Trans-Pacific Partnership agreement (TPP)
After 10 years of negotiations, trade ministers from 12 Pacific Rim countries representing 40% of the world’s economy and one-third of global trade have reached a trade agreement, referred to as the Trans-Pacific Partnership (TPP) treaty, which will, if approved, help to promote economic growth in the Asia-Pacific region in the 21st century.
The treaty liberalizes trade in sectors ranging from agriculture to pharmaceuticals, and incorporates an investment chapter which provides important substantive and procedural protections for investment flows within the TPP trade bloc.
The Contracting Parties to the agreement are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam. Other countries which may join include South Korea, Taiwan, the Philippines and Colombia. China has indicated that it may wish to participate at some point.
The agreement will not come into force until it is ratified by all 12 states. It faces opposition in some countries, however, including in the US where, among other concerns, opponents fear the arrangement will result in the export of manufacturing jobs to lower-wage countries. Congress is unlikely to take up the TPP before mid-2016, just before the US presidential election. The upcoming national elections could also impact the ratification process in Canada. The agreement’s full text will not be available for several weeks to allow for each state’s legal review, but it is understood to include the following main elements.
Tariffs and quotas
The agreement is intended to eliminate more than 18,000 import tariffs, including those on cars, machinery, information technology and consumer goods, chemicals and agricultural products. Agreement on access to dairy markets proved particularly challenging. The solution may lie in countries adopting a tariff-rate quota, whereby imports above a certain amount, or a certain percentage of market share, would be subject to additional tariffs, and farmers compensated for losses. It is understood that cars will be allowed to be imported from other TPP member states without tariffs as long as a minimum of 45% of the car’s content is manufactured in a TPP member state (lower than the 62.5% regional content provision in the North American Free Trade Agreement).
The US had sought 12 years of patent protection for a new class of pharmaceutical products called “biologics” to encourage investment in expensive treatments. Others, however, argued for a maximum period of 5-6 years to bring down drug costs and the burden on state-subsidized medical programs. A compromise has reportedly been reached whereby new pharmaceutical products will have patent protection for a minimum of five years, which could be extended by several years in certain circumstances.
TPP member states will reportedly need to meet International Labor Organisation standards including on collective bargaining, independent unions, a minimum wage, safe workplaces, child labor, forced labor and excessive hours, and will be potentially subject to penalties if the agreed standards are not met.
Similarly, member states not doing enough to combat trafficking in endangered animals, illegal or unsustainable logging and fishing could face penalties under the TPP agreement.
State-Owned Enterprises (SOEs)
The treaty will reportedly ensure that SOEs act on the basis of commercial considerations and provide non-discriminatory treatment with regard to sales and purchases of goods. The agreement will also establish information-gathering procedures for countries wanting more information on SOEs and their investments. It is not clear, however, how SOEs will be defined and whether countries like Malaysia and Vietnam, where SOEs are prevalent in many industries, will receive exclusions or exemptions for certain market sectors.
Participating countries in the TPP have reportedly agreed not to block cross-border transfers of data over the Internet, nor require that servers be located (or data be stored) in a member state in which a business is operating. The final text, however, may reveal important exceptions to this principle due to concerns raised during the negotiations on issues of privacy laws and personal data protection.
By removing nationality requirements and restrictions on investing, the agreement is intended to facilitate trade in services, including those relating to finance, engineering, software, education, legal, information technology and telecommunications.
The participating countries were apparently unwilling to stipulate penalties for any failure to implement currency-related commitments. A side agreement, however, will apparently commit TPP member states not to engage in competitive devaluations to benefit their own exporters, with provisions for separate and regular consultations, and the establishment of a committee to address currency issues.
Investor-state dispute settlement mechanism
The treaty includes an investment chapter which reportedly provides the usual suite of protections to investors from one TPP country making investments in another. These include the right to national treatment, most-favored nation treatment, fair and equitable treatment, full protection and security, free transfer of funds (subject to exceptions such as there being a balance of payment crisis) and no expropriation of property without full and prompt compensation.
Importantly, the chapter reportedly empowers investors to be able to bring an international arbitration claim directly against the government hosting an investment (rather than through the local courts or the investor’s own government) for a breach of the protections in the TPP treaty. Such claims will be decided by independent arbitrators sitting in a neutral location and applying international law.
The investor-state arbitration rules reportedly contain a number of innovative features, including: a binding code of conduct for arbitrators; scope for non-party interventions; time limits for bringing a claim; the consolidation of related arbitrations; and safeguards to prevent the continuation of abusive or frivolous claims. In addition, reportedly on the insistence of Australia which is presently defending an investment treaty claim brought by Philip Morris over the Australian government’s regulation of tobacco, a member state may choose to exclude the tobacco industry from the investor-state dispute settlement mechanism.
What does this mean for you and how Dechert can help?
Ratification of the TPP agreement by all 12 participating states may take some time and is not guaranteed. If and when approved, the TPP will create substantial immediate and longer-term opportunities and protections for importers, exporters, contractors and investors.
Dechert’s international trade and arbitration groups have extensive experience advising clients on all aspects of trade regulation, investment treaties and international arbitration. We can advise on how best to take advantage of the opportunities created by the TPP treaty, and to ensure compliance with all applicable regulatory standards and licensing requirements.
This update was written by members of Dechert’s international trade group, Jeremy Zucker, Richard Tauwhare and Roger Matthews, and Mark Mangan from Dechert's international arbitration group. For more information and guidance on these issues, please contact: