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CRS Report for Congress Prepared for Members and Committees of Congress The Trans-Pacific Partnership Agreement Ian F. Fergusson Specialist in Internatio nal Trade and Finance Bruce Vaughn Specialist in Asian Affairs December 12, 2011 Congressional Research Service 7-5700 www.crs.gov R40502 ership Agreement Congressional Research Service At the Asia-Pacific Economic Cooperation Forum (A PEC) in November 2011, the leaders of the United States, Australia, Brunei, Chile, Malays ership Agreement Congressional Research Service Introduc tion................................................................................................................... ...................1 Existing and Potent ial Memb ership.............................................................................................. ...3 U.S. Objectives and Interests.................................................................................................. .........5 Context with Other Regi onal Architectures.....................................................................................5 A Comprehensive Trade Agreement................................................................................................ U.S. Trade with Current Trans- Pacific Partner Countries.........................................................9 Potential Controversies........................................................................................................ ..........11 Agricultural Products.......................................................................................................... .....11 Dairy.......................................................................................................................... ........11 Beef........................................................................................................................... ........12 Other Issues................................................................................................................... ..........12 Intellectual Prop erty Rights...............................................................................................12 Pharmaceu ticals................................................................................................................ .14 State-Owned Enterprises...................................................................................................14 Government Procurement.................................................................................................14 Environment and Labor.....................................................................................................15 Trade Promotion Authority...................................................................................................... Figures Figure 1. TPP States and Pote ntial Additiona l Members...............................................................17 Tables Table 1. U.S. Goods Trade with TPP Countries, 2010.....................................................................9 Table 2. U.S. Private Services Trade with TPP Members, 2010....................................................10 Contacts Author Contac t Inform ......18 ership Agreement Congressional Research Service At the Asia-Pacific Economic Cooperation Forum (A PEC) in November 2011, the leaders of the United States, Australia, Brunei, Chile, Malays Background information for this report was derived from presentations made by Ambassador John Veroneau, Deputy U.S. Trade Representative (USTR), Mariano Fernandez, Ambassador of Chile to the United States, Roy Ferguson, Ambassador of New Zealand to the United States, and Chan Heng Chee, Ambassador of Singapore to the United States at a Pan-Pacific Forum “Energizing a Renewed Trans-Pacific Partnership,” on Thursday, November 6, 2008, as well as Assistant USTR for Southeast Asia and the Pacific, Office of the USTR, Barbara Weisel and Jeffery Schott, Senior Fellow, Petersen Institute for International Economics, “US Engagement in the Asia-Pacific: The Decision to Join the Trans-Pacific Strategic Economic Partnership,” East West Center, October 30, 2008. Other Department of Defense and Department of State officers, embassy officials, and publ ic policy institution analysts were also consulted. Remarks of President Obama at Suntory Hall, Tokyo, Japan, November 14, 2009. ership Agreement Congressional Research Service “The Trans-Pacific Partnership-Moving Forward,” Press Release of Australian Minister for Trade Simon Crean, November 14, 2009. quoted in “Trans-Pacific Partnership Talks Conclude, Malaysia Weighs Joining Eight-Nation Talks,” International Trade Reporter, March 25, 2010. ership Agreement Congressional Research Service bowl’ of multiple tariffs depending on the source of a product and, in turn, a flood of rules of origin to determine which source is to be assigned to a product.” Existing and Potential Membership As the United States entered into exploratory di scussions to join Brunei, Chile, New Zealand, and Singapore in the TPP, then Assistant Secretary of State for Economic, Energy and Business Affairs Daniel Sullivan stated his view that the TPP will likely expand its membership and “could provide as one possible foundation for, and build momentum towards, a Free Trade Area of the Asia-Pacific.” Sullivan also described the agreement as supporting U.S. interests in the areas of “intellectual property rights, standards, transparency, labor rights, and the environment.” It is envisaged that the TPP will add members in successive tranches. On November 20, 2008, Australia announced that it would participate in the TPP negotiations. Former Australian Prime Minister Kevin Rudd, who is now Australia’s fo reign minister in the government of Prime Minister Julia Gillard, called for an Asia-Pacific community that would include the United States and have a broad mandate that would include political, security, economic, and global issues such as climate change. Former President Bush’s notification to Congress of December 30, 2008, Jagdish Bhagwati, “From Seattle to Doha,” Foreign Affairs , December 2005. Daniel Sullivan, Assistant Secretary of State for Economic, Energy and Business Affairs, “The Administration’s Focus on Promoting Free Trade and Enhancing U.S. Trade and Export Opportunities,” September 8, 2008. Ibid. “Asia-Pacific Leaders Welcome Obama’s Commitment to Trans Pacific Partnership,” International Trade Reporter November 19, 2009. “Trans -Pacific Partnership,” The Daily Post New Zealand , September 23, 2008. ership Agreement Congressional Research Service New Zealand offers very few problems because we are very keen on environment and labor agreements as part of an overall approach to FTAs.” U.S. membership in the TPP would place New Zealand on an equal economic footing with other TPP members that have FTAs with the United States. New Zealand Trade Minister Tim Groser welcomed President Obama’s announcement that the United States intends to proceed with the TPP. Singapore also generally shares New Zealand’s desire to keep the United States strategically and economically engaged in the Asia-Pacific region. Singapore has stated that it favors linking Asia and the Americas as opposed to creating an Asian-only block. Singapore Prime Minister Lee Hsien Loong stated on November 15, 2009, that “all of us welcomed very much the announcement of the U.S. yesterday to engage with the TPP.” “US Trade Move Big News for NZ: Clark,” New Zealand Herald , September 23, 2008. “Groser Welcomes US Announcement on Trans-Pacific Partnership,” November 13, 2009, beehive.govt.nz. “Singapore Welcomes US Joining Trans-Pacific Trade Agreement,” Channel News Asia , September 22, 2008. “Asia-Pacific Leaders Welcome Obama’s Commitment to Trans Pacific Partnership,” International Trade Reporter November 19, 2009. “Possible Inclusion of Vietnam in TPP Talks Sparks Controversy,” Inside US Trade , March 6, 2009. Letter from Ambassador Ron Kirk to Speaker Nancy Pelosi, October 5, 2010, http://www.ustr.gov/webfm_send/ 2337. ership Agreement Congressional Research Service apparel, footwear, metal products, and clocks and watches sectors. Some see Malaysia’s commitment to the TPP as a method to reinforce the government’s economic reform agenda. According to the U.S. Chamber of Commerce, “participation in the TPP will help promote the domestic economic reforms in Malaysia which Prime Minister Najib Razak launched after taking office last year.” U.S. Objectives and Interests While trade with the current TPP nations represents a relatively small part of U.S. trade with Asia and the world (see Table 1 ), U.S. participation in the TPP could provide it with the critical mass necessary to expand to other countries. By doing so, the TPP countries may be able to shape the regional economic architecture to the comprehensive standards of the TPP and of U.S. FTAs. Conversely, there is concern that, should the United States find itself outside the dominant regional economic architecture of Asia, trade could be diverted away from the United States. Economic linkages can also reinforce strategic relationships. If U.S. trade ties were diminished as a result of being excluded, then U.S. strategic interests and leverage could also suffer. Some view the TPP as a useful initiative that, wh en pursued in combination with other diplomatic initiatives, could do much to improve not only trans-Pacific trade relations but also help positively affect change in the perceptions of Asian states of the U.S. commitment to Asia. Secretary of State Hillary Clinto n’s presence in and attention to the region, the U.S. decision to sign the Treaty of Amity and Cooperation, and President Obama’s announcement of U.S. interest to engage on the TPP and other multilateral groupings in Asia have all helped to positively reshape regional perceptions of the United States’ posture in the region. During his speech in Tokyo in November 2009 President Obama highlighted his Asia-Pacific ties through his personal experience in Hawaii and Indonesia and stated “the Pacific rim has helped shape my view of the world.” In that speech he also reaffirmed the U.S. commitment “to strengthen old alliances and build new partnerships with the nations of this region.” Context with Other Regional Architectures U.S. Chamber of Commerce Press Release, ” U.S. Chamber Pleased that Malaysia Is Joining Trans-Pacific Trade Talks, October 6, 2010. http://www.uschamber.com/press/releases/2010/october/us-chamber-pleased-malaysia-joining- trans-pacific-trade-talks. Remarks of President Obama at Suntory Hall, Tokyo, Japan, November 14, 2009. For more detailed analysis, see CRS Report RL33653, East Asian Regional Architecture: New Economic and Security Arrangements and U.S. Policy , by Dick K. Nanto. ership Agreement Congressional Research Service Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Vietnam) plus China, Japan, and South Korea. The ASEAN + 6 group is also known as the East Asia Summit (EAS). It includes ASEAN members, China, Japan, and South Korea as well as India, Australia, and New Zealand. It is thought that key states in ASEAN wanted to balance the influence of China in the EAS by including Austra lia, India, and New Zealand. The United States is currently seeking membership in the EAS, and Secretary of State Clinton will be traveling to P. Parameswaran, “US to Join Budding Asia-Pacific Free Trade Agreement,” Agence France Presse , September 22, 2008. For more on the evolving strategic architectures of Asia see CRS Report RL34312, Emerging Trends in the Security Architecture in Asia: Bilateral and Multilateral Ties Among the United States, Japan, Australia, and India , by Emma Chanlett-Avery and Bruce Vaughn, Emerging Trends in the Security Architecture in Asia: Bilateral and Multilateral Ties Among the United States, Japan, Australia, and India, by Emma Chanlett-Avery and Bruce Vaughn. ership Agreement Congressional Research Service over time. The services schedule follows a negative-list approach, meaning that a category of services trade is covered in the agreement unless specifically excluded. The services schedules reportedly represent a significant expansion on the parties’ services commitments to the WTO. The agreement contains chapters addressing potential nontariff barriers such as customs valuation procedures, sanitary and phytosanitary standards (SPS), and technical barriers to trade (TBT). New Zealand Ministry of Foreign Affairs and Trade “Trans-Pacific Strategic Economic Partnership Agreement: Key Outcomes- June 2005, ” http://www.mfat.govt.nz/Trad e-and-Economic-Relations /Trade-Relationships-and- Agreements/Trans-Pacific/0-key-outcomes.php. TPP Countries Examining New Compro ership Agreement Congressional Research Service of these negotiations is principles on cross-border trade in services, in which APEC members reached agreement in November 2009. This agreement prohibits APEC countries from mandating a local presence requirement for companies engaged in cross-border provision of services. Harmonization of rules of origin, supply chain “APEC Endorses Services Principles, Rules of Origin Initiative,” Inside U.S. Trade , November 27, 2009 Assistant USTR Barbara Weisel, Presentation to the Pete rson Institute for International Economics, October 25, 2010; “U.S. May Ask TPP Countries to Establish Regulatory Coordinating Bodies,” Inside U.S. Trade , October 8, 2010. The World Bank Group, Doing Business 2011: Making a Difference for Entrepreneurs, national rankings, at http://www.doingbusiness.org/rankings. Weisel, fn 25. ership Agreement Congressional Research Service At the 2011 APEC summit, the leaders of Japan, Canada, and Mexico announced that they would seek consultations with partner countries with a view towards joining the negotiations. Each of these countries potentially could bring economic and strategic benefit to the agreement, however each faces challenges to convince existing parties in the negotiations that they are willing to put all issues on the table—and be seen by existing TPP participants as having the political backing to do so—without being seen as pre-negotiating or acquiescing to preconditions. Japan’s entry could transform the agreement by its sheer size as the world’s third-largest economy, but it may need to convince the other parties that it is serious about opening its agricultural sectors and willing to Singapore Malaysia Australia Source: U.S. International Trade Commission Notes: Rank based on total trade (imports + exports); imports for consumption, U.S. domestic exports. U.S. Trade with Current Trans-Pacific Partner Countries Table 1 shows U.S. trade in goods with the TPP partner countries. In 2010, the United States ran ership Agreement Congressional Research Service Concluding a TPP agreement would involve ne gotiating FTAs with New Zealand, Brunei, Chile $2,324 $1,155 $3,479 $1,169 New Zealand 1,643 1,755 3,398 -112 Singapore 9,292 3,771 13,063 5,521 Australia 13,168 5,600 18,768 7,568 Malaysia 2,096 1,243 3,339 853 Total 28,523 13,524 42,047 14,999 Source: Bureau of Economic Analysis, Survey of Current Business, October 2011. Notes: BEA does not collect services trade data from every partner country. The United States also maintains extensive services trade with TPP countries. Generally, the United States has maintained consistent surpluses with these countries except for New Zealand. In the case of Australia, with which the United States has an FTA, total services trade grew at an annual rate of 11.75% in the four years following the FTA’s coming into effect, and services exports grew even faster at 14.25% per annum. Chile and Singapore have also experienced an upward, if more measured, trajectory in two-way services trade. ership Agreement Congressional Research Service Potential Controversies In negotiating an agreement with the TPP countries, several potential controversies may arise. Some are country specific, such as agriculture issues with New Zealand. Other issues may “Comments by the National Milk Producer’s Federation Concerning the Trans-Pacific Partnership,” http://www.nmpf.org/files/file/NMPF%20TPP%20FTA%20Comments_012509.pdf. Discussions with New Zealand embassy officials, November 2008. ership Agreement Congressional Research Service U.S. beef cattle producers have also expressed concern over an FTA with New Zealand. Currently New Zealand is allocated a tariff rate quota (TRQ) of 4.4 cents per kilogram inside a 213,402-ton quota for imported beef and 26.4 cents outside the TRQ. Some U.S. cattle producers are concerned that the TRQ on imported beef will be removed as a result of the FTA negotiations. The U.S. Cattleman’s Association has favored the imposition of a quantity-based safeguard during a phase-out period and a tariff snapback to MFN rates if imports surge once tariffs are eliminated. Other Issues On November 12, 2011 at the APEC summit a br oad framework for an agreement was released containing general descriptions of the 20 negotiating chapters from which an agreement may be “USTR-Announced New Zealand FTA Gets Cool Agriculture Reaction,” Inside U.S. Trade , September 26, 2008. “Outlines of the Trans-Pacific Partnership Agreement,” http://www.ustr.gov/about-us/p ress-office/fact-sheets/2011/ november/outlines-trans-pacific-partnership-agreement. U.S. Trade Representative, 2010 National Trade Estimate Report on Foreign Trade Barriers , available at http://www.ustr.gov/uploads/reports/2010/NTE/NTE_COMPLETE_WITH_APPENDnonameack.pdf (hereinafter, FTB report ), New Zealand, p. 261. ership Agreement Congressional Research Service U.S. Trade Representative, 2011 Special 301 Report , http://www.ustr.gov/webfm_send/2841, Chile, p. 28. Placement of a trading partner on the Priority Watch List or Watch List indicates that particular problems exist in that country with ership Agreement Congressional Research Service Curb trade in counterfeit medicine. Reaffirm TPP Parties’ commitment to the Doha Declaration on TRIPS and Public Health. Pharmaceuticals New Zealand administers a national formulary for medicines that the government purchases for its national health service. The United States has expressed concern that the practices and procedures of the Pharmaceutical Management Agency (Pharmac), which maintains the formulary, put “innovative pharmaceutical products,” often made in the United States, at a disadvantage to older, generic products. In negotiations with Australia over a similar system, the United States and Australia agreed to a series of consultation and transparency mechanisms, designed to afford U.S. manufacturers an opportunity to make their case for inclusion in the formulary. NZ reportedly has ruled out changes to PHARMAC absent “reciprocal” concessions by the United States to federal or state-level drug pricing or reimbursement programs such as Medicaid. State-Owned Enterprises The United States offered proposals related to St ate-Owned Enterprises (SOEs) for consideration at the Lima round. U.S. business and others ha ve longed complained that SOEs benefit from USTR White Paper, http://www.ustr.gov/webfm_send/3059. FTB report, New Zealand p. 263. “U.S. Leaked TPP Proposal on Drug Pricing Sets Up Fight with New Zealand,” Inside U.S. Trade , November 3, 2011. Coalition of Service Industries and U.S. Chamber of Commerce, State-Owned Enterprises: Correcting A 21 Century Market Distortion , http://www.thecityuk.com/assets/Trade/CSI-paper.pdf. “Vietnam Rejects U.S. Push on State Firms in Trade Talks,” The Financial Express , October 30, 2011. ership Agreement Congressional Research Service procurement preferences for its Maori population pursuant to the Treaty of Waitangi. In previous FTA negotiations with Malaysia, the United States had sought concessions on government procurement preferences designed to assist the ethnic Malay population. U.S. FTAs with Australia, Peru, Chile, and Singapore includ e sections on government procurement, which provide opportunities for firms of each nation to bid on certain federal, state, and municipal “Labor, Environmental Standards to be Same Across all Eight TPP Countries,” International Trade Reporter, August 19, 2010. “USTR Green Paper on Conservation and the Trans-Pacific Partnership,” http://www.ustr.gov/about-us/press-office/ fact-sheets/2011/ustr-green-paper-conservation-and-trans-pacific-partnership; ÚSTR Touts TPP Environmental Proposal, But Acknowledges Challenges , Inside U.S. Trade , December 9, 2011. “Marantis Says TPP Advances Conservation; USTR Releases TPP Environmental Provision,” International Trade , December 9, 2011; “U.S. Pushes Conservation Initiatives for Proposed Trans-Pacific Pact , Bridges Weekly Trade News Digest , December 7, 2011. ership Agreement Congressional Research Service Trade Promotion Authority In order for any TPP agreement negotiated to come into force, legislation implementing the agreement must be passed by both houses of Cong ress. Most of the previous trade agreements have received congressional consideration under “fast-track” procedures known as trade promotion authority (TPA), which last expired in 2007. TPA allows the President to negotiate reciprocal trade agreements that are to receive expedited congressional consideration (i.e., limited debate and committee consideration, no amendments, and an up or down vote) as long as the President adheres to specific deadlines and consultation requirements. TPA allows Congress to exercise its constitutional authority over trade, while giving the President added leverage to exercise his authority to negotiate trade agreements by effectively assuring U.S. trade partners that final agreements are given swift and unamended consideration. Some observers have expressed concern that future trade agreements, including any agreement reached under the TPP framework, will be difficult to negotiate in the absence of TPA. CRS-17 Figure 1. TPP States and Potential Additional Members Source: ership Agreement Congressional Research Service Author Contact Information Ian F. Fergusson Specialist in International Trade and Finance ifergusson@crs.loc.gov, 7-4997 Bruce Vaughn Specialist in Asian Affairs bvaughn@crs.loc.gov, 7-3144