While the member state domestic political wrangling is to come, most notably in the US Congress, 2015 was a year that finally saw twelve Pacific economies reach agreement on a mammoth free-trade deal, the Trans Pacific Partnership (‘TPP’), slated to come into force by 2018.1
These twelve, all members of the Asia Pacific Economic Cooperation (‘APEC’), from out of whose membership, but separate to it, TPP was born have agreed to form the widest and deepest free trade agreement in history. This success is all the more astonishing, and the extent of the free trade obligations reached more impressive, if one considers that the so-called 2013 ‘Bali Agreement’ from the World Trade Organisation ‘Doha Round’ – the fourteen years of WTO trade talks aiming for really quite modest opening up of global trade - appears to have run aground, thanks to Indian objections to liberalising global agricultural trade.2
WTO of course is a global trade agreement. TPP leapfrogs WTO and it does so capturing over one quarter of global trade from twelve countries that account for nearly 40% of global GDP.
The arguments for and against TPP have been well-rehearsed: under the TPP agreement, export revenues among the twelve member countries are expected to increase by USD$305 billion per year by 2025, and workers’ incomes also increase. Reductions on export tariffs for carmakers, up to eight years of data protection for new biotech drugs, and a reduction of restrictions on sales in international markets for technology companies represent just a few of the many additional benefits anticipated from the TPP. There are even additional environmental protection safeguards.
Detractors, however, say TPP has the potential to promote cheaper goods from low-wage countries, undermining manufacturing jobs in a country like the USA; and will do nothing to address income inequality amongst member countries. Nobel laureate, Joseph Stiglitz, called TPP “a motivator of greater inequality.”
Before the TPP text was released – so much of the criticism of TPP arose from the fact that unusually all drafts were kept secret - there were fears the intellectual property (‘IP’) chapter of TPP would lead to abuses by multinational (particularly US pharmaceutical and ITC firms), since the agreement allows foreign companies to sue governments for changing laws or policies that significantly damage their business. In the event, however, the IP chapter only retains data exclusivity in pharmaceuticals for eight years, rather than the twelve years US pharmaceuticals have become used to in the USA.3
Mexico, Chile and Peru: Participation in the TPP from the Pacific Alliance
As three of the four members of the existing Pacific Alliance regional trade bloc, Mexico, Chile and Peru will all feel distinct effects from TPP. Sofofa, a Guild Federation that represents industrial companies in Chile, has announced that it considers TPP beneficial for Chile, and President Bachelet has been vocal in asking Congress to support the agreement. Chile and Peru, both commodity-driven economies, will see 98% of taxes on their exports of dairy, sugar, wine, rice and seafood eliminated; with tax and tariff reductions on many other foods. Additionally, Peru will benefit from Australia’s participation in TPP, because of potential synergies between their mining sectors. Chile arguably will be less impacted, as the two countries already maintain a trade agreement.From a commercial perspective, TPP stands out as the first major trade agreement of the innovation era. It possesses clear-cut provisions designed to safeguard digital trade and data flows, and permit commercial enterprises to store data across borders, rather than requiring them to store data domestically. Mexico, and to a lesser extent, Chile, led the push during TPP negotiations for such data flow provisions, successfully overriding Asia-Pacific countries such as Australia and Singapore, who were less enthusiastic. In this way, the TPP has already provided an avenue for Latin American economies to demonstrate leadership in the nascent trade and regulation of digital information.Colombia: The Pacific Alliance’s Non-ParticipantColombia is the only Pacific Alliance member not participating in the TPP, although it has formally expressed an interest in doing so, and is in a strong position to join. All current states in the TPP are also part of the APEC membership, of which Colombia is not, and it is thought that this may have contributed to Colombia´s current exclusion. Colombia requested APEC membership in 1995 (which it has yet to receive) and maintains free trade agreements with five of the eleven current TPP members. Colombia recently signed a free trade agreement with South Korea, and it is negotiating a free trade agreement with Japan. For the most part, it should not see its exports diverted as a result of the trade within the bloc.
China and Brazil: The Excluded
China:China’s conspicuous absence from the TPP holds important implications for the shape of regional trade between the Asia-Pacific countries and Latin America. China’s exclusion has angered Beijing, causing them to view TPP as a geopolitical containment effort rather than a free trade agreement.Closer examination of TPP membership, and China’s lack of participation reveals a definitive line with the US and Japan on one side, and China on the other. Perhaps not coincidentally, the US and Japan have both refused membership in the Asian Infrastructure Investment Bank (AIIB), which China announced in part as an answer to America’s much-vaunted (but scarely delivered) ‘Asian Pivot’, ostensibly to help facilitate regional connectivity and infrastructure development in the Southeast Asian region.TPP isn’t the only Asia-Pacific deal in town. For many years, and led by the ten member states of the Association of Southeast Asian Nations (‘ASEAN’) there have been moves to launch a Regional Common Economic Partnership (‘RCEP’) of the ASEAN ten plus Australia, China, India, Japan, South Korea, and New Zealand. The RCEP area should have a combined GDP of $17 trillion, and also make up about 30% of world trade. However, RCEP is a very different type of trade agreement, with none of TPP’s breadth of provisions or scope. But the reach of even these more modest ambitions has exceeded ASEAN’s grasp and ASEAN member states recently delayed (again!) implementation of RCEP until the end of 2016. It was supposed to come into force December 31st 2015.Of ASEAN members most notably Indonesia struggled with the idea of opening up Indonesian markets from their current highly protected state. Other ASEAN members like Vietnam, Malaysia, Singapore and tiny Brunei are also TPP members and, they believe, their economies will roar ahead, grabbing the lion’s share of foreign direct investment (FDI), while more timorous Indonesia will experience a severe opportunity cost of forgone FDI.Brazil:This concept of ‘FDI opportunity cost’ is talked about amongst bankers and economists in Brazil. The limits of geography aside (Brazil is not a Pacific state, nor a member of APEC, from out of some of whose members TPP was born), the position of Brazil in a Latin America where TPP is a major economic driver is fascinating.On the one hand, the Pacific Alliance used the trade deal as a way to further establish themselves as an alternative to Brazil’s large domestic market. On the other, Brazilian public policy is preternaturally uninclined to engage in free trade, or the agreements to underpin it. Brazil remains a rather protectionist market. With an economic crisis, a deep political corruption scandal, a currency value loss of 35% against the US dollar, low presidential approval and a ten percent inflation rate, domestic issues are taking precedence within the Brazilian government, and diverting attention away from trade agreements. While Brazil’s currency depreciation has benefited exports, Brazil now runs the risk of losing out to Chile and Peru, as 24% of Brazil’s exports last year went to TPP countries. TPP also gives Chile, Mexico and Peru access to US markets that Brazil, Argentina and Venezuela can only ever dream of, no matter who in power.Given the political stasis and risk of recession becoming depression in Brazil, it is feared by some that TPP will be a punctuation mark which will start to see a marked divergence of future FDI away from Brazil and pivoting toward TPP members; especially in higher value-added sectors.This leaves Brazil, Argentina and Venezuela with Mercosur. Along with Uruguay, Bolivia and Paraguay, these are the six full members of Latin America’s ‘EEC’ (as the pre-cursor to the European Union was known). Traditionally Mercosur is looked upon, by free trade hobbyists, with a look of faint embarrassment that one might have for a wayward child. Until the very recent political changes in Argentina, and Venezuela, it was thought unlikely that any real life might be breathed into Mercosur, but perhaps the potential is there, one day, for Mercosur to be a bridge to TPP in some way. But, realistically, this can never happen unless Brasilia see a major shift in focus away from domestic market protectionism and towards a real commitment to integrate into international free trade.
Although the conclusion of the TPP talks is a major feat, all is not over yet. Most member countries are waiting quietly to see how the US Congress will react to, among others, the data protection clause for pharmaceutical clinical trials before putting the agreement forth to their own congresses.
Given the upcoming US presidential election, the Democratic Party’s resulting need to cater to its labour union base, and the lobbying strength of PhRMA, the member countries may have to wait a while before the US Congress decides whether to allow the President to ratify the agreement.4
In the meantime, companies who are able to see the writing on the wall are considering how best to leverage TPP in investment plans for their developing economies portfolios.
We are already seeing some pharmaceutical companies preparing for imminent regulatory coordination between TPP’s Latin America countries. What will be most interesting to look for, and especially at a time when global investors are being much more choosey whether or how much to invest in developing economies, is if we see any early sign of FDI switching towards the TPP ‘LATAM three’ and away from countries outside TPP.
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2.TPP, also, is not all about tech and pharma. Some of the toughest TPP talks were between the US and Japan about opening the latter’s highly protected agricultural sector.
3.This is eight years longer than the exclusivity protection they currently enjoy, however, in some TPP member countries.
4.The USA is not the only country that may struggle to ratify. This is also true of Malaysia, which almost dropped out of TPP in the final furlong. For Malaysia ensuring that TPP does not endanger its ‘Bumiputera’ laws is critical. The Bumiputera laws provide for positive discrimination for ethic muslim Malays for housing and certain land rights; education and employment preferment.