The TPP and the Pacific Alliance: complementary agreements toward higher regional economic...

THE TRANS-PACIFIC PARTNERSHIPS AND THE PACIFIC ALLIANCE:COMPLEMENTARY AGREEMENTS TOWARD HIGHER REGIONAL ECONOMIC INTEGRATION IN THE ASIA PACIFIC REGION

BY JUAN NAVARRO

Jeramie

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Document: REIWG 36-061A Draft: FIRST Date: 13 November 2016 Source: ABAC Canada Meeting: Lima, Peru

ABOUT ABAC

ABAC was set up to provide a link between APEC and the business community. Drawn from the private sector, ABAC members collectively prepare an annual report with recommenda-tions on how to improve the business and investment environment within the Asia-Pacific region. ABAC members are appointed by their respective Leaders, and represent a range of business sectors, including small and medium enterprises. The ABAC International Secretariat based in Manila. For more information, visit www.abaconline.org

ABOUT THE ASIA PACIFIC FOUNDATION OF CANADA

Established by an act of Parliament in 1984, the Asia Pacific Foundation of Canada (APF Canada) is a not-for-profit organization focused on Canada’s relations with Asia. Our mission is to be Canada’s catalyst for engagement with Asia and Asia’s bridge to Canada. APF Canada supports the building of Asia-competency and promotes knowledge and understanding of developments in Asia. Its research and policy work focuses on trade, investment, innovation, energy, and the environment.

A leader in research and analysis on Canada-Asia relations for over 30 years, APF Canada partners with government, business leaders, academics, and opinion makers in Canada and across the Asia Pacific region to offer clear, specific, and actionable policy advice.

ABOUT THE AUTHOR: JUAN SALVADOR NAVARRO

Mr. Navarro has vast experience conducting economic analysis, studies and research as an economist for 10 years at the Mexican Central Bank, as well as a university professor at pres-tigious universities. During the past year, Mr. Navarro has focused his research on themes related to international trade and FTAs. In addition, Mr. Navarro is a successful Canadian business entrepreneur, member and leader in different business and global organizations such as the Canadian International Council.

Submitted to Policy Research Grants Asia Pacific Foundation of Canada. This report was presented at the ABAC IV 2016 meeting in Lima, Peru.

The views expressed here are those of the author’s, and do not necessarily represent the views of the Asia Pacific Foundation of Canada.

3 ASIA PACIFIC FOUNDATION OF CANADA - FONDATION ASIE PACIFIQUE DU CANADA

TPP & PA : REGIONAL ECONOMIC INTEGRATION

The last report of the Organisation for Economic Co-operation and Development (OECD) pointed out that recovery in the global economy after the crisis remains modest due to a combination of economic factors, citing weak global trade as one of the causes. A report by the World Bank highlighted that global trade growth decreased from an approximate average of 7 percent during the period from 1990 to 2007 to about 4 percent annually after the crisis. The World Bank also listed the slowing momentum in the liberaliza-tion of commerce, the maturing global supply chains, and the weakness in global investments as some other reasons behind this slowdown in international trade. Despite the lacklustre economic environment, there were 277 regional trade agreements (RTAs) registered at the World Trade Organization, as of December 2015. Still, these RTAs have not been enough to reactivate the global economy because many of these agree-ments have faced new realities and issues of international trade.

Thus, global economy slowdown requires countries to make sound decisions and actions to reacti-vate global trade as an important component to boost economic growth to benefit all nations. RTAs such as the Trans-Pacific Partnership (TPP) and the Pacific Alliance (PA) come up at a crucial moment because they represent real engines for an improved global economy. The TPP and PA are innovative, proposing new solutions and overcom-ing challenges as no trade pact has done before, breaking new ground in a number of areas that go beyond traditional RTAs, and supporting a multilateral trading system to recover the route. Based on their frameworks, these two free trade agreements (FTAs) might be complementary agree-ments that contribute to the integration of the dynamic Asia-Pacific region through the creation of the Free Trade Area of the Asia-Pacific (FTAAP). Both trade pacts are aligned with the goals of the Asia-Pacific Economic Cooperation (APEC) forum that aims to open investment and trade within the region and has been a key supporter of the FTAAP.

THE TRANS-PACIFIC PARTNERSHIPS AND THE PACIFIC ALLIANCE: COMPLEMENTARY AGREEMENTS TOWARD HIGHER REGIONAL ECONOMIC INTEGRATION IN THE ASIA PACIFIC REGION

BY JUAN NAVARRO



Canada, as a member of the TPP, an observer of the PA, and a member of APEC, has a unique opportunity as a leader in bridging Latin America and the Asia-Pacific region. Taking this role will send a clear message of Canada’s genuine interest to contribute to and strengthen its relationships with the nations of the Asia-Pacific region. The participation of Canada needs to come from leaders, policy makers, government, business people, and Canadian society. Canadians need to understand that the TPP and PA are excel-lent allies to boosting their country’s economy, expanding and opening new markets, and inte-grating its business and economic trade sectors to global supply chains. Reports indicate that only 3.6 percent of Canadian businesses are exporting, showing the potential to keep encouraging entre-preneurs to think and trade globally.

The TPP and PA represent two excellent pathways toward higher regional economic integration in the Asia-Pacific region, giving Canada an opportunity for a leadership role and to act as a bridge between Asia and Latin America. Studies show that compa-nies that export tend to be more competitive and productive, and that they achieve higher profits than those companies that don’t export. The benefits of FTAs to Canadian businesses include opening up opportunities to global supply chains from traditional to advanced manufacturing, creative industries, professional and financial ser-vices, tourism, education, and business.

THE TPP AND THE PA

On February 4, 2016, the TPP was signed by 12 nations: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The TPP is a comprehensive and state-of-the-art free trade agreement that put together new solutions to many issues that have plagued global trade for

the last several years. At this stage of the TPP, each nation is following the domestic procedures for ratification, so the FTA has been signed, but is not in force yet. In comparison, on May 1, 2016, the PA, composed of Colombia, Chile, Peru and Mexico, (the latter three being TPP members), entered in force. This alliance opened a new chapter in the history of the Latin American region and its trade relationship with the world, in particular the Asia-Pacific region.

The goals of both regional FTAs have many concurrences, but there are also some differences in their approach and how the agreements are implemented. The TPP aims to remove barriers to investment, to liberalize trade, to eliminate or reduce tariffs and non-tariff barriers, and to go further in the establishment of trade rules and disciplines on a range of issues affecting global trade. The PA aims to become a platform for trade and economic integration with a clear interest to promote business in the Asia-Pacific region. The PA has introduced standards that go further than the free movement of people across borders, including elimination of visas, a decision that is already having a positive impact on tourism and overall business.

COMPARATIVE ANALYSIS

The TPP includes the United States and Japan, two of the top three world economies, but also includes dynamic nations with high potential to grow economically and with industries well con-nected to global supply chains. For the last few years, Vietnam has had a 6.4 percent growth in their GDP per capita, one the fastest worldwide. Of the PA members, four nations have economies with an expertise in international trade, and all have FTAs with the United States, the European Union (EU), and Canada. Additionally, according to Doing Business 2016, the PA nations earned



the top four places in the ranking of ease of doing business in the Latin American and Caribbean region: Mexico (1), Chile (2), Peru (3), and Colombia (4), a clear indication of the potential for international business opportunities. The TPP represents about 40 percent of the global GDP and 28 percent of world goods exports. Globally, TPP nations represent more than one-third of exports of heavy and light cars, one-quarter of chemical exports, one-fifth of aerospace exports, and more than half of mining exports. It is esti-mated that the TPP will eliminate about 18,000 tariffs. In parallel to this, PA nations, as part of the Latin American and Caribbean (LAC) region, represent 52 percent of the total trade, 39 percent of the GDP, and 45 percent of the foreign direct investment (FDI). The PA eliminated 92 percent of tariffs on products among PA nations.

The TPP and PA have integrated provisions that exceed international standards, and they have offered solutions to several issues that com-panies of all sizes and industries were facing, exporting and importing goods and services and doing international business overall. Solutions included improvements or new standards related to market access, rules of origin, trade facilita-tion, customs co-operation, public procurement, cross-border services, financial services, trans-parency, digital commerce, public procurement, investments, and investor-state dispute settle-ment (ISDS). TPP members have also added new standards related to intellectual property rights (IPRs) and state-owned enterprises (SOEs) that they included in separate chapters. In the PA, there is a higher interest in promoting free movement of people and tourism, encouraging academic and cultural exchanges, and integrating stock markets. While these two FTAs represent rather comprehensive documents, a further look at three important themes, investments, IPRs, and SOEs, will be undertaken for the purposes of this paper.

INVESTMENTS

The PA and TPP have followed similar pathways to include investment articles in their agree-ments. They have designed individual chapters that set the basis of a good business environ-ment in their regions. Both agreements included provisions that offer more certainty to foreign investors, such as setting clear definitions of what constitutes an “investment” and an “inves-tor”, incorporating National Treatment (NT) and Most Favoured Nation (MFN) provisions in pre- and post-establishment stages. These two concepts, NT and MFN, are key provisions that help investors feel more confident investing in a foreign country, as one, NT, prohibits the dis-crimination of a foreign investment as compared to a local investment and the other, MFN, guar-antees that a member country must be accorded the same advantages as any other “most-favored” member by the granting country. It is worth noting that the TPP includes special chapters for important themes that will also inevitably impact investments, such as labour, competitive-ness, business facilitation, regulatory coherence, technical co-operation, and capacity building. For investors who have determined that a violation to their rights has occurred, the ISDS provi-sions provide for a fairer and transparent process than originally seen in other investment or trade agreements. For instance, both agreements allow for public access to hearings and allow for the potential discussion of an appellate mechanism.



The following table is a side-by-side comparison of the investment chapters of both agreements.

PROVISIONS ABOUT INVESTMENTS TRANS-PACIFIC PARTNERSHIP PACIFIC ALLIANCE

Chapter Number Nine Ten

Definition of investment Yes / Art. 9.1 Yes / Art. 10.1

Lists required characteristics of investment Yes Yes

Definition of investor Yes / Definition of Party and non-Party investor

Yes / Definition of Party and non-Party investor

Includes requirement of substantial business activity No No

Type of National Treatment (NT) clause Article 9.4 Pre- and post-establishment

Article 10.4 Pre- and post-establishment

Reference to “like circumstances” Yes Yes

Type of Most Favoured Nation (MFN) clause



Includes Denial of Benefits clause Yes / Art. 9.15 Yes / Art. 10.13

Discretionary (“Party may deny”) or mandatory (“benefits shall be denied”) Unilaterally discretionary Unilaterally discretionary

Investments covered Applies to post-BIT investments only

Applies to post-BIT investments only

Procedural issues (ISDS) Yes Yes

Fair and equitable treatment (any mentioning in the text, except preamble) Yes Yes

Includes Expropriation and Compensation clause Yes / Art. 9.8 Yes / Art. 10.12

Includes treatment in Case of Armed Conflict or Civil Strife Yes / Art. 9.7 Yes / Art. 10.7

Includes transfer of funds clause Yes / Art. 9.9 Yes / Art. 10.11

Includes prohibition of performance requirements Yes / Art. 9.10 Yes / Art. 10.8



Requires senior management nationality No / Article 9.11 No / Art. 10.9

Health and environment (any mentioning in the text, except preamble)

Yes / Art. 9.16 Yes / Art. 10.31

Labour standards (any mentioning in the text, except preamble)

Yes, TPP has a special chapter for Labour (chapter 19)

Yes

Corporate social responsibility (any mentioning in the text, except preamble)

Yes / Art. 9.17 Yes / Art. 10.30

Corruption (any mentioning in the text, except preamble)

TPP has one chapter about it: Chapter 26 “Transparency and Anti-Corruption”

Yes / Art. 10.30

Subrogation clause Yes / Art. 9.13 No

Reference to investment promotion in text of agreement (not preamble)

TPP has one chapter about this and other related themes: Chapter 22 “Competitiveness and Business Facilitation”

Yes / Art. 10.29

Dispute Settlement included

Yes. In addition, TPP has Chapter 28 “Dispute Settlement” setting rules about this important theme

Yes. In addition, PA has Chapter 17 “Dispute Settlement” setting rules about this important theme

Frivolous claims

Inclusion of a process for addressing claims that are “manifestly without legal merit” as a preliminary objection

frivolity is an element considered when awarding costs to a respondent who has successfully objected the validity of a claim

Technical co-operation/capacity building

TPP has one chapter setting rules about this theme: Chapter 21 “Cooperation and Capacity Building”

Yes / Art. 10.33



INTELLECTUAL PROPERTY RIGHTS (IPRS)

According to the World Intellectual Property Organization (WIPO), the reasons why nations should consider promoting IPRs in their econo-mies are to encourage innovation, boosting their economic growth, and to give legal rights to innovators regarding their inventions and overall work, balancing these with the interest of society to have access to these innovations. In terms of IPRs, the TPP and PA have made improvements to the IPR system, but have taken different routes. On the one hand, TPP members invested a lot of time in this topic and discussed at length on how to create a better framework that balanced the interests of all stakehold-ers. The final document showed standards that no previous FTA had covered and went beyond current provisions of Trade-Related Aspects of the Intellectual Property Rights Agreement. The new standards defined in the TPP improved the provisions related to trademarks, copyrights, and patents, including criminal penalties for trade secret theft, clarifications regarding IPR enforce-ment including infringement in the digital space, and a proviso that TPP members cannot exclude SOEs from IP compliance rules. In addition, TPP negotiators agreed to include provisions about traditional and biologic medicines.

On the other hand, even though the PA docu-ment includes some articles referring to intellectual property, it does not have a specific chapter addressing IPRs separately. Instead, PA nations established a work group with the goal of bringing together the four intellectual property offices of member nations to plan and execute a strategy with joint and specific co-operation activities that strengthen IPR protection. This group has been working in three specific areas: intellectual property, copyrights, and transver-sal issues. In October of last year, the PA issued

a joint declaration stating that they would be working on specific activities to increase intel-lectual property protection and to ensure access to services related to intellectual property. The Patent Prosecution Highway, one of the planned activities, consists of sharing information among the four intellectual property offices of PA nations and makes the registration processes simpler and faster for the final user. The second activity was the study of possible measures for harmonization, and the simplification of proce-dures in the field of trademark registration. The PA takes a pragmatic approach, swiftly moving forward from purposes to concrete actions in benefit of their individual economies.



STATE-OWNED ENTERPRISES

The ratio of state-owned enterprises among the Fortune Global 500 grew from 9 percent in 2005 to 23 percent in 2014, and SOEs from China strongly influenced this number. Likewise, the OECD pointed out the importance of implement-ing an effective legal and regulatory framework that guarantees a fair competition between SOEs in Asia and other companies. For this reason, this international organization created the forum “OECD-Asia Network on Corporate Governance of State-Owned Enterprises” with the goal of creating a space to share best practices related to SOEs and, in this way, boost competitiveness and economic growth in Asian economies. Many times, SOEs fulfil a social purpose and their pres-ence adds value to society. However, when SOEs offer commercial services or products, regulation should be put in place to avoid any preferential support by governments or regulations, allowing all companies to compete on an even playing field.

Since many TPP nations have active and power-ful SOEs in their economies, such as Vietnam and Malaysia, and considering the potential-ity of China joining the TPP, the United States promoted and achieved consensus to include a separate chapter about SOEs in this agreement. Some of the provisions in this chapter included requiring a list of SOEs to share with the other TPP Parties, providing reporting requirements to guarantee SOEs make purchases and sales in a commercial base, and ensuring SOEs do not discriminate against the enterprises of other TPP nations. In comparison to this, the PA did not include a chapter about SOEs in its agree-ment. Still, in the event that member nations ever deemed this to be an important subject to address, there is a flexibility in their functioning which can allow for the creation of a work group that could regulate the space and create special activities, just as they did for IPRs. Furthermore,

the agreement allows them to make amendments and a new chapter could be agreed upon by the four nations, as they did on July 3, 2015, when they added a new chapter on regulatory improve-ment. The TPP chapter on SOEs could serve as a good reference to this end.

THE TPP AND THE PA IN THE BROADER CONTEXT OF APEC

The international trade system is at a very criti-cal moment in which positions and definitions are crucial to support the recovery of the global economy and to boost business in local communi-ties. It seems that two main options exist about how nations might position themselves on FTAs. One option is to withdraw from them, keeping distance or stepping back from any membership in FTAs, the decision of the U.K. to leave the European Union being a recent example of this position. The other option is that nations keep moving forward toward more integration with current partner nations and new ones, trying to be part of larger FTAs which allow integration of their industries to global supply chains. It is important to clarify that every nation has the right to decide how they will participate in these processes of trade and regional economic inte-gration, analyzing their industries, identifying strengths and weakness, setting objectives, and preparing to compete and to reap the benefits of their efforts. In this regard, the TPP and PA are two excellent examples of nations trying to move forward in their goals of greater trade and economic integration with countries of the Asia-Pacific region.

Analyzing the TPP and PA in the broader context of APEC suggests that both FTAs share the values of APEC related to deeper integration and collaboration in the Asia-Pacific region to achieve sustainable economic growth. In the coming days, a study to create a roadmap, step-by-step,



for the Free Trade Area of the Asia-Pacific will be released. Endorsed by APEC nations in 2014, it has generated great expectation and will arrive at a very important moment considering the need to accelerate international trade. According to the Peterson Institute for International Economics, there are two feasible roads for reaching the FTA AP’s vision. One option is the expan-sion of the TPP. The second option is through a new agreement that brings together different FTAs of the region, including the TPP and the Regional Comprehensive Economic Partnership (RCEP). RCEP is a potential RTA between the Association of Southeast Asian Nations (ASEAN) and six states with which ASEAN has existing FTAs, including China. While the two scenarios presented by the Peterson Institute are feasible, considering the PA and TPP as two complemen-tary agreements in the context of APEC that can support each other would be economically and socially useful. The TPP and PA working together under their respective frameworks could con-tribute to the integration and prosperity of the Asia-Pacific region and beyond.

The TPP and PA require commitments and more economic and trade integration efforts from their members and, most importantly, both FTAs share common values about global trade. Over the past few years, some analysts have suggested that the TPP and RCEP might be the two FTAs that could match the composition of the FTA AP. However, other critics worry that RCEP would not be a good match with the TPP because it would set provisions below TPP standards, which would make integration with the FTA AP more difficult. For that reason, the PA gets a gold star rating based on all that has been achieved since it was signed. For instance, the PA, consistent with its practical approach since they signed the agreement in 2011, has been in a constant invest-ment promotion campaign, visiting more than 22 nations to invite them to invest in the PA

region, organizing business summits, and con-tacting directly more than 5,000 business people to become a real platform for trade and economic integration. In addition, PA members have opened consulates and embassies together to provide information and promote their nations’ businesses in countries of interest. Last, but not least, they have achieved a milestone success with the integration of their four stock markets into the integrated Latin American market, known as MILA by its acronym in Spanish. MILA offers investment opportunities in equities on over 700 companies from the four PA nations. The frame-work created by the PA has lead to substantial benefits and could serve as an example for RCEP negotiations and a vital piece, along with the TPP, of the FTA AP puzzle.

CANADA’S ROLE AS A BRIDGE BETWEEN LATIN AMERICA AND ASIA

Canada’s role in helping bridge Latin America with Asia is a unique opportunity to demonstrate Canada’s genuine interest to collaborate in initia-tives between both regions. Moreover, this role would allow Canada to be present and involved in the different trade initiatives occurring in these areas and to promote its own companies in growing markets. To succeed in this role, it could make use of its expertise in these regions and make effective use of its seats as special observer in the PA, as a signatory nation of the TPP, and as a member of APEC. Canada’s participation in these three spaces could positively influence the course of co-operation and integration for both regions. There is a wealth of Canadian expertise from its long history negotiating FTAs with all of the PA members, FTAs with Costa Rica and Panama, as well as nine foreign investment pro-motion and protection agreements with countries of the region. In addition, its experience through



the Canadian Trade Commissioner Service, with offices in 23 nations of the Asia Pacific region and 20 in Latin America countries, makes Canada a the perfect position to assume this role. According to Global Affairs Canada, since the Americas “were made a foreign policy prior-ity in 2007, two-way trade between Canada and the Americas has increased over 40 percent and two-way investment has more than doubled.”

Marc Lortie, a former Canadian diplomat with extensive experience representing Canada abroad as Canadian Ambassador to Chile, Spain, and France, as well as sherpa for the third Summit of the Americas, pointed out in this report that Canada’s role as a trade bridge linking Latin America with Asia is a real possibility and an opportunity it should take. He added that even though there are Asian countries doing direct business in Latin America, Canada has in its favour a vast knowledge of the region. He men-tioned that during the last 20 years, Canada has truly developed a meaningful relationship with Latin America, and, for that reason, Canada is very well-positioned there through several FTAs and investments. Mr. Lortie further noted that Canada counts on huge relationships with Asia and, along with Port Vancouver, one of the most important ports in the Pacific. These are unde-niably great assets to put in play when looking to bridge both sides. He advised that if Canada wants to succeed in this role, it needs to find creative and pragmatic solutions that link these regions effectively. About Canada’s participation as observer in the PA, Mr. Lortie affirmed that being an observer gives Canada the opportunity to better understand the issues being discussed, and gives the country an opportunity to col-laborate on the possible solutions. Mr. Lortie concluded his contribution to this report by saying that Canada remains an open trading partner and that is good, because prosperity is in open markets and dynamic trade. “Canada has

to be extremely attentive and vigilant because the forces of protectionism are on the rise”, said Mr. Lortie, “and it is not a good signal at all for Canada and the overall economy.”

Canada has been an active observer of the PA ever since it became the first non-Latin American observer to this trade pact in 2012. In 2015, Canada hosted a PA delegation on a study tour of the extractive sector and in June 2016, Canada and the PA signed a joint declaration on part-nership, in which they identified six areas for increased co-operation: education and training; technology and innovation; responsible natural resource development; science; small- and medium-sized enterprises; and trade facilitation and promotion. Canada should seize the current opportunities and take the next step to bridging and supporting PA nations, observers of the PA, and Asian economies. To this end, Canada has to apply its leadership and influence in several orga-nizations of the Asia-Pacific region, particularly the APEC forum.



CONCLUSION

Global trade is a key element to boost the global economy and recover the dynamism present before the crisis. The TPP and PA are two inno-vative trade agreements that share common values that have taken two somewhat different approached to achieve similar outcomes. These FTAs can and should serve as building blocks towards the FTAAP. In this regard, the possibil-ity for Canada to assume an active role as a trade bridge to between Latin America and Asia is a unique opportunity that should not be looked over. Likewise, Canadian businesses should strive to better understand the benefits of FTAs such as the TPP and PA, and prepare themselves to partic-ipate in global opportunities, as they are endless.



SOURCES:

World Bank. 2016. Global Economic Prospects. Retrieved from: https://www.worldbank.org/content/dam/Worldbank/GEP/GEP2016a/Global-Economic-Prospects-January-2016-Implications-Trans-Pacific-Partnership-Agreement.pdf

Deloitte. 2014. The future of productivity: Smart exporting for Canadian companies. Retrieved from: http://www2.deloitte.com/content/dam/Deloitte/ca/Documents/insights-and-issues/ca-en-insights-issues-future-of-productivity-2014.pdf

PWC. 2015. State-owned enterprises: catalysts for public value creation? Retrieved from: https://www.pwc.com/gx/en/psrc/publications/assets/pwc-state-owned-enterprise-psrc.pdf

Jeffrey J. Schott, Cathleen Cimino-Isaacs, and Euijin Jung. July 2016. Implications of the Trans-Pacific Partnership for the World Trading System. Peterson Institute For International Economics.

Retrieved from: https://piie.com/publications/policy-briefs/implications-trans-pacific-partner-ship-world-trading-system

Lortie, Marc. Interview by author. British Columbia, November 4, 2016.

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