Canada: The TPP Morphs Into The CPTPP

Last Updated: November 17 2017
Article by Jesse Goldman, Matthew S. Kronby and Julia Z. Webster

Prompted by the United States’ withdrawal from the Trans-Pacific Partnership (TPP), on November 10, 2017, Canada and the remaining 10 TPP member countries agreed on a modified framework to bring the agreement into force. At Canada’s request, the agreement is now named the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). While the absence of the United States is obviously important given the size of its economy and importance to international trade in goods and services, the CPTPP is a significant achievement for the 11 parties. For Canada, it is a landmark agreement that sends a strong signal that it is serious about diversifying its trade, particularly with Asia, in an era of uncertainty about north-south trade under the Trump administration. Canada is one of the big winners in the CPTPP; regardless of the outcome of the NAFTA renegotiations, U.S. bound tariff levels are already among the lowest in the world. Where Canada had not focused its trade liberalization strategy sufficiently was in Asia, home to many of the fastest growing economies in the world, and Japan, the world's third largest economy by GDP. Canada now has the opportunity to significantly increase its trade in goods and services with CPTPP parties while the United States is sidelined in the region due to its withdrawal from the TPP earlier this year.

While most of the original TPP text remains unchanged, and all of the parties’ commitments relating to liberalized trade in goods, services, procurement, and investment remain intact, 20 TPP items are "suspended" in the CPTPP to reflect the concerns of the remaining member countries. These provisions will not be implemented by the CPTPP parties until the parties agree by mutual consent to do so. The suspended provisions, while notable, do not form the backbone of the CPTPP. Given the divergent interests and levels of economic development among the 11 parties it is remarkable how much of the original TPP is either unchanged or was only subject to minor alteration in the CPTPP.

During the TPP renegotiation at the Asia-Pacific Economic Commission Ministerial Meeting, Canada sought concessions on culture, intellectual property, and rules of origin for the automotive sector and campaigned for progressive chapters on gender rights and labour standards. The original TPP text included:

  • a number of U.S.-demanded restrictive patent and copyright provisions;
  • targeted protections for the federal government’s promotion of Canadian culture; and
  • Japanese-demanded automotive rules of origin that prescribe a lower percentage of parts manufactured in member countries than those required under the NAFTA.

Canada is the second largest economy in the CPTPP and it stands to benefit from liberalized access to growing economies in Asia and, most importantly, Japan. The CPTPP will benefit a number of significant Canadian export sectors: agriculture; fish and seafood; forestry and wood products; information and communications technologies; and services (financial, professional and environmental). Canadian importers and consumers also will benefit when Canadian tariffs on 95 percent of goods imported from CPTPP member countries are eliminated when the agreement comes into force, with the balance of remaining tariffs to be phased out in stages over the next several years. As with all free trade agreements, adjustments will occur in Canada's economy as investors and supply chains respond to the CPTPP.

Changes to the TPP Text

The member countries’ trade ministers released a Ministerial Statement announcing the core elements of the CPTPP. The major changes compared to the TPP are primarily to provisions in the Intellectual Property chapter (Chapter 18), which were originally included at the insistence of the United States (and agreed to by smaller economies, notwithstanding their deep misgivings, in exchange for improved market access to the United States for their goods). The suspended provisions from the TPP include:

  • the term of protection for copyright (which provided for 70 years of protection, in contrast to Canada’s domestic laws which provide for 50 years of protection);
  • patent extensions (patent term adjustments for delays by a granting authority and patent term adjustments for extended pharmaceutical marketing approval processes);
  • protection on new biologics, patent test data, rights management information, technological protection measures, legal remedies and safe harbours for internet providers; and
  • offences concerning the protection of encrypted program-carrying satellite and cable signals.

One of the more contentious chapters of the TPP, the Investor-State Dispute Settlement (ISDS) system (Chapters 9) remains mostly intact. The scope of its application was curtailed by suspending provisions that permitted investors to submit arbitration claims for breaches of “investment agreements” and “investment authorizations”, which usually pertain to resource concessions.

It should be noted that the original TPP was the product of lengthy and difficult negotiations about ISDS that had already produced more nuanced and state-friendly provisions than those in many earlier free trade and investment agreements. Canada was not in a position to agree to further concessions regarding dispute mechanisms considering its hardline approach on Chapter 19 in the current NAFTA negotiations.

The Environment chapter (Chapter 20) remains mostly unchanged, subject to a partial suspension of “other applicable laws” in a provision on the prohibition of illegal trade in wild flora and fauna. This partial suspension is actually a significant change from the TPP text and is perhaps the clearest consequence of U.S. withdrawal because suspension reflected parochial U.S. interests arising from the Lacey Act. The TPP Environment chapter required members to prohibit the domestic sale of products harvested in violation of foreign conservation laws and was used by U.S. industries to increase compliance risks when sourcing non-U.S. harvested products. This obligation was opposed by most TPP members and the CPTPP version of Chapter 20 suspends the words that caused the obligation.

Next Steps

The CPTPP is subject to further negotiations. Global Affairs Canada indicates that there are a number of outstanding issues and reinforces the Government of Canada’s commitment to “fostering open markets, creating well-playing middle class jobs, and helping businesses, especially women-owned SMEs, succeed in international markets” and that the Canadian government “will not be rushed into an agreement that is not in the interest of Canada.” In reality, the precarious state of the NAFTA negotiations, particularly on rules of origin, put Canada in a difficult position. Canada did not want to signal that it was prepared to agree to the TPP’s relatively low regional content requirements in the automotive rules of origin at the same time that the United States, in the NAFTA renegotiations, is seeking new minimum U.S. domestic content rules that would hurt Canadian auto parts manufacturers.

Annex II of the Ministerial Statement, the “List of Suspended Provisions”, indicates that four areas must be finalized:

  1. a cultural exception for Canada;
  2. exceptions regarding trade sanctions for Vietnam;
  3. exceptions for state-owned enterprises in Malaysia (Annex IV); and
  4. exceptions regarding coal production in Brunei (Annex II).

The cultural exception for Canada concerns domestic regulations on Canadian content and government funding of the arts and culture across the country, and especially in Quebec. These concerns were acknowledged in the Ministerial Statement that recognized “the right of each party to preserve, develop and implement its cultural policies.” Again, Canada's position was heavily influenced by the ongoing NAFTA renegotiations, where Canada is seeking to hold the line against U.S. demands to eliminate the NAFTA’s blanket “cultural industries exemption” in favour of more targeted carve-outs based, ironically, on the TPP it withdrew from.

The government of Vietnam is concerned about future trade sanctions due to its current labour standards. It is requesting more time to adopt and implement domestic laws regarding labour unions before the CPTPP comes into force. Malaysia and Brunei are requesting more time to adjust to the provisions in the CPTPP regarding State Owned Enterprises for their state owned energy companies (Chapter 17).

Once the text of the CPTPP, including the suspended obligations, is finalized, member countries will sign the agreement and commence their respective internal implementation and ratification processes. Once at least 6 of the 11 countries ratify the CPTPP, it will come into force as among the ratifying countries. The majority of tariff reductions on goods will take effect when the CPTPP comes into force, as will all liberalization provisions for services and investment. The member countries are targeting late-2018 for entry into force but that may slip into 2019 depending on how quickly the parties can resolve the outstanding negotiating issues and complete their respective ratification procedures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Jesse Goldman
Matthew S. Kronby
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