13 March, 2018
On March 8, 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was signed in Santiago, Chile, by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam (member states). Governments from the member states have indicated that once the accord is ratified, it could have a transformative effect on both its members and the wider global trading system, with comprehensive chapters on subjects such as the environment, labor rights and e-commerce, among others. The CPTPP accounts for 495 million people representing 13.5 percent of the world total economic output—worth a total of $10 trillion.
The CPTPP replaced the former Trans-Pacific Partnership Agreement (TPP), which was entered by and among the current member states and the United States. Following the 2016 U.S. presidential election, the newly elected President Donald Trump signed an executive order formally withdrawing the United States from the TPP at a time when the agreement was in the process of ratification by its member countries. In order for the TPP to enter into force and effect, it had to be (i) ratified by all members before February 4, 2018, or (ii) ratified by at least six members which together represented a gross domestic product (GDP) of more than 85 percent of the GDP of all signatories. Withdrawal by the United States made it impossible for the TPP to enter into full force and effect since its GDP represented 69.9 percent of the combined GDP of the TPP signatories. The TPP member countries represented 40 percent of the total economic output of the entire world.
Following the collapse of the TPP, the remaining 11 countries continued negotiations to salvage an agreement and on January 23, 2017, negotiations concluded with the member states agreeing to enter into the CPTPP, which retains most of the provisions of the TPP. However, the CPTPP does have its differences with the TPP and it suspended 22 controversial chapters and provisions on investment, government procurement, state-owned enterprises, intellectual property and e-commerce, which had been originally included into the TPP under pressure from the United States.
Nevertheless, the coverage of the CPTPP is comprehensive, comprising 30 chapters, numerous annexes and several hundreds of pages of the TPP that were not suspended. The standard free trade chapters include National Treatment and Market Access for Goods, Rules of Origin, Customs Administration, Technical Barriers to Trade, Sanitary and Phytosanitary Measures, Investment, Cross Border Trade in Services, Financial Services, Temporary Entry for Business Purposes, Government Procurement, State Owned Enterprises and Designated Monopolies, Textile and Apparel Goods, Intellectual Property and Dispute Settlement. The CPTPP also includes innovative chapters including Small and Medium Sized Enterprises, the Environment, Electronic Commerce, Cooperation and Capacity Building, Competitiveness and Business Facilitation, Development, and Transparency and Anti-Corruption.
The CPTPP clarifies how entry into force will work, given that the original provisions in TPP chapter 30 meant that U.S. participation was necessary for the agreement to enter into force and effect. The CPTPP provides that “at least six or at least 50 percent” of the accord’s signatories must ratify for the deal to entry into force, and indicates that the threshold which applies will be “whichever is smaller.” Once such threshold is met, the CPTPP will take effect for this group 60 days after they have all notified New Zealand, the accord’s depositary.
Any signatory which ratifies the CPTPP after it comes into force will have to wait 60 days from the date when they notified their ratification for it to take effect for such signatory. The CPTPP also outlines how withdrawal and accession will work. Regarding accession, the CPTPP clarifies that new members can join after the agreement is in effect, so long as existing parties agree. New entrants can include any state or separate customs territory, according to the CPTPP.
The CPTPP also includes a provision on reviewing the trade deal. It provides that “if the entry into force of the TPP is imminent or if the TPP is unlikely to enter into force, the Parties shall, on request of a Party, review the operation of this Agreement so as to consider any amendment to this Agreement and any related matters.”
CPTPP vs TPP
The main provisions of the TPP that were suspended are listed in the CPTPP’s annex and are found in the following chapters:
- Customs Administration (Express Shipments): There is now no obligation to review, and potentially exempt, customs duties on express shipments under a de minimis amount.
- Investment: The scope of the investor-state dispute settlement (ISDS) mechanism is narrower in the CPTPP. Suspensions in the Investment chapter preclude claims relating to investment contracts and approvals (identified as “investment agreements” and “investment authorizations” in the TPP). This means that under CPTPP private companies who enter into an investment contract with a member state government will not be able to use ISDS clauses if there is a dispute in connection with such contract.
- Cross Border Trade in Services (Express Delivery Services): Disciplines on postal monopolies and cross-subsidization will be limited. Thus, sole postal operators will be able to continue operating within CPTPP countries.
- Financial Services: Suspensions were agreed in connection with the minimum standard of treatment relating to financial services linked to the “investment agreements” and “investment authorizations.”
- Telecommunications: The suspended provision provided for reconsideration of decisions made by telecommunications regulatory bodies in the event of disputes with companies whose interests were adversely affected by a decision from such regulatory bodies.
- Government Procurement: The suspended provisions indicated that procuring entities could promote compliance with international labor rights as part of their procurement processes. Furthermore, any negotiation to expand coverage of the Government Procurement chapter, particularly in relation to state government and local government contracts, will be delayed. Parties will only initiate talks on this issue at least five years after the date of entry into force of the CPTPP.
- Intellectual Property: Chapter 18 includes the most suspensions, including suspension of measures agreed with respect to: patentable subject matter, patent term adjustment for unreasonable curtailment, protection of undisclosed test or other data, extension of copyright protection to 70 years after the author’s death, technological protection measures, rights management information, protection of encrypted program-carrying satellite and cable signals, legal remedies and safe harbors.
- Environment: The suspended language would have required member states to take action to address violations to the wildlife trafficking laws of countries that were nonparties to the CPTPP.
- Transparency: This provision established certain “procedural fairness” obligations that would have applied to pharmaceutical products and medical devices. The suspension has been made for transparency and procedural fairness requirements for listing new products and devices for reimbursement purposes for pharmaceutical products and medical devices.
- Biologics: No data or market protection is provided for new medicines, including biologics. The data protection of five to eight years which was set forth in the TPP is now without effect.
These suspended provisions can be given force and effect only by the consensus of all member states.
This creates a potential bargaining chip should the United States seek to join the CPTPP in the future and have the aforementioned suspensions removed.
Prospects for New Signatories
With the CPTPP now in the process of ratification, other countries throughout the world have begun to express interest in joining the agreement in the future. The International Trade Secretary of the United Kingdom, Liam Fox, recently stated that his government is interested in exploring the possibility of joining the CPTPP once their country exits the European Union.
Similarly, in late January 2017, the Taiwanese Ministry of Foreign Affairs indicated that their government is committed to joining the CPTPP and are keen to be included in the second round of accession discussions. Other countries which have expressed interest in joining the CPTPP include South Korea, the Philippines, Indonesia, Colombia and Thailand.
President Trump has also expressed interest in rejoining the CPTPP if the United States is offered better conditions than those offered in the TPP. Lately there has been lobbying by U.S. business groups and Republican lawmakers who are requesting President Trump to prioritize engagement with the CPTPP’s member states.
NAFTA Countries—Canada and Mexico
Canada and Mexico are arguably in the best position among the member states, as they are both members to the CPTPP and the North American Free Trade Agreement (NAFTA). This grants them privileged free access to the U.S. market which most of the other member states do not enjoy since few of them have free trade agreements in place with the United States. At the same time, Canada and Mexico will have free access to the markets of the remaining member states, thereby becoming commercial hubs for the Americas and the Asia-Pacific region.
The CPTPP agreement, along with NAFTA and free trade agreements with the European Union, make Canada and Mexico among the few nations on the planet with free trade access to the Americas, Europe and the Asia-Pacific region.
Mexico has a network of 10 free trade agreements with 45 countries, 32 reciprocal investment promotion and protection agreements with 33 countries and nine trade agreements within the framework of the Latin American Integration Association. Furthermore, Mexico and the European Union launched negotiations in May 2016 to update their free trade agreement. The seventh round of negotiations was completed on December 21, 2017, and EU Trade Commissioner Cecilia Malmstrom indicated that they are close to a deal. Work has been finalized on a number of topics, including on competition, small- and medium-sized enterprises, transparency, sanitary and phytosanitary measures, good regulatory practices, and trade and sustainable development.
Canada has 15 free trade agreements and 36 foreign investment promotion and protection agreements. Regarding the CPTPP, the Office of the Chief Economist of Global Affairs Canada projected the economic impact for Canada to total $4.2 billion. The Canadian government has stated that CPTPP gains for Canada will be greater than the $3.4 billion gain expected under the TPP, due to improved market access for Canadian business to other CPTPP countries in the absence of U.S. competition.
Notwithstanding the above, NAFTA is currently being renegotiated after President Trump threatened to withdraw from the agreement. While NAFTA and CPTPP could offer unprecedented benefits for those doing business in Mexico and Canada, companies should have a contingency plan in place that includes assessing the impact of a failure to reach a new deal for an amended NAFTA. Publicly traded companies should also assess whether revisions to their risk disclosure are required in their securities filings on the implications of failed NAFTA renegotiations and a subsequent withdrawal by the United States from NAFTA.
Singapore
Singapore is likewise in a position to benefit greatly from the CPTPP. Singapore has a free trade agreement with the United States, joining Mexico and Canada as member states with direct access to U.S. markets. Further, Singapore is one of the only member states to have free trade access to both the
U.S. and China.
Singapore is a member of ASEAN, giving it direct access to 10 Southeast Asian countries. In addition, it currently has a network of 12 bilateral free trade agreements and nine regional trade agreements in force. Singapore is also currently negotiating a free trade agreement with the European Union. To take advantage of its position as a global hub, Singapore has a variety of incentives available for companies that choose to use Singapore as a regional or global headquarters.
Furthermore, Singapore already enjoys strong commercial links with other CPTPP member states, which accounted for around $162.4 billion, or 22.2 percent, of Singapore’s total goods trade in 2017.
Vietnam
Vietnam, like Singapore, is a member of ASEAN, and already enjoys a network of 10 free trade agreements, with seven more currently being negotiated. Uniquely amongst CPTPP members, Vietnam is a member of the Eurasian Economic Union Free Trade Agreement, giving it free trade access to Russia and Kazakhstan, among others. Combined with its free trade access to China, this means Vietnam is well-placed to provide access to the various markets associated with China’s One Belt, One Road initiative.
Vietnam stands to gain 1.32 percent in GDP growth rate, 3.8 percent in import growth rate, and 15 percent to 17 percent in terms of export growth rate. The CPTPP will also give Vietnam access to Canada, Mexico and Peru for the first time. In 2017, Vietnam enjoyed $36 billion in foreign direct investment, which is set to grow once the CPTPP comes into force.
For further information, please contact:
Giles T. Cooper, Partner, Duane Morris
gtcooper@duanemorris.com
