), it could be very problematic to have carved out the ISDS provision in the TPP. 

The World Trade Organization, or What Happens When a Tree Falls and No One Cares

Update:  As if to prove my point, check out this headline in today's Inside US Trade:

• WTO Efforts On Doha Work Program Face Obstacles, May Miss July Deadline

  World Trade Organization members are facing such fundamental differences and are at such a preliminary stage in their efforts to devise a work program to conclude the stalled Doha round that Geneva sources expressed doubts they can meet their July 31 deadline for establishing a detailed blueprint for potential negotiations.

There is an ongoing philosophical debate about what happens when a tree falls in a forest and no one hears it.  Does the falling tree make a sound?

In Geneva, the “tree” of the World Trade Organization (WTO) might be in danger of falling.  It might have already fallen.  Either way, very few seem to even care. 

It’s a bit like watching a slow-motion disaster—a flood or a prolonged monsoon rain period that gradually overwhelms the landscape.  In the case of the WTO, the consequences of drowning will be felt (like in many disasters) by the poorest and least able to cope members of the global community.

In working with British trade officials over the past two days, I have explained how the global framework for dealing with trade in services was built in the GATT/WTO.  In the late 1980s, officials struggled with developing new rules to bring some structure, order and predictability to international trade in services.  This was a very tricky task, since services cannot be easily seen or measured.

Yet clearly, some governments were putting up barriers both large and small that blocked the trade of services like engineering, architecture, medicine, education, travel and tourism, construction and so forth.  At the time—in pre-internet days especially—it was not entirely obvious how some services could be delivered across borders easily. 

Officials had to devise systems to classify the mechanisms for providing services and then go on to discuss ways of opening up markets in services sectors and providing fair treatment of foreign service providers.  These discussions required creativity and boldness and a willingness to try something different.

However, since it was all so new, as the last big round of trade negotiations finished, most governments were reluctant to commit very much in the new General Agreement on Trade in Services (GATS).  As a result, from the moment the Uruguay Round ended, services were placed on the “built-in agenda” for further discussions the next time the new World Trade Organization met for trade liberalization negotiations.

It’s been 20 years and we are still waiting for the next round of global services talks. 

The rest of the WTO agenda remains equally stalled.  No new rules have been written for vast swaths of trade at the multilateral level in more than two decades.  The Doha Development Agenda (DDA), launched with great fanfare in November 2001, has gone almost nowhere.

But it actually gets worse than that.  The WTO General Council met in November 2014 and managed to achieve the following (after a nearly 20-year record of failure, missed deadlines, incomplete negotiations, and mounting costs):   

Decides as follows:

•  — Work shall resume immediately and all Members shall engage constructively on the implementation of all the Bali Ministerial Decisions in the relevant WTO bodies, including on the preparation of a clearly defined work program on the remaining DDA issues as mandated in paragraph 1.11 of the Bali Declaration.

•  — As per paragraph 1.11 of the Bali Declaration, Members agree that the issues of the Bali package where legally binding outcomes could not be achieved, including LDC issues, shall be pursued on priority.

•  — The deadline for agreeing on the work program mandated in the Bali Declaration shall be July 2015.

Seriously?  The tree has fallen and cannot get up.

Let’s examine the evidence here.  “Work shall resume immediately and all Members shall engage constructively on the issues.”  Keep in mind that 160 governments are members of the WTO and many keep whole embassies full of staff members permanently based in Geneva to work on trade issues.  These people have, surely, been working on something for the past 13 years.  (If not, taxpayers really ought to monitor this much more closely.)

The WTO ambassadors agreed to create a program on the DDA.  This is a trade agenda first prepared more than a decade ago.  Business is utterly uninterested in rules of the trading game that might have been appropriate at the time but may be completely useless now.  What good is it to discuss the rules and market opening for cassette tape players in a world increasingly ruled by smart phones?

Ambassadors said that they need a “clearly defined” work program to get to an outcome that hardly anyone cares about.  This must surely be the very definition of futility. 

The second bullet point (which is written so poorly that it does not make sense on its own terms) says that officials need to try to get to an agreement in areas where they were unable to get to an agreement.  I suppose it could have been worse—it could have said something like, “We agree that we have agreed on a few items.”

Finally, it finishes with the statement that the work program will be decided in another 8 months.  This is not the same thing as saying that we will finally finish the deal in a few months.  This simply says that they might, possibly, given enough good will and constructive engagement, achieve a plan to discuss the things that they have been discussing for more than a decade.  

Now, there are no doubt individuals who will fiercely argue that the WTO did or has, in fact, accomplished a bit more than I have suggested.  The General Council has agreed on, for example, a different work plan to implement a deal that they all agreed they would implement on trade facilitation more than a year ago (the Bali declaration from December 2013).  There was a little bit on food stockpiling and cotton.

But I think my broader point remains.  Take a look at what was finally agreed on issues of importance to the Least Development Country (LDC) members:

Decides as follows:

1.1. With a view to facilitating market access for LDCs provided under non-reciprocal preferential trade arrangements for LDCs, Members should endeavour to develop or build on their individual rules of origin arrangements applicable to imports from LDCs in accordance with the following guidelines. These guidelines do not stipulate a single set of rules of origin criteria. Rather, they provide elements upon which Members may wish to draw for preferential rules of origin applicable to imports from LDCs under such arrangements.

That’s it.  To help the very poorest members of the community, members ought to endeavor to use some guidelines.  Not necessarily—mind you—guidelines actually developed by the very body that claims to create rules for global trade.  But, rather, to use some guidelines as a starting point in crafting potentially individualized rules that apply only to each member. 

There are so many tragedies here it’s hard to know where to start.  However, when years and years of negotiations yield only the weakest set of guidelines for one part of one element of a deal aimed at the least developed members of a community, it is very hard to face the situation in multilateral trade with any sort of optimism.  Whether or not this particular tree made a sound when it crashed seems to make very little difference. 

Future posts will discuss some of the potential solutions (and perhaps allow my friends at the WTO to continue to talk to me in the future).  Stay tuned!

Blocking Trade With a Label

Trade policy experts frequently discuss non-tariff barriers (NTBs) or non-tariff measures (NTMs) that hamper the movement of goods across borders.  But much of this discussion takes place at a high level of generality with few specific examples.

Businesses on the ground are not particularly interested in vague discussions about NTBs.  Instead, they are occupied with trying to understand and respond to specific issues that prevent their goods from getting into or out of markets.  One underappreciated problem for companies is product labeling. 

Governments can certainly use labeling laws and regulations as a means to protect their markets from foreign competition.  Often, however, government regulatory bodies and legislators view product labels as a necessary tool to protect their citizens from harm or to provide customers with important information.

Global and regional trade rules all allow governments to regulate in the interests of public health, animal health and plant life.  For companies, ensuring safe products with reliably high quality is also important.  Hence, both government and firms would agree that regulations for product labeling are necessary. 

But many governments appear to be asking for excessive information to be included on products.  For smaller companies in particular, onerous regulations on labels can make it impossible for otherwise competitive firms to trade. 

As an example, here are the rules for exporting food products to Laos:

Food distributed directly to consumers in Laos must carry Lao language wording in a font and size that is clearly visible. Foreign language wording is also permitted.

In principle, food product labels are required to indicate the following:

·      name of product

·      registration number for food products

·      name and location of producers or company that packed products for distribution

·      country that produced the product

·      quantity of product (expressed in metric system)

·      important contents of products in percentage in relation to gross weight, in decreasing order

·      production date or expiry date, depending on products

·      if available, advice on storage, preparation methods, use of preservatives and colorings

In practice, it may be that regulations requiring Lao language labels are not always enforced.  Uncertainty is one of the biggest challenges for businesses.  Uneven enforcement of the rules means that companies could be caught out at any moment if the regulations are not strictly followed.

Thailand has equally complex rules around labels, with particularly strict provisions for dairy, baby foods, canned foods, vinegar, beverages, edible oil and fats, and gourmet powder (defined as an article containing monosodium glutamate (MSG) and used for food seasoning).  Food products must be approved and registered with the Thai Food and Drug Administration (FDA). When seeking registration, importers must supply two samples of each product, details of the exact composition by percentage of each ingredient, and six labels. Foodstuffs in sealed containers are subject to specific regulations.

Assuming a company survives this far, food products for shipment into Thailand must show labels in Thai with the following information for consumers:

·      Name and brand of the product (both generic and trade)

·      Registration number

·      Name and address of the manufacturer

·      Name and address of the importer

·      Date of manufacturing and expiry

·      Net weight and volume

·      Any additives used

·      Health and nutritional claims (if any)

Alcoholic beverages must advise the percentage of alcohol content. There must also be a health warning, printed in Thai, on the label or on a sticker, with specific wording.

Cosmetics have to be labeled in Thai with:

·      The name and type of the product

·      The name of manufacturer and address

·      Directions for use

·      Net contents

·      A statement of caution if irregular use may cause injury

These rules from Thailand are so complex, overall, that firms may have to use a local agent or importer to help register foreign products and help with labeling.  Again, for smaller firms, meeting these rules may prove impossible.

These examples may be on the extreme end, but juggling different requirements for labeling of products, boxes, packaging and so forth is a common issue across companies, countries and sectors.  If labeling rules get to be too onerous, firms will simply bypass markets entirely. 

Future posts will continue to highlight specific examples of labeling and other non-tariff barriers as well as explore how free trade agreements can conflict with labeling rules and create outcomes that governments do not always appear to appreciate.