Mihai Prisacariu Professor Kent Jones Prisacariu International Trade Theory and Policy 29 November 2015 Trans-Pacific Partnership The Investments Chapter Background The Trans-Pacific Partnership is an agreement in place between twelve countries Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam to promote economic growth within these nations. The agreement will seek to set a new standard for global trade while confronting new economic issues emerging in the 21 st century. In total, the TPP includes thirty chapters covering economic and trade issues, starting with trade in goods and continuing to customs and trade facilitation. The TPP incorporates new and emerging trade issues related to the internet and the digital economy, the participation of state-owned enterprises in international trade and investment, and the ability of small businesses to take advantage of trade agreements. Finally, the TPP seeks to unite twelve different countries. Different by their varying geography, language, history, size, and levels of development regarding world trade. The TPP signatories realize that such a deal requires close cooperation including special transitional periods and mechanisms which allow the signatories more time to develop the capacity to implement these new obligations. Furthermore, the TPP covers the full spectrum of trade in order to create new opportunities and benefits for businesses, workers, and consumers. Moreover, TPP seeks to set a new standard in global trade through five
Prisacariu 2 key features including comprehensive market access, regional approach to commitments, addressing new trade challenges, inclusive trade, and work as a platform for regional integration. First, the TPP enables comprehensive market access across the twelve nations by eliminating or reducing tariff barriers across most goods and services that cover the full spectrum of trade. Furthermore, these services include trade and investment in order to create new opportunities and benefits for businesses, employees, and consumers. Second, included in the TPP is its regional approach to commitments. This statement means that the TPP will facilitate the development of production and supply chains among the signatories. As a result, trade efficiency between signatories will increase, allowing the creation of new jobs, increased standards of living, enhanced conservation efforts, as well as the opening of new domestic markets. The third defining feature of the TPP revolves around addressing new trade challenges. These new trade challenges include the development of the digital economy as well as the role of state-owned enterprises in the global economy. By addressing these issues, the TPP seeks to promote innovation and increase productivity among the participating countries. The fourth feature regards introducing more inclusive trade policies. The goal of this feature is to make sure that economies of all sizes and levels of development can benefit from trade. Strategies to ensure fair behavior include commitments to help small businesses understand the agreement whilst also focusing on building trade
Prisacariu 3 capacity. These actions will ensure that signatories can meet the requirements of the agreement and thus take full advantage of the TPP s benefits. The fifth and final feature of the TPP is to be a platform for regional integration. This feature allows regional economies to be integrated within the agreement as well as facilitate the inclusion of other economies in the Asia-Pacific region. The successful implementation of these 30 chapters will help the TPP countries to take full advantage of the features previously mentioned. The investments chapter of the TPP strengthens the rule of law within the Asian-Pacific regions by stopping foreign governments from discriminating against American investors. The measure found in the investment chapter will ensure that all investors will have access to the tools needed to remediate any breach of their rights. The investment chapter of the TPP has a set of core obligations that provide protection to all TPP member investors and investments. These obligations would: 1) Provide for national treatment: There will be no less favorable treatment than a TPP country provides to its own investor or investments. The mostfavored-nation treatment which states that no less favorable treatment than a TPP country to another country s foreign investor or investments provides a minimum standard of treatment for investment. The most-favored-nation measure provides protection against both denial of justice and failure to provide police protection under the customary international law. 2) Ensure that any expropriation by a TPP government is done solely for the good of the public: This expropriation will be done only in accordance under
Prisacariu 4 the due process of law and be subject to prompt, adequate and fully realizable and transferable compensations. 3) Allow for transfer of funds to be made freely and without delay, subject to certain exceptions: These exceptions are in place so that governments can manage volatile capital flows, restricting investment-related transfers to balance a payment crisis and other economic crisis to protect the integrity and stability of the financial system. 4) Bear performance requirements on specific local content, export, and technology transfer or technology localization. 5) Ensure no nationality base restriction on the appointment of senior manager by investors and that no investors will lose control of his or her investment based on nationality. The chapter also has a Non-conforming measure section where signatories agreed that all obligation apply to all sectors and activities except for the limitations mentioned in this section. These exception are recorded in Annex I and II of the Investments Chapter and will still be in place even after the TPP agreement enters into effect. The Denial of Benefits section of the chapter allows for a TPP Party to deny shell companies that are established in a TPP country that has little business activity in that country the full benefits of a TPP party. Also under this section, one TPP country can deny investment benefits to companies from a non-tpp country under a sanction regime from another TPP country. The Investor-State Dispute settlement process will give investors the right to seek neutral, international arbitration on the event of a dispute between two TPP
Prisacariu 5 parties over violations from the investments Chapter. The safeguards for a fair settlement are as follows: Transparency of arbitral proceedings ensuring that all arbitration documents will be open and available to the public. Amicus curiae submissions ensuring that all stakeholders can submit amicus curiae, also known as friend of the court briefs. Non-disputing party submissions Governments and other TPP parties are able to make submissions to the panels for the interpretations of the Agreement. Expedited review of frivolous claims and award of attorneys fees Panels can review and dismiss frivolous claims on an expedited basis while still awarding attorney s fees to the respondent government. Interim review and award challenges parties that are in dispute can review on proposed arbitral awards prior to issuance and allow the parties to option to challenge a tribunal award. Binding joint interpretations TPP parties can agree on interpretations of the agreement that are binding on tribunals. Time limits an investor can bring an investor-state claim in three and a half years form the date of the alleged breach. Claimant Waiver the claimant engaged in an investor-state arbitration cannot proceed in parallel for a challenges to the same measure. After years of negotiations, the agreement was reached between the twelve signatories on October 5 th, 2015. The intense negotiations were met with criticism as
Prisacariu 6 they were often kept secret from the public domain. There are still questions as to who will truly benefit from the TPP. Analysis While the TPP may appear to benefit members of society, many aspects of the deal have come under harsh criticism. There are worries over the first section of the TPP regarding the elimination of tariffs. While some individuals feel that the removal of tariffs on goods will benefit citizens, others suggest that since the U.S. already has very low tariffs, the benefits that their removal will bring to American consumers (and foreign producers) will be small (New Yorker). Furthermore, the gains in export sales for American companies that will find it easier to sell goods to foreign countries will be minimal. Another section of the TPP that may lead to confusion revolves around the new regulatory policies imposed on the twelve signatories. While the TPP requires the nations to follow the strict labor standards by the International Labor Organization, people wonder if the governments will actually enforce these standards. These standards include prohibitions against child labor, minimum-wage and maximum-hour rules, and various workplace-safety regulations. However, the implementation of these standards shows a commitment to shy away from race to the bottom economics, meaning that globalization makes countries cut back on regulation and enforcement of decent working conditions in order to lower labor costs (Economist). The next subject of the TPP that has come under scrutiny is regarding global conservation efforts. The trade deal includes wildlife protections built in. However, just like the labor organization standards, it is unclear how stringent these regulations will
Prisacariu 7 be enforced. First, the Obama administration sought to restrict illegal wildlife trade in the deal (National Geographic). However, critics wonder if the administration was just using this regulation as well as other environmental provisions as a selling point in an attempt to raise Americans support for the agreement. Moreover, the vague environmental chapter in the TPP is seen as a window dressing for a deal that could also encourage environmentally destructive practices including palm oil plantations and increased fossil fuel exports (National Geographic). These large Malaysian palm oil plantations have led to an increased amount of endangered species in the local area as well as the burning of timber that emits smoke into the atmosphere. In addition to these concerns, the language of the environmental chapter is considered weak by skeptics. Jacob Phelps, an environmental scientist at Lancaster University in England, feels that this weak wording could lead to an equally and arguably far greater potential for it to devastate wildlife (National Geographic). The weak wording within the agreements includes phrases such as Each country commits to take appropriate measures to protect and conserve wildlife it has determined is at risk in its territory (TPP). In response to criticism about these vaguely worded statements within the environmental chapter, Michael Froman, a U.S. Trade Representative admitted that there s no such thing as a perfect trade agreement. It s a negotiation (National Geographic). Moreover, people are disappointed that the text states that countries must take measures to combat illegal wildlife trade rather than requiring them to prohibit it (National Geographic). U.S. Representative Sandy Levin, a Democrat from Michigan, stated that these vague statements are not going to lead to the revolutionary changes we have been told to expect on the House floor in May.
Prisacariu 8 Clearly, the vagueness surrounding the conservation portion of the TPP has led to criticism as individuals wondering whether the environmental and economic consequences agreed to in the new deal. The TTP s investment chapter is certainly worthy of further analysis. To start, U.S. financial firms object to the exception that allows Malaysia to use discretion to prohibit foreign investment in the financial sector (ProQuest). The Malaysian investment exception allows their government to determine what investments, such as those from banks and insurance companies, will be approved on the basis if they are in the best interests of Malaysia (ProQuest). This exception has been described by individuals such as President Peter Allgeier, the president of Coalition of Service Industries (CSI), as very disturbing. It appears to be completely discretionary a terrible precedent (ProQuest). U.S. financial services firms are attempting to sway the Obama administration to add an adjustment that would decrease the power of this exception. This adjustment could take form of a side letter (ProQuest). If Malaysia could agree to a side letter, the country could only exempt investment below a set monetary threshold or also identify specific criteria that goes into the best interests test. The data flow provision in the TPP financial services chapter contradicts agreements on data flows in the electronic commerce chapter. This inconsistency has caused confusion and objection from U.S. financial firms as the provision allows an obligation for countries to transfer data across borders freely but also stops short of banning countries from requiring data to be stored on local servers (ProQuest). The electronic commerce chapter specifically goes against these provisions: it states that
Prisacariu 9 countries must refrain from blocking data flows as well as imposing a location restriction on data transfer. This restriction on data transfer worries those in the financial sector, as any delays in providing data to financial regulatory agencies would jeopardize a company s right to operate (Allgeier). Moreover, the U.S. Government did not seek to stop the location restriction on data transfer. Another highly criticized aspect of the TPP investments is, once again, the lack of language clarity. For example, the second provision in the TPP investment chapter states that For greater certainty, the mere fact that a subsidy or grant has not been issued, renewed, or maintained, or has been modified or reduced by a Party, does not constitute a break of this Article, even if there is loss or damage to the covered Investment as a result (TPP). There is no specific criteria regarding what constitutes a breach of the above provision. Robert Howse, International Law Professor at New York University, argued that he would rather have the provision establish criteria for what might in fact constitute a breach rather than establishing what does not would give more certainty to arbitrators (ICSID). This obscure language is a common theme throughout segments of the TPP. Furthermore, he felt that additional wording stating that a breach would only occur due to a lack of due process or unfair selectivity in the decision would provide a level of certainty necessary to the parties involved (ICSID). While exceptions and language clarity of the investment chapter were met with criticism, the investment chapter did bring positive new features that go beyond the U.S. Free Trade Agreements. First, the chapter includes provisions that seek to limit the amount of wasteful suits and claims that cost an economy time and money. The TPP permits governments to seek expedited review and dismissal of claims that are
Prisacariu 10 manifestly without legal merit (TPP). In addition, if the entire case is dismissed because of a lack of legal merit, the tribunal will render an award that closes the open dispute. The cases that lack legal merit are closed early on, before they unnecessarily consume the parties resources (ICSID). Expediting frivolous suits is a positive addition for all parties involved as cases that do have legal merit will be heard in a more timely fashion. Foreign direct investment is one of the key factors of economic growth. Given that the economic growth of the United States has been slowing down, more Foreign Direct Investment help increase the growth of the economy. In the table below we can see the levels of FDI among the TPP countries.
Prisacariu 11 As we can see, the United States Foreign Direct Investment into the other TPP members is over $85 billion. However, there is only $69 billion of FDI in the United States in 2013. Furthermore, total Foreign Direct Investments in the United States was $236.3 billion in 2013 (Organization of International Investment). Meaning that only 29.24% of the United States FDI came from the TPP countries, which account for 40% of the world s economy. These numbers clearly show how the U.S. is lagging when it comes to FDI into its own economy. Even though the United States barrier of FDI are relatively low, further reducing those barriers will still result in a significant increase in economic welfare. The Transpacific Partnership will help reduce many of the barriers that currently inhibit investments from the twelve countries mentioned in the table. Recommendations Even though this partnership will create many benefits to all the TPP countries, there are many aspects that need improving. For example, the lack of clear language in the investments chapter is under harsh criticism because the negotiations for this partnership, as well as details about the terms of the agreement, were kept secret, omitted, or misrepresented. However, this can expected when a small number of people decide the trade terms for twelve different countries. Now that the official text of the TPP is publically available: lawyers, economist, politicians, and businessman have voluntarily contributed their feedback to the text. This feedback should be screened and taken into consideration to strengthen the wording of the text. With more clear and explicit wording, the TPP s text would be more actionable and inspire more trust for all the twelve countries that are part of this treaty.
Prisacariu 12 Another cause for concern is the exceptions that are found in many of the TPP chapters. These exceptions could create tensions between countries and industries, such as the Malaysian investment exception. Even though the exceptions were created for the greater good of this partnership, all countries should be open to continuous negotiations. The purpose of the further negotiations is the complete elimination of the exceptions. These exceptions are a barrier that stand in the way of free trade among the member countries of the Transpacific Partnership. After the elimination of the exceptions, 40% of the world s economy would be closer to complete free trade. Free trade benefits everyone, and although not everyone will benefit equally, there is still an extra benefit. The government understand this. However, the government still oppose free trade. The government s reason is that the constituents believe that free trade will take away their jobs or reduce their wages. Therefore, the problem is not the governments that oppose free trade, but the people that elect the government. In order for the TPP to be adopted we need to shift our focus from convincing the government that free trade is good to educating the people on the benefits of free trade. A campaign should be launched in order to educate about general international trade concepts and show how countries gain from trade. The campaign should consist of nationwide advertising that promote speaker series and workshops in the major cities. This campaign should be initiated by the President of the United States, with the support of the companies that would stand to gain the most from the implementation of the TPP
Prisacariu 13 Conclusion The TPP is a very important treaty that combines forty percent of the world economy by drastically reducing trade barriers. Even though this partnership has been met with criticism, it will improve the economic growth of the member countries. The implementation of the aforementioned recommendations would increase most signatories confidence in the TPP, thus convincing the U.S. Congress (and the governments of the other 11 countries) to vote in favor of the Trans-Pacific Partnership.
Prisacariu 14 Works Cited "Foreign Direct Investment in Mexico since the Approval of NAFTA." The World Bank Economic Review 19.3 (2005): 473-88. Organization for International Investment. Web. http://www.ofii.org/sites/default/files/fdius2014.pdf "The Corporate-Friendly World of the T.P.P. - The New Yorker." The New Yorker. N.p., 06 Oct. 2015. Web. 09 Dec. 2015. http://www.newyorker.com/news/daily-comment/the-corporate-friendly-world-ofthe-t-p-p "Racing to the Bottom." The Economist. The Economist Newspaper, 27 Nov. 2013. Web. 09 Dec. 2015. http://www.economist.com/blogs/freeexchange/2013/11/labour-standards "Manifest Lack of Legal Merit - ICSID Convention Arbitration." International Center for Settlement of Investment Disputes. N.p., n.d. Web. By Rachael Bale PUBLISHED Thu Nov 05 09:20:31 EST 2015. "How the Trans- Pacific Partnership Will-and Won't-Protect Wildlife." National Geographic. National Geographic Society, n.d. Web. 09 Dec. 2015. http://news.nationalgeographic.com/2015/11/151105-tpp-free-trade-wildlifetrafficking-conservation-cites/ https://icsid.worldbank.org/apps/icsidweb/process/pages/manifest-lack-of- Legal-Merit.aspx "The Trans-Pacific Partnership @ USTR.gov." The Trans-Pacific Partnership @ USTR.gov. N.p., n.d. Web. 09 Dec. 2015. https://ustr.gov/tpp/
Prisacariu 15 "Financial Firms Worried about TPP Exception for Malaysia, Data Flow Rules." Inside US Trade 33.43 (2015)ProQuest. Web. 27 Nov. 2015. TPP INVESTMENT LANGUAGE AIMS TO TIGHTEN STANDARD FOR MST BREACH." Inside US Trade 33.44 (2015)ProQuest. Web. 27 Nov. 2015. I pledge my honor that I have neither received, nor provided unauthorized assistance during the completion of this work. PrisacariuMihaiVth