At the recent Asia Pacific Economic Cooperation (“APEC“) Summit in Da Nang, Vietnam, the 11 remaining countries of the Trans-Pacific Partnership (“TPP11“) took a significant step forward to finalize a new agreement now referred to as the Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP“).  Media reports were mixed as some outlets reported that there was an agreement in principle while others reported that Canada was not ready to sign on.  However, the end result is an impressive draft agreement in principle on most of the existing terms with some key exceptions and a few remaining issues from Canada’s perspective.  To its credit, Japan has been leading the effort to move forward with the CPTPP in hopes of the United States rejoining the agreement at some point in the future.

Suspension of Certain Provisions

The CPTPP incorporates all of the Trans-Pacific Partnership (“TPP“) agreement terms except for 20 provisions that will be put in “suspended” status.  These suspended terms are mainly issues of interest to the United States including the operational provisions of the Investor State Dispute Settlement (“ISDS“) chapter, commitments relating to labor rights, biologics, as well as intellectual property and copyright protection provisions.

The CPTPP still goes well beyond the simple duty reductions in a “normal” trade agreement to include principles on e-commerce, the environment, transparency and anti-corruption, regulatory coherence and cross border trade in services, among many other things. The CPTPP is a progressive agreement reflecting the “state of the art” in international trade and investment and an impressive achievement, if the 11 parties can see it through to execution and ratification.

Outstanding Issues

In addition to certain provisions being put in suspended status, the parties have yet to agree upon four parts of the agreement including state-owned enterprises related to Malaysia, commitments on coal relating to Brunei, dispute settlement involving trade sanctions for Vietnam and Canada’s cultural exception. The parties will need to come to agreement on these four provisions prior to signing.  Additionally, each party will need to have domestic political support for CPTPP as it will require ratification of each party and this may require further changes.

Perspective on Canada

At the conclusion of APEC, Canada Prime Minister Trudeau was reported as stating that he “wasn’t going to be rushed into a deal that was not yet in the best interest of Canadians. That is what I’ve been saying at least for a week, and I’ve been saying it around TPP12 for years now and that position continues to hold.” It was also reported the Prime Minister Trudeau said there is still “important work to be done,” namely on the creation of a gender rights chapter, changes around rules of origin — a part of the deal with particular salience to the auto parts sector — and issues surrounding Canada’s protection and promotion of culture.”

Canada’s position on the CPTPP may be influenced by the current North America Free Trade Agreement (“NAFTA“) negotiations where country of origin requirements for automobiles have been a point of contention.  Additionally, Canada’s attempt to incorporate the Investor State Court (“ISC“) concept that was developed as part of the Canada-European United Comprehensive Economic Trade Agreement (“CETA“) into CPTPP may be futile.   This is because Japan categorically rejected the ISC concept in its free trade agreement negotiations with the EU for the Japan European Union Economic Partnership Agreement (“JEEPA“).  Similarly, the EU dropped all reference to ISDS and the ISC when it initiated negotiations with New Zealand and Australia.

Canada’s push for the ISC is interesting in light of the threat of the United States to withdraw from NAFTA. Not having a CPTPP in place if the United States were to withdraw from NAFTA, could weaken Canada’s negotiating position with the remaining CPTPP members who could also ratify the deal without Canada’s involvement.

Japan’s Leadership

What motivated Japan’s remarkable leadership in the APEC CPTPP negotiation was two fold. First, remains the hope of bringing the United States back to the multilateral global trading system at some point in the future.  Second, there was also an opportunity to have the first high-level free trade multilateral agreement in Asia Pacific, which could boost Japan’s economy and establish more sophisticated trade rules than the bilateral agreements Japan has entered into to date. The CPTPP also sets the minimum standard of the bilateral negotiation between Japan and the United States, even if such bilateral negotiations seem difficult to avoid.

CPTPP Impact

The impact of the CPTPP will not be as great as the TPP would have been, in terms of its quantitative contribution to growth, though it is hard to measure because the reforms in CPTPP go well beyond mere duty rate reduction.   Moreover, as the agreement reflects the best practice standard in many areas such as ecommerce, regulatory coherence, transparency, environment and labor, these areas will gain stronger footholds as principles of international trade and investment law, which can be used as building blocks for the future. Businesses in the region who are not from the TPP11 countries also support it because “a rising tide lifts all boats”, and the growth will create opportunities for other trading partners as the TPP11 economies grow.

The CPTPP will affect some businesses in the region directly and some indirectly. There will also inevitably be some trade diversion to the TPP11/ CPTPP countries away from non-parties.  But the results are likely to be that the GDP growth impact is far larger than the trade diversion impact.  To the extent that the CPTPP further opens markets to healthy competition, it will challenge some businesses who currently hide behind various forms of protectionism.  Overall, the CPTPP looks like something that will be good for the TPP11 members, achieving much more quickly than a series of bilateral deals, and it may eventually attract the US back into a multilateralist global trading system.

Looking Forward

One of the main topics for discussion in this year’s APEC meetings was how governments must play a role in retraining and “up-skilling” their citizens to compete, not only in a more open trade and investment environment, but also in light of the 4th Industrial Revolution.

The CPTPP is one among several regional agreements making progress in the Asia Pacific region without the United States. Others include JEEPA and the Regional Cooperative Economic Partnership (“RCEP“).  Although the Trump Administration currently says that it prefers bilateral agreements, some of its leverage in negotiating bilateral deals may be diminished as the multilateral agreements progress forward.

Further negotiations will be necessary to finalize the agreement however, the APEC was a pivotal moment for moving the CPTPP forward and the parties hope to have a signed agreement by the first part of 2018.

For additional information, please contact Fred Burke, Kana Itabashi or James Small.