[CTC] Ministers Face Down Long List Of Thorny Issues As Hawaii Round Starts

[Arthur Stamoulis]

Inside U.S. Trade - 07/24/2015
TPP Preview: Outstanding Issues Explained
Ministers Face Down Long List Of Thorny Issues As Hawaii Round Starts
Posted: July 23, 2015
Trans-Pacific Partnership (TPP) ministers seeking to reach an agreement next week in Hawaii are facing an uphill battle due to the number and difficulty of outstanding issues in the negotiations, despite a strong push by the United States and other participating countries to get a deal done, according to private-sector sources.

Below is a non-exhaustive list and explanation of the key outstanding issues in the TPP negotiations. In light of the many thorny challenges remaining, some sources put the odds of reaching a deal during the July 28-31 ministerial meeting in Maui at 50-50. Inside U.S. Trade will have a reporter on the ground beginning July 24 to report on all the latest developments.

One source involved in the negotiations said the conditions exist to reach a deal in Hawaii, but the big "question mark" is whether Canada will make concessions on agriculture market access. As of press time, Canada had not yet come forward with a market access offer on dairy and poultry, despite constant pressure from the United States and other TPP countries. One business source said that if Canada does not budge, other countries will likely hide behind it and refuse to make concessions on their sensitive issues.

Canada's position is also important due to the centrality of dairy market access in the negotiations. The U.S. is taking the position that any further opening of its own dairy market to imports from New Zealand must be balanced by new access it obtains in Canada and Japan. And New Zealand is linking its willingness to agree to intellectual property (IP) provisions and other rules to a strong outcome on dairy, which is its major export.

The IP text remains perhaps the chapter with the most outstanding issues, many of which revolve around protections for pharmaceuticals, though there are other thorny topics like geographical indications.

TPP negotiators began holding talks in Maui on July 22, although formally the chief negotiators meeting does not begin until July 24.

The extent of outstanding issues was made clear in separate documents issued this week by the New Zealand and Peruvian governments identifying the topics to be discussed in Hawaii.

Both governments listed IP, goods market access, rules of origin including textiles, state-owned enterprises, investment, and legal issues. Peru said the legal issues work would consist of the legal scrub of the TPP chapters that have already been concluded. It also said negotiators will work in Hawaii on the so-called "non-conforming measures," or exceptions, to the TPP's market-opening commitments on investment.

Government procurement was the only topic listed by the New Zealand government but not by the Peruvian government for the Hawaii agenda.

The New Zealand document came in the form of a July 21 letter from the trade ministry to Jane Kelsey, a professor at the University of Auckland and prominent TPP critic, in response to an official information request. The Peruvian document was a resolution by the trade ministry published in the July 21 edition of El Peruano, the official newspaper.

INTELLECTUAL PROPERTY:

The most difficult issues in the chapter relate to pharmaceutical IP. Chief among them is the length of data exclusivity for biologics drugs, which is widely believed to be one of the last issues - if not the last - that will be resolved. A May 2014 draft of the IP chapter leaked last fall by Wikileaks identified zero, five, eight and 12 years as the possible terms. The U.S. has been pressing for 12 years, based on the argument that this reflects its domestic law. However, the relevant U.S. law - the Biologics Price Competition and Innovation Act - technically requires only four years of data exclusivity, although it requires 12 years of market exclusivity.

But informed sources are predicting that the likely outcome will be seven years, which reflects the proposal laid out in President Obama's last several budget requests. On a related issue, TPP countries still seem to be at odds over how to define biologic drugs.

Also outstanding are the length of the transition periods developing TPP countries will be given before they have to comply with agreement's obligations on pharmaceutical IP. The U.S. had initially floated the idea of a transition period tied to a country's level of development, but that proposal has fallen out of favor. The vast majority of TPP countries are now expected to get a specific amount of time to comply with their obligations, with the number of years differing by country.

Meanwhile, some of the substantive obligations on pharmaceutical IP are also unresolved. This is the case onpatent linkage, which generally refers to the requirement that health regulators delay marketing approval of a generic drug until any dispute over whether it infringes an existing patent has been resolved. The U.S. is pushing for an obligation on patent linkage, but with language that would allow countries some flexibility in how they implement it. This seems to be in part driven by the fact that the U.S. has different systems for addressing this issue for biologics and traditional, small-molecule drugs (see related story).

Another substantive obligation is patent-term extensions, under which applicants can receive extensions to their patents to compensate for delays in processing the patent application or the marketing approval. While this issue is still technically open, TPP countries appear to be moving in the direction of requiring mandatory patent-term extensions.

Meanwhile, some countries such as Chile have been negotiating bilateral side letters with the United States on certain IP issues. For instance, Chile is seeking to ensure in a side letter that the obligation on patent linkage from its bilateral free trade agreement with the United States prevails over whatever language is included in TPP.

Although not part of the IP chapter, a related issue is the transparency annex sought by the U.S. that would establish disciplines on government bodies that make decisions about reimbursement for drugs and medical devices under public health plans. The key issue there is whether New Zealand will agree to the disciplines, with its willingness to do so likely to depend on the dairy outcome.

Apart from pharmaceuticals, another major outstanding issue in the IP chapter is geographical indications. The U.S., Australia and New Zealand are pushing rules that would require countries to, among other things, maintain a process that allows for applications for GI protection to be rejected or canceled under certain circumstances. But TPP countries have long been at odds over whether international agreements between TPP countries and other parties such as the European Union would be excluded from having to comply with these GI rules, and if so, what would be the scope of such an exception.

Despite the long list of unresolved issues on IP, TPP negotiators over the past few months seem to have narrowed the gaps substantially in other areas. These include the requirements for internet service providers to address potentially infringing content posted by their users; a life-plus-70-years term for copyright protection; criminal sanctions for recording movies in theaters; and language related to protection of trade secrets.

GOODS MARKET ACCESS:

Many of the outstanding issues in this area relate to agriculture, including the complicated dance over dairymarket access involving the U.S, Canada, Japan and New Zealand.

The only major remaining issue between the U.S. and Japan on agriculture market access is rice, although some additional work may need to be done on dairy after Canada comes to the table. On rice, the two sides months ago had been discussing proposals to further open up Japan's rice market to U.S. producers by between 50,000 and 175,000 metric tons a year. The U.S. is also pushing for better quality of access, which means enabling U.S. rice producers to sell to Japanese end users directly instead of the current requirement that they sell to a Japanese government agency.

But the U.S. and Japan now appear to have mapped out potential compromises on rice market access - as well as their outstanding bilateral issues on automotive trade - essentially meaning they are ready to make a deal but waiting for other countries to fall in line before taking the final step.

Still, a key question for many TPP countries is whether and how the market-opening commitments that Japan makes to the U.S. on sensitive agriculture products will be extended to other parties. Sources predicted that there will not be any big "reveal" of a U.S.-Japan deal ahead of time as some had expected, but rather that Japan will incrementally make improved offers to the other parties on sensitive products that reflect its understandings with the United States.

Another key outstanding issue on agriculture is sugar, namely Australia's demands for greater access to the protected U.S. sugar market. U.S. Trade Representative Michael Froman has publicly signaled the U.S. is willing to give TPP countries additional sugar access as long as it does not undermine the U.S. sugar program, but sources on different sides of the debate disagree about how much room the U.S. has to work within that parameter.

In the area of industrial goods, the U.S. is under pressure from Vietnam to lower tariffs on apparel and footwear. The fight over apparel has focused on the rule of origin, though this has been less the case with footwear. The U.S. has offered a 12-year phaseout on sensitive athletic footwear, with the duty cut substantially on day one, lowered to 50 percent of its initial level in year six, and eliminated at the end of the 12th year, sources said. One industry source said that U.S. offer may be acceptable to Vietnam.

AUTOMOTIVE ISSUES WITH JAPAN:

Aside from agricultural market access, trade in automobiles and auto parts is the other major area that is technically unresolved between the U.S. and Japan, although the two sides are within striking distance. They have been at odds over the functioning of a special automotive dispute settlement mechanism, tariffs on auto parts, and the rule of origin for automobiles, although the latter issue is linked to the broader TPP rules of origin negotiations.

On the dispute settlement mechanism, there are two main controversial elements. The first is the remedy available to either side if they prove that the other has introduced a new market access barrier. The U.S. has proposed a "tariff delay" mechanism that would allow it to punish Japan by postponing the phaseout of the U.S. auto and truck tariff if Japan puts in place a new non-tariff barrier impeding U.S. autos. If the auto tariff is already phased out, the U.S. could snap it back to the most-favored nation level.

The second controversial element of this mechanism is Japan's demand that it be reciprocal, meaning Japan could also have recourse to it if the U.S. puts in place a non-tariff barrier that impedes access for Japanese autos. As Japan has no tariffs on passenger cars, it is seeking the ability to raise its tariffs on U.S. agricultural products if the U.S. puts up barriers to Japanese autos. It is unclear whether the U.S. would be willing to agree to institutionalize this type of cross-sector retaliation.

RULES OF ORIGIN:

A key sticking point in rules of origin is on textiles and apparel. The U.S., Mexico and Peru are pushing the strict yarn-forward rule of origin for apparel, which means a finished apparel item can only qualify for tariff cuts if every component, starting with the yarn, originated in the region. This is opposed by Vietnam, which currently imports yarn and fabric from non-TPP countries like China, Taiwan and South Korea.

The U.S. and its allies are pushing a limited exception to the yarn-forward rule in the form of a short supply list of textile inputs not available in sufficient quantities in the region. But the key question remains whether the U.S. will be willing to grant Vietnam any additional exceptions to yarn-forward, as it has done to partners in previous free trade agreements.

TPP countries have also been racing to finish the hundreds of product-specific rules of origin that will be included in the agreement. These are specific rules that apply to the products that are exempted from the general rule of origin, which is based on regional value content.

Another issue where TPP countries have long clashed in the rule of origin chapter relates to cumulation. TPP countries appear to have agreed in principle to allow regional cumulation for all products, which would allow one country to include components or inputs from another TPP country into a final good and still be considered an originating product. But negotiators had disagreed over how to handle situations where one TPP country imposes different tariff levels for the same product on different TPP countries and it is unclear whether they have resolved this.

STATE-OWNED ENTERPRISES:

TPP countries appear to have agreed on the SOE text, which contains disciplines aimed at ensuring state-owned firms that compete with private companies do not receive unfair benefits from governments that provide them with advantages. But negotiators are still hashing out the specific entities that will be exempted from the disciplines, to be contained in an annex that each country will attach to the chapter.

Every country is seeking some exceptions, including the United States, although the negotiations seem to have focused on whittling down the exceptions being taken by Vietnam and other Southeast Asian countries where SOEs play a larger role in the economy. Singapore, for instance, is expected to seek an exception for Temasek, its state-owned investment firm, as well as companies in which Temasek is invested.

INVESTMENT:

The outstanding issues in the investment chapter appear to have not changed much since a January 2015 draft of the text later published by Wikileaks. That text revealed that negotiators have reached consensus on nearly all of the provisions of the chapter except for the scope of the investor-state dispute settlement (ISDS)mechanism and the extent to which signatories would be allowed to impose capital controls in order to mitigate a financial crisis.

The draft text illustrates that TPP countries are trying to limit the scope of the ISDS mechanism in several ways.

First, some countries including Mexico are refusing U.S. demands to extend the use of ISDS to breaches of certain public concession contracts that governments have granted to a private company and which are known as "investment agreements." The second way in which TPP countries are seeking to narrow the scope of ISDS is by requesting carveouts for specific sectors, such as Canada in the audiovisual sector and Malaysia on government procurement. In addition, Australia is still linking its willingness to agree to ISDS to securing a strong outcome on agricultural market access.

LABOR:

The labor chapter is largely finished and is expected to reflect the so-called May 10 standard that requires countries' labor laws to uphold fundamental labor rights contained in the 1998 International Labor Organization declaration.

But the major outstanding issue is whether and how countries where current labor practices fall short of those standards will come into compliance with their TPP obligations.

Congressional Democrats and labor unions have identified the main culprits as Vietnam, which bans labor unions independent of the one sanctioned by the ruling Communist Party, and Mexico. USTR has indicated that it is negotiating "consistency plans" with Vietnam and potentially other TPP countries with steps to bring them into compliance, but congressional Democrats say they have still seen no evidence of that.

NON-CONFORMING MEASURES ON SERVICES & INVESTMENT:

U.S. businesses have long worried that even if the TPP lays out strong obligations for countries to open up their services markets and lift investment restrictions, countries would seek broad exceptions - known as non-conforming measures (NCMs) - from those commitments. As such, U.S. efforts have focused on trying to get countries to narrow their NCMs from covering entire sectors to focusing on specific entities or laws. This has been a major challenge with some Southeast Asian countries like Vietnam and Malaysia that have never before negotiated services and investment obligations on the basis of a so-called negative list.

In particular, Malaysia has sought broad carveouts for its so-called Bumiputra policies that provide preferential treatment to businesses owned by ethnic Malays in areas like services and government procurement. Countries such as Malaysia and Vietnam had also sought broad carveouts on financial services.

One area where TPP countries seem to have made some progress in recent months is on NCMs for the e-commerce chapter, which includes an obligation for countries not to block the flow of digital data across borders. Vietnam and Singapore had previously been seeking carveouts on certain e-commerce obligations, but these issues now appear to be on a path to resolution, according to a business source.

TOBACCO:

The question of what type of language, if any, a TPP deal will contain regarding anti-tobacco regulations remains up in the air. Both the U.S. and Malaysia tabled competing proposals on this topic in August 2013, but the discussion has advanced little since then. One business source said the other TPP countries are waiting for a signal from the U.S. on how it wants to handle this issue.

Malaysia has proposed that anti-tobacco laws and regulations be excluded from being challenged under the agreement's state-to-state or ISDS mechanisms. The U.S. has also informally floated the idea of a carveout from ISDS for anti-tobacco measures. But formally, it has stuck to a less-expansive proposal tabled in August 2013.

A private-sector source pointed out that the Obama administration is boxed in when it comes to its position on tobacco. On the one side, it faces pressure from the Democratic base to support a tobacco carveout, despite the fact that few congressional Democrats who want a carveout would actually vote for TPP.

On the other side, the administration faces strong opposition to a carveout from congressional Republicans such as Senate Majority Leader Mitch McConnell (R-KY) who are likely to the deliver the votes for a final TPP deal. That puts the administration in a "no win" situation of either angering its base or hurting its chances of passing a TPP deal, this source said. - Matthew Schewel


-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://lists.citizenstrade.org/pipermail/ctcfield-citizenstrade.org/attachments/20150724/12fbd480/attachment-0001.htm>