TPP: Investor FAQs

I have spent an amazing amount of time in the past week talking with investors, investment companies, hedge funds and the like about the Trans-Pacific Partnership (TPP).  I thought it might be useful to share some of the frequently asked questions (FAQs) about what the TPP does and does not deliver for investors.

As always, for more details or help figuring out what the TPP might do for your company, please contact us at the Asian Trade Centre.

Who is in the TPP?

12 countries are currently members:  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam

Who is not in the TPP?

Notably: China, South Korea, Taiwan and 6 ASEAN countries including Indonesia, Thailand and Philippines

Who might be in the TPP later?

I am projecting up to 20 members in total, with the addition of South Korea, China, Hong Kong, Taiwan, Philippines, Columbia, Costa Rica and Panama

When will expansion take place?

First we have to get the TPP approved and implemented with the current membership.  Then it will likely need to run for at least a year before anyone is able or willing to talk about expansion.  But if you do the math, expansion is possible in 3-5 years.

Can I see what is in the TPP?

Yes.  The complete 1200 page set of texts, plus 5000 pages of country-specific schedules, and more than 100 side letters are available for your reading pleasure.  Check out your favorite TPP member’s trade website for details or use the official repository documents from New Zealand at: http://www.mfat.govt.nz/Treaties-and-International-Law/01-Treaties-for-which-NZ-is-Depositary/0-Trans-Pacific-Partnership-Text.php

Wow.  That’s a complicated agreement

Yes it is.  Note that the benefits for your specific firm or industry are likely to be scattered across multiple places in the agreement, so you cannot simply check one chapter.  I would note, however, that while the texts are dense, the possible savings or increased business opportunities for most companies makes it worthwhile to invest time and money in figuring out this deal. 

When will it take effect?

Ah.  This gets more complicated still.  The short answer is that the United States has to approve the TPP by a majority vote in both houses of Congress before the TPP can enter into force and companies can start enjoying the benefits of the agreement.  Thus, the timing is really dependent on how fast the Americans can get approval.  Other TPP members are likely to wait until the United States has finished its messy internal procedures before they act.  In a world of miracles, the TPP could come into effect by next fall.  The second default option is entry into force in April 2018.  The third default is any time after this date when the United States joins Japan and at least four other members. 

Do you have to be a TPP registered company or pay local taxes or something to get the benefits of the TPP?

Not necessarily.  The TPP is intended for use by TPP member firms for use in buying and selling goods and services with other TPP members.  But what constitutes a TPP member firm is not the location of the headquarters or the tax domicile address.  It gets a bit complicated, but basically what matters most is where, in geographic space, a firm creates and delivers products or services.  A firm that makes orange juice inside Malaysia is likely to be a covered entity even if the headquarters of the firm is in Amsterdam. 

Can I link up the TPP with other trade agreements?

No.  You cannot take orange juice made in Malaysia and sell it in Europe using the TPP.  The TPP is intended for companies buying and selling from TPP member countries into other TPP member countries.  While member firms are likely to receive the greatest benefits from sourcing from TPP countries, note that the content in goods need not be 100% from TPP countries.

What does the TPP do for investors that they don’t get otherwise?

Please review the specific provisions of the investment chapter (also read my blog post from November 11).  In brief, there are several key elements that make the TPP extremely helpful for investors.  First, TPP investors have significantly enhanced market access.  Basically, in the TPP, if a sector is NOT listed, it is opened for investment.  Across all 12 members, the number of closed sectors or areas is extremely small and many of the closed areas are unlikely to be of much commercial interest to investors in any case.  Second, TPP investors receive better protection of investments.  The details are many but basically investors should have less risk and uncertainty arising from TPP investments in the future.

So, who wins and who loses in the TPP?

This is sneaky.  If you are sitting in a big investment company, bank or hedge fund, you should be paying for this kind of information!  All I will say here is that previously protected sectors may offer the most substantial benefits and market opportunities.  Countries that were less open in the past will likely reap more benefits, all else being equal, than countries that have been extremely open.

What about non-members?

The potential implications of the TPP are substantial.  Savvy firms will be carefully combing through the agreement to determine what benefits might apply and thinking hard about how to structure the company to take the greatest advantage of this deep and broad set of commitments.  Not everything changes, of course.  Firms that had substantial markets outside the TPP may continue to operate without impact.  But the competitiveness of some firms may shift and create new opportunities that weren’t present before.  Trade and investment may well be shifted from non-TPP members to TPP countries in the future.  Whole factories could be unbolted and moved, however the more likely outcome is a gradual change in suppliers or customers or increased investments in member countries and a decrease in investment in non-members. 

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

Fantasizing about a Free Trade Area of the Asia-Pacific (FTAAP)

The diplomatic calendar in Asia gets extremely busy in November.  Over the years, officials have expanded the number of meetings attached to the Leader’s Meeting of APEC.

Last week in Manila, the leaders of APEC economies gathered and wore fancy hand embroidered shirts for this year’s “family photo.” In addition to the various meetings for APEC itself, some of the leaders also met on the sidelines for a review of the Trans-Pacific Partnership (TPP) and the Pacific Alliance (PA).  In between, many of the leaders also held bilateral meetings.  Finally, officials met in Kuala Lumpur over the weekend in a host of meetings associated with ASEAN including the East Asia Summit (EAS). 

These meetings addressed more than just economics.  But in trade, three things stood out.  As APEC chair, the Philippines consistently promoted small and medium enterprises (SME) across the overall agenda.  Small companies form the backbone of most APEC economies and a year of focus on their needs was helpful.  Second, ASEAN leaders celebrated the forthcoming launch of the ASEAN Economic Community (AEC) at the end of the year.  Finally, the APEC Leader’s Declaration highlighted the importance of achieving broad goals of free and open trade and investment.

This commitment reiterates past statements by APEC about the importance of the eventual Free Trade Area of the Asia Pacific (FTAAP).  APEC was launched in 1989 as a non-binding, advisory trade body that currently includes 21 member economies.  Economic benefits from sustained, regional trade liberalization would be enormous.  Member economies now account for 40 percent of the world’s population, 55 percent of the world GDP and 44 percent of world trade.

Starting in 2010, leaders agreed that the plans to get to an FTAAP could take different formats.  APEC would provide “leadership and intellectual input into the process of its development, and [play] a critical role in defining, shaping and addressing the ‘next generation’ trade and investment issues that an FTAAP should contain.”  In 2014, China pushed for a comprehensive study on how a 21 member economy agreement might take place.

Officially, leaders have endorsed several pathways to reach FTAAP.  APEC currently has no ability to negotiate directly, so the institution requires an outside mechanism to reach a deal.  Two of the officially sanctioned pathways to reach the FTAAP are now in play:  the 12 party Trans-Pacific Partnership (TPP) and the 16 party Regional Comprehensive Economic Partnership (RCEP). 

The hope of FTAAP backers has always been to allow both tracks to merge in the end to create an APEC-wide package of commitments.  In general, these hopes are likely to be dashed for several reasons.

Economies that have negotiated a “high quality” agreement in the TPP will prefer everyone to simply sign on.  From the earliest days of the TPP, membership has been opened to all APEC economies.  Not all have chosen to join and many of the remaining APEC economies are not eager to sign onto TPP-level commitments, including opening nearly all goods--and particularly agricultural trade--at (mostly) zero tariffs, new and expanded openings in services and investment markets, new rules on intellectual property protections, opening of government procurement markets, signing up for labor and environmental protection provisions in a trade agreement, and so forth. 

If economies outside the TPP are reluctant to step up to this deal, perhaps RCEP could serve as a better vehicle for moving ahead with trade liberalization inside APEC.  It is not clear how ambitious RCEP might become, but early signs suggest a significant gap in enthusiasm for market opening between the two deals.  For example, on goods trade alone, RCEP may see a “tiered” approach with different percentages of commitments forthcoming from some members to other members.  Services and investment provisions will likely have less opening and fewer protections.  While the negotiating agenda is expanding in RCEP it is unlikely to be as deep or broad. 

Hence, allowing RCEP to become a defacto platform for FTAAP would also require TPP member countries that are outside RCEP (including all of the Americas) to agree to fewer protections and less market opening.  The practical consequences of doing so would be modest, as most firms would likely opt to use the broader, more comprehensive TPP provisions if at all possible, rather than the shallower commitments in RCEP/FTAAP.

Merger of TPP/RCEP also contains some additional problems.  Not all APEC members are included in either agreement.  Four are currently left out of both: Hong Kong, Papua New Guinea, Russia, and Chinese Taipei. 

While some theoretical literature speaks eloquently about “multilateralizing regionalism,” in practice, this is devilishly difficult to do.  RCEP itself can be seen as an attempt to follow exactly this prescription—folding five different ASEAN +1 agreements (with China, South Korea, Japan, India, Australia and New Zealand) into one.  But officials have struggled to even exchange market access offers for one another in goods, despite two years and 10 rounds.  What countries offer to one partner may, or may not, be something they are ready and willing to offer to another. 

Converting RCEP into an FTAAP could contain similar challenges.  The nine excluded partners from RCEP (Canada, Chile, Hong Kong, Mexico, Papua New Guinea, Peru, Russia, Chinese Taipei, and the United States) might have dramatically different ideas about what should/should not be folded into FTAAP.  In addition, whatever commitments RCEP members have made to one another might be altered with the addition of new participants, as RCEP members could be quite uncomfortable making the same offers to a new grouping.

RCEP also contains non-APEC economies (Cambodia, India, Laos and Myanmar). Converting the agreement into FTAAP may mean bringing non-members into APEC or somehow cutting these participants out of the future, larger agreement.  Either option could prove tricky in practice.

In short, it is unlikely that a satisfactory FTAAP agreement can be created by merging RCEP with TPP or by morphing one or the other into a new agreement in the future.  Hence, if APEC wants to create an FTAAP that contains all members or gives all 21 member economies the option of joining, it should start from the beginning with all 21 members. 

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

TPP Impressions: Competition and State Owned Enterprises (SOEs)

In our continuing effort to unpack the Trans-Pacific Partnership (TPP) agreement and do the hard work of pouring over long, dense and frequently mind-numbingly dull pages of the trade agreement, this post reviews the rules and schedules for competition and state-owned enterprise (SOE) chapters (16 & 17). 

As might be expected for someone sitting in Singapore for more than a decade, questions have come in thick and fast regarding the specifics of what will happen on SOEs.  With the caveats up front that I am not a lawyer and can be hesitant to discuss highly sensitive domestic issues, it seems that these chapters deserve at least a blog post.  They demonstrate the careful balancing act found throughout the TPP between encouraging fair trade between members and allowing governments to pursue a variety of public policies in the public interest.

Free trade agreements (FTAs) do not always cover competition policy and none has tried to address SOEs directly.  Why include these highly sensitive topics in the TPP?  This question may seem even more puzzling because, depending on how SOEs are defined, every state is likely to harbor at least one.  For some TPP member countries, SOEs account for significant shares of the domestic economy.  So why bother with fraught negotiations in this area?

The primary reason given by TPP officials is that many of the benefits of an FTA could be undermined if competition in both goods and services is not free and fair.    Three elements are especially important to ensure fair competition:  non-discrimination, transparency and due process. 

Chapter 16 spells out in detail the rules related to ensuring how all three objectives will be met by member states, including all the necessary legal procedures to be followed.   Member states are allowed, as in the rest of the agreement, to have transparent exemptions for public interest or public policy grounds.

Given the different histories of the member states in addressing competition policy (and policy vis-à-vis SOEs more specifically) the agreement also includes provisions for cooperation between members.  Member states are required to have and to follow domestic rules to protect consumers from fraudulent and deceptive commercial activities.  

Note, however, that Chapter 16 is not subject to dispute settlement using TPP mechanisms (SOE provisions, by contrast, in Chapter 17 are enforceable).  Brunei was granted an extra time to complete the creation of domestic competition policies and laws, including the creation of a national level competition authority. 

The far more controversial portion of competition can be found in Chapter 17 on SOEs.  Again, depending on how these are defined, TPP members have many entities, agencies, and companies that might reasonably fit a definition of "state owned."  Early discussions in the TPP focused on strengthening the competition chapter sufficiently on its own to ensure competitive practices and compliance with anti-monopoly regulations.  However, this was seen as insufficient given the scale and scope of some current (and potentially future) TPP member SOE firms. 

Hence TPP officials crafted an additional 36 page agreement, accompanied by country-specific annexes detailing exceptions to SOE commitments for individual members.  As noted further below, many of these exceptions are quite sweeping in nature.  The final result is likely to represent a modest first-step forward in disciplining unfair advantages that SOEs can have in markets.

After much painful wrangling, officials settled on the following definition of a covered SOE: an enterprise engaged in commercial activities with either: direct government ownership of more than 50% of share capital; ownership interests that results in control over more than 50% of voting rights; or where members have the ability to appoint the majority of members of the management body (members of the board or equivalent).  Note that TPP member states are not required to privatize SOEs and are not prevented from creating new ones. 

The specific area of focus is ensuring that SOEs compete fairly when they are engaged in providing commercial activities.  Commercial activities are actions undertaken by an SOE for the purpose of making profits (not-for-profit or cost-recovery actions are excluded) while making goods or services that are sold to consumers in situations where the firm decides how much to provide and at what price.  

This chapter contains extensive legal language to try to focus the rules as specifically as possible on certain entities while allowing others to continue as before.  Broad exceptions include SOEs involved in monetary policy like central banks, certain types of financial services suppliers, sovereign wealth funds, pension funds, and entities engaged in government procurement.

All other SOEs are supposed to operate using non-discriminatory commercial principles, including when purchasing or selling goods and services directly, or when working with other SOEs.  The TPP includes new transparency rules that require members to clearly identify SOEs and specific programs of assistance (when requested to do so by a TPP member). 

State owned firms can receive benefits that non-state owned firms do not receive.  The TPP tries to address some of these issues by requiring that any non-commercial assistance should not harm competitors.  Chapter 17 lays out at length the rules around what constitutes injury and how such claims should be addressed. 

Not every SOE is subject to the rules.  Annex 17-A outlines the threshold level an SOE must meet: currently set at 200 million Special Drawing Rights.  (The website CoinMill.com shows the following conversion rates: 1 million SDRs=USD$1.38 million.)  This threshold is to be adjusted every three years.  New negotiations on potential extensions of the agreement are due within five years of entry into force.

Most of the SOE commitments apply only to firms operating at the federal level of government.  Annex 17-D outlines many extensive, specific exemptions claimed by each TPP member state for sub-federal (or sub-central) SOEs.  Singapore, which does not have a sub-federal level at all, created a special annex, 17-E, to cover its own exemptions.  Malaysia also created a special annex for Permodalan Nasional Berhad and Lembaga Tabung Haji. 

Other exceptions to the SOE rules can be found in the country-specific annexes IV to the agreement.  Recall that, unless specific non-conforming measures (NCMs) are listed, SOEs are subject to the terms of the agreement.  Hence, many governments appear to have been extremely conservative in listing NCMs or exceptions to coverage.  As an example, although the agreement clearly notes in multiple places that sovereign wealth funds are excluded, Singapore specifically listed a variety of activities that may be related to Temasek and GIC that can continue after the TPP enters into force.

NCMs can include either broad categories of activities or list specific entities.  An example of a broad exemption is Vietnam’s coverage of “all current and future activities” of SOEs owned or controlled by the Ministry of Defense of Viet Nam or the Ministry of Public Security of Viet Nam, except Viettel Global JSC., and enterprises exclusively engaged in commercial activities not related to national defense, public order or public security.  Malaysia carved out the broad category of all Bumiputera enterprises and specifically listed commitments related to Petroliam Nasional Berhad (PETRONAS), its subsidiaries or any new, reorganized or successor enterprise.

The scale of exemptions like these, coupled with high threshold levels and application of the rules to SOEs largely at the federal or central level only, means that the extent of disciplines related to SOE activities in the future is hard to discern.  Since the TPP represents the first time governments have tried to address competitiveness challenges arising from SOE actions, it may have been wise to take limited steps.  Many governments view their own SOEs as providing important or even vital services and were clearly reluctant to wade in too deeply with new commitments at this time. 

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

TPP First Impressions: Investment

Hanoi--Chapter 9 of the Trans-Pacific Partnership (TPP) addresses a critical issue for many firms:  the rules of the game that apply to foreign investors in TPP countries.  Currently, TPP investors can face a complicated thicket of regulations, shifting rules, and informal practices that make it difficult or even impossible to open and maintain businesses and investments in some TPP member countries. 

This chapter aims to simplify and clarify the rules for inward investment by TPP firms.  Doing so should make it easier for firms to operate across TPP countries and help unleash new growth for member countries.  It may ultimately be the most important chapter for a member like Vietnam.

While most of the attention has been given to one aspect of this chapter, Investor-State Dispute Settlement (ISDS), let me begin by highlighting the rest of the rules in the chapter before turning to ISDS specifically.  As in many TPP chapters, the legal language can be dense and should be used with guidance from a good legal team that has experience decoding other trade agreement provisions.

When TPP parties speak of investments that are covered, they have a broad range of activities in mind, including: an enterprise; shares, stock and other forms of equity participation in an enterprise; bonds, debentures, other debt instruments and loans;  futures, options and other derivatives; turnkey, construction, management, production, concession, revenue-sharing and other similar contracts; intellectual property rights; licences, authorisations, permits and similar rights conferred pursuant to the Party’s law; and other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages liens and pledges.

The basic point of the chapter is to ensure that investors are granted greater certainty with fewer risks of government action that could negate or destroy their investments. 

Investors are also promised free transfers of things like profits, dividends, proceeds, and payments from the investment in and out of the member country.  Investors are also granted the ability to invest without being subject to certain performance requirements, such as a possible demand that investors export a certain amount, or include a certain percentage of local content, or transfer technology as a condition for investment permission. 

The rules create opportunities for firms, but are not a guarantee of success.  Nothing in the chapter promises profits or will compensate investors for normal business risks and losses. 

What is spelled out in detail, however, are the rules regarding what happens when a TPP member government directly or indirectly seizes property through expropriation (nationalization). Government can, it should be emphasized, continue to make policy in the public interest and render decisions that could invalidate investments.  For instance, a government can legitimately order the demolition of shops if these stand in the way of land needed for new roadways.  However, the TPP makes clear that the government must follow certain policy steps prior to expropriation and provide adequate compensation.   

In most of the rest of the TPP agreement, member states are legally bound to follow the rules.  If they do not, other member governments can challenge their behavior, using the provisions in the dispute settlement chapter. 

Investors also have recourse to another mechanism for ensuring compliance.  Section B of the chapter spells out in detail the rules around ISDS that allows investors to directly sue a government for breach of the agreement (illegal seizure of property).  The lengthy passages devoted to ISDS spell out in detail how investors can claim arbitration to resolve the dispute.

Investors, like all business owners, also have the right to use domestic court procedures to resolve issues.  However, if the government seizes property, it is not unreasonable to assume that some court systems in some countries might not view the matters of the case dispassionately or may hesitate before deciding against their own government.  In these situations, investors have the ability under the TPP to have the matter dealt with by arbitration. 

The concerns about ISDS generally involve a few points.  First, it means that domestic government decisions could be overturned by a foreign entity.  TPP officials were keenly aware of this possibility and have tried to ensure that governments maintain their right to regulate and make laws in the public interest while balancing the needs of investors.  Early versions of ISDS, as found in many of the nearly 3000 bilateral investment treaties (BITs) and free trade agreements (FTAs), had much less precise rules around the use of ISDS.

Second, firms could use ISDS to sue governments with great regularity.  In practice, this has not happened.  Companies do not launch complaints very often.  I would argue that ISDS is a bit like a “nuclear option.”  This is an approach that can only be used when all other approaches have been tried and found lacking, because a company that complains about a foreign government is not likely to find a hospitable environment for doing business in the country in the future. 

Third, ISDS can be used for any type of breach.  This is not correct for the TPP, which takes great care to detail the conditions that warrant the use of ISDS.  Annex 9B spells out in detail exactly what constitutes an expropriation for the TPP. 

Just like the services commitments discussed in yesterday's post, understanding TPP investment provisions requires carefully reading the specific text with the rules that apply to all 12 parties and then sorting through the annexes.  Note that Chapter 9 contains several short annexes in the text—several of which are country specific or applicable to, for instance, Peru, Mexico or Canada.

Investors or potential investors will also need to carefully review the country-specific annexes that list all non-conforming measures (NCMs).  Just like the services negotiations, investment commitments were made on the basis of a negative list.  If your sector or industry is NOT listed, it means you have access.

The list of NCMs for investment also contains a range of prohibited investments or restrictions on full access for TPP members.  Some of these restrictions may be problematic as the exemption can be deep and broad while others are likely to be of limited commercial significance. 

Canada, for instance, maintains the right to regulate the sales and marketing for air transportation services, as well as many rules around maritime services and transport, and maintains a possible cultural exception that allows the government to create rules or subsidize books, videos, music and other forms of cultural expression.  Malaysia reserved the right to review materials for consistency with domestic decency standards.

Japan has an odd commitment that allows it to create any measure it wants for “telegraph services, betting and gambling services, manufacture of tobacco products, manufacture of Bank of Japan notes, minting and sale of coinage, and postal services in Japan.”  Vietnam bundled together potential restrictions on the manufacturing of paper and buses with more than 29 seats.  The complicated nature of these commitments—combining things that may not appear logically connected—highlights the importance of reviewing the entire TPP document for hidden barriers.

Malaysia has scheduled a broad exception for Bumiputera policies.  These are the programmes that provide advantages for Malay citizens, somewhat akin to affirmative action programmes used elsewhere.  While considerably less sweeping, several other TPP members also lodged NCMs to protect native peoples.

How much these measures will affect your potential investment depends on whether you had hoped to manufacture buses with more than 29 seats or planned to operate a taxi or create movies you wanted to show in some local theaters.  For most investors, however, the TPP will grant significant new access to investment markets.  Equally important, the investment chapter and its provisions help ensure that the rules that allow such foreign investment will not shift overnight in the future.  For most investors, greater certainty and less risk are always helpful.

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

Initial TPP Impressions: Trade in Services

While market access for goods in the Trans-Pacific Partnership (TPP) remains subject to some exceptions and complications, the TPP exceeds my expectations for the quality of the services commitments. 

TPP member states might have been expected to exclude some services subsectors, but generally this did not happen.  The services elements of the TPP may turn out to be the most ambitious aspect overall.

Services are increasingly important to today’s globalized economy.  Our research shows that even for manufacturing firms, services account for somewhere between 30-70 percent of the total value embedded in supply chains.  Failure to provide market access with minimal conditions attached would have strangled the efforts of many firms trying to compete across the TPP. 

Services are also a critical mechanism for smaller firms or companies in more remote, geographically distant locations to plug into larger supply chains.  Even micro enterprises can deliver services via e-commerce platforms.

Trade in services is divided into 12 sectors and approximately 160 subsectors, ranging from business services to construction to travel to retail.  In many Asian free trade agreements (FTAs), services commitments are woeful.  Members have opted to keep many sectors and subsectors closed to foreign participation or have opened only areas with limited or even zero commercial importance. 

The TPP does not take the same approach.  Companies should find it easier to deliver services across member states, particularly because the TPP does not allow, for example, quantitative limits to be placed on services.  In other FTAs, members frequently allow in foreign medical clinics, but may limit the total number of such clinics to one or two facilities.  Or caps may be placed on the total number of employees or boards of directors. 

In the TPP, by contrast, foreign companies can deliver services without having to have a representative office or be a resident to serve the market.  The TPP requires that members treat foreign service suppliers just like local service suppliers.

To understand TPP commitments, it is necessary to do two things.  First, the text of Chapter 10 applies to all TPP members.  This section lays out the rules and regulations that member states agree to follow for services.  Note that services and investment provisions are often bound together, particularly in the annex schedules, as some services are difficult to deliver without a presence locally.

Second, in cases where members know that they are not in compliance with these sweeping rules and have no aspirations to change the domestic situation to come into compliance, members can schedule, in their annex, any areas where they are out of line with the incoming rules.  This is called a list of non-conforming measures (NCMs) and they are subject to negotiation among all 12 parties.

Reading these schedules to help determine what services can actually be supplied to any TPP market from another TPP market is trickier than it appears.  If your subsector is NOT listed, then it is opened for foreign competition from TPP partners. 

This mechanism for scheduling TPP openness is actually a far more progressive method than the one used in most other FTAs.  Under the “negative list” approach, members are obligated to open everything, unless they specifically note their objections in the annex at the outset. 

Using a negative list does two important things.  First, it ensures that new services are automatically opened for TPP competition without the necessity of tedious negotiations that might take years to conclude.  Second, it helps governments be more ambitious, since every exception to the rule has to be noted in full and new barriers cannot be easily created later. 

Negotiating on a negative list can be intimidating the first time officials try to use this approach.  The automatic response is to simply list all 160 subsectors as closed and then slowly, slowly peel off subsectors from the initial list as negotiations progress. 

Note that, mirroring World Trade Organization (WTO) handling of services, financial services and telecommunications have their own chapters in the TPP.  Both have long been regarded as “backbone” service sectors which warrants special handling.

Some TPP countries appear to have been extremely cautious in their scheduling and to hedge against potential problems and gain future policy space by claiming a broad NCM.  Note that, for some TPP members, these exceptions may not ever be used. 

In other countries, the NCM may not matter overly much, as they are taken in areas of likely limited interest to other members.  For instance, Japan requires that persons in the motor vehicle disassembling repair business must have a business in Japan.  Assuming that electronic repairs do not count, it could be hard to imagine how a person might disassemble a car from overseas.  Individuals engaged in specifying measurement instruments have a host of rules to continue to follow in Japan.

For countries like Vietnam and Malaysia that have never used a negative list before, I would have expected that the peeling off restrictions exercise would have still left an extremely long NCM list.  However, a glance at Annex 1 shows that both members largely matched the ambition levels of other partners. 

For example, Vietnam (like many other TPP member countries) will continue to have some restrictions in place on foreign lawyers.  Tour guides continues to be a sensitive area for some members, with limited (or no) foreign access. 

But an examination of the schedules also throws up some surprises.  Vietnam has an odd rule that appears to make it more difficult to open up a second (or more) retail establishment, although the measure is meant to expire within five years after the agreement takes effect.  Services attached to agriculture, hunting and forestry still require a local partner.  Major anniversaries in Vietnam must be marked with local film screenings only.  Canada has a surprising number of rules around owning duty free shops. 

My personal favorite—so far—is a rule that allows amusement park investors to come into Vietnam, but only if they invest more than US$1 billion.  Less than that and you are subject to onerous criteria that will likely to make it impossible to build the amusement park of your dreams.   

Other restrictions across TPP members could be more problematic, including a host of rules around broadcasting rights, some restrictions on services and investment in energy or mining, and rules on internal land and sea transport that can prevent TPP parties from delivering these services. 

Over time, it is possible that some of these restrictions will be relaxed.  In the meantime, if a country did not schedule a NCM, it cannot easily create a new one to block market access to TPP member countries in the future. 

In short, like other elements of the agreement, the basic texts have to be read carefully with the country-specific annexes.  While the TPP may appear to have extensive carve-outs or broad exceptions in some specific areas, these are actually significantly fewer in number and cover a handful of subsectors that may be viewed as commercially meaningful to some TPP members.  Certainly, compared to other agreements on services, the TPP may be setting the standard for high quality in this area.

[Note that Japan’s market access schedule for goods is now fixed—it no longer ends, as noted in my last post, at chapter 65 but includes all industrial goods.]

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