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Thorny Issues in Trans-Pacific Partnership Negotiations

Trade negotiators from 12 countries left Maui at the end of July 2015 without reaching a final agreement on the Trans-Pacific Partnership (TPP), a massive trade pact among countries that represent about 40 percent of the world economy. The 12 countries negotiating TPP are the United States, Japan, Mexico, Canada, Australia, Malaysia, Chile, Singapore, Peru, Vietnam, New Zealand, and Brunei Darussalam.

Stymying further progress on the agreement are several tough issues that won’t be easy to reconcile as several countries dig in to protect certain sectors of their economies. Further complicating negotiations are up-coming October elections in Canada and the desire on the part of the U.S. to finalize the deal before 2016 presidential election campaigns go into high gear.

It’s ironic that this deal—portrayed as an agreement to open important Pacific Rim markets—is being held up by traditional protectionist tactics as countries seek to protect key industries.

One of the thorny issues for the U.S. and New Zealand is Canada’s supply management program for dairy products, poultry and eggs. Besides trying to balance domestic production with domestic demand and providing price supports, Canada’s program imposes quotas on dairy imports and stiff tariffs over those quotas. For example, tariffs on butter can be as high as 299 percent.

New Zealand and the U.S. would like TPP to provide better access to that Canadian dairy market. As a small country, New Zealand is nonetheless a major dairy exporter, and dairy products account for about 30 percent of New Zealand’s merchandise trade exports. But with Canada’s Prime Minister Stephen Harper facing what could be a tight reelection, Canadian negotiators might be reluctant to alienate the domestic dairy industry. On the other hand, Harper does want the trade deal and may have to compromise to reach that goal, as New Zealand had been adamant in holding to its position.

A continued bone of contention for Australia is the U.S. sugar program, which restricts imports and imposes high tariffs above the import quotas. (Similar to Canada’s dairy program, by the way.) Australia, in its earlier bilateral trade agreement with the U.S., did not get the U.S. to agree to allow more sugar imports, and that still rankles.

Another issue divides Mexico and Canada from Japan—and to some extent, the U.S.—“country of origin” thresholds, that is, the domestic content of auto parts and what percentage had to come from TPP countries to have that be duty-free. Mexico and Canada weren’t happy with the proposed deal the U.S. and Japan agreed to, which would have allowed Japan to source more parts from countries that aren’t part of the TPP. Now, those four countries have to get together to reach agreement.

Intellectual property issues are one of the key areas of disagreement. The U.S. is holding out for longer patent protection for biologic drugs and is insisting on a 12-year period, while other countries are proposing much shorter periods. U.S. laws dictate that other companies may not produce a generic version of that biologic drug until 12 years after the biologic has been approved. Biologics generally take much longer for development, testing and regulatory approval. By the time they get to market, most of the costs have been expended while half or more of the patent life of 12 years is already used. That means its real or effective patent life is much less. But countries such as Australia think that the longer patent life will mean higher prices for their formularies for drugs.

Not in the news recently during the negotiations but still one of the major sticking issues is investor-state dispute settlement (ISDS). ISDS allows an investor in a country party to an agreement to make a claim that another country has expropriated its investment and to ask for compensation. When that occurs, the dispute would be arbitrated, generally by an international panel.Whether that remains in or out of the TPP is still a question. It is likely that ISDS will be revised to address some of the criticisms.

These thorny issues will be difficult to resolve in a tight timeframe. If negotiators had approached TTP as an opportunity to free up markets and reintroduce free trade for the benefit of all the parties, it could have been a major accomplishment. But mercantilism is still the standard approach in international trade.