Sonja Pavic, Riyaz Dattu
Nov 10, 2015
We would like to acknowledge the following Osler lawyers for their contributions to this Update:
Malcolm Aboud, Michael Fekete, Peter Glossop, Gerard Kennedy, Nathaniel Lipkus, Devon Robertson and Patricia Wilson.
On November 5, 2015, a month after 12 Pacific Rim countries representing 40% of the global economy concluded their negotiations on the Trans-Pacific Partnership (TPP), the legal text of the agreement was released to the public. The agreement is a result of seven years of negotiations and comprises 30 chapters plus schedules and annexes, totalling thousands of pages. It covers subjects not previously considered as standard features of international trade and investment agreements, including anti-corruption, electronic commerce, rules on transfer of data and cybersecurity.
The agreement also covers subject areas previously covered by international trade and investment agreements such as reduction of tariff and non-tariff barriers, cross-border services trade including financial services, temporary entry of business persons, intellectual property, investment protection including investor-state arbitration, trade remedies, public procurement and dispute resolution.
The full implications of the text of the agreement will take months to completely absorb, and there will also be challenges attached to ratification of the TPP by all the parties, namely Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.
Once implemented, the TPP will undoubtedly be considered among the greatest landmark agreements concluded in the two decades since the coming into effect of the World Trade Organization (WTO) Agreements. It will cover trade and investment in one of the fastest growing regions of the world. In this Update we identify some of the salient aspects of the TPP.
Relationship to WTO, NAFTA and CETA
The TPP is intended to co-exist with other regional trade agreements such as the North American Free Trade Agreement (NAFTA), the recently concluded Canada-EU Comprehensive Economic Trade Agreement (CETA) and the multilateral WTO Agreements. Chapter 1 of the TPP specifically recognizes parties’ existing rights and obligations under the WTO Agreements, as well as rights and obligations that parties owe one another under other international agreements.
The parties to the TPP are all WTO members. The WTO multilateral rules permit members to enter into regional trade agreements provided such agreements provide for the elimination of tariffs and other barriers for substantially all trade between the free trade members. According to the WTO, there are 262 such regional agreements currently in force. The advent of regional trade blocs in the 1970s, along with the multilateral GATT and now the WTO Agreements, has effectively given rise to what has been termed the “spaghetti bowl effect” or the “noodle bowl effect” in the context of trade arrangements between Asian countries.
Tariff and Non-Tariff Barriers
A key aim of the TPP, as for any free trade agreement, is to reduce and ultimately eliminate tariffs to improve market access opportunities abroad for domestic producers. Not surprisingly, the agreement sets out detailed obligations required to be implemented by all parties with respect to tariff liberalization, as well as the usual market access guarantees, which require all parties to provide each other’s goods with “national treatment” once they enter a TPP market, with certain limited exceptions. Cultural goods, for instance, are exempted from certain obligations. The TPP also contains provisions prohibiting import and export restrictions on goods traded within the region, as well as enhanced transparency provisions for import and export licensing procedures.
Specific provisions apply to the agriculture sector. For instance, parties are prohibited from using export subsidies in TPP markets, and must work together to discipline the use of export credits at the WTO. The TPP also establishes an Agricultural Trade Committee.
In addition to tariffs, there are also non-tariff trade barriers such as “technical barriers” which can take the form of mandatory technical regulations. Technical barriers can restrict trade by being overly burdensome or discriminatory against imported goods. The TPP promotes the use of internationally accepted standards and requires that technical regulations not be used as barriers to trade.
Services including Financial Services
The TPP covers all service sectors except those specifically excluded by a party. Canadian service providers will benefit from greatly enhanced access to service sectors in the economies of the TPP parties. Likewise, the Canadian market will be more open to foreign service providers. While the TPP includes the same core obligations found in WTO and other international agreements, the parties’ access commitments go beyond those in the WTO General Agreement on Trade and Services because of the “negative list” approach requiring that the specific exceptions from the free trade access be expressly detailed in a schedule.
Canada has excluded health, public education and other social service sectors. Canada also has a broad reservation for existing and future programs and policies related to cultural industries. All TPP countries have preserved their right to decide, regulate and control how to develop and extract their natural resources.
The TPP also includes a dedicated chapter for financial services trade – one of the largest service sectors in Canada. The chapter provides for enhanced market access commitments from TPP parties with which Canada does not have an existing regional or bilateral trade agreement. It also provides protections for financial investors and a special dispute resolution framework tailored to the financial services sector. However, like other financial services trade agreements, the TPP preserves the broad discretion of financial regulators to take measures to promote financial stability and maintain the integrity of their financial systems.
More generally, TPP parties have committed to encouraging communication between their financial authorities and to establishing a Financial Services Committee that will allow for ongoing discussion and collaboration.
The TPP will require Canada to become a member of several multilateral IP treaties, for which Industry Canada had already begun phasing in implementation.
The TPP introduces additional protection for patented inventions, particularly in the pharmaceutical field. Under CETA, unreasonable delays in approving a pharmaceutical product will lead to additional protection for up to two years following patent expiry. The TPP further provides that unreasonable delays at the Patent Office beyond five years will lead to extended patent terms. Canada’s eight-year market protection for biologics has now become an international standard, with flexibility in how it is achieved. New safeguards will ensure transparency in national pharmaceutical reimbursement and removal of technical barriers in pharmaceutical review and inspection.
Within CETA, Canada committed to introduce a geographic indication protection system and to protect over 170 marks covering various foods and beer, with limitations to protect existing public domain uses. Under the TPP, safeguards are to be introduced to ensure that geographic indications are not accorded unduly high protection in comparison to trademarks.
Other important changes arising from the TPP include an increase in the copyright term from 50 to 70 years, the application of trade secrets law to state-owned enterprises and the criminalization of certain misuses of trade secrets.
Canada does not currently have investment promotion and protection obligations with Australia, Brunei, Japan, Malaysia, New Zealand, Singapore or Vietnam. Under the TPP’s investment chapter, Canadian investors will, for the first time, receive commitments in investment liberalization and protection of their investments from these countries, with the intention of providing a more stable and secure investment environment.
The TPP investment chapter is, for the most part, based on the text of the 2004 U.S. model bilateral investment treaty and the NAFTA investment chapter. It includes what are now considered standard guarantees prohibiting expropriation without prompt and adequate compensation, and requiring investors from Canada and other TPP countries to be treated in a fair and equitable manner. In terms of other substantive rights, the TPP will ensure investors are accorded both “national treatment” and “most-favoured-nation treatment,” meaning that foreign investors cannot be treated in a less advantageous manner than domestic investors or investors of any other country. The investment provisions also include access to international investor-state mechanisms for dispute settlement, enabling foreign investors to enforce their rights against the host-state of the investment in an independent international arbitration proceeding.
At the same time, the TPP preserves the right of governments to legislate and regulate in the public interest. In particular, it preserves Canada’s ability to review certain foreign investments pursuant to the Investment Canada Act. However, the review threshold will be raised to $1.5 billion in enterprise value for investors who are nationals of an original signatory to the TPP or entities controlled by nationals of those TPP parties. State-owned enterprises will not be eligible for the higher threshold. The $1.5 billion threshold in the TPP is consistent with the increase in the threshold proposed under the CETA, which is also awaiting completion of the ratification process.
The TPP removes existing significant barriers to selling products and services to foreign governments. Of note for Canadian suppliers is new access to government procurement contracts for goods and services in Australia, Brunei, Malaysia and Vietnam. In the United States, Canadians will now enjoy new market access and will compete on a level playing field to win contracts awarded by certain major publicly funded regional power authorities that spend over $4 billion annually in construction projects. Similarly, foreign suppliers will have new and greater opportunities to sell products and services to the Canadian government.
The TPP also guarantees procedural fairness for suppliers by requiring non-discrimination, transparency, impartiality and accountability in the procurement process.
Canada has also agreed with the other NAFTA parties to harmonize TPP and NAFTA public procurement provisions, and with the United States to apply the TPP procurement thresholds to the government procurement activities covered by NAFTA.
Transparency and Anti-Corruption
Under the Transparency heading, countries will have to ensure developments affecting other signatories are published or disclosed, including legislative updates and administrative rulings and proceedings.
The TPP also requires each country to adopt legislation criminalizing the offering of an undue advantage to a domestic or foreign public official. Among other obligations, countries will also be required to ensure corporations are held liable for corruption offences and adopt measures regarding books and records, whistleblower protection and integrity of officials.
Transfer of Data
Multiple elements of the TPP – including the chapters on electronic commerce, telecommunications and intellectual property – will have an impact on privacy. Most notably, the chapter on e-commerce places limits on restricting international transfers of information.
The TPP requires each country to allow the cross-border transfer of information, including personal information, by electronic means when this activity is for the conduct of the business of a covered person. A country may, however, have its own rules concerning electronic transfers of information to achieve a legitimate public policy objective, provided that the measure (i) is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade; and (ii) does not impose restrictions on transfers of information greater than are required to achieve the objective.
The TPP also prohibits the imposition of measures requiring a covered person to use in-country data centres as a condition for conducting business in that country, unless the measures can be justified as necessary to achieve a legitimate public policy objective and meet conditions of not being discriminatory, arbitrary or a disguised restriction on trade.
Exceptions for the application of the above rules have been provided for financial institutions, public procurement or information processed on behalf of the government.
The TPP’s dispute settlement mechanism is modelled on the well-established and tested WTO dispute settlement system. It provides for alternative methods, such as conciliation and mediation, to voluntarily resolve a dispute at its early stages. If disputes cannot be settled at an early stage, the complaining party can request that the case be heard by an independent panel of trade experts, who must have the appropriate expertise to effectively decide the dispute in the specialized area at issue.
TPP parties also have recourse to certain remedies to encourage compliance with the agreement. For instance, complaining parties have recourse to trade retaliation, as well as a cooperative mechanism, which includes the creation of a monetary fund that is jointly leveraged for initiatives to improve compliance and resolve issues.
With the TPP negotiations concluded and the legal scrub complete, the parties must now begin the process of ratifying and implementing the agreements at the domestic level. In the U.S., the agreement must be approved by the U.S. Congress before it can be ratified. In Canada, the process of ratification is controlled by the Cabinet, which can vest authority on the Minister of Foreign Affairs to sign the ratification instrument. As of 2008, the federal government as a policy has followed the process of tabling treaties in the House of Commons before ratification. There have been calls within Canada for the agreement to be reopened as it was negotiated by the previous government without full consultation with the Canadian public. However, this appears to be unlikely given the difficult years of negotiating and balancing of strong competing interests required to complete the TPP.