United States: Trans-Pacific Partnership Has Challenges, Opportunities For U.S. Companies

Ronald A. Oleynik is a Partner and Farid Hekmat is an Associate both in our Washington DC office.

HIGHLIGHTS:

  • The United States and negotiating partners have reached a preliminary agreement on the Trans-Pacific Partnership (TPP), the most important U.S. trade deal since the North American Free Trade Agreement (NAFTA).
  • Consisting of 30 substantive chapters covering a broad range of trade issues, TPP's primary impact will be reduction in tariffs and other trade barriers.
  • A congressional vote on TPP will likely not take place until late 2016, and although the full text of the agreement has not been released, certain provisions have been made public.

The U.S. and its 11 negotiating partners – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam – reached preliminary agreement on October 5, 2015, on the Trans-Pacific Partnership (TPP), which would result in the world's largest free-trade area, with a combined GDP of $27 trillion, equaling almost 40 percent of the global economy. As the most important U.S. trade deal since the North American Free Trade Agreement (NAFTA), TPP presents both opportunities and challenges for U.S. businesses, since increased competition from foreign imports will be coupled with lower barriers abroad. A congressional vote on TPP will likely not take place until late 2016, and although the full text of the agreement has not been released, certain provisions have been made public and are discussed below in detail.

Background

Negotiations for TPP began in January 2008 when the U.S. joined Brunei, Chile, New Zealand and Singapore on liberalization of financial services. In June 2013, Canada and Mexico officially joined the negotiations, with Japan joining the next year. Though driven primarily by economic concerns, an underlying current in the TPP negotiations has been the growing Chinese economic clout as well as a desire by the U.S. to take the initiative in establishing economic and trade ground rules as market liberalization spreads in Asia and the Pacific Rim.

In reaching an agreement, TPP negotiators navigated a maze of sensitive and contentious issues, including Japan's five sacred agricultural commodities (beef, pork, wheat, sugar and rice) and Canada's protected dairy market, non-party content rules for automobile exports, data protection for biologics, protections for intellectual property and new rules for e-commerce. Because modern trade agreements require modifications to existing U.S. law, an important development was passage of Trade Promotion Authority (TPA) by the U.S. Congress in June 2015. Under TPA (also called "Fast Track"), a final trade agreement signed by the U.S. president will be voted on by Congress only on a straight up-or-down vote. Under TPA, there only can be limited debate, and no amendments will be allowed. TPA was critical in assuring other TPP participants that deal specifics agreed upon in the negotiating process would not be altered by the U.S. Congress.

Main Points

TPP consists of 30 substantive chapters covering a broad range of trade issues, including tariffs and quotas on goods, rules of origin, customs administration and facilitation, sanitary and phytosanitary barriers to trade, rules for investment, cross border trade in services, financial services, telecommunications, e-commerce, government procurement, competition policy, intellectual property, labor and environmental standards, and trade remedies and administration.

Unlike the proposed Trans-Atlantic Trade and Investment Partnership (TTIP) between the U.S. and the European Union, which will be significant mostly for its increased regulatory harmonization, TPP's primary impact will be reduction in tariffs and other trade barriers. According to the Obama Administration, 18,000 tariffs on U.S.-made goods will be cut. Tariffs on most industrial goods will be phased out almost immediately. Additionally, all tariffs on textiles and apparels will be eliminated, though duties on some sensitive goods will be phased out over a longer period.

Current U.S. tariffs on automobiles (2.5 percent) and light trucks (20 percent) will remain in place for 25 and 30 years, respectively. In fact, the removal of most automobile-related tariffs will be back-loaded in the TPP. Significantly for the "Big Three" U.S. automakers (GM, Ford and Chrysler), Malaysia (currently at 30 percent) and Vietnam (currently at 70 percent) will eliminate their tariffs for automobiles.

A compromise also was reached on the parts content requirements for automobiles. Under NAFTA, 62.5 percent of content in an automobile must originate from the U.S., Canada or Mexico in order to qualify for NAFTA's tariff-free treatment. Under the TPP, only 45 percent of content must originate from a TPP participant in order to be eligible for reduced tariffs.

TPP also includes significant changes on trade in agricultural commodities. Most tariffs on U.S. agricultural exports will be eliminated. According to U.S. negotiators, more than 50 percent of U.S. agricultural exports (by value) will receive duty-free treatment.

Japan will eliminate duties on 74 percent of beef-related tariffs, while tariffs on fresh, chilled or frozen beef will be reduced from 38.5 percent to 9 percent within 16 years. Tariffs on most pork products will be immediately cut by half (to 2.15 percent) and be completely phased out within 11 years. Additionally, Japan will modify its current "gate price" system (under which additional duty is place on imported pork if the price is below a determined market price). Japan also will establish a new 114,000-ton country specific quota (CSQ) for U.S. wheat that will grow to 150,000 tons within seven years. Japan also will reduce tariffs on processed wheat products such as biscuits, crackers, cookies, and uncooked spaghetti and macaroni.

Japan also agreed to modestly loosen import restrictions on rice, its most sensitive agricultural commodity. Currently, Japan imports 770,000 tons of rice under tariff-free state trading (of which U.S. exports account for almost half, at a value of $269 million in 2014), but imposes a prohibitive 778 percent tariff on imports outside the minimum access framework. Under TPP, Japan immediately will set aside a duty-free CSQ of 50,000 tons for U.S. rice, eventually rising to 70,000 tons.

Neither the U.S. nor Japan agreed to significant liberalization on trade in sugar. The U.S. will establish an 86,300-ton quota for TPP participants, of which Australia will receive 65,000 tons, while Japan will significantly reduce tariffs on sugar products such as caramel and maple syrup, but only will allow 500 tons of duty-free imports of raw or refined sugar.

Canada also held a hard line trade in dairy products. Under its current dairy supply management system, strict production limits and prohibitive tariffs have protected small, inefficient diary operations at the cost of high prices for consumers. Although the U.S. and New Zealand pressed for a substantial opening of the Canadian market, only imports equal to 3.3 percent of Canada's annual production of dairy products will be eligible for tariff relief under the TPP.

The extent of intellectual property protection for biologics (drugs developed from living cells) was a controversial issue that garnered widespread attention from public advocacy groups. Current U.S. law provides 12 years of data protection, which was adamantly opposed by countries such as Vietnam and Australia, who feared increased healthcare costs. Under TPP, biologics will receive at least five years of data protection, though participating countries have the option of lengthening this period.

TPP also will usher in changes to cross-border trade in services by adopting a "negative-list" regime under which the parties may not impose barriers (e.g., quantitative restrictions on the supply of services, requirements for specific types of entities or joint ventures or local presence) unless they have specifically excluded a certain sector. Even then, each party accepts an obligation not to make its measures more restrictive in the future and to bind any future liberalization. Trade in financial services takes a similar approach and permits the sale of certain financial services across borders, rather than requiring a service provider to establish operations in the country in which the services are sold.

Reaction and Timeline

Reaction to the TPP has been decidedly mixed. The U.S. Chamber of Commerce has shown broad support, though specific industries have been vocal in their criticism. The auto industry, in particular, is urging Congress to reject the deal as currently constituted. Automaker Ford has urged Congress to "renegotiate TPP and incorporate strong and enforceable currency rules," while the CEO of the Biotechnology Industry Organization has protested that "12 years of data exclusivity is a prerequisite to attract the type of investment required to continue medical innovation."

Labor groups also have criticized the agreement. The AFL-CIO claims that the TPP will lead to additional outsourcing of U.S. jobs abroad, and the president of the Communications Workers of America called the TPP "a bad deal for working families and communities."

The timeline for congressional approval of the TPP is uncertain at this point. Under TPA, the full text of the TPP must be made available to Congress at least 90 days prior to the president formally signing the agreement (and the text must be made available to the public at least 60 days prior to the signing). Additionally, the International Trade Commission is required to provide a full report assessing the TPP's impact on the U.S. economy within 105 days of the president's signing of the agreement. Subsequently, once the president submits the agreement, Congress has 90 legislative days to either approve or reject the agreement. Given the political calendar and upcoming presidential primaries, the most likely time period for a congressional vote may be the lame duck period following the November 2016 presidential election.

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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