WHERE NEXT? PICKING UP THE PIECES OF THE TRANS-PACIFIC PARTNERSHIP

Transcription

1 WHERE NEXT? PICKING UP THE PIECES OF THE TRANS-PACIFIC PARTNERSHIP

2 AUTHORS Matthew Kronby is a partner at Bennett Jones LLP specializing in international trade, investment and regulatory compliance matters. He is widely recognized as one of Canada s leading international trade lawyers. Before joining Bennett Jones, he was Director General of the Government of Canada s Trade Law Bureau from 2009 to 2012 and served in the Bureau as a manager and legal counsel for more than 15 years. He has also served as senior legal counsel to Canadian negotiating teams in the negotiation of the Comprehensive Economic and Trade Agreement with the European Union and in free trade negotiations with Colombia, Peru and Singapore. John Weekes is a senior business advisor at Bennett Jones. He provides clients with an insider s perspective on how governments approach the negotiation of trade agreements and the management of trade relations. He frequently offers public commentary on the challenges facing governments in these areas. During a 35 year career with the Government of Canada he served as Senior Assistant Deputy Minister in the Department of Foreign Affairs and International Trade, Chief Negotiator for the NAFTA, Ambassador to GATT during the Uruguay Round of negotiations that led to the creation of the WTO, and as Ambassador to the WTO from 1995 to ACKNOWLEDGEMENTS The authors express appreciation to Irina Rocheva at Bennett Jones for her valuable statistical research. BUSINESS COUNCIL OF CANADA The Business Council of Canada brings business leaders together to shape public policy in the interests of a stronger Canada and a better world. Founded in 1976, the Business Council is a non-profit, non-partisan organization composed of the chief executives of Canada s leading enterprises, representing companies from every region and sector of the economy. Through supply chain partnerships, service contracts and mentoring programs, Business Council members support many hundreds of thousands of small businesses and entrepreneurs in communities of all sizes across Canada.

3 TABLE OF CONTENTS EXECUTIVE SUMMARY 4 HISTORY OF THE TRANS-PACIFIC PARTNERSHIP 5 Where the TPP fits into our trading system 7 REQUIREMENTS FOR THE TPP TO COME INTO FORCE 8 General 8 Canada 8 LEARNING FROM THE TPP 10 Canada and Japan 10 In other countries 10 In Mexico and the U.S. 11 Tariffs: Better access for Canadian goods 11 Rules of origin: significantly more flexible than NAFTA 13 Automotive products: the challenges and opportunities of more competition 14 Textiles and apparel: increased sourcing flexibility should mean new export opportunities 15 Heavy crude oil: easier access to tariff preferences for exports to the U.S. 16 Regulatory measures for goods: Improving WTO commitments on cooperation and transparency 16 Trade in services: stability, predictability and new markets 17 Investment and dispute settlement: modernization and new protections for Canadian investors 18 Government procurement: new market access for Canadian suppliers 19 Intellectual property: despite concerns, mostly status quo for Canada 20 E-commerce: reflecting the digital era 20 Temporary entry: helping businesses and investors with commercial interests 21 Trade remedies: Governed by NAFTA and the WTO 21 State-owned enterprises: modest steps toward levelling the playing field 22 NEXT STEPS FOR CANADA IN A WORLD WITHOUT TPP 24 CONCLUSION 25 GLOSSARY 25 APPENDIX A 26 Canadian trade agreements with TPP signatories 26 Canadian import/export of goods with TPP countries (2015) 27 Canadian import/export of services with TPP countries (2014) 28 Totals Canadian import/export of goods and services with TPP countries 29

4 4 EXECUTIVE SUMMARY The Trans-Pacific Partnership (TPP) is a big deal both in length and substance. Negotiated by 12 countries over seven years, its 5,544 pages span issues from automotive parts to intellectual property, state-owned enterprises to government procurement. With the election of Donald Trump, the TPP is in limbo: without support from the US, it cannot be implemented. But regardless of its final status, the experience of negotiating a comprehensive, multi-country agreement holds important lessons for Canada. The agreement improved on the NAFTA in many ways and offers insights should there be a NAFTA renegotiation. This report lays out the history of the TPP, including its economic impact and place within the international trading system. It highlights what was in the TPP for Canadian businesses and lays out, chapter-by-chapter, some of the most important differences between the TPP and Canada s existing obligations under NAFTA. Finally, the paper identifies next steps for Canadian trade policy in a world without the TPP. There are significant opportunities to boost Canada s trade relationships in the Asia Pacific region. These include negotiating a bilateral Canada-Japan free trade agreement, building a stronger economic relationship with China, and proposing a free trade agreement with the Association of South-East Asian Nations (ASEAN). GDP OF TPP MEMBERS (USD)

5 HISTORY OF THE TRANS-PACIFIC PARTNERSHIP The TPP has its roots in an initiative by Brunei Darussalam, Chile, New Zealand, and Singapore to negotiate a Trans-Pacific Strategic Economic Partnership agreement 1. Colloquially known as the P4 (Pacific 4), these negotiations began in September The agreement was signed in July 2005, and came into force for all four countries in P4 had an important strategic vision, but was limited in terms of its economic clout with a combined 2013 Gross Domestic Product (GDP) of US $762 billion. One of the P4 s key objectives was to gradually eliminate duties. P4 members encouraged Canada to join, but Ottawa s concern about addressing tariffs on dairy and poultry products led to reluctance. By 2008, other countries were showing interest in joining the P4, and on September 22, 2008 the Bush Administration launched negotiations to bring the US on board. In November 2009, President Obama committed the United States to engage with the expanding group of countries with the goal of shaping a regional agreement that will have broad-based membership and the high standards worthy of a 21st century trade agreement. U.S. Trade Representative - Ron Kirk formally notified Congress of the Administration s intention to enter into negotiations on December 14, Once the U.S. joined, Canada s interest intensified. Malaysia joined the negotiations in October 2010, Canada and Mexico in October 2012 and Japan in May Economic significance of the TPP In September 2016, Global Affairs Canada (GAC) issued an analysis entitled the Economic Impact of Canada s Potential Participation in the For more information see the article The Trans- Pacific Partnership Agreement by the Congressional Research Service dated December 12, 2011 at Trans-Pacific Partnership Agreement 3. The report notes the broad importance of the TPP for Canada: The twelve countries in the TPP form one of the largest trade areas in the world, accounting for nearly 40 per cent of global GDP. For Canada, the TPP countries as a group would be Canada s largest trading partner, with more than 70 per cent of Canada s trade and investment flowing through the TPP region. Three of Canada s top five trading partners are located in the TPP area (the US, Mexico and Japan.) Moreover, the TPP region includes many partners in the dynamic Asian- Pacific region, a region which, for several decades, has been the driving force of global economic growth. The GAC analysis also points out that the TPP establishes new free trade agreements (FTAs) with seven Asian-Pacific countries. Canada s total bilateral trade with these seven partners is substantial, at approximately $50 billion annually, and greater than Canada s current trade with its third-largest trading partner (Mexico.) The bulk of Canada s trade with these members is accounted for by trade with Japan the third largest economy in the world. Looking at the costs and benefits of TPP membership for Canada, the analysis estimates GDP gains of $4.3 billion by Notably, should TPP move forward and Canada choose against ratification, the study projects GDP losses for Canada of $5.3 billion. TPP marked the first time since NAFTA negotiations that Canada, the United States and Mexico have sat down at the same table to negotiate a trade agreement. If 4 the TPP comes into force, the two deals would coexist alongside one another. 5 Both agreements would be vital 3 analysis-analyse/tpp_ei-re_ptp.aspx?lang=eng 4 Whether or not the TPP will ever come into force is an open question and one that will be analyzed in this paper. However, to facilitate presentation in this analysis we will normally assume that the TPP will come into force. 5 Article 1.2 (1) of the TPP (Relation to Other 5

6 for the conduct of business in North America, and it is important that the business community understands both the changes and how the agreements would interact. Given the importance of supply chains in North America, business will want a clear understanding of how the TPP rules of origin could affect these supply chain relationships 6. The TPP could facilitate sourcing among all 12 TPP partners and, in the event that other countries accede to it, the ability to source over an even broader area. This would create both opportunities and challenges for Canadian business. Many businesses have developed regional supply chains to harness the combined competitive strengths of the three North American countries. This development has improved the capacity of North American companies to compete in global markets. In the broader TPP marketplace, these competitive conditions would evolve, creating both new opportunities and new challenges for North American production. Both the erosion of Canadian preferences and increasingly liberalized rules of origin will affect these supply chains, regardless of whether or not Canada ratifies the TPP. But it is equally clear that the opportunities would only be there if Canada is inside the Agreement. In considering the TPP, it is important to recognize how much the nature of global commerce has changed over the last 20 years and the Agreements) recognizes the Parties intention for this Agreement to coexist with their existing international agreements and each Party affirms in relation to existing international agreements to which that Party and at least one other Party are party, its existing rights and obligations with respect to that other Party or Parties, as the case may be. 6 The rules of origin determine whether a particular product qualifies for the preferential treatment established under the free trade agreement. Essentially they require that any product must contain a certain minimum level of content produced in TPP countries. If this is not the case or cannot be established then the product in question can still be imported but would be subject to the MFN tariff rather than the treatment under the TPP, which usually will be duty free either immediately when the TPP comes into force or as tariffs on certain goods are phased out as scheduled in the TPP. importance of Asia as a key driver of the global economy. Trade in services has become much more important. Using value added statistics, the Conference Board of Canada has concluded that in 2011 services accounted for 44 per cent of Canadian exports, compared to only 16 per cent using conventional trade statistics 7. Investment also plays a much more important role. Recently in New York, the Governor of the Bank of Canada 8 noted, We know that sales by Canadian-owned foreign affiliates now exceed total exports from Canada, approaching 30 per cent of GDP. The investment provisions of the TPP establish the international rules within which this commerce takes place. Many Canadians look at the investment provisions of an agreement from a defensive perspective, but they are also protecting vital commercial relationships of great benefit to many Canadian companies and to Canadians. The TPP makes a serious effort to take account of these and other developments and takes on the challenge of setting new rules relevant for 21 st century commerce. A distinctive feature of the TPP is its status as the first regional preferential trade agreement linking major economies on both sides of the Pacific. The International Monetary Fund projects that Asia, led by economic development in China and India, will account for close to 45 per cent of the world s GDP by In addition, the UNDP suggests that by 2020, 1.7 billion middle class consumers in Asia will account for 42 per cent of the world s total consumption 9. Some might question whether forecasts about Asian growth are too optimistic, 7 Spotlight on Services in Canada s Global Commerce, The Conference Board of Canada, 48 pages, August 5, 2015, Report by Jacqueline Palladini (see in particular pages 6 and 7) References to this IMF and UNDP information are contained in BUILDING BLOCKS FOR A CANADA- ASIA STRATEGY a report prepared by the Asia Pacifica Foundation of Canada which can be found at: building-blocks-canada-asia-strategy 6

7 7 but even allowing for this, it is clear that this region of the world has become and will remain a major force in the global economy for the foreseeable future. The TPP offers countries in the Americas an opportunity to be a privileged partner with a number of significant Asian partners. Where the TPP fits into our trading system Structurally, the TPP is a free trade agreement within the multilateral trading system. This type of agreement is specifically envisaged in the World Trade Organization Agreement by Article 14 of the General Agreement on Tariffs and Trade (GATT) and Article V of the General Agreement on Trade in Services (GATS). Subject to certain conditions, those articles permit WTO Members to enter free trade agreements in which the benefits accorded in the agreements are limited to their parties, despite the general WTO requirement for most-favoured nation (MFN) treatment. Like NAFTA before it, the TPP borrows heavily from the GATT and the WTO Agreement more generally. For instance, the provisions dealing with national treatment for goods are essentially those in GATT Article III. The rules for the use of anti-dumping and countervailing duties remain primarily those in the WTO. Disciplines on technical barriers to trade and on sanitary and phytosanitary measures draw heavily from the WTO agreements on those subjects. The TPP government procurement chapter is borrowed from the recently improved WTO Government Procurement Agreement (GPA), but extends coverage to TPP countries that are not parties to the GPA: Australia, Brunei, Chile, Malaysia, Mexico, Peru, and Vietnam.

8 REQUIREMENTS FOR THE TPP TO COME INTO FORCE General Now signed, the TPP must be ratified before it can come into force. By its terms, the TPP cannot come into force without the participation of the United States. Even without ratification in the United States, the TPP (or a similar agreement) will remain very much in U.S. commercial and strategic interests. The business community will continue to advocate strongly for an agreement to secure key emerging markets in the Asia Pacific region, and policymakers will be concerned about leaving a regional vacuum, which would open up new opportunities for China. Sooner or later, the United States will want to return to the negotiating table. The starting point for any new effort would almost certainly be the TPP - an agreement already signed by 12 regional players. The TPP contemplates a range of scenarios for its entry into force. 10 The first is that it will do so 60 days after all original signatories have notified the Depositary (New Zealand) that they have completed their applicable legal procedures. If that does not happen within two years of signature (February 4, 2018), entry into force requires six or more of the original signatories representing at least 85 per cent of the combined 2013 GDP of the original signatories. As a practical matter, this requires ratification by both the U.S. and Japan. If the Agreement were to enter into force, other countries can join in. To enter, new members must be approved by consensus of the existing Parties (that is, the countries for which the Agreement already has entered into force). The Agreement provides for the TPP Commission, composed of the countries that are already parties, to conduct a review to determine that the signatory has fulfilled all requirements to give effect to the Agreement. 11 This additional vetting process creates a powerful disincentive for signatories to be latecomers to the ratification process; if the Government of Canada 10 Article Article does plan to ratify the TPP, it will be very much in Canada s interest for it to have done so before the Agreement enters into force. Canada For Canada, completion of the applicable legal procedures required for ratification entails two principal steps: 1. Parliament will have to pass implementing legislation. Under Canadian law, treaties are not self-executing, meaning that they do not automatically have force of law in Canada. Instead, where a treaty requires that Canada take affirmative actions to comply with it, or where non-complying laws or regulations exist, new laws or regulations must be enacted or existing ones amended to achieve compliance with the treaty. In the case of trade agreements such as the TPP, Parliament passes implementing legislation to make the necessary amendments to Canadian laws. The most obvious example of a law that will need to change is the Customs Tariff, which establishes the rates of duty that Canada imposes on imported goods. Those rates will need to be amended to reflect the tariff reduction commitments that Canada has undertaken in the TPP. 2. Canada will need to ratify the TPP; that is, give its formal consent to be bound by it. Ratification requires a decision by Cabinet but does not involve Parliament. However, the Liberal Government may choose to maintain the policy adopted by the previous Conservative Government of tabling the treaty itself in Parliament, and allowing Parliament 21 sitting days to consider the treaty and offer views on it prior to its ratification. The outcome of this process is not binding on the Government and is to some extent redundant for a treaty like the TPP, which requires parliamentary action on implementing legislation in order to take effect. However, tabling of the TPP would give Parliament a chance to debate the merits of the treaty itself rather than using the implementing legislation as a proxy for that debate. 8

9 9 Unlike in the Canada-EU Comprehensive Economic and Trade Agreement (CETA), the provinces have not accepted any specific affirmative commitments under the TPP and therefore no implementing action is required at the provincial level to give effect to the agreement.

10 LEARNING FROM THE TPP Canada and Japan Improved access for Canadian goods to the Japanese market, the third largest economy and the fourth largest purchaser of Canadian merchandise exports, was the biggest immediate prize for Canada in the TPP. Japan is a particularly important market for Canadian agri-food products, worth more than $3.5 billion in Furthermore tariffs on many agri-food imports remain high in Japan (and in other TPP countries), such as the 38.5 per cent duty on beef imports. In addition, Australia has already negotiated and implemented an FTA with Japan, as has Chile. These agreements have put Canadian suppliers at a serious disadvantage in the Japanese market. The TPP would restore the balance and give Canada new opportunities as well by reducing or eliminating Japanese domestic protection. It therefore should be unsurprising that Canada has been trying to negotiate an economic partnership agreement with Japan for several years. Currently, trade relations between Canada and Japan fall under the WTO. If the TPP comes into effect, both the TPP and the WTO will continue to apply to the conduct of bilateral trade. For areas beyond the purview of the TPP, (notably antidumping, countervailing duties and disciplines on agricultural support subsidies), the WTO would continue to provide the rules. However, for most other subjects, the TPP would considerably liberalize trade. The TPP would also add to the predictability of trade through strengthened rules in various areas ranging from technical barriers to trade and sanitary and phytosanitary to protections for Canadian companies selling their products in Japan through investment vehicles. The agreement would: break down import barriers in Japan for many products, remove the discriminatory advantage now enjoyed by Australian and Chilean suppliers to the Japanese market, and ensure that Canadian exporters will have access to that market on the same terms as all other TPP countries including our NAFTA partners. If TPP were ever to come into force without Canada then the contrary will apply in each of these situations. Canadian firms would not benefit from the protections afforded by the investment provisions to foreign affiliates of Canadian companies operating in Japan. Furthermore the enhanced but largely procedural provisions in the areas of product standards and sanitary and phytosanitary restrictions would not apply to Canada. These rules could be particularly important for agricultural exports. The net effect would put Canada in a much worse competitive position in the Japanese market than it enjoys today. Inevitably we would see declines in sales of certain products to Japan and Canadian exporters would have a reduced share of Japanese imports. In other countries While 97 per cent of Canada s TPP goods trade is with Mexico, the U.S. and Japan, there is still a lot of potential for beneficial trade with the other eight. 10 Among these countries, Canada already has FTAs with Peru and Chile. Canada already enjoys duty-free access to these two markets, so the TPP would not add new benefits in terms of tariff reductions. However, bringing these partners inside the TPP would encourage sourcing inputs for the manufacture of goods for export to other TPP countries such as the United States. Currently, Canadian exports to these countries would not be considered as originating goods in terms of the US free trade agreements with Chile and Peru. That would change under the TPP. The other improvements in the TPP described in this paper would also enhance the free trade relationship between Canada and Chile and Peru. Canada does not have FTAs or investment protection agreements with Vietnam, Australia, Malaysia, Singapore, New Zealand and Brunei. With these partners the terms of trade would be significantly improved, as duties would be eliminated. The TPP would also establish

11 investment protections that would increase predictability for Canadian firms that conduct business and make sales in these countries through foreign affiliates. This would include Canadian banks and insurance companies, which are increasingly seeking new opportunities in offshore markets. Finally, operating within the broad framework of the TPP would offer new opportunities for collaboration between Canadian firms and firms in these countries. In Mexico and the U.S. While the 12 countries that have signed the TPP represent nearly 40 per cent of the world s economy, the United States alone accounts for over half that amount. When considering Canada s relationship with TPP countries, the US and Mexico are by far the most important partners, accounting for 94 per cent of Canada s TPP trade in goods (96 per cent of Canadian exports). Together, the remaining nine countries share six per cent, with much of that going towards Japan and Australia. 12 Thus for Canada, the relationship between TPP and the agreement already governing trade with Mexico and the US (NAFTA) becomes a key element to understanding potential benefits for Canadian businesses and consumers. For most matters covered by NAFTA, the TPP would become the normal operational trade agreement among the three North American countries, effectively overtaking it. However, there are a number of key NAFTA provisions not included in the TPP. For Canadian interests, the most important is NAFTA Chapter 19, with its special binational panels for the resolution of disputes over the domestic application of anti-dumping and countervailing duty law. This binational panel process was one of the major achievements of the Canada-U.S. Free Trade Agreement, and was carried forward and made permanent under NAFTA. Individual companies may want to conduct 12 That figure is even larger when Canada s other existing FTA partners in the TPP region, Chile and Peru, are considered. a more precise audit or seek expert advice regarding how the TPP would affect their specific business dealings in or with the United States and Mexico. Due to the overwhelming importance for Canada of its trade with the United States and Mexico, an assessment of the potential benefits of the TPP for Canadian business must consider the extent to which the TPP s commitments go beyond or otherwise differ from those in the NAFTA. We have identified several areas where these differences would create new opportunities for Canadian businesses: Tariffs: Better access for Canadian goods 11 The TPP s primary strength comes from its actual and potential geographical coverage. The TPP includes among its signatories key large or emerging economies in Asia, with which Canada does not have free trade agreements: Japan, Malaysia, Singapore and Vietnam. Prior to joining the TPP negotiations, Canada had been seeking to negotiate bilateral FTAs with two of those countries, Japan and Singapore 13, and to conclude a bilateral investment treaty with Vietnam. In terms of new opportunities, trade on preferential terms with Japan, the world s third largest economy and Vietnam, a populous and rapidly developing economy, would be the immediate geographic prizes for Canada under the TPP. The potential market access benefits for Canada extend as well to the possible accession to the TPP of other dynamic economies in Asia with which Canada does not have preferential trade agreements, including Philippines, Taiwan, Indonesia and Thailand, all of which have expressed interest in joining. Even within the NAFTA region, it can be anticipated that increased U.S. exports as a result of the TPP would mean greater export opportunities to the United States as a result of existing North American supply chains. Conversely, were the TPP 13 The Singapore FTA negotiations stalled in 2007 and were put on hold by mutual agreement in index.aspx?lang=eng

12 to enter into force without Canada, those North American supply chain relationships would be threatened for Canadian companies selling inputs to US and Mexican producers exporting to the TPP region. Across the TPP region, tariff elimination would ultimately result in duty-free treatment for around 95 per cent of tariff lines overall (including agricultural products) and nearly 100 per cent of industrial goods. In this sense, tariff elimination under the TPP is almost as extensive as in the Canada-EU Comprehensive Economic and Trade Agreement (CETA), where duties will go to zero on some 99 per cent of tariff lines, and is significantly deeper than under most intra-asian FTAs. However, the pace of tariff elimination would be slower than in CETA. Approximately 98 per cent of tariff lines will go to zero immediately on entry into force of CETA, and the longest phaseout period will be seven years. By contrast, under the TPP around 75 per cent of tariff lines would go to zero on entry into force and phase-outs for the remainder, particularly in some sensitive sectors can run to 15 years or more. The single biggest benefit the TPP would offer to Canadian business would be liberalized access for merchandise exports to the Japanese market, as well as to Vietnam and Malaysia, particularly in the following sectors: Agriculture, including pork, beef, wheat, barley and canola oil (current Canadian exports to Japan, Vietnam and Malaysia total approximately $4 billion) 14 ; Chemicals and plastics (approximately $1.15 billion) 15 ; Fish and seafood products (approximately $368 million) 16 ; 14 Agriculture and Agri-Food Canada Trade Data and Analysis - industry-markets-and-trade/statistics-andmarket-information/agriculture-and-food-marketinformation-by-region/asia/trade-data-andanalysis/?id= Statistics Canada - Canadian International Merchandise Trade Database gc.ca/cimt-cicm/home-accueil?lang=eng 16 Agriculture and Agri-Food Canada Trade Forestry products (approximately $1.18 billion) 17 ; Industrial machinery (approximately $504 million) 18 ; Metals and minerals (approximately $3.2 billion) 19. Not all of that liberalized access will be immediate or unconditional. In the case of industrial goods, the majority of Canada s exports to the TPP region would be duty-free immediately on entry into force for the Agreement and most of the remainder will be duty-free within 10 years. Vietnamese and Malaysian tariffs on goods in many of the above sectors, which can run as high as 30 to 50 per cent, would be eliminated within seven years. However, Canadian businesses considering exports of seafood, agricultural, forestry or metal products to Japan would need to examine Japanese market access commitments carefully, because for certain goods in those sectors Japan s phase out commitments can be lengthy and its commitments can differ among TPP countries or can be subject to tariff rate quotas (TRQs) or transitional safeguards. For example, Japan s commitments would enable it to impose country-specific TRQs 20, including for Canada, on wheat and barley products and edible fats and oils, differential tariff elimination commitments Data and Analysis industry-markets-and-trade/statistics-andmarket-information/agriculture-and-food-marketinformation-by-region/asia/trade-data-andanalysis/?id= Statistics Canada - Canadian International Merchandise Trade Database gc.ca/cimt-cicm/home-accueil?lang=eng 18 Statistics Canada - Canadian International Merchandise Trade Database gc.ca/cimt-cicm/home-accueil?lang=eng 19 Statistics Canada - Canadian International Merchandise Trade Database gc.ca/cimt-cicm/home-accueil?lang=eng 20 A TRQ is a tariff rate quota. This a technique which allows for a partial liberalization of trade. The rate of duty for a particular product is lowered (usually to zero) for an agreed quantity of imports. Once that quantitative limit is reached the duty reverts to a higher level that is usually quite trade restrictive. 12

13 on imports of certain fish species, ferro-alloys and nickel and coniferous lumber products, and transitional safeguards subject to certain triggers, on imports of beef and pork. Canadian goods exporters can therefore expect significant new market opportunities, particularly in Japan, Vietnam and Malaysia but would need to examine the TPP s tariff schedules and other provisions closely to determine when and how those opportunities could be fully realized. Rules of origin: significantly more flexible than NAFTA NAFTA eliminated all tariffs on all goods produced within its region. As a result, the TPP would offer Canadian importers and exports no preferential tariff rate advantages over NAFTA, although, as noted, it would eliminate or significantly reduce tariffs on certain important items of trade with other TPP parties, notably Japan, Vietnam and Malaysia. However, even for trade within the NAFTA region, the TPP s rules of origin would, in some cases, offer advantages to Canadian businesses relative to the rules of origin in NAFTA. When a product is wholly produced or obtained within the territory of the parties to a preferential trade agreement, determining its origin can be simple. It becomes more difficult when inputs for a finished product come from outside the parties to the agreement. This is now commonplace as trade has evolved in recent decades away from a model involving manufacturing in one country and exporting to another, to a model predicated on multi-national supply and global value chains. A key consideration when negotiating rules of origin in a trade agreement is striking a balance that allows sufficient flexibility for manufacturers and importers to take advantage of the tariff preferences offered by the agreement, while limiting the extent to which materials originating outside the agreement s territory can qualify for preferential treatment. NAFTA was negotiated amidst concerns that European and Asian companies would use Mexico as an assembly hub to exploit NAFTA s duty free treatment for exports to the United States and Canada 21. Accordingly, NAFTA rules of origin err toward less flexibility. Qualification as NAFTA originating can be notoriously complicated, particularly in the case of automotive goods. 13 Under NAFTA, goods from a NAFTA country containing input materials from non-nafta countries will be deemed NAFTA originating if the production in the NAFTA country sufficiently transforms the input materials. The transformation required is established by product-specific rules which often involve a shift from one tariff classification to another at a chapter, heading or sub-heading level. However, in many cases, to qualify for NAFTA preferences, goods must, in addition to or instead of a tariff shift, fulfil certain regional value content requirements based on the value of non-originating materials. In addition, non-party inputs can comprise up to a certain percentage of the value of the good without affecting its originating status. Under NAFTA, that de minimis value is seven per cent. The rules of origin in the TPP are designed to be significantly more flexible than those in NAFTA, in recognition that trade has evolved toward a value chain model and to facilitate participation in those value chains by businesses in the TPP region. That flexibility takes several forms, including the following: Like NAFTA, the TPP predominantly uses tariff shift as the test for originating status but for many manufactured goods the TPP offers more flexibility to use regional value content (generally in the per cent range) as an alternative. The TPP also affords exporters a greater choice of methodologies than under the NAFTA for calculating regional value content, including, for many goods, a focused-value method which considers only specified non-originating materials and therefore should reduce the administrative burden entailed in tracking nonoriginating materials for origin purposes. The de minimis threshold for non-originating materials is 10 per cent rather than seven per 21 Indeed there was also some American concern that Canadian producers might do the same thing, for instance for men s wool suits.

14 cent, although some inputs are not eligible for de minimis treatment, mostly food products, such as dairy products for use in prepared foods. The rules allow for absorption or roll-up, whereby intermediate inputs that have acquired originating status in any other TPP Party are considered 100 per cent originating, even if those intermediate goods themselves contain inputs from non-tpp sources. Administrative procedures by which origin certificates: may be completed by the producer, exporter or importer; may be submitted in English in any TPP Party; and need not follow a prescribed format so long as minimum data requirements are satisfied. The TPP therefore would give supply chain managers another set of rules of origin to consider when making sourcing and investment decisions. While the TPP s rules are designed to simplify compliance for preference qualification and encourage intra-tpp supply chains, it would take some time once the Agreement was in force before meaningful conclusions can be reached as to whether the Agreement fulfils these aims. As the TPP would co-exist with prior FTAs, Canadian exporters or importers whose goods already qualify under Canada s existing FTAs with TPP partners will be able to operate without much change. However, the TPP s rules of origin would in some cases make more economical supply chain choices available. They also may offer new opportunities where preference qualification under those existing agreements is uncertain or vulnerable. Automotive products: the challenges and opportunities of more competition Automotive rules of origin in the TPP have attracted particular scrutiny because they are more liberal than those in the NAFTA, although not to the extent that Japan, which sources automotive inputs from across Asia, had sought in the negotiations. Whereas the NAFTA requires regional value content of 62.5 per cent (using a net cost methodology) for passenger cars, light trucks, engines and transmissions and of 60 per cent for other vehicles and covered parts, the regional value requirements under the TPP are 45 per cent (net cost) for finished vehicles and range from per cent for parts, depending on the parts. The TPP also does away with NAFTA s burdensome tracing list for automotive inputs. In contrast with the absorption principle, listed components and sub-assemblies imported from outside the NAFTA region retain their nonoriginating origin throughout the supply chain for purposes of regional value content calculation. However, as automotive technology has evolved, the percentage of vehicle components not on the tracing list has grown and those items are considered NAFTA originating regardless of their actual origin. This has meant that the amount of actual originating content in vehicles considered to be NAFTA originating has in fact been well below the nominal requirements, although still higher than what the TPP would permit. In terms of inbound trade, Canada would phaseout its 6.1 per cent MFN tariff on motor vehicles through five annual, back-end loaded cuts (to 5.3 per cent on entry into force, five per cent, 2.5 per cent, 2 per cent and then zero at the end of year four.) By contrast, the U.S. would eliminate its 2.5 per cent tariff on passenger vehicles over 25 years and its 2 per cent tariff on trucks (including pickup trucks and vans) over 30 years. It should be noted that Korean vehicles, which in the near-term can be expected to remain the most significant foreign competitor for those from Japan, will enter Canada duty-free as of January 1, 2017, under the tariff elimination provisions of the Canada-Korea FTA. In the event of an import surge, Canada would be able to impose a special motor vehicle transitional safeguard on Japanese imports for 12 years following tariff elimination. The safeguard can be maintained for up to five years. A similar safeguard is available to the United States for 10 years after its (longer) tariff elimination period and can be maintained for up to four years. 14

15 Anticipating the actual effects on automotive supply chains for both vehicles and parts requires looking at the particular circumstances of each company. However, some general observations can be made: At the level of parts producers, the large multinational manufacturers are already involved in global value chains and should find it relatively easy to adapt to the new rules and to benefit from them. Some smaller parts producers may find the new situation more challenging. North American vehicle producers might prefer stricter rules of origin. which would make it difficult for Japanese producers to maintain their current supply chain relationships if they wanted to qualify for duty-free treatment under the TPP. The new rules would put producers in all TPP countries in essentially the same situation with respect to access to competitive inputs. This was probably a consideration for American policy makers given the low level of the US MFN import tariff for passenger vehicles: 2.5 per cent. For companies manufacturing vehicles in Canada, it is critical that they enjoy the same freedom to source globally as producers in the U.S. and Mexico. Otherwise, the rational for producing vehicles in Canada would be weakened and the incentive to invest in Canada would be reduced. Despite the additional competition the TPP would entail for Canadian automotive parts manufacturers, given the highly integrated nature of the North American automotive industry the automotive sector is one where it is hard to see any rational for Canada to decide to stay out of the TPP if the agreement is coming into force for the U.S. and Mexico. In fact, the Canadian automotive industry would be at a significant disadvantage if outside of the TPP, making it increasingly difficult to attract automotive assembly or parts-manufacturing mandates. The September 12, 2016 GAC analysis estimates that under this scenario, Canadian automotive production and investment would both decline by four per cent. Textiles and apparel: increased sourcing flexibility should mean new export opportunities Another sector in which the TPP rules of origin would offer somewhat more flexibility than the NAFTA is textiles and apparel. The TPP devotes a full chapter to textile and apparel goods, including their rules of origin. Like the NAFTA, the TPP adopts a yarn-forward rule for most textile and apparel goods, meaning that a product will qualify as TPP originating only if all of its components, beginning with the yarn (but not the fibre from which that yarn is produced) are produced in the TPP region. However, the TPP includes a short supply list of 194 yarns, fabrics and fibres that are not produced commercially in the TPP region. 22 Apparel goods made from the products on the short supply list would qualify for TPP preferential duty treatment, provided, in many cases, that the goods also satisfy a specified end-use requirement. A few items on the short-supply list would be removed after five years. Nevertheless, the list is far more expansive than the list of short-supply goods that has been negotiated under NAFTA, which is the subject of a bilateral negotiating process. 23 The TPP also includes measures to streamline the administration and enforcement of the textile and apparel rules of origin by customs authorities. The increased flexibility for sourcing of inputs should increase export opportunities, including in the United States, for Canadian apparel manufacturers, most of which source their fabrics and yarns from outside the NAFTA region. While the NAFTA does provide preferential quotas that allow certain volumes of non-originating apparel to qualify for duty-free treatment in the United States and Mexico, access to those quotas can be difficult or expensive to obtain, particularly for newer or smaller manufacturers. 22 Annex 4-A, Appendix Annex 300-B, Appendix 6. 15

16 Heavy crude oil: easier access to tariff preferences for exports to the U.S. The TPP would help to ensure that shipments of Canadian heavy crude oil, in excess of two million barrels per day, can be exported preferentially to the United States. Under the NAFTA, the use of any amounts of non-originating diluent (petroleumbased substances used to reduce the viscosity of bitumen to enable it to flow through pipelines) can cause shipments of Canadian crude to be considered non-originating and therefore subject to US duties and other fees. Tracing and certifying crude oil blended with diluent as NAFTA-originating can be particularly challenging and costly for exporters. Under the TPP, Canadian origin crude would retain its originating status provided that the diluent constitutes no more than 40 per cent by volume of the blended crude. 24 Regulatory measures for goods: Improving WTO commitments on cooperation and transparency A challenge for Canadian negotiators in a comprehensive trade agreement such as the TPP is achieving the consensus to establish meaningful disciplines on the non-tariff barriers to trade in goods that can pose significant hurdles for Canadian businesses seeking access to export markets. Within the TPP region, the particular hurdles for business include differing regulatory requirements across jurisdictions that can increase compliance costs and a lack of regulatory transparency in parties, such as Vietnam. Efforts to address these hurdles must contend with a range of objections both within Canada as well as from the other negotiating parties. Some of these are legitimate, for example concerns about unduly interfering with each Party s ability to regulate for legitimate public welfare objectives or creating new barriers for trade with third countries. Others, less benign, can range from bureaucratic imperatives to protect their turf to outright trade protectionism. The baseline for disciplines on non-tariff barriers to trade in goods is found in two WTO Agreements, the Agreement on Technical Barriers to Trade (TBT) and the Agreement on Sanitary and Phytosanitary Measures (SPS),which establishes specific obligations on measures to address food safety and animal and plant health. NAFTA contains obligations similar to those in these WTO agreements. The TPP Agreement offers modest improvements on those agreements. For example, the TPP s TBT and SPS chapters each impose additional transparency requirements on Parties beyond those in the WTO s TBT and SPS Agreements. The TBT chapter of the TPP incorporates by reference many of the WTO TBT Agreement s obligations, but it also contains additional disciplines on the fair treatment of another Party s conformity assessment bodies including limiting the grounds on which a Party can reject the results of a conformity assessment body outside its territory. The chapter also includes seven sector-specific annexes, covering wines and spirits, information and communication technology products, pharmaceuticals, cosmetics, medical devices, formulas for prepackaged foods and food additives, and organic products. The annexes contain a range of sector-specific provisions (some mandatory, others hortatory) to promote consistency, flexibility and transparency in the regulation of covered products. The annexes may be useful for Canadian exporters in these sectors in seeking to address particular non-tariff barriers or intransigent regulators. 16 Special bilateral commitments on TBT measures in the automotive sector are also significant. In appendices to their respective tariff schedules, the United States and Japan have agreed to cooperate on harmonization for motor vehicle environmental performance and safety and Japan has agreed, among other things to recognize the equivalency of certain US motor vehicle safety regulations. By virtue of additional appendices to the Japanese and Canadian tariff schedules, Japan has further 24 Annex 3-D, Section V, Chapter 27, Heading Note 3 (Diluent Rule)

17 agreed to accord Canadian automotive exports MFN treatment with respect to any technical regulations, standards or conformity assessment procedures it adopts or applies in accordance with its agreement with the United States. The SPS Chapter elaborates on the obligations of the WTO SPS Agreement in the areas of risk assessment and the recognition of regional conditions and equivalent measures by another Party. It also contains obligations that are not found in the WTO SPS Agreement on how import checks are to be conducted, certification requirements for trade in a good, and audits of another Party s control programs. The Agreement also contains a Chapter on Regulatory Coherence, which is effectively about improving the quality of regulation-making procedures in developing country TPP Parties. However, the Chapter is mostly explanatory and is not subject to the TPP s dispute settlement mechanisms. Trade in services: stability, predictability and new markets The disciplines in the TPP on services are structured much like those in the NAFTA. The TPP distinguishes between services provided through commercial presence in another Party which are treated as investments and made subject to the disciplines of the Investment Chapter, including investor-state dispute settlement and services provided by other modes of supply (from a provider in one TPP Party into another Party; by a provider in one Party to visitors from another Party; or by the presence of a natural person of one Party in the territory of another Party). The latter three modes of supply are covered by a Chapter on Cross-border Trade in Services (CBTS), which contains obligations on, among other things, nondiscrimination, market access and free transfers of funds. As in the NAFTA and other Canadian FTAs, these obligations apply on a negative list basis, meaning that they apply to a Party s treatment of all services unless that Party has specifically excluded them through reservations listed in one of two annexes: Annex I (for existing non-conforming measures) and Annex II (for spheres of activity that may be subject to current or future measures). In the TPP, each Party was required to list in Annex I existing non-conforming measures of national and regional governments, while those at the local level were grandfathered. Also like the NAFTA, financial services are excluded from both the investment and CBTS chapters and addressed in their own stand-alone chapter, which contains a broad carve-out for prudential measures. 17 The negative list approach is generally considered to achieve more comprehensive liberalization than the positive list approach used in the WTO s General Agreement on Trade in Services, in which commitments on national treatment and market access apply only to the service sectors and modes of supply identified by each Member in its schedule to the agreement. However, in practice, much depends on the extent of each Party s Annex I and II reservations. As the TPP demonstrates, a negative list approach can lead to much the same result as would a positive list; market access and national treatment commitments of the Parties to the TPP, whether for cross-border trade in services or investment, do not for the most part go beyond their commitments in the GATS or other existing FTAs. The more significant achievement of the TPP s negative list approach is that it both locks-in existing market access and non-discrimination across a broad range of sectors (all except those for which a Party has taken an Annex II reservation) and contains a ratchet whereby future liberalization in those sectors is also lockedin. This is because the protections for existing non-conforming measures under Annex I or at the local level apply only to the extent that those measures are maintained or promptly renewed and are not made more trade restrictive. As such the TPP will ensure a more stable, predictable legal regime for Canadian service suppliers operating in the TPP region by preventing TPP parties from backtracking on market access and nondiscriminatory treatment under their current or future legal regimes. In addition, the TPP does provide some measure of improved market access in the United States for certain categories of professional services

18 and land transportation services, although much of this is binding already-open treatment. The September 2016 GAC analysis estimates that Benefiting from the new US commitments in professional services and land transport services 25, Canadian exports of these services to the US are expected to increase by US $2.3 billion and US $275 million, respectively. We understand much of these anticipated increases would result from growth in consumption in the U.S. resulting from general effects of the TPP. It is also important to bear in mind that the GAC analysis comments that Overall, quantifying the effect of services commitments and market access is much more challenging than is the case for goods. Investment and dispute settlement: modernization and new protections for Canadian investors The Investment chapter of the TPP contains substantive protections for investments made by individuals or businesses of one TPP Party in the territory of another Party. In its core obligations and structure, it resembles the investment chapter of the NAFTA (Chapter 11) and Canada s more recent bilateral investment treaties (BITs). Like those treaties, the obligations in the chapter apply on a negative list basis, meaning that they apply to all sectors and investment activities unless the TPP Party has specified otherwise in either Annex I (for existing measures) or Annex II (for certain spheres of activity that may be subject to current or future measures). Also like those treaties, the TPP would permit an investor to bring an arbitration claim against the host TPP Party for violations of the protections set out in the treaty. This procedure is known as investor-state dispute settlement. The TPP does not contain the radical overhaul of investor-state dispute settlement found in CETA. However, the TPP s investment chapter does reflect a response to some of the same concerns that motivated that overhaul, in particular that key substantive obligations (such as expropriation, minimum standard of treatment and most- 25 See TPP Annex II - United States - 11, and Appendix II-A 18 favoured nation treatment) in NAFTA and other investment treaties have been subject to expansive interpretations by investor-state arbitral tribunals and can unduly constrain governmental measures to protect public welfare. The TPP elaborates on and constrains the scope and constituent elements of these obligations, using wording developed in the post-nafta model BITs. For example, the chapter clarifies the kind of measures that may give rise to indirect expropriation claims (where the investor retains ownership or legal control but a regulatory or other measure significantly impairs the investment) 26 and the extent to which an investor s thwarted expectations are to be considered in respect of minimum standard of treatment and indirect expropriation claims. 27 Elsewhere, the treaty limits the ability of investors to challenge host country measures that target the production, consumption or regulation of tobacco products. 28 The Chapter also allows for certain preliminary challenges regarding the merits of an investor s claim or the competence of a tribunal to adjudicate it. Relative to the NAFTA, these and other similar provisions will operate to constrain the ability of investors to bring claims in the first place or to prevail when they do bring them. Conversely, other TPP provisions expand the scope for investment claims beyond those in the NAFTA. Two important examples are claims based on contracts between investors and states and claims regarding measures relating to investments in financial institutions. Neither the TPP, nor the NAFTA nor other Canadian BITs include an umbrella clause to ensure that Parties observe any obligations they enter into with regard to investments. However, the TPP, like the 2012 US Model BIT, makes investment agreements or investment authorizations directly arbitrable under 26 Annex 9-B: non-discriminatory regulatory actions [ ] that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations. 27 Article 9.6(4) and Annex 9-B, para. 3(a)(ii) and footnote Article 29.5.

19 the treaty s investment arbitration provisions. 29 Notably, the TPP, unlike other treaties allowing such claims, permits the Respondent State Party to counterclaim against the investor. 30 Like the NAFTA, claims relating to investments in financial institutions are covered by the TPP s Chapter on Financial Services (Chapter 11), which incorporates certain obligations from the Investment chapter. Also like the NAFTA, investor claims are subject to a screening process whereby the Respondent State and the State of the investor can decide whether the measure at issue is shielded by the treaty s exceptions for prudential measures. However, the TPP allows for investor claims respecting investments in financial institutions under a broader range of obligations than does the NAFTA. Whereas the NAFTA limits those claims to, effectively, the obligations regarding expropriation and the right to repatriate earnings and other assets, the TPP also allows claims for breach of the minimum standard of treatment obligation, which is probably the most frequently arbitrated obligation under investment treaties generally. As such, the TPP offers a notable additional protection for investments in financial institutions beyond that in the NAFTA. Because (1) the TPP will co-exist with the NAFTA; (2) each treaty offers investor protections that are in some cases more expansive and in others more limited; and (3) investors are precluded from bringing claims under both treaties for breaches triggered by the same measure, aggrieved Canadian investors considering claims against the United States or Mexico will need to carefully assess the pros and cons of using each treaty before deciding which one best suits their circumstances. Because the TPP would also coexist with Canada s other free trade and investment agreements, the same will be true for Canadian investors in Chile and Peru. Canada does not currently have stand-alone investment protection agreements or FTAs with investment protections with Australia, Brunei, Japan, Malaysia, New Zealand, Singapore, or 29 Article 9.18(a)(i)(B) or (C) and Article 9.18(b)(i)(B) or (C). 30 Article 9.18(2). 19 Vietnam. The ability to invoke and directly enforce these protections through investor-state dispute settlement will benefit outbound Canadian investment, particularly in countries like Vietnam, Malaysia and Brunei, where rule of law and the independence of domestic courts is less assured than elsewhere in the TPP region and where largescale, capital intensive projects such as those in the extractive sectors can be particularly vulnerable to arbitrary or confiscatory treatment. By helping to mitigate these risks, the TPP could be expected to encourage Canadian direct investment in these TPP countries above currently modest levels (collectively less than $40 billion, of which Australia accounts for some $26 billion 31 ). Access to the TPP s investment protection regime is unlikely to motivate new inbound investment flows to Canada given that rule of law and the functioning of our judicial system are not high on the list of concerns for inward investors. As well, in accordance with a reservation that Canada has taken under Annex I to the TPP, significant acquisitions in Canada by investors from other TPP countries will continue to be subject to Investment Canada Act review. Government procurement: new market access for Canadian suppliers In the TPP s chapter on Government Procurement, each Party commits to allowing suppliers from the other Parties to participate in its tendering processes by specific government entities and to the fairness of those processes. The commitments apply to procurements of goods, services and construction services above certain value thresholds. Canada already has made and obtained similar commitments from its NAFTA and bilateral FTA partners as well as in the WTO s plurilateral Government Procurement Agreement, which includes the United States, Japan, New Zealand and Singapore, as well as Canada. The value of the Chapter s obligations for Canadian business therefore lies largely in the new access 31 Global Affairs Canada Foreign Direct Investment Statistics

20 accorded to approximately $260 million in procurement opportunities by the remaining TPP parties: Australia, Brunei, Malaysia and Vietnam. In addition, Canadian companies will gain new access to procurement by major federal and regional US power authorities, such as the Tennessee Valley Authority, which collectively build over $4 billion in construction projects annually, and to procurement by sub-national governments in Chile and Peru. Intellectual property: despite concerns, mostly status quo for Canada The intellectual property (IP) provisions of the TPP, have been among the most contentious in the agreement. It is widely recognized that the United States regards IP as a source of comparative advantage and that, since the NAFTA and the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) in the early 1990s, U.S. negotiators have used trade negotiations to shape international IP protections to further U.S. interests. While the TPP negotiations were no different in this respect, in the end the TPP s IP provisions require Canada to make very limited changes to its existing intellectual property regime beyond those to which it has already committed under other international agreements, including the World Intellectual Property Organization s treaties and CETA. As such, criticisms that the TPP will compromise the access of Canadian businesses to foreign intellectual property or impose onerous additional costs or responsibilities for the use of that property are overblown. The most significant change that will be required under the TPP is to Canada s copyright regime. Canadian law, which conforms with or exceeds the NAFTA requirements, currently extends copyright protection for 50 years beyond the calendar year of the author s death, or if the author is unknown, the earlier of 50 years after the year in which the work was published or 75 years after the year in which it was made. The TPP would keep works out of the public domain for, in most cases, an additional 20 years. It would require copyright protection for 70 years beyond the life of the author, 70 years after the year of publication or, 70 years after the year of its creation if it was not published within 25 years. However, these longer copyright terms are reflective of those already in place in the United States and many other countries. While they undoubtedly will entail some additional costs for Canadian users of copyrighted works, Canadian cultural industries and authors (or more accurately their estates) will benefit from the extended protection, including in countries that, as permitted under the Berne Convention, offer longer copyright protection for foreign works on a reciprocal basis. Concerns were raised during the negotiations about changes that might be required to Canadian law regarding data exclusivity periods for biologic drugs and liability for internet service providers with respect to infringing materials, as well as how Canadian commitments in the CETA regarding protections for geographical indications (distinctive names for products, mostly agricultural goods, from particular regions) might conflict with obligations in the TPP. However, none of these concerns materialize under the final TPP text. 20 Canada will need to make some changes to its intellectual property rights enforcement laws, but these are minor. They include expanding the grounds for the detention of imported goods to those that bear trademarks confusingly similar to those registered in Canada and criminalizing piracy of digital content that involves the removal or alteration of rights management information. The real implication for Canadian business is likely to be better protection against the theft or misuse of their intellectual property in their operations elsewhere in the TPP region, particularly in developing country Parties. E-commerce: reflecting the digital era Unlike NAFTA, which predates commercialization of the Internet, the TPP reflects contemporary commercial realities by including the most comprehensive set of rules on digital trade and electronic commerce yet found in a trade treaty. These rules, which are based on but extend beyond those in recent US FTAs, aim to promote electronic commerce and discipline protectionist and anti-competitive practices affecting data flows and digital trade. The WTO s moratorium

21 on the imposition of customs duties on electronic transmissions is made permanent for TPP Parties. The Chapter confirms that TPP Parties must provide non-discriminatory treatment to digital products of other Parties. It also, for the first time in a trade agreement, contains hard commitments to: prohibit requirements for the disclosure or transfer of source code of mass-market software as a condition for market access, subject to certain exceptions; and allow cross-border data flows and prohibiting data localization measures such as requirements to use or locate computing facilities in-country to conduct business in a TPP country. While these last two requirements are unquestionably innovative, they are each subject to a potentially expansive exception for legitimate public policy measures, which may weaken their value. Nor does the Chapter apply to government procurement or to financial services. The exclusion of financial services from the data flow and forced localization requirements reflects a significant tension between regulators and the regulated industry in the financial services sector. It has provoked vocal criticism from the US financial services sector in particular as an impediment to market access and efficient international operations by companies in the sector. Despite these limitations, the new commitments in the E-Commerce chapter should provide additional predictability for Canadian businesses operating in the TPP region, enabling them to better structure their operations to take advantage of their commercial and technological capabilities. Temporary entry: helping businesses and investors with commercial interests The NAFTA, like the Canada-US FTA before it, includes provisions that facilitate business travel and temporary relocation to other Parties by eliminating labour tests and numerical quotas for various categories of business visitors. The TPP 21 contains a similar chapter, but the temporary entry commitments in the TPP vary widely by Party. They apply to specified categories of business persons, which can include: contractual services suppliers such as skilled professionals and technicians intra-corporate transferees and their spouses after-sales installation and support personnel. In many cases, the commitments are made on a reciprocal basis so it will be important to consider the commitments of the Parties of both origin and destination for a visitor to determine the coverage that applies. Where temporary entry commitments do apply, they will make it easier for Canadian service providers and investors to work and support their clients and operations elsewhere in the TPP region. Importantly, and despite the fact that the chapter does not require changes to a Party s immigration formalities or apply to citizenship, nationality, residence or employment on a permanent basis, the United States has not made any commitments under the TPP chapter, due to domestic sensitivities about immigration policy. Canadian business visitors to the United States can continue to rely on the United States temporary entry commitments under Chapter 16 of the NAFTA, which, while dated, offer privileged access unavailable to business persons from other TPP countries. Trade remedies: Governed by NAFTA and the WTO The TPP imposes no significant new rights or obligations on Parties concerning trade remedies. 32 With respect to anti-dumping and countervailing duty investigations, the trade remedies chapter includes a non-binding annex on best practices but otherwise makes explicit that Parties retain their WTO rights and obligations under Article VI of GATT 1994, the Anti-Dumping Agreement and the Agreement on Subsidies and Countervailing 32 Though see the comment below on the Non- Commercial Assistance disciplines in Article 17.6 of the Chapter on State-Owned Enterprises.

22 Measures (SCM Agreement). Those rights and obligations are not incorporated into the TPP Agreement, with the result that the treaty venues for Canadian challenges to the application of trade remedies by other TPP parties will continue to be the WTO or, in the case of companies subjected to anti-dumping or countervailing duties by the United States or Mexico, review by a NAFTA Chapter Nineteen panel. Similarly, Canadian companies will continue to be able to initiate trade remedy complaints under the Special Import Measures Act in respect of unfair trade practices by other TPP countries or their competitors in those countries. The TPP also offers a transitional safeguards regime for import surges that cause or threaten serious injury. Because the safeguards will be available only for the first three years the agreement is in force or the duration of the tariff elimination period for the goods at issue, and because the Party imposing the safeguard measure must provide each exporting Party with substantially equivalent trade compensation, these transitional safeguards are unlikely to see significant use. State-owned enterprises: modest steps toward levelling the playing field A particular interest in the TPP negotiations was to impose greater disciplines on state-owned enterprises (SOEs) in order to level the competitive playing field in markets where SOEs operate and may engage in discriminatory practices or benefit from government subsidies and regulatory preferences. The extent to which the TPP has achieved that objective is a matter of debate. The immediate focus of business concerns was Vietnam, where the presence of SOEs in the economy is especially large, but also Malaysia and Singapore. Longer-term considerations include China s potential accession. Chapter 17 of the TPP sets out obligations that are aimed at preventing anti-competitive and trade distortive practices of SOEs and designated monopolies. Key obligations in the Chapter, which go well beyond existing commitments in the NAFTA or the WTO Agreement, include commitments by the Parties to: Ensure that SOEs and designated monopolies act on the basis of commercial considerations and in a non-discriminatory manner when purchasing or selling goods or services; Avoid causing adverse effects to the commercial interests of other Parties by providing SOEs with non-commercial assistance (essentially, subsidies); Comply with a range of transparency measures, including listing their SOEs and disclosing information to other Parties about the nature of government ownership and noncommercial assistance; and Provide courts with jurisdiction over civil claims against foreign SOEs, thereby precluding sovereign immunity defences by those SOEs. 22 The scope of the Chapter is circumscribed by the definitions of SOEs and designated monopolies. SOEs are defined as enterprises that are principally engaged in commercial activities, that are owned or controlled by a Party, and meet the minimum revenue threshold of 200 million Special Drawing Rights (approximately CAD $360 million at current exchange rates). 33 Designated monopolies are defined as privately owned monopolies that are designated by Parties after the date the TPP enters into force, and any government monopoly that Parties have or will designate as a monopoly. Exemptions extend to: pension funds that operate at arm s length from their governments, (such as the Canada Pension Plan Investment Board) and certain activities of sovereign wealth funds; government procurement; regulatory or supervisory activities of central banks and financial regulatory bodies; 33 An enterprise is owned or controlled by a Party if a Party: (i) directly owns more than 50 percent of the share capital, (ii) controls the exercise of more than 50 percent of the voting rights, or (iii) holds power to appoint a majority of members of the board of directors or any equivalent management body.

23 23 non-government bodies exercising authority over financial service suppliers; and services supplied in the exercise of governmental authority. In addition, there are Party-specific exemptions set out in annexes and schedules to the chapter. Most Parties, including Canada, have exempt SOEs and designated monopolies of sub-central (state and territory) levels of government and each Party (except Singapore and Japan) has a schedule of non-conforming measures to which the disciplines of the chapter do not apply. Some of these measures are narrowly tailored to the activities of specific enterprises, while others broadly exempt all SOEs and designated monopolies from certain obligations. For example, Vietnam has secured an exemption from the requirement that its SOEs and designated monopolies act in accordance with commercial considerations when purchasing or selling goods in Vietnam. Canada has exempted the Canadian Broadcasting Corporation (CBC), Telefilm Canada and future SOEs involved in cultural industries from the obligations of the Chapter. Despite its limitations, Chapter 17 of the TPP is a useful, if modest, step forward in addressing the concerns of private enterprise in Canada and other TPP countries competing against SOEs in Asian TPP countries. In particular, the Non-Commercial Assistance disciplines (in Article 17.6) may be a useful adjunct to the WTO s SCM Agreement, or trade remedies actions, for governments whose domestic industries (e.g. steel) have struggled to compete with exports from SOEs in non-market economies such as Vietnam.

24 NEXT STEPS FOR CANADA IN A WORLD WITHOUT TPP In a world without the TPP we recommend Canada do four things to further its trading ties with the Asia-Pacific region: 1. Complete the Economic Partnership Agreement (EPA) negotiations with Japan. These negotiations are already quite far advanced, but were effectively put on hold pending the outcome of the TPP. Canada and Japan should be able to finish these negotiations relatively quickly based on the work done earlier and the bilateral efforts of both countries in the TPP. An agreement would be of significant benefit to both countries. Moving forward bilaterally would also send a message to the next U.S. Administration that other countries are not prepared to wait indefinitely for the United States to resolve domestic ambivalence about liberalized trade with Asia. It would also encourage American businesses, which would be competitively disadvantaged in the Japanese market, to renew pressure on the Administration and Congress for the U.S. to get back in the game. rank as the fourth-largest economy by Once again, Australia and New Zealand are ahead of us in building free trade relationships with ASEAN Support the APEC leaders call for the negotiation of a free trade area of the Asia- Pacific. This makes great sense as a long-term objective because it would involve China as a full partner. Even if the next U.S. administration lacks interest, the pressures of globalization will prove even harder to manage without using trade agreements and it will only be a matter of time before the United States returns to the trade negotiations arena. Solid homework and creative engagement by Canada with other APEC countries would put Canada in a strong position to advance its interests when the action resumes. 2. Initiate negotiations with China to establish an enhanced trade relationship. Canadian suppliers are already disadvantaged by the FTAs that both Australia and New Zealand have with China. 3. Propose negotiations with the ASEAN community 34 on an FTA that would try to achieve a similar level of ambition as the TPP. ASEAN as a group is a very significant player. According to McKinsey 35 if ASEAN were a single country, it would already be the seventhlargest economy in the world, with a combined GDP of $2.4 trillion in It is projected to 34 ASEAN (The Association of South East Asian Nations) is made up of 10 nations Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam public-sector/our-insights/understanding-aseanseven-things-you-need-to-know

25 25 CONCLUSION The TPP represents an important systemic advance in the making of trade agreements. The TPP improved on NAFTA by better reflecting the realities of doing business in If implemented, the TPP would modernize Canada s trade relationships with three of our most important partners (the United States, Mexico and Japan), and offer the prospect of much deeper trade relationships with the other TPP signatories, including significant and dynamic new economies such as Malaysia and Vietnam. In a world without the TPP, the agreement serves as a roadmap for improving NAFTA. The TPP is also an important part of building a new future for Canada in the Asia Pacific region. If the TPP or a modified version of the agreement were to come into force, Canada should encourage other countries to join and use the accession negotiations to make sure that the terms of their accessions will ensure a high quality trade relationship going forward. There is a strong prospect that a number of other countries would want to seek to accede to the TPP at an early date including Colombia, Philippines, Thailand, Taiwan, South Korea and Indonesia Importantly, as a party to the TPP, Canada would be at the table to participate in determining the terms on which these countries would join the TPP. Canada already has FTAs with Korea and Colombia but the TPP includes disciplines not present in those agreements. If those countries are part of the TPP and imports from them are subject to its rules of origin, it would increase the potential competitiveness of Canadian firms in other TPP markets including those of the U.S. and Mexico. GLOSSARY BITs Bilateral investment treaties CBTS- Cross-border Trade in Services CETA - Canada-EU Comprehensive Economic and Trade Agreement FTA- Free Trade Agreement GAC- Global Affairs Canada GATS- General Agreement on Trade in Services GATT- General Agreement on Tariffs and Trade GDP - Gross Domestic Product GPA- Government Procurement Agreement MFN- Most-Favoured Nation NAFTA- North American Free Trade Agreement SCM: Subsidies and Countervailing Measures SOES- State-owned enterprises SPS - Sanitary and Phytosanitary Measures TBT - Technical Barriers to Trade TPP- Trans-Pacific Partnership TRQs- tariff rate quotas WTO- World Trade Organization Should the agreement never be implemented, there are other significant opportunities to boost Canada s trade relationships in the Asia Pacific region. These include negotiating a bilateral Canada-Japan free trade agreement, building a stronger economic relationship with China, and proposing a free trade agreement with the Association of South-East Asian Nations (ASEAN).

26 26 APPENDIX A Canadian trade agreements with TPP signatories United States Mexico Japan Vietnam Puru Australia Malaysia Chile Singapore New Zealand WTO Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes FTA with Canada Investment Protection Treaty with Canada North American Free Trade Agreement (NAFTA) As part of NAFTA NAFTA - - Canada- Peru Free Trade Agreement (CPFTA) As part of NAFTA - - As part of CPFTA - - Canada- Chile Free Trade Agreement (CCFTA) - - As part of CPFTA Brunei Darussalam Other Significant Trade Agreements with Canada Canada - U.S. Agreement on Government Procurement Source: Global Affairs Canada, aspx?lang=eng

27 27 Canadian import/export of goods with TPP countries (2015) Value in Canadian dollars (million) TPP Signatory Total Import/Export Exports Imports 1 United States $687, $402, $285, Mexico $37, $6, $31, Japan $24, $9, $14, Vietnam $4, $ $4, Peru $4, $ $3, Australia $3, $ $1, Malaysia $3, $ $2, Chile $2, $ $1, Singapore $2, $1, $ New Zealand $1, $ $ Brunei Darussalam $7.30 $2.90 $4.40 Source: Global Affairs Canada - Statistics on International Commerce - By Country (including TPP countries)

28 28 Canadian import/export of services with TPP countries (2014) Value in Canadian dollars (million) TPP Signatory Total Import/Export Exports Imports 1 United States $119, $52, $67, Mexico $3, $1, $2, Japan $3, $1, $1, Australia $2, $1, $ Singapore $2, $ $1, Malaysia $ $ $ New Zealand $ $ $ Chile $ $ $ Brunei Darussalam Peru Vietnam Note: This table and the accompanying chart use 2014 data because the 2015 data was only available for the United States and Japan. Source: Global Affairs Canada - Statistics on International Commerce - By Country (including TPP countries)

29 29 Totals Canadian import/export of goods and services with TPP countries in Canadian dollars (million) Import of goods Import of services Total import Export of goods Export of services Total exports Totals for import/exports United States $285, $67, $352, $402, $52, $454, $807, Mexico $31, $2, $33, $6, $1, $7, $41, Japan $14, $1, $16, $9, $1, $11, $28, Australia $4, $ $5, $ $1, $2, $7, Singapore $3, $1, $5, $ $ $1, $6, Malaysia $1, $ $ $1, $ $2, $4, New Zealand $2, $ $2, $ $ $1, $3, Chile $1, $ $1, $ $ $1, $3, Brunei Darussalam $ $ $1, $1, $2, Peru $ $ $1, Vietnam $ $4.40 $ $2.90 $7.30 Totals $346, $75, $421, Source: Global Affairs Canada - Statistics on International Commerce - By Country (including TPP countries)

30 30 FURTHER READING The Trans-Pacific Partnership: What s in it for Canada? Business Council of Canada October 2016 Economic impact of Canada s potential participation in the Trans-Pacific Partnership agreement Global Affairs Canada September 2016 Debunking alarmism over the TPP and IP: Why the Trans-Pacific Partnership is a good deal for Canadian innovators Richard C. Owen January 2016 The economic effects of the Trans-Pacific Partnership: new estimates Peter A. Petri, and Michael G. Plummer January 2016 Potential macroeconomic implications of the Trans-Pacific Partnership The World Bank January 2016 Better in than out? Canada and the Trans-Pacific Partnership Dan Ciuriak, Ali Dadkhah, and Jingliang Xiao April 2016 Why the TPP is such a big and good deal for Canada Trevor Tombe October 2015

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