One of the first decisions taken by US President Donald Trump after he assumed office was to withdraw the US from the TPP, a comprehensive trade and investment agreement that would have set new standards in integration and market access right across its 12 member states. 

The US had already signed the TPP but it had not yet been ratified by the US Congress and it became a political hot potato during the 2016 Presidential elections. 

In President Trump’s letter of withdrawal, he wrote that the US would pursue bilateral agreements with relevant trade partners instead of joining a multilateral arrangement. 

The Trump Administration considered the withdrawal an easy campaign promise to keep, but after eight years of tough negotiations on all sides, the move was a big disappointment among the other eleven TPP members and for many within the US itself.

At the APEC Summit 2017 in Da Nang, the eleven remaining countries, the “TPP-11”, took a significant step forward to finalize a new agreement now referred to as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). 

Media reports were mixed, as some outlets reported that there was an agreement in principle while others reported that Canada was not ready to sign on. 

However, the end result is an impressive draft agreement in principle on most of the existing terms, with some exceptions and a few remaining issues for each of the parties. 

To its credit, Japan has been leading the effort to move forward with the CPTPP in the hope of the US rejoining the agreement at some point in the future.

Basic framework and suspension of certain provisions

The approach taken by the TPP-11 avoids renegotiating the entire agreement, leveraging on the path-breaking work that went into the TPP itself. 

The CPTPP does this by incorporating all of the terms and conditions of the TPP except for 20 provisions that will have “suspended” status. 

These suspended terms are mainly issues the US had a particular interest in. They include issues such as the Investor State Dispute Settlement (ISDS) chapter, commitments relating to labor rights, biologics, as well as intellectual property, data exclusivity for biologics, and copyright protection provisions.  

Notwithstanding the suspension of the “US issues”, the CPTPP is still a “21st Century Trade Agreement” that goes well beyond the simple duty reductions in a traditional trade agreement to include principles on e-commerce, the environment, transparency and anti-corruption, regulatory coherence, and cross-border trade in services, creating a level playing field for the private sector compared to State-owned enterprises (SOEs), among many other things. 

The CPTPP is a progressive agreement reflecting the “state-of-the-art” in international trade and investment. It will be an impressive achievement if the eleven parties can see it through to execution and ratification.

Outstanding issues

In addition to certain provisions being put into suspended status, the parties have yet to agree upon four parts of the agreement, including SOEs relating to Malaysia, commitments on coal relating to Brunei, dispute settlement involving trade sanctions for Vietnam, and Canada’s cultural exception. 

The parties will need to come to agreement on these four provisions prior to signing. Additionally, each party will need to have domestic political support for the CPTPP as it will require ratification by each party and this may require further changes.

Perspective on Canada

At the conclusion of APEC 2017, Canadian Prime Minister Justin Trudeau was reported as stating that he “wasn’t going to be rushed into a deal that was not yet in the best interest of Canadians. 

That is what I’ve been saying at least for a week, and I’ve been saying it about TPP-12 for years now and that position continues to hold.” 

It was also reported that he said there is still “important work to be done,” namely on the creation of a gender rights chapter, changes around rules of origin - a part of the deal with particular salience to the auto parts sector - and issues surrounding the protection and promotion of Canadian culture.

Canada’s position on the CPTPP may be influenced by the difficult and ongoing North America Free Trade Agreement (NAFTA) re-negotiations, where country of origin requirements for automobiles have been a point of contention. 

Additionally, Canada’s attempt to incorporate the Investor State Court (ISC) concept that was developed as part of the Canada-European United Comprehensive Economic Trade Agreement (CETA) into CPTPP may be futile. 

This is because Japan categorically rejected the ISC concept in its free trade agreement negotiations with the EU for the Japan European Union Economic Partnership Agreement (JEEPA). 

Similarly, the EU dropped all reference to ISDS and the ISC when it initiated negotiations with New Zealand and Australia, providing further indications that the TPP Investor-State dispute mechanism remains controversial.

Canada’s push for the ISC is interesting in light of the threat of the US to withdraw from NAFTA. Not having a CPTPP in place if the US were to withdraw from NAFTA could weaken Canada’s negotiating position with the remaining CPTPP members. 

In fact, it is not out of the question that the TPP-11 could become TPP-10 if Canada cannot agree to terms in this area and ultimately the CPTPP went ahead without it.

Japan’s leadership

Two factors motivated Japan’s remarkable leadership in the APEC CPTPP negotiations. First, there remains the hope of bringing the US back to the multilateral global trading system at some point in the future. 

Second, there was also an opportunity to have the first high-level free trade multilateral agreement in Asia-Pacific, which could boost Japan’s economy and establish more sophisticated trade rules than the bilateral agreements Japan has entered into to date. 

The CPTPP also sets the minimum standard of bilateral negotiations between Japan and the US, even if such bilateral negotiations seem difficult to avoid.

CPTPP’s impact

The impact of the CPTPP will not be as great as the TPP would have been in terms of its quantitative contribution to GDP growth in all of the member states, though it is hard to measure because the reforms in the CPTPP go well beyond mere duty rate reductions. 

Moreover, as the agreement reflects the best practice standard in many areas such as e-commerce, regulatory coherence, transparency, the environment, and labor, these areas will gain stronger footholds as principles of international trade and investment law, which can be used as building blocks for the future. 

Businesses in the region who are not from the TPP-11 countries, including most US businesses in the region, also support it because “a rising tide lifts all boats”, and the growth will create opportunities for other trading partners as the TPP-11 economies grow.

The CPTPP will affect some businesses in the region directly and some indirectly. There will also inevitably be some trade diversion to the TPP-11 / CPTPP countries away from non-parties. 

But the results are likely to be that the GDP growth impact is far larger than the trade diversion impact. 

To the extent that the CPTPP further opens markets to healthy competition, it will challenge some businesses who currently hide behind various forms of protectionism. 

Overall, the CPTPP looks like something that will be good for the TPP-11 members, achieving results much more quickly than a series of bilateral deals, and it may eventually attract the US back into a multi-lateralist global trading system.

Looking forward

One of the main topics for discussion at this year’s APEC meetings was how governments must play a role in retraining and “up-skilling” their citizens to compete, not only in a more open trade and investment environment but also in light of the fourth industrial revolution (Industry 4.0).

The CPTPP is one among several regional agreements making progress in the Asia-Pacific region without the US. Others include JEEPA and the Regional Cooperative Economic Partnership (RCEP). 

For Vietnam, the EU-Vietnam Free Trade Agreement (EVFTA) has already been signed and is pending ratification, representing a real “here and now” opportunity for Vietnam.

 Further negotiations will be necessary to finalize the CPTPP. However, APEC 2017 was a pivotal moment for moving the CPTPP forward and the parties hope to have a signed agreement by the first part of 2018. 

Combined with Vietnam’s other trade initiatives, this should help maintain the momentum in Vietnam’s impressive socioeconomic development in the coming years.

(*) With contributions from James Small and Kana Itabashi from Baker & McKenzie Toronto and Tokyo, respectively.

VN Economic Times