The Trans-Pacific Partnership is a wide-ranging free trade agreement being negotiated by a dozen Pacific Rim countries that could be finalized later this year. It offers the prospect of improving access to key markets and lowering costs for both importers and exporters. This article examines the history of the TPP, the current status of the negotiations and the outlook for its implementation.
How did the TPP come to be?
The TPP had a humble beginning in a small regional free trade agreement called the P-4, which was concluded among New Zealand, Chile and Singapore in 2005 and added Brunei in 2006. This FTA initially excluded services and investment, but when the parties announced their intent to add financial services and investment to the scope of the agreement in 2008, President George H.W. Bush announced that the U.S. wanted to join. Within a few months the parties decided to go even further by pursuing a comprehensive FTA, prompting Australia, Peru and Vietnam to sign on as well.
The initiative stalled while the U.S. went through a political transition following the November 2008 election that brought President Obama to the White House. In late 2009, however, Obama announced that negotiations would begin, and the first round was held in Australia in March 2010.
As the negotiations proceeded more participants were added. Malaysia joined in 2010, followed by Canada and Mexico in 2012 and Japan in 2013. South Korea declined an invitation to join, and while other countries have expressed an interest, the negotiations are now far enough along that no additional participants are likely to be added until the agreement is actually in effect.
What is the status of the negotiations?
More than 20 rounds of negotiations have been held over the past five years and much of the agreement has been finalized. Some chapters, including those on intellectual property rights, state-owned enterprises, regulatory coherence and investor state dispute mechanisms, remain open and likely will require political tradeoffs among trade ministers to be resolved. Another key sticking point is the lack of a bilateral deal between the U.S. and Japan, which have yet to find common ground on improved market access for agricultural products and automobiles.
In both cases, further progress will likely be delayed until the U.S. Congress grants trade promotion authority (TPA) to the president. TPA allows the president to submit legislation to implement a trade agreement that Congress cannot amend and must vote within a relatively short time frame to approve or reject. It is widely accepted that trading partners will not table their best offers to resolve the remaining issues until they know that U.S. lawmakers will not be able to alter a final deal. In the meantime bilateral negotiations among the parties are ongoing, with U.S. negotiators meeting weekly with one country or the other.
How will the TPP be applied?
The TPP will reportedly be applied across the board to all parties, meaning that its rules of origin and market access commitments will apply to goods made in all TPP countries. However, U.S. trade officials have said that the existing U.S. bilateral FTAs with Australia, Canada, Singapore, Mexico, Chile and Peru will co-exist with the TPP.
Importers will thus have the flexibility to enter eligible goods under either the TPP (once it takes effect) or the applicable FTA and thus use the rules of origin and duty rates that are most advantageous to them. For example, under a pre-existing FTA the rules of origin for an imported good may be more generous and the duty rate may be zero, but importers interested in sourcing inputs for the product from TPP countries with which the U.S. does not already have an FTA (Malaysia, Japan, Vietnam, New Zealand and Brunei) could choose to enter the product under the TPP rules even though the final duty rate may not yet have been eliminated under that agreement.
When will the TPP take effect?
The short answer: Not until at least late 2016. That means importers may still have another 18 months before they could start taking advantage of duty-free treatment for goods from TPP member countries.
Now let’s look at the schedule in more detail. The conclusion of TPP is dependent on congressional approval of TPA. If the Senate passes TPA by the end of May and the House passes it by the July 4 recess, then the TPP parties could spend July and August hammering out the final details.
Using this scenario, the TPP could be ready to be signed by Sept. 1. However, under the new TPA, the president is required to notify Congress of his intent to sign a trade agreement 90 days prior to actually doing so. Further, 60 days prior to signing the agreement the text has to be made available. So in this case the U.S. could sign the TPP perhaps in December.
Once the agreement is signed, a list of laws that have to be changed to implement it is due within 60 days and the U.S. International Trade Commission must submit a report within 105 days. The House and Senate committees of jurisdiction then get one more opportunity to shape the final outcome through a so-called mock markup, which involves reviewing draft implementing legislation and advising the White House of any adjustments lawmakers feel should be made. The administration may then choose whether to include those changes in the final bill.
Once this process is complete the president must submit the final text of the agreement to Congress and can send up the final implementing legislation no sooner than 30 days later. In the scenario we are considering, this means a final bill could be sent to Capitol Hill by approximately April 15, 2016.
However, at this point the process could be affected by several outside factors. One is the length of the “legal scrub” necessary to ensure that the TPP’s commitments and objectives are accurately reflected in the implementing legislation. Another is the time needed to translate the final agreement text into each participant’s language and to review those translations for accuracy.
Although there is no deadline for submission of the final bill, once it is sent a clock begins ticking. The House Ways and Means Committee must report the bill out within 45 days of receiving it, and the full House must vote on it within another 15 days. Thereafter the Senate Finance Committee has 15 days to report the bill out, followed by another 15 days for the full Senate to vote on it. The bill would then go to the president for signature, which could take up to 10 days. On our calendar we are now looking at about July 23, 2016.
Even once the bill is passed, the president has to proclaim its entry into effect, and there is no deadline for that to happen. History indicates that the U.S. is loath to proclaim or implement an FTA prior to the other participants being ready to implement as well. Countries will have to approve the necessary laws, rules and regulations to put the TPP into effect, and the U.S. generally insists on reviewing these changes to ensure they accurately reflect TPP commitments and then waiting until they are finalized before proceeding itself. Since five of the TPP parties (New Zealand, Brunei, Malaysia Vietnam and Japan) do not already have FTAs with the U.S., this process is likely to take longer for them than the other six.
History is also a good place to turn when evaluating when TPP may take effect. The average time from signature of a U.S. FTA to its entry into force is two years. The most recent agreements (Colombia, Korea and Panama) averaged four years, but FTAs with Israel, Singapore, Australia and Chile all took less than one year. All the others took longer than one year from signing to effectiveness.
The bottom line is that nobody really knows when companies will be able to begin claiming duty-free treatment under TPP. The dates outlined above are only estimates and depend on numerous factors, from the ability of the U.S. Congress to approve TPA to the effect of upcoming elections in TPP countries. For the time being, the best companies can do is keep an eye on the latest developments (e.g., by subscribing to the Sandler, Travis & Rosenberg Trade Report) and make sure policymakers hear their voices.
About The Author Nicole Bivens Collinson
Nicole Bivens Collinson is a well-known international trade authority in Washington, D.C. and has over 25 years of experience in government, public affairs and lobbying. She leads Sandler, Travis & Rosenberg’s international trade and government relations practice. You can reach Nicole at email@example.com. To keep up with the latest news on Trade & Customs Legislation in the U.S. Congress, click here and follow ST&R on Twitter @STRTRADE.