Using the Trans-Pacific Partnership to Foster Value Chains

APEC Currents December 2015

Companies are increasingly structuring or restructuring their value chains to take advantage of new opportunities. In a value chain world, firms have been using advancements in technology and transportation to fundamentally restructure their existing operations.  Companies can increasingly locate exactly the right “slice” of an operation in exactly the right geographic location. Even the smallest firms in remote locations can plug into chains and deliver goods or services to other companies or directly to consumers. 
 
New trade agreements, and particularly the Trans-Pacific Partnership (TPP), should make it even easier for companies to create or contribute to value chains across the member countries.   
 
The TPP brings together 12 countries:  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. The agreement is complex and broad with 30 chapters and includes many changes at the domestic levels for member countries.
 
Under the agreement, companies can gain substantial benefits from being located in TPP member countries and selling goods and services into other TPP member markets. 
 
The most obvious change in a post-TPP world will be the reduction of tariffs. On the date of entry into force of the agreement, 90% of all goods tariffs in all 12 members will drop overnight to zero.  The remaining tariffs will also drop, over time, with many eventually becoming duty free.
 
The tariff reductions mean that firms may no longer have to contend with tariff peaks—specific items or sectors where tariffs can easily reach 30, 50, or 150%. In many of these markets, companies hoping to export products have not been competitive.  With the reduction in tariffs, new TPP markets should now be attractive to many firms.
 
Dropping duties to zero also improves the prospects for firms to add value to products at home.  In the past, tariff escalation meant that low tariffs might apply to raw and unprocessed materials like raw coffee beans. But once processed, like roasted coffee beans, firms might face higher tariffs. Worse still, ground coffee might draw higher tariffs yet and a bottled coffee drink could have had tariff rates so high as to be completely impossible for firms to compete with locally produced bottled beverages.
 
After the TPP is implemented, however, all tariffs may drop to zero, including reductions in processed goods. This is especially critical for food manufacturers who can take advantage of duty free access for raw, roasted, and ground beans as well as bottled coffee. Firms can shift into higher-value sectors now and are not limited to exporting only unprocessed goods and raw materials to remain competitive.
 
The rules of origin (ROOs) in the TPP are the same for all products across all 12 member countries. This means that once a product qualifies for preferences in one country, it automatically is eligible for preferences such as reduced or zero duties in all members.
 
The TPP also allows cumulation across TPP member markets. This lets firms add up (or cumulate) the materials and inputs for any given good from across all 12 TPP markets.  For example, a firm that produces packaged soups can add up vegetables, broth and noodles added from TPP markets like Australia or Malaysia to “count” towards meeting the overall rule of origin for soup exported to Canada, Japan or the United States. 
 
Cumulation across a dozen participants means that the TPP is likely to be more helpful for companies than bilateral free trade agreements agreements where firms can only include the contents sourced from the two partners. Bilateral deals also only work for selling the finished goods back to the partner.
 
Each product or tariff line has a specific rule of origin attached.  Firms will need to research their product categories to determine how best to meet TPP origin criteria. (Soup 21.04 requires a change in tariff heading, so nearly all soups should easily qualify as “TPP originating.”)
 
The changes in tariffs are to be accompanied with new procedures in customs. For instance, TPP members are going to make a host of changes designed to speed up and reduce costs at the borders. 
 
Many firms will be eligible for self-certification of origin, eliminating the need for time-consuming trips to chambers of commerce or other bodies to obtain a certificate of origin (CO).  Customs officers will grant firms advance rulings that will clarify the specific rules of origin to be applied to particular products and ensure that these classifications will not shift for a year. As noted earlier, once a product qualifies for benefits, it qualifies under the origin criteria for entry into all 12 member markets.
 
The agreement also includes specific rules for express shipments and other expedited delivery processes. Customs officials are to allow pre-arrival processing and guaranteed release within specific time periods. 
 
Supply chain and logistics companies themselves may also benefit directly from TPP changes.  This is because the agreement also opens up services sectors for easier access to TPP firms. 
 
Other key services may include back office processing of all types, legal services, HR, accounting, transportation, warehousing, or construction.  The method of opening service sectors is also important, as member governments promised to allow TPP member participation in services sectors automatically, unless an individual government has specifically exempted a service from market opening. The actual numbers of reservations lodged by member governments are relatively modest.
 
TPP firms also have significantly improved investment opportunities in member countries, including market opening and better protection of investments.
 
The TPP also contains the first agreement on e-commerce. For smaller firms, this chapter may be particularly important as small companies can more easily plug into supply chains using e-commerce. 
 
Note that firms need not automatically be registered, headquartered or file taxes in a TPP member country in order to count as a TPP firm—what matters is largely where, in geographic space, production takes place.  The final products must also be sold into TPP markets.  It is not possible to use the agreement and qualify for benefits into non-member markets. 
 
As an example, a company cannot create soup in Singapore using largely TPP content and sell this with zero tariffs into the EU. The EU is not a participant in the TPP and none of the provisions of the agreement apply for items destined for European markets. Soup destined for the Japanese or Australian markets, however, is eligible for TPP benefits since Japan and Australia are partner countries.

TPP negotiations are complete, but domestic procedures must be completed before the deal will be implemented. In general, officials created three means to bring the agreement on line.  First, if all 12 members finish domestic procedures within 2 years, the deal takes effect 60 days after the last member agrees to implementation. If, however, all 12 have not agreed within 2 years of final signing, then the TPP can automatically take effect in 26 months if at least 6 members representing 85% market share (in practice, the United States, Japan and four other members) have completed their domestic procedures. Finally, if the internal approvals process drags on longer than two years, the TPP can come into effect 60 days after the 6th member (at least) finishes domestic procedures for implementation.
 
The agreement provides potentially significant benefits for qualifying firms and products.  Companies may find that existing supply chains should be altered or adjusted to allow specific products to qualify for TPP benefits into TPP member markets. Some changes in sourcing of inputs and raw materials may be necessary to reach the necessary level of content for the agreement to be applicable.
 
This complex trade deal, however, will also require an investment by companies that intend to use the agreement into understanding specific provisions.   Firms must determine which benefits may or may not apply. But the payoff from successful use of the TPP could be substantial.
 
The release of the TPP texts also allows other APEC economies to study the agreement carefully and consider how similar rules and procedures might be implemented in different settings.  For example, some of the provisions currently found in the TPP might be usefully picked up in the ongoing Regional Comprehensive Economic Partnership (RCEP) negotiations. APEC members may also want to think about how rules that help foster value chains could be incorporated into a potential Free Trade Area of the Asia Pacific (FTAAP). 
 
Finally, since the benefits of the TPP could be substantial for many companies, excluded parties may need to examine their own domestic rules and regulations with a keen eye towards improving competitiveness conditions on the ground.  Firms are mobile and will move to take advantage of opportunities for growth and expansion wherever they find them. Countries that have an uncertain or risky policy environment or expensive, time consuming or complicated procedures in place may not be well positioned to compete going forward. 

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

Lipstick, Bicycle Chains and Durians: All Free Trade Agreements Are Not The Same

Free trade agreements (FTAs) have been mislabeled—they ought to have been called preferential trade agreements (PTAs) instead.  The agreements are not so much about “free” trade as they are about giving preferences or benefits to member state firms that non-member firms do not receive.  The net effect might be more “freeing” but this is not the same thing as giving the same set of benefits for everyone. 

We can argue about whether or not granting different access to various partners is helpful or harmful.  Rather than engage in a philosophical discussion about the merits of global vs. regional vs. bilateral trade deals, this post highlights differences in one important element of existing trade agreements:  various tariff preferences granted for specific products into just one country.  Showing how existing trade agreements signed by Vietnam handle the same limited set of products like lipstick, bicycle chains and durians helps illustrate variations across FTAs.

The primary outcome of existing FTAs has been to grant member firms lower tariffs than non-members receive.  FTAs may do lots of other economic things, including opening up markets for services or investment or creating new commitments or rules for intellectual property rights or competition policy.  But most of the focus and use of existing FTAs has been to receive lower tariffs (that can be thought of as a tax on imports) than firms could receive before an FTA came into existence.

Whenever we assess “quality” of an FTA, a key element is the extent to which the agreement provides new market access for firms by lowering tariffs on goods.  Countries can agree to make no new commitments at all—the existing tariff on imported goods in a category remains unchanged (at the MFN level that applies to all WTO members).  Or countries can agree to lower tariffs in certain product categories.  They can do so all at once at the very beginning of the deal or they can do so gradually over time (in even stages or in “lumpy” reductions where a tariff might drop a little bit up front and steeply at some distant time). 

More ambitious deals generally offer 1) deeper tariff cuts on 2) more products in 3) a shorter time frame.  Because FTAs are the result of negotiations, the content of any individual FTA varies—all parties have to agree on the final commitments.

As newer agreements get signed, the old agreements are not retired.  Instead, companies can opt to use whatever deals provide the most useful benefits for their products.  For many products, FTAs provide no difference in tariffs as the MFN rate is already 0.

But for other items, FTAs do provide benefits that can vary by agreement.  To see how this works in practice, consider specific products that firms may want to export to Vietnam.  Vietnam has multiple agreements in force, mostly centered on ASEAN.  The country has enthusiastically been signing new deals, including the TPP and a bilateral agreement with the EU and another with South Korea, but these have not yet taken effect.

A company that wants to ship lipstick into Vietnam from a country with no existing FTA has to pay the MFN rate of 20%.  But firms in ASEAN can ship lipstick into Vietnam with no tariff at all using ATIGA.  The ASEAN-China agreement (ACFTA) also allows Chinese companies to ship lipstick duty free to Vietnam. 

As with any FTA, firms do have to meet rules of origin (ROO) criteria to be eligible to receive lower tariffs.

Korean companies currently have no benefits for lipstick in their ASEAN-Korean FTA (AKFTA).  This means that, while many Korean products receive lower tariff rates on products using this agreement, lipstick exporters are out of luck and must pay the MFN rate of 20%. 

Japanese exporters are granted a slight duty reduction at 20% in the ASEAN deal (AJCEP) but a bilateral agreement between Vietnam and Japan gives Japanese companies an improved deal at 14.5% (VJEPA). 

Australian and New Zealand (AANZFTA) companies get access to the lipstick market of Vietnam with a 10% duty and India receives (AIFTA) a reduction to 20%. 

Under the TPP, the 11 parties in the agreement can look forward to 0 duties, but only after the current rate drops in four equal installments across 4 years.  Hence, in relatively short order, Japanese, Australian and New Zealand companies can expect to receive the same 0 duty preferences that their ASEAN competitors already receive.  Since the TPP will grant better benefits than existing deals, firms should start using the TPP.  For American or Mexican or other TPP lipstick companies that only had MFN rates before, the post-TPP preferences are especially important.

Vietnamese customers might be asking whether all these trade deals mean that they can expect to pay less for lipstick in the future.  The answer is that they might—if firms decide to pass the tariff savings through into lower prices.  Firms could also opt to keep the savings in the form of higher profits or greater shareholder returns. 

It’s also possible that lipstick manufacturers will not take advantage of FTAs, as the market in Vietnam is not attractive enough—for whatever reason—to ship lipstick no matter how high or how low the tariffs might be on the product.

The same uneven set of benefits can be seen for other firms shipping goods to Vietnam.  Bicycle chains are surprisingly complicated, with multiple categories of chain.  For a roller chain of expanded metal (HS73151111), the MFN rate is 40%.  ASEAN firms pay a 5% duty.  Chinese firms pay 20%.  Korean firms have no specific benefits under AKFTA and pay 40%.  Japanese firms (under both the ASEAN agreement and the bilateral deal), Australian and New Zealand firms all pay 35%.  Indian firms are charged 36%.  TPP members will pay 0 duty in four years.

Durians and many other fruits are subject to an MFN rate of 30%.  But ASEAN, Chinese, and Korean farmers can ship durians duty free now.  Japanese firms get better benefits under the ASEAN agreement than the bilateral (20% vs. 22.5%).  Australia and New Zealand are currently subject to 10% tariffs on durians and Indian companies pay 20%.  Post-TPP entry into force, however, members will pay 0 duties immediately for durian shipments to Vietnam.

The examples show the differences across trade agreements.  For most products where the existing MFN rate is higher than 0, ASEAN already grants duty free access to Vietnam.  Some of the existing trade agreements match these 0 tariff rates or at least provide lower tariff levels than non-FTA members receive.  Since the TPP is both broader and deeper than existing agreements for Vietnam, firms should expect better benefits (or tariff cuts that match ASEAN) for nearly all products either on entry into force of the agreement, or in the near term. 

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

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***