Earlier this week, President Barack Obama signed into law legislation giving the US “fast track” authority to conclude the Trans-Pacific Partnership (TPP) — removing a major roadblock to the 12-nation regional trade and investment pact.
There now appears to be sufficient political will for remaining hurdles, though high, to be cleared.
For New Zealand, the real promise of the TPP lies in greater market access for our primary products – especially dairy. But to access these benefits (if available),
New Zealand will need to trade concessions in other areas.
The size of the prize
The US, Japan and Canada represent the three largest economies involved in the TPP negotiations. None of them has a Free Trade Agreement (FTA) with New Zealand, and all of them currently impose high barriers to agricultural imports.
If New Zealand can remove or reduce these trade barriers, the size of the prize could be game-changing.
Indeed, collectively, the TPP countries account for a combined GDP of more than US$27 trillion. A study by the East West Centre estimated the potential gain to New Zealand exports at US$4.1 billion in 2025 – a 6.8% increase. New Zealand exports to China have grown four-fold since New Zealand signed the FTA with China in 2008. Exporters hold out similar hopes for the TPP.
But there is a way to go before the Government can feel confident the deal will deliver sufficient gains for exporters. Negotiations on market access concessions have been left until last – and New Zealand negotiators will be working hard to achieve real progress in the coming weeks.
Will the trade-off stack up for New Zealand?
Any market access improvements, however large, will be balanced against difficult concessions in other areas. The TPP will be a wide-ranging agreement, with a particular emphasis on so-called ‘next-generation’ trade issues (that is, beyond border tariffs) to help integrate and facilitate regional supply and value chains.
New Zealand does not have many bargaining chips to offer. We have little remaining tariff protection, few restricted services, large Foreign Direct Investment (FDI) inflows and small FDI outflows. Our limited overseas footprint also means that New Zealand does not – in the near term – stand to gain significantly from ancillary agreements, like enhanced investor protections.
New Zealand’s guiding strategy for negotiating ancillary chapters is accordingly, and in general terms, to reduce domestic (including fiscal) risk, rather than secure particular rights. Of these ancillary issues, three are particularly important:
the scope of intellectual property (IP) rights
restraints or disciplines on government procurement (especially of pharmaceuticals which are presently bulk-purchased in New Zealand through PHARMAC), and
the reach of investor-state dispute settlement (ISDS).
None of these issues is likely on its own to be a deal breaker. With careful drafting and appropriate safeguards in place, the costs associated with stronger IP protections, ISDS or new procurement rules should all be manageable.
In the end, the question is whether one can point, overall, to sufficient market-access gains to justify the trade-offs.
The TPP is likely to extend the scope of IP rights, which will have regulatory and cost implications for New Zealand. In 2013, leaks from the TPP talks revealed that New Zealand had opposed US demands for greater IP protection. It is unclear whether concessions have been made in respect of other IP rights but recent reports suggest negotiators have agreed to extend copyright terms.
The TPP is also likely to include binding ISDS. One might argue that this ought not to be especially controversial, given that New Zealand already has binding ISDS agreements as part of its FTAs with China (2008), ASEAN (2010), Malaysia (2010) and Korea (2015). Also, although increasingly the subject of public scrutiny, the risks of ISDS can be significantly reduced by careful drafting. New Zealand’s negotiators are highly-skilled in this respect.
Nonetheless, all negotiations face constraints. The TPP investment chapter may in some respects go further than the text of deals previously reached by New Zealand. For instance, it may extend some “pre-establishment” rights without wholly carving out Overseas Investment Act approval decisions from all aspects of the ISDS mechanism.
A leaked draft also included a weak form of “umbrella” clause, under which investors could claim ISDS compensation for a State’s failure to adhere to non-treaty investment obligations. This would be a new (and not necessarily prudent) step for New Zealand in its FTA investment chapters. It is also not clear whether the TPP will include any cross-cutting general exceptions, which assist in explicitly balancing investor protections with a State’s right to regulate.
New government procurement rules could affect the way PHARMAC makes decisions (although there is no suggestion that PHARMAC will be abolished by the deal). A draft annex on “transparency and procedural fairness for pharmaceutical products and medical devices”, leaked earlier last month, sets out principles and procedures that PHARMAC would need to work within. Critics argue that the annex could expose PHARMAC to protracted litigation brought by international pharmaceutical companies.
Given that more rules provide more scope for complaint, this may be so. However, PHARMAC, as a Crown agency, is already subject to public law rules which can be enforced through judicial review. TPP is most likely simply to increase the intensity and cost of challenges against PHARMAC’s decisions.
A level playing field for trade and investment
In making any cost-benefit assessment, one must bear in mind that the future of global commerce is being reshaped by ‘mega-regional’ trade and investment agreements. While the TPP may not be perfect, it looks increasingly likely to be a reality, whether New Zealand joins or not.1
If New Zealand walks away, its exporters will likely be at a significant disadvantage, relative to their competitors in other TPP economies. The purpose of the TPP is to level the playing field for trade between member states. It will do quite the opposite for countries outside the deal.
The onus is on negotiators to secure meaningful gains for exporters, and to minimise fiscal and sovereignty risk, so that New Zealanders can be confident they are better off in the tent, than outside of it.
A ministerial meeting aimed at finalising the TPP is scheduled for the last week of July.
If our negotiators succeed, and New Zealand joins the TPP, New Zealand will need to go through a process to ratify the treaty. This will include ensuring New Zealand’s domestic laws and regulations are consistent with our obligations under the TPP.
Chapman Tripp will be running seminars in Auckland, Wellington and Christchurch on the implications of the TPP for New Zealand business, once the agreement is finalised.