Trans-Pacific Partnership Agreement Reached: A View From Canada
On October 5, 2015, after over a decade of difficult negotiations and compromise, 12 Pacific Rim countries reached agreement on what is being referred to as “the largest, most ambitious free trade initiative in history” – the Trans-Pacific Partnership (“TPP”).
In addition to Canada, parties to the TPP include Brunei, Chile, Japan, Australia, New Zealand, Singapore, Peru, Malaysia, Mexico, the United States, and Vietnam. While the final legal text of the agreement has not been publicly released, the participating governments have reached an agreement on all terms. The Canadian government’s Technical Summary can be found here.
Although there has been opposition from several sectors of the Canadian economy, including the dairy industry and automotive parts sector, the TPP has significant levels of support from many industries, including the Canadian beef and mining industries. Concerns about the opening of supply management were rampant prior to the release of any substantive TPP details, but the weakening of supply management is considerably less than what was originally predicted, and is accompanied by a politically announced compensation package that is both substantial in size and expansive in coverage for an extended period of time. The provisions of the TPP span a wide range of sectors and activities, including opportunities for government procurement, intellectual property protection, and investor state dispute settlement considerations.
Minerals, Metals and Oil
Canadian mineral and metal exports (including petroleum products) to TPP countries account for over $173 billion annually. Many TPP countries are major manufacturing centres, with a considerable appetite for such resource products.
A wide range of tariffs will be completely eliminated on various products of base metals of iron, steel, aluminum and nickel. This tariff elimination will be phased in over a ten year period. In addition, both Japan and Vietnam are eliminating their current tariffs on petroleum products within the next ten years.
Another significant concession for Canada is found in the modified rules of origin for Canadian crude oil. Under the North American Free Trade Agreement (“NAFTA”), any Canadian heavy crude that had been treated with a non-NAFTA originating diluent was subject to full US Tariff rates on heavy crude. However, the TPP will create a rule of origin that will allow a not-yet-disclosed level of non-TPP originating diluent while still qualifying for preferential tariff treatment. Given the billions of dollars of crude that flows into the US from Canada, this change is likely to have a major impact once implemented.
With the passage of the Extractive Sector Transparency Measures Act (“ESTMA”), and the technical guidance thereto, there has been a recent focus on transparency and anticorruption in the extractive sector. This is seen in the TPP by the inclusion of a specific chapter on transparency and anti-corruption. This chapter is meant to fulfill a dual purpose. First, it assures Canadian businesses transparency in regards to regulatory schemes of countries in which they operate. Second, it is reported to include provisions building on recent Canadian anti-corruption legislation and the United Nations Convention against Corruption.
However, it remains to be seen precisely what measures will be put in place, and how much teeth these measures will have. Ideally, the measures would conform with ESTMA and assist companies in properly completing all required disclosures in an expedited manner. Hopefully, it will also ensure that any domestic laws that would otherwise prevent disclosure, and thus put extractive companies at risk of non-compliance with either domestic law or ESTMA, will be repealed or otherwise over-ridden by the TPP obligations.
Key features of TPP in the automotive sector include accelerated dispute settlement and tariff snapback protection, a special motor vehicle safeguard, regulatory measures and non-tariff barrier protections, a bilateral committee on motor vehicles, tariff elimination, one set of rules of origin, and a promise from Malaysia to not apply quantitative restrictions or introduce any new impositions or charges on Canadian imported motor vehicles. The provisions for the automotive sector have been characterized as a win, with Prime Minister Stephen Harper stating, “"Our view is the rules that we've achieved mean that our automobile industry is going to have unprecedented access to the global market,” and noting that an announcement on funding for the industry could be expected in the near future.
The TPP will result in a tariff elimination for vehicle and vehicle parts among participating nations. The tariff elimination will be implemented in Canada using a five-step transition period that will gradually take the tariff from the current rate to nil, with the majority of the elimination taking place in the latter three years of the five year period. The transition period will see Canada’s 6.1% tariff reduced to 5.5%, 5%, 2.5%, 2%, and finally zero. The TPP also includes a single set of rules of origin that apply to all parties, where 45% of the cost of a vehicle or Canadian-produced part and 40% of other key Canadian parts will have to be from a TPP participant. The time period for the tariff phase-out is far shorter than the time period negotiated by the United States.
The TPP includes an agreement between Canada and Japan to treat each other with Most Favoured Nation (“MFN”) status on the issues of non-tariff barrier protections and regulatory issues in the automotive sector. The TPP includes a separate dispute settlement mechanism and process specifically governing any non-compliance between Canada and Japan, which is seen as more efficient and favourable than the mechanism negotiated by the United States. This process includes a permanent dispute settlement mechanism, referred to as a “snap back,” that would allow tariff rates to be returned to the original rate for 100 days; the use period for this mechanism extends to six years after the tariff is eliminated. Additionally, a bilaterally agreed upon safeguard has been included as a preventative measure against import surges for a period of 12 years. The agreement also includes the creation of a Bilateral Committee on Motor Vehicles for Canada and Japan, which is intended to create a mandatory forum for discussion in order to prevent contentious issues from arising.
Intellectual Property and Pharmaceuticals
The TPP effects for the pharmaceutical industry are based on the existing Canadian framework for pharmaceuticals and also align with the pre-existing structure from the Comprehensive Economic and Trade Agreement (“CETA”). The TPP includes allowances for retention of export exceptions, a two year limit on additional protection, and a strong exception for regulatory review. These provisions were designed to balance the rights of innovator pharmaceutical companies whose ingenuity and R&D expenditure bring drugs into the marketplace with the desire to reduce health care costs.
The protections afforded for traditional intellectual property, including for industrial designs, copyright, and patents, are in line with existing Canadian policy. Enforcement provisions are also consistent with the recently enacted Combating Counterfeit Products Act.
One key area that is not directly addressed in the Technical Summary will be in regards to the treatment of “biologics” – pharmaceuticals grown from biological cell lines instead of crafted from small molecules. Biologics require a greater investment on the part of innovation-based pharmaceutical companies with greater fixed expenses in research and development. Proposals prior to conclusion called for either a five-year or twelve-year data protection period. At the moment, this remains to be determined. Based upon public reports, the Parties have agreed to a five-year data protection minimum. This period is a minimum period only, and Parties will be free to adopt stricter data protection time frames. The TPP will reportedly also contain further, and as yet undisclosed, measures for biologic data protection.
Textiles and Apparel
The TPP also attempts to liberalize, to a degree, the textile and apparel industry. This chapter will, by necessity, have a complex set of product-specific rules of origin. The baseline for these rules will be a “yarn-forward” concept, which can help streamline the process by allowing certain clearly delineated non-originating base products to be used in the textiles. The rules also allow for accumulation of textiles materials and production among TPP countries.
According to the Technical Summary, the rules of origin for textiles, notably the yarn-forward rules, are more generous than those found under NAFTA. Canadian suppliers will thus have a greater ability to export into our major trading partner that would otherwise not be present if excluded from the TPP.
Given the increasing digitization of our lives and business, the TPP will contain chapters dedicated to telecommunications and e-commerce. According to the Technical Summary, Parties will be required to refrain from placing any customs duties on electronic products transmitted across national boundaries. Parties will also commit to avoid any disruption of information flow across borders and to refrain from governments requiring data be stored only on local servers.
Innovators will also be protected. In addition to the protection afforded under the investment chapter, governments will be prevented from seizing source code from any TPP enterprise.
In addition to liberalizing e-commerce, the TPP also requires a more open and liberal market for telecommunications providers. From the information provided thus far, new obligations will be put in place regarding telecommunications interconnection, licensing procedures, and requiring independence for regulatory bodies.
It remains to be seen what teeth these rules will have. There has been no explicit mention that these obligations will be subject to specific and binding arbitration mechanisms. Without a strong enforcement mechanism, what is a bold foray into protecting the future of commerce may prove to be of little impact.
Agriculture and the Supply Management System
The TPP will create better access to the markets of other TPP partner countries for agricultural goods, especially in areas with traditionally high tariffs on agricultural products, such as pork products. Canada currently exports over $34 billion worth of agricultural products to TPP member countries each year. The government had several key focuses for its agricultural negotiations, most notably beef, wheat and barley, canola oil, and wine and spirits.
Pork & Beef
Canada has achieved significant concessions in TPP pork markets. These include an elimination of Japan’s over-gate price tariff of 4.3% on pork cuts and offal and an under-gate tariff reduction from 482 yen/kg to only 50 yen/kg within 10 years. Japanese tariffs on processed pork products, and on items such as sausages, which were not subject to quota, will be completely eliminated within 10 years. This preferential status is subject to a 10-year transitional volume-based safeguard. This represents a significant reduction in a market that was previously nearly inaccessible due to heavy tariffs and low quotas.
Canada has also secured commitments from Vietnam to completely eliminate all tariffs on fresh/chilled pork products and sausages within nine years.
Japan and Vietnam have also agreed to significant reductions in tariffs, to be phased in within the next 2-15 years depending on the product and destination. The current tariffs on beef products range between 31-50%, and will either be completely eliminated or reduced to 9%. This creates new opportunities for Canadian meat farmers eager to find new customers in countries that previously had highly regulated and expensive meat markets.
Wheat, Barley, and Canola Oil
TPP nations also made significant concessions in grain crops that will provide a significant advantage to Canadian farmers over EU and other foreign growers. These concessions are largely focused on Japan and Vietnam, which had previously protected domestic grain industries, especially rice and barley, through aggressive tariff rates.
Japanese tariffs on Canadian feed wheat and feed barley will be completely eliminated without any quotas on the date the TPP enters into force. All Vietnamese wheat tariffs will be immediately eliminated.
Canada will also have a Canada-specific quota on wheat and barley which will grow over a six year period. This quota will start at 40,000 and 25,000 tonnes, respectively, growing to 53,000 and 65,000 tonnes. These quotas are in addition to Canada’s allotment of the general quota for wheat and barley imports. These special quotas will also receive mark-up reductions of approximately 45-50% of the standard under-quota markup applied to all other wheat and barley.
Finally, both Japan and Vietnam will eliminate current tariffs on canola oil. This product accounts for approximately $1.8 billion annually, with Japan representing a current leading market for Canadian canola exports.
Wine and Spirits
After securing preferential access for Canadian wine and spirits in the European market, obtaining significant market access concessions in Asian markets beginning to clamour for high-quality Canadian wine and spirits was a key goal for Canadian negotiators. Malaysia, Vietnam, and Australia have agreed to completely eliminate tariffs on all Canadian whisky (which was subject to tariffs of up to 55%) within the next 15 years (with Australia eliminating its 5% tariff immediately).
Similarly wine, ice wine, and sparkling wine will see eliminations of duties immediately in New Zealand and Australia. Japan, Vietnam and Malaysia will gradually eliminate their own tariffs on Canadian wine within the next 7-15 years. Canada has now secured preferential access for its wine and spirits in the EU, the US, Asia, and Oceania, placing domestic producers at considerable advantage and providing a fantastic opportunity for expansion and export.
Unsurprisingly, negotiations from the TPP resulted in Canada making concessions with regards to the supply management system. A five-year transition period for new access, which will be granted through quota, will see increased amounts primarily in the dairy industry (with the focus being on value-added products) but will also include increases in the egg and poultry industries.
Changes in the dairy sector will amount to 3.25% of current annual industry production, as well as 2.3% for eggs, 2.1% for chicken, 2% for turkey and 1.5% for broiler hatching eggs. The new access for dairy includes liquid milk, but is mainly to be directed to value-added products and processing.
Despite providing only modest concessions, Canada has prepared a roster of programs to be implemented to support producers and processors which includes the Income Guarantee Program (with the purpose of income protection for producers for ten years plus a five year phase-out period), the Quota Value Guarantee Program (which will provide protection against reduced quota values for producers), the Processor Modernization Program (to support small to medium sized processors), and the Market Development Initiative (to further promote the interests and initiatives of those in the supply management system; this programming includes a budget of $15 million). These programs will have an aggregate value of more than $4 billion.
The Government has also clarified that this dollar figure, and these programs, are an aggregate total of compensation for liberalization carried out under CETA with the EU, and not in addition to it. The former CETA compensation funds will be rolled into this larger compensation program package.
Thus far, Canadian dairy farmers, displeased with receiving only $4 billion for concessions of only 1.5-3.25%, have vigorously objected to this necessary liberalization. Other TPP countries had expressed that a failure to provide for liberalization would be unacceptable and would be a stopping point for any further negotiation. In fact, many countries, such as New Zealand and the United States, are facing questions over how little market access Canada was allowed to provide in these sheltered and uncompetitive industries.
Sanitary and Phytosanitary (SPS) Measures
While considerable market access has been granted amongst the TPP Parties, countries have retained their ability to place strong SPS measures in place on agricultural and agri-food products. SPS Measures will be subject to principle of regionalization (recognition that regional conditions are important in SPS protections), equivalence (to allow recognition of equivalent foreign SPS protections for licensing and import purposes) and scientific risk analysis (to ensure that SPS Measures are based on scientific principles).
The Parties have also committed to establish a committee on SPS Measures to allow for experts to share views in the interests of facilitating trade. There will also be a cooperative technical consultation mechanism to review SPS Measures put into place.
This will be a key measure for the Canadian agricultural and agri-food industry to keep abreast of. Countries and regional groups, such as the EU, have historically used SPS provisions to invoke arbitrary barriers to trade. The language of this section, and the scientific risk analysis provision in particular, will be critical to understand if the TPP SPS Measures chapter will be based upon sound scientific analysis, or precautionary principle fear-mongering.
Rules of Origin
Outside of the automotive sector, the TPP rules of origin reflect the realities of current trade agreements including integrated North American supply chains. It provides for accumulation of materials and production among the TPP countries during origin calculations.
According to the Technical Summary, the Rules of Origin will include product-specific rules of origin which can be calculated using either a “build-down” method consistent with current Canadian free-trade agreements or via a “build up”/”focused value” method.
It will be important for any company engaging in trade in the TPP zone to carefully review the ongoing developments in the legal text regarding Rules of Origin. Such rules are often used as a non-tariff barrier to trade by denying the applicability of favourable tariff or regulatory treatment under the guise that the product is “foreign” to the agreement. Importers and exporters that do not carefully document their supply chains may be vulnerable to considerable penalties or unexpected duties.
The global government procurement market is valued at over $1.3 trillion. However, it is a sector of the economy that is heavily protected and it has been historically difficult for Canadian suppliers to enter into foreign markets. These difficulties are exemplified by issues such as the “Buy America Act” established by the United States, which has increased tensions and led to the first application of the Foreign Extraterritorial Measures Act outside of the context of the Cuba embargo. This seems to be particularly perverse, as restrictions and obstacles established in government procurement force governments to spend more tax dollars than necessary, both on more expensive solutions and on conducting more complicated procurement processes.
The TPP will reportedly base its government procurement provisions along the guidelines of the modernized World Trade Organization (“WTO”) Agreement on Government Procurement. This will, in theory, provide for open procurement in markets that have traditionally been difficult to enter including Australia, Malaysia and Vietnam.
Based on the Technical Summary provided by Canada, the procurement discipline will apply primarily to federal level government procurements of the other parties. However, sub-federal access will be included for Chile, Peru, and Australia.
In addition, the procurement discipline will have NAFTA ramifications. The United States, Canada, and Mexico have agreed to harmonize the tendering provisions of Chapter 10 of NAFTA with the TPP procurement discipline. This includes a standardization of the monetary thresholds that will apply to procurement activities covered by NAFTA. This will reduce the administrative burden on the governments by removing a multiplicity of thresholds.
Canada will also be receiving new market access to certain key US sub-federal procuring entities. This will include major power and utility companies including the Tennessee Valley Authority, the Bonneville Power authority, and the Western Area, Southeastern, and Southwestern Power Administrations.These entities account for over $4 billion a year in construction projects.
In addition, Canadian suppliers should pay careful attention to which Canadian entities the procurement discipline applies to. Under Canadian law, Canadian suppliers can take advantage of the procurement rules of any foreign trade agreement, including obligations against biasing of technical specifications or inappropriate evaluation processes. A new trade agreement can expand the scope of the protections granted and the scope of Canadian government entities covered.
Regardless of the specifics, Canada has secured certain exemptions, including exemptions in certain cultural industries and exemptions for preferential access for aboriginal peoples.
Trade in Services
Each year, Canada exports over $95 billion worth of services abroad. Services also account for over 16% of Canada’s total trade, and present excellent growth opportunities. As such, securing broad market access provisions was a key goal for Canadian negotiators.
As with CETA, the TPP will follow a “negative-list” approach whereby national treatment and market access protections will be given to foreign service providers unless explicitly carved out. The TPP will also create a standstill to prevent the Parties from enacting more restrictive measures in the future, which will combine with a “ratchet” mechanism, like in CETA, whereby future liberalization in a market will become the new benchmark and will “lock-in” and prevent de-liberalization.
As with CETA, the TPP will provide mechanisms for Mutual Recognition Agreements (“MRAs”) between Canadian competent authorities and their counterparts in TPP countries. This presents new opportunities for professionals such as engineers and architects to increase their labour mobility without worrying about re-education in the new jurisdiction. However, as with CETA, this process is voluntary on the competent authorities, and thus any lawyers seeking to relocate to New Zealand should contact their closest bencher.
The TPP also creates a broad “prudential carve out” for the financial services sector, which represents Canada’s continued commitment to preserving financial regulation and rules. However, the TPP will also require Parties to provide a greater degree of transparency and at least some increase in market access for foreign financial service providers. This will include national treatment and minimum standard of treatment obligations (subject to the aforementioned prudential carve-out).
Investment and Investor-State Dispute Settlement
The TPP will include an investment chapter that will incorporate a framework that includes rules and provisions related to expropriation and a structure that will focus on timely and sufficient compensation for cases of expropriation.
Provisions will also include a framework for international arbitration for the purposes of independent international investor-state dispute settlement (“ISDS”), with the goal of providing greater stability and certainty for foreign investors and ensuring that there is a minimum standard of treatment.
As with CETA, the TPP ISDS chapter will also reportedly include provisions designed to protect the Parties right to regulate in the public interest and to allow for greater transparency in ISDS proceedings. The US Trade Representative reports that the TPP will contain provisions to allow for intervenor submissions and submissions by non-Parties. It will also include a mechanism for winning parties to recover costs if successful. This may help defray the costs for investors that are intimidated out of bringing legitimate claims due to the costs of an ISDS proceeding.
In the Technical Summary and in the media, Canada has advised that the ISDS system and investor-protection rules of the TPP will closely resemble those of NAFTA, as modified by the current evolution of customary international law and the interpretations of the NAFTA Trilateral Commission.
Finally, while granting Canadian investors greater protection abroad, particularly in countries that have (historically) had issues with government seizure and expropriation, Canada has secured an exemption for the application of the Investment Canada Act. This is in line with previous trade agreements. Canada has also claimed to have secured exemptions for certain specific industries and areas of the economy. If previous agreements can be used as a measuring stick, it is likely that this will include exemptions in regards to aboriginal peoples and cultural property.
Labour and the Environment
The TPP will directly incorporate chapters relating to labour standards and the environment. For the first time, Canada will commit to a free trade agreement that has enforceable commitments to protect and promote recognized labour principles and rights as set out by the International Labour Organization’s 1998 Declaration on Fundamental Principles and Rights at Work. The TPP will also protect the right to collective bargaining and commit the parties to the elimination of child and compulsory labour. The TPP will include non-compliance and monitoring procedures.
Similarly, the Technical Summary indicates that environmental protections will be incorporated into the legal text, and will be enforceable via a binding dispute-resolution process. The TPP will create commitments to combat illegal fishing, logging, and wildlife trade (including commitments under the Convention on International Trade in Endangered Species of Wild Fauna and Flora). However, until the legal language of these commitments is released, there is little beyond speculation as to what these commitments will be.
Inter-Party Dispute Settlement
The focus of the TPP in the area of dispute settlement was modernization, transparency, and certainty. The TPP creates a dispute settlement model based on the WTO mechanisms, with provisions for alternative methods for dispute settlement, procedures to expedite disputes, a panel with expertise in specialized areas, a co-operative mechanism with an associated monetary fund, as well as provisions for public hearings and non-governmental submissions.
Trade remedies similar to those of the WTO with regards to rights and obligations (e.g.: anti-dumping) will also be incorporated under a trade chapter.
Negotiations on the TPP began several years ago, and ended in an intense discussion period leading up to its announcement. Despite concerns from the dairy and automotive industries, Prime Minister Stephen Harper noted that, "This deal is, without any doubt whatsoever, in the best interests of the Canadian economy."
The TPP means that Canadian agricultural exports see a great deal of benefit from the agreement in reduced tariffs and access to traditionally difficult markets, Canada will have access to government procurement projects, the dairy industry will see adjustments to the traditional supply management figures, and the automotive industry will see a substantial reduction in the parts and vehicles manufactured in Canada.
It also remains to be seen whether the TPP will survive the ratification process. The next step is a legal scrub by lawyers and translators for the member nations, which is expected to take place in the coming months. Once the final text is settled, it still must be ratified by the national legislatures of the Parties.
There has already been some opposition within the US Congress and by the Canadian New Democratic Party (“NDP”), one of the major parties currently vying in the Canadian election. None of these opponents have stated what they would do in place of accepting the TPP, or what mysterious power they have to force a dozen other nations back into negotiations. The only certainty is being one of the only countries cut out from a massive trade liberalization program would be damaging to the Canadian economy. However, considering the vagaries of politics, this is a potential outcome, and all Canadian businesses should be aware of this possibility and should keep careful track of the ratification process both at home and abroad.
To assist, in the coming weeks and months Canada will release further details as to the contents of the TPP, including, eventually, the entire legal text. The International Trade and Investment Group at McCarthy Tétrault will continue to provide updates as they are released.