What you need to know about the Trans-Pacific Partnership (TPP)

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15-10-11 TPP

Current rules under the North American free-trade agreement (NAFTA) require that 62.5 per cent of auto parts come from North America in order to avoid tariffs. Under the TPP, content requirements are lower and this may cost Canadian jobs. A 45-per-cent level will be  required to be considered duty-free for some parts and 40 per cent for other components.

 

 

What is the Trans-Pacific Partnership (TPP) ?

Canada, U.S. and Mexico have long had special access to each other’s markets under NAFTA.

Instead of a group of three as under NAFTA, twelve countries would share in the advantages of TPP membership. Broadly speaking, the Trans-Pacific Partnership (TPP) is similar to NAFTA in that it involves pledges to reduce or eliminate tariffs on a wide range of goods and services. It also sets out rules for resolving disputes and provides a modest attempt to set some minimum employment standards in the twelve member countries.

Could anything stop the implementation of the TPP?

The TPP deal still requires the approval of the U.S. Congress and many Democrats and some Republicans are expressing strong reservations about the deal.

For example, just days after the signing, leading Democratic Presidential candidate Hillary Clinton said she couldn’t support the TPP.

In an interview on U.S. National Public Radio, Clinton said the TPP does not meet her bar for creating jobs, raising wages for Americans and advancing national security.

Clinton said she was also worried “about currency manipulation not being part of the agreement” and that “pharmaceutical companies may have gotten more benefits and patients fewer.”

“As of today, I am not in favor of what I have learned about it,” Clinton said, later adding, “I don’t believe it’s going to meet the high bar I have set.”

Ford Motor Co., has similar concerns to Clinton’s and is pushing the U.S. Congress to reject the deal because it doesn’t have any provisions to address currency manipulation by Japan and other countries.

In Canada, a multi-step ratification process involves submissions to the federal Treasury Board, two pieces of legislation (the treaty itself and the implementing legislation), a waiting period of at least 21 sitting days, followed by the actual passage of the legislation through the House of Commons and the Senate.

The NDP (and its labour allies) have promised an all out fight against approval of the deal while the Conservatives, of course, are strongly supportive.

The Liberals are being cagier about their position but have been obliquely indicating support for the deal.

Given that both the Liberals and New Democrats have been clear that they will in no way work with a Harper minority government,  the TPP would figure prominently in any post-election discussions between the two parties aimed at cobbling together a working relationship that had the confidence of the House.

What are the key sectoral changes under TPP?

Autos

Canada clearly has made some significant concessions on auto imports that will likely result in Canadian job loses.

The Canadian Vehicle Manufacturers Association, whose members consist of the Canadian units of Chrysler, GM and Ford Motor Co., said it is concerned about the five-year phase-out of the 6.1-per-cent tariff on imported vehicles. That’s a much shorter time frame than the U.S. elimination of its 2.5-per-cent tariff on Japanese passenger cars over 25 years and the 30 years it will take to end the 25-per-cent U.S. tariff on light trucks.

Perhaps the biggest threat to auto sector jobs relates to changes in parts rules.

Current rules under the North American free-trade agreement (NAFTA) require that 62.5 per cent of auto parts come from North America in order to avoid tariffs.

The new “content” thresholds for parts under the TPP are significantly lower and this could cost jobs. Moreover, they differ for different kinds of parts. A 45-per-cent level is required to be considered duty-free for some parts and 40 per cent for other components. Included in the 45-per-cent or 40-per-cent levels are engines, transmissions, chassis components, bumper systems and suspensions. A third set of parts can be considered originating in TPP countries with just 35-per-cent TPP content.

Most auto experts believe that the deal has some upside potential for large Canadian parts companies that have easy access to capital, such as Linamar Corp., Magna and Martinrea International Inc.

On the other hand, the concern of many smaller auto parts companies that are relying on the low value of the Canadian dollar to stay afloat, is that they will be swamped by competition from low-cost TPP countries such as Malaysia and Vietnam.

Other industry sources believe auto makers from Japan that are not located in Canada now will have even less incentive to invest here if their cars can enter duty-free and if they can obtain low-cost parts from China or other countries that can then become part of Japan-made engines or transmissions.

Subaru Canada Inc., for example, imported 72 per cent of the vehicles it sold in Canada in the first nine months of the year from Japan and stands to benefit most among the Japanese companies from the tariff elimination.

Prime Minister Harper has announced $1 billion worth of measures to help maintain vehicle assembly in Canada and attract new investment over the next 10 years.

But auto industry officials expressed doubt about whether a federal program of that size can help persuade General Motors Co. find new products for its Oshawa, Ont., assembly plants or Fiat Chrysler Automobiles NV to keep its endangered assembly plant in Brampton, Ont., open.

Unifor, the union that represents workers at the Canadian units of the Detroit Three auto makers was even more pessimistic and said the deal puts 20,000 auto jobs at risk in Canada.

Pharmaceuticals

Biological pharmaceuticals were among the final points of disagreement in TPP negotiations. Biological products (biologics) include vaccines, blood and cutting-edge products that combine natural substances.

The final deal provides pharmaceutical companies with five – eight years of exclusive use of new biotechnology before having to share that data with generic drug manufacturers. The Biotechnology Industry Association (an industry trade group) had been urging TPP countries to match the current 12-year intellectual property restrictions that are in place in the United States. The association called the shorter protections “remarkably short-sighted” and warned they would chill global investment in new health research.

As indicated above, in the U.S. biologics are protected, in effect, from all competition from generic versions of biologics—for twelve years after they get marketing approval from the the U.S. F.D.A., even if their patents have expired. Other countries, however, typically have much shorter protection periods, or no formal protection period at all. In the T.P.P. negotiations, the U.S. pushed to make twelve years the standard in all twelve countries, even though there’s no good evidence suggesting that such a lengthy period is necessary to drive innovation. And while it ended up compromising—the deal will now protect biologics for five to eight years—the T.P.P. will still almost certainly drive up the price of these drugs in countries like Peru, Vietnam, Malaysia, and Mexico, and as a result limit patients’ access to them.

Dairy

Canada’s supply management system in dairy and poultry was not abandoned, but Canada would give TPP members duty-free access to 3.25 per cent of its dairy market and 2.1 per cent of its poultry market.

Within hours of the deal being announced, the Harper government said it would pay $4.3-billion over 15 years to dairy, chicken and egg farmers affected by the TPP or Canada’s free-trade deal with the European Union.

Perhaps not surprisingly, the Dairy Farmers of Canada responded favourably to the deal.

“We obviously would have preferred that no additional market access be conceded in the dairy sector,” Dairy Farmers president Wally Smith said in a statement. “However, we recognize that our government fought hard against other countries’ demands. … We have come a long way from the threat of eliminating supply management.”

Intellectual Property

The biggest change in “intellectual property” is a requirement to extend the term of copyright from life of the author plus 50 years to life plus 70 years. The additional 20 years will likely keep works out of the public domain for decades. The New Zealand government estimates that this change alone will cost NZ$55 million per year for a country that is one-ninth the size of Canada. Moreover, New Zealand was able to negotiate a delayed implementation of the copyright term provision, with a shorter extension for the first 8 years. It also obtained a clear provision that does not make the change retroactive – anything in the public domain stays there. Malaysia also obtained a delay in the copyright term extension requirement.

Canada, on the other hand, simply accepted the U.S. driven changes and the cost to Canadians could be significant. If the New Zealand’s estimate is accurate, the cost to the public alone will easily exceed $100 million per year. Hundreds of well known Canadian authors and composers who died years ago will not have their work enter the public domain for decades.

Agriculture

Canada expects the TPP will be good for much of the agricultural sector as new export markets open up, thanks to the elimination or reduction of tariffs amongst member countries. The timeline varies by country and by product.

Access to the large Japanese market is a key prize for TPP members. Once the deal comes into force, Japan will immediately end tariffs on 32 per cent of its agricultural imports, while other tariffs would be reduced or eliminated over the next 20 years. Australia, Malaysia and New Zealand will eliminate more than 90 per cent of their agricultural tariffs immediately once the deal is in place.

Canola and processed food and beverages were highlighted by Canadian officials as export sectors that should benefit under the deal.

Canadian beef and pork producers may be among the big winners under the TPP deal. From 2012 to 2014, Canadian producers exported $2.6-billion worth of pork and $1.3-billion worth of beef to TPP markets, though much of that was to Canada’s NAFTA partners. Within 10 years, Japan is promising to eliminate its tariffs on a wide range of pork products, while the current 50-per-cent tariffs on beef will be reduced to 9 per cent within 15 years.

Other sectors

Industrial goods like farming and construction equipment as well as aerospace products would get quick access to TPP markets under the deal.

“Canada has obtained an advantageous tariff outcome – the elimination of all tariffs on industrial goods from all TPP countries,” states background information released by the Canadian government.

 

Other key issues in assessing the TPP

Investor-state provisions 

Free-trade deals, including NAFTA, have provisions for resolving disagreements between states. They also include investor-state provisions that allow private companies to contest (sue) government decisions. The TPP is no exception.

The investor-state provisions of Canada’s Comprehensive Economic and Trade Agreement (CETA) with the European Union was one of the main sources of controversy against the deal from within the EU. To date, there is still no final approval of CETA from the European Parliament due, in part, to objections to these provisions.

Canadian officials have said that the investor state provisions in the TPP are similar to those that are in CETA and NAFTA.

This is extremely worrisome. Lawsuits under these provisions used to be rare, but they’re becoming a growth industry. Nearly a hundred have been filed in the past two years, as against some five hundred in the quarter century before that.

There has also been an expansion in the types of claims that have been brought. Lawsuits under these provisions were originally meant to protect investors against seizure of their assets by foreign governments. Now lawsuits go after things like cancelled licenses, unapproved permits, and unwelcome (by corporate interests) government regulations and subsidies.

To what extent will Canadian exporters take advantage of the reduced tariffs under TPP?

In theory, under TPP Canadian companies will gain a competitive advantage over their rivals from non-TPP countries who will still face the existing tariffs.

In practice, it should be noted that despite signing 23 free trade agreements, Canada’s actual participation in world trade has shrunk substantially over the last decade, relative to our GDP and relative to total world trade.  Canada’s real exports of goods and services grew just 0.3 per cent per year from 2006 through 2014: the worst performance in our postwar history, and the worst of any major industrial economy. For example, the free-trade agreement signed between Canada and South Korea became effective in January 2015. During its first several months of operation, Canadian exports dropped 7 per cent, while our imports grew 8 per cent.

In other words, based on Canada’s experience with past trade agreements, it is not at all clear that Canadian exporters will take advantage of the lower tariffs provided under TPP at a scale that will compensate for increased imports in auto parts and other vulnerable sectors. This does not bode well for Canadian jobs.

Labour rules

The deal includes rules banning child labour and, in theory at least, entrenches the rights of workers in the 12 member countries to unionize.

The problem with the TPP labour rules is their enforceability. For example, Canadians of course, already have the right to unionize. That said, unions have been in decline in the private sector in Canada for over 30 years and in practice weak labour legislation makes it extremely difficult for workers wishing to join a union to certify new bargaining units in their place of work. If that is the case in Canada, imagine how difficult it will be to enforce the TPP’s rules regarding the right to unionize in places like Vietnam, Mexico and Brunei.

 

Bottom Line

As indicated above, the NDP and the labour movement strongly oppose the TPP agreement while the Conservatives and most business leaders strongly support it. The Liberals have generally been supportive of TPP (and “free trade” more generally) but officially are waiting to see the fine print before making a final decision on whether to support it.

While governments can implement transition programs to cushion vulnerable sectors from the harmful effects of trade agreements (witness the Harper government’s announcements on dairy and auto supports), Parliament can only vote up or down on the content of TPP.

TPP will likely be debated in Parliament in the early months of the new government. Canadian voters will have their say on the composition of that Parliament on Oct. 19. While TPP is far from the only issue that will determine the results of the Oct. 19 election, it is certainly one of the more important.

 

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