The Trans-Pacific Strategic Economic Partnership Agreement Ian F. Fergusson Specialist in International Trade and Finance Bruce Vaughn Specialist in Asian Affairs December 7, 2009 Congressional Research Service 7-5700 www.crs.gov R40502 CRS Report for Congress Prepared for Members and Committees of Congress The Trans-Pacific Strategic Economic Partnership Agreement Summary The economic and strategic architectures of Asia are evolving. One part of this evolving architecture is the Trans-Pacific Strategic Economic Partnership Agreement (TPP), a free trade agreement that includes nations on both sides of the Pacific. The TPP, which originally came into effect in 2006, currently includes Brunei, Chile, New Zealand, and Singapore. The United States, Australia, Peru, and Vietnam have also expressed interest in joining. On November 14, 2009, President Obama committed to engage with current and potential future members of the TPP to shape a broad-based regional agreement. Other architectures, such as the Association of South East Asian Nations (ASEAN), Asia-Pacific Economic Cooperation (APEC) forum, Australian Prime Minister Kevin Rudd’s Asia-Pacific community initiative, and the East Asia Summit (EAS) have both economic and strategic aspects. They can be grouped into two categories: (a) groupings that are Asia-centric in approach and exclude the United States, and (b) those that are Trans-Pacific in nature and that include, or would include, the United States and other Western Hemispheric nations. The TPP is one vehicle that could be used to shape the U.S. agenda with the region. Asia is viewed as of vital importance to U.S. trade and security interests. According to the U.S. Trade Representative, the Asia-Pacific region is a key driver of global economic growth and accounts for nearly 60% of global GDP and roughly 50% of international trade. Since 1990, AsiaPacific goods trade has increased 300% while there has been a 400% increase in global investment in the region. The United States has pursued its regional trade interests both bilaterally and through multilateral groupings such as APEC, which has linked the Western Hemisphere with Asia. There appears to be a correlation between increasing intra-regional economic activity and increasing intra-regional political and diplomatic cooperation. Many observers view the more recent intra-Asian Association of Southeast Asian States (ASEAN) plus three—China, Japan, South Korea – and the ASEAN plus 6 [also known as the East Asia Summit]—China, Japan, South Korea, India, Australia, New Zealand—groups as having attracted more interest within the region in recent years. The United States is not a member of either the EAS or the ASEAN plus three group. President Obama has stated that the United States looks forward to engaging with the East Asia Summit more formally. China’s rapidly expanding economy and Japan’s developed economy have made them attractive trading partners to many Asian nations. Many regional states also view the United States as having been distracted by events in Iraq and Afghanistan in recent years. This has led some to increasingly look to China and Japan as key partners. China’s approach to the region has also shifted dramatically in recent decades as it now pursues its interests with the region in a relatively accommodative manner. U.S. participation in the TPP would involve the negotiation of FTAs with New Zealand and Brunei. The United States currently has FTAs in force with Chile and Singapore, and with interested parties Australia and Peru. Bilateral negotiations with New Zealand may focus on agricultural goods such as beef and dairy products. The possible inclusion of Vietnam may prove controversial from the standpoint of certain U.S. industry groups, such as textiles and apparel, as well as those concerned with human rights and intellectual property issues. The involvement of Vietnam could add a higher level of difficulty and is illustrative of the challenges associated with developing a truly Asia-Pacific-wide trade grouping. All the potential parties may face complex negotiations in integrating the myriad FTAs that already exist between some TPP parties. Congressional Research Service The Trans-Pacific Strategic Economic Partnership Agreement Contents Origins........................................................................................................................................1 Existing and Potential Membership .............................................................................................2 Some Congressional Reactions to the TPP...................................................................................4 U.S. Objectives and Interests.......................................................................................................5 Context with Other Regional Architectures..................................................................................5 A Comprehensive Trade Agreement ............................................................................................6 U.S. Trade with Current Trans-Pacific Partner Countries .......................................................7 Potential Controversies ...............................................................................................................8 Agricultural Products ............................................................................................................8 Dairy ..............................................................................................................................8 Beef ................................................................................................................................9 Other Issues ..........................................................................................................................9 Intellectual Property Rights .............................................................................................9 Pharmaceuticals ............................................................................................................ 10 Government Procurement.............................................................................................. 10 Environment and Labor................................................................................................. 10 Trade Promotion Authority.................................................................................................. 11 Figures Figure A-1. TPP States and Potential Additional Members........................................................ 13 Tables Table 1. U.S. Goods Trade with TPP Countries, 2008 ..................................................................7 Table 2. U.S. Private Services Trade with TPP Members, 2008....................................................8 Table A-1. U.S. Merchandise Trade with New Zealand 2008 ..................................................... 12 Appendixes Appendix. U.S. Merchandise Trade with New Zealand, 2008 .................................................... 12 Contacts Author Contact Information ...................................................................................................... 14 Congressional Research Service The Trans-Pacific Strategic Economic Partnership Agreement Origins1 The Trans-Pacific Strategic Economic Partnership (TPP) was initially conceived in 2003 by Singapore, New Zealand, and Chile as a path to trade liberalization in the Asia-Pacific region. Brunei joined negotiations in 2005, and the TPP came into force in 2006. In March 2008, the United States joined the negotiations to conclude the investment and financial services provisions. The United States already has Free Trade Agreements (FTA) with TPP members Singapore and Chile and with potential TPP partners Australia and Peru. The President notified Congress of his intention to negotiate with the existing TPP members on September 22, 2008, and with other potential members, Australia, Peru and Vietnam on December 30, 2008. It is now expected that this group of eight countries will define an agreement that other states can sign on to.2 The first meeting of the interested parties was expected to occur in Singapore in late March 2009, however, this meeting was postponed at the request of the United States in order to allow Obama Administration officials time to take office and conduct a review of U.S. trade policy.3 On November 14, 2009, President Obama committed the United States to engage with the TPP countries “with the goal of shaping a regional agreement that will have broad-based membership and the high standards worthy of a 21st century trade agreement.”4 President Obama also stated in his November 2009 Tokyo speech that, the growth of multilateral organizations can advance the security and prosperity of this region. I know that the United States has been disengaged from these organizations in recent years. So let me be clear: those days have passed. As an Asia Pacific nation, the United States expects to be involved in the discussions that shape the future of this region and to participate fully in appropriate organizations as they are established and evolve. While some observers noted that the President did not explicitly commit the United States to join the TPP negotiations, the same day, the Australian trade minister, Simon Crean, announced that the first TPP negotiating session would take place in Australia among the eight countries early in 2010.5 Analysts, observers, and decision makers generally believe that the inclusion of United States could act as a catalyst for other Asia-Pacific states to join. In this way, the TPP is viewed as a potential building block to a larger Free Trade Area of the Asia Pacific (FTAAP).6 This move is 1 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 public policy institution analysts were also consulted. 2 Simon Crean, “Trans-Pacific Partnership Agreement,” Media Statement, November 14, 2009. 3 “US Delays TPP Talks to Allow Obama Cabinet Members to Take Office,” Inside US Trade, February 27, 2009. 4 Remarks of President Obama at Suntory Hall, Tokyo, Japan, November 14, 2009. 5 USTR Likely to Negotiate TPP, Then Seek Expansion to Other Countries,” Inside U.S. Trade, November 20, 2009. 6 “The Trans-Pacific Partnership-Moving Forward,” Press Release of Australian Minister for Trade Simon Crean, November 14, 2009. Congressional Research Service 1 The Trans-Pacific Strategic Economic Partnership Agreement significant in that it will likely be seen as a U.S. policy response to the rapidly increasing economic and strategic linkages among Asian states, some of which have excluded the United States and the Americas in recent years. Some observers believe the TPP membership will expand U.S. trade with Asia while strengthening U.S. ties with the region. The United States remains a leading trade partner for nearly all Asian states. Despite this, the relative importance of the United States as a trading partner for many Asian states is declining. There is fear among some U.S. policy and trade analysts that the United States runs the risk of being marginalized if it does not respond to the proliferation of trade agreements that have emerged in Asia in recent years. By engaging in the TPP, the United States may be seeking to change this dynamic, both by seeking to join this new trading bloc and by shaping it to be consistent with already-existing comprehensive U.S. FTAs. The declaration by the United States that it would engage in the TPP process comes at a time when U.S. trade policy under President Obama remains under development. While the United States has begun to engage with its trading partners in the World Trade Organization over the ongoing Doha Round negotiations, agreement does not appear to be within reach. Also due to various difficulties surrounding each of the pending FTAs with Colombia, Panama, and Korea , the administration has not yet chosen to bring them to Congress for consideration under trade promotion authority. Given that the United States has comprehensive FTAs with four of the potential TPP parties, and would be negotiating with New Zealand, which has a decidedly profree trade outlook, negotiation of a TPP agreement may present the new administration with the means to pursue a fresh trade strategy unencumbered by present trade controversies. However, other trade analysts view the increasing web of bilateral and regional trade agreements with suspicion. Critics assert that the emphasis on regional and bilateral negotiations undermines the World Trade Organization (WTO) and increases the risk of trade diversion. Trade diversion occurs when the existence of lower tariffs under a trade agreement causes trade to be diverted away from a more efficient producer outside the trading bloc to a producer inside the bloc. What also results from the plethora of negotiated FTAs is, according to one economist, “a ‘spaghetti 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.” 7 Existing and Potential Membership As the United States entered into exploratory discussions 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.”8 Sullivan also described the agreement as supporting U.S. interests in the areas of “intellectual property rights, standards, transparency, labor rights, and the environment.”9 7 Jagdish Bhagwati, “From Seattle to Doha,” Foreign Affairs, December 2005. 8 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. 9 Ibid. Congressional Research Service 2 The Trans-Pacific Strategic Economic Partnership Agreement 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. Australian Prime Minister Kevin Rudd has 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. 10 Former President Bush’s notification to Congress of December 30, 2008, indicated that Australia, Peru, and Vietnam would also be potential negotiating partners. This incremental approach to construct a comprehensive free trade agreement may make negotiations for the entry of additional members more manageable. It is likely that Congress may wish to consider or to examine the entry of future members. Chile, New Zealand, and Singapore have all expressed their support for the inclusion of the United States in the TPP as well as their desire that this will act as a catalyst for further expansion of the TPP. Chile is a relatively isolated trade-dependent nation that is looking to Asia to expand its trade opportunities. Chile views the TPP as a way to help it navigate its course in an era of increased globalization and as an instrument for Chile to try to gain access to Asian markets and to ensure that it is not isolated outside international trading arrangements in Asia. New Zealand, another trade-dependent country, supports liberalized trade through the WTO process but is also seeking alternative comprehensive free trade relationships in both bilateral and regional forums. New Zealand views the TPP as a way to add some momentum to trade liberalization among Asia-Pacific Economic Cooperation (APEC) member countries.11 New Zealand also favors the continued engagement of the United States in the region. In this way, it has strategic as well as economic reasons for seeking to include the United States in the TPP. New Zealand has long sought an FTA with the United States and hopes that its advanced country status and free trade bona fides will assist it in a difficult environment for trade expansion. Former New Zealand Prime Minister Helen Clarke stated, “I believe that to [U.S.] Democrats, New Zealand offers very few problems because we are very keen on environment and labor agreements as part of an overall approach to FTAs.”12 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. More recently, New Zealand Trade Minister Tim Groser welcomed President Obama’s announcement that the United States intends to proceed with the TPP.13 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.14 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.”15 10 “Asia-Pacific Leaders Welcome Obama’s Commitment to Trans Pacific Partnership,” International Trade Reporter, November 19, 2009. 11 “Trans -Pacific Partnership,” The Daily Post New Zealand, September 23, 2008. 12 “US Trade Move Big News for NZ: Clark,” New Zealand Herald, September 23, 2008. 13 “Groser Welcomes US Announcement on Trans-Pacific Partnership,” November 13, 2009, beehive.govt.nz 14 “Singapore Welcomes US Joining Trans-Pacific Trade Agreement,” Channel News Asia, September 22, 2008. 15 “Asia-Pacific Leaders Welcome Obama’s Commitment to Trans Pacific Partnership,” International Trade Reporter, November 19, 2009. Congressional Research Service 3 The Trans-Pacific Strategic Economic Partnership Agreement The potential participation of Vietnam in the negotiations may prove more controversial. Heretofore, Vietnam has been described as an “observer” to the talks and it remains unclear under what circumstances the country would become a full-fledged negotiating partner. For a grouping primarily of advanced and middle income countries, Vietnam would be the least-developed participant in the negotiations. While it has made great strides in liberalizing its economy and has been granted WTO membership, criticism of its standards on labor rights, intellectual property protection, and corruption remain. It has also come under fire for its human rights policies. U.S. textile and apparel groups expressed their opposition to the inclusion of Vietnam in TPP negotiations in a March 5, 2009, Trade Policy Staff Committee hearing. The National Association of Manufacturers stressed the barriers to US exports to Vietnam including “poor protection for intellectual property, licensing, standards, regulations, subsidies and a lack of transparency.”16 However, the perceived willingness of Vietnam to undertake the type of reforms needed to join the TPP, either now or in the future, could serve as a catalyst for other developing countries in the region to undertake such reforms. Some Congressional Reactions to the TPP Senator Charles Grassley, Ranking Member of the Committee on Finance, welcomed the announcement that the United States was initiating negotiations to join the group. Today’s announcement is good news. It’s in our national interest to strengthen our economic relations with the Trans-Pacific region. Negotiation of this agreement will help further that effort. And it may pave the way to a broader regional trade agreement in the future. If we want to have any influence over that process, we need to get involved. We can’t advance our economic interests if we’re not at the table.17 On March 10, 2009, 45 House members signed a letter to President Obama in urging him to continue talks on the TPP. This bipartisan effort was headed by then-Representative Ellen Tauscher and Representative Kevin Brady, who wrote: “We expect the TPP will be a gold standard agreement, eliminating tariffs on all traded goods among members and reducing barriers 18 to trade in services and other sectors beyond standards set in the World Trade Organization.” During the 110th Congress, however, Senators Norm Coleman and Russ Feingold, and Representatives John McHugh and Randy Kuhl wrote USTR Schwab expressing their concerns about the possible implications of an agreement with New Zealand on U.S. dairy producers. According to Representative McHugh’s letter: the New Zealand dairy industry has the ability to flood our market with new imports, including such dairy products as cheese, milk proteins, butter fat, and dairy food preparations. These actions would likely result in the closure of thousands of small and medium-sized American dairy farms, and negatively impact hundreds of rural manufacturers.19 16 “Possible Inclusion of Vietnam in TPP Talks Sparks Controversy,” Inside US Trade, March 6, 2009. “Trans-Pacific Economic Partnership, Pending Trade Agreements,” Congressional Documents and Publications, September 22, 2008. 18 “New Democrats Urge Obama to Continue TPP Talks,” Inside US Trade, March 13, 2009. 19 Press Release of Rep. John McHugh, “McHugh to Administration: Dairy Must be Protected During FTA Negotiations,” September 25, 2008, (http://mchugh.house.gov/News/DocumentSingle.aspx?DocumentID=103709) 17 Congressional Research Service 4 The Trans-Pacific Strategic Economic Partnership Agreement More recently, House Ways and Means Committee Chairman Charles Rangel and Trade Subcommittee Chairman Sander Levin stated “The TPP offers both opportunities and challenges. Done effectively, it can be of mutual economic benefit.… It also presents the challenge … of grappling with the inclusion of a new country, Vietnam.”20 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, below), 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 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, when 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 Clinton’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.”21 Context with Other Regional Architectures22 There are several overlapping and potentially competing regional architectures in Asia having both economic and strategic aspects. They can be grouped into two categories: the first being those that are Asia-centric in approach and would exclude the United States, with the second being trans-Pacific in nature and would include the United States and other Western Hemispheric nations. In the first Asia-centric group are the Association of Southeast Asian Nations (ASEAN) + 3 and ASEAN + 6 groups. The ASEAN + 3 group includes the members of ASEAN (Brunei, 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, 20 House Committee on Ways and Means, “Lawmakers on Announcement of US Engagement on Trans Pacific Partnership Free Trade Agreement,” November 16, 2009. 21 Remarks of President Obama at Suntory Hall, Tokyo, Japan, November 14, 2009. 22 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. Congressional Research Service 5 The Trans-Pacific Strategic Economic Partnership Agreement and New Zealand. It is thought that key states in ASEAN wanted to balance the influence of China in the EAS by including Australia, India, and New Zealand. The U.S. position toward the EAS appears to be evolving given President Obama’s recent statement on engaging the EAS. The 21-member Asia-Pacific Economic Cooperation (APEC) group is the most comprehensive trans-Pacific group that includes the United States. A Free Trade Area of the Asia Pacific (FTAAP), proposed at the 2006 APEC meeting in Hanoi, would include all APEC members and is being considered by APEC as a whole. Such an approach has proven to be difficult to negotiate with all members. Many hope that the TPP will add a bottom-up impetus to promote trade liberalization among APEC states and potentially succeed where the FTAAP thus far has not.23 Australian Prime Minister Kevin Rudd is also promoting an Asia-Pacific community initiative. Since the end of World War II, the United States traditionally has played a central role in developing or leading Asian strategic and economic architectures. While the United States has tried in the past to develop multilateral strategic groups, such as the Southeast Asia Treaty Organization (SEATO), it has had more success in the strategic arena in Asia through its key bilateral treaty relationships with Australia, Japan, the Philippines, South Korea, and Thailand. Collectively, this post-World War II system of bilateral alliances became known as the San Francisco system. The United States has more recently engaged in trilateral security discussions with Australia and Japan and has made a key strategic opening to India. Other regional states, such as Singapore, also enjoy close bilateral strategic and defense relations with the United States, though they are not defined by treaty.24 A Comprehensive Trade Agreement The United States generally has sought to negotiate comprehensive free trade agreements that liberalize trade in all sectors of the economies of partner countries. In its FTA policies, the United States seeks to follow the provisions of the WTO General Agreements on Tariffs and Trade which has stipulated that free trade agreements cover “substantially all trade” among the participating countries (Article XXIV(8)(b)). The TPP likewise has endeavored to achieve a similar level of comprehensiveness, which may be one reason that the TPP has attracted attention from the United States. The TPP provides for the complete elimination of tariff lines among Chile, New Zealand, and Singapore, and a 99% liberalization with Brunei, all to be phased out 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.25 The agreement contains chapters addressing potential non-tariff barriers such as customs valuation procedures, 23 P. Parameswaran, “US to Join Budding Asia-Pacific Free Trade Agreement,” Agence France Presse, September 22, 2008. 24 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. 25 New Zealand Ministry of Foreign Affairs and Trade “Trans-Pacific Strategic Economic Partnership Agreement: Key Outcomes- June 2005, ” (http://www.mfat.govt.nz/Trade-and-Economic-Relations/0--Trade-archive/0--Tradeagreements/Trans-Pacific/0-key-outcomes.php) Congressional Research Service 6 The Trans-Pacific Strategic Economic Partnership Agreement sanitary and phytosanitary standards (SPS), and technical barriers to trade (TBT). The agreement also contains chapters on competition policy, intellectual property rights, government procurement policy, temporary movement of business persons, and provisions governing the settlement of disputes. The agreement sets out memoranda of understanding (MOU) among the parties on labor and environmental cooperation. Chapters on financial services and investments are currently being negotiated. Table 1. U.S. Goods Trade with TPP Countries, 2008 (million $) Country Rank Imports Exports Total Balance Singapore 19 15,719 25,656 41,375 9,937 Chile 33 8,182 11,367 19,549 3,185 New Zealand 55 3,152 2,444 5,596 (708) Brunei 137 121 106 227 (15) TOTAL-TPP 9 27,174 39,573 66,747 12,399 Australia 25 10,535 20,948 31,483 10,413 Peru 42 5,840 5,687 11,527 (153) Vietnam 38 12,611 2,673 15,284 (9,938) Pacific Rim 690,106 287,227 977,333 (402,879) World 2,090,483 1,169,821 3,260,304 (920,662) Source: U.S. International Trade Commission Notes: Rank based on total trade (imports+exports); imports for consumption, U.S. domestic exports. Countries who have expressed an interested in joining the TPP are italicized. U.S. Trade with Current Trans-Pacific Partner Countries Table 1 shows U.S. trade in goods with TPP countries. In 2008, the United States ran a merchandise trade deficit with New Zealand and Brunei, and ran surpluses with Chile and Singapore, yielding an overall trade surplus with the TPP bloc. Taken as a bloc, trade with the TPP countries represents the ninth-largest trading partner of the United States, ahead of Saudi Arabia and just behind France. However, trade with the TPP represents a small percentage of U.S. total trade with the Pacific Rim (7%) and the world (2%). Concluding a TPP agreement would involve negotiating an FTA with New Zealand and Brunei. This likely would entail tough talks on sensitive U.S. agriculture sectors such as beef, lamb, and dairy products. U.S. goods trade with New Zealand is relatively small. New Zealand was the 55th largest trading partner of the United States in 2008 with two-way trade of $5.6 billion. U.S. imports of $3.1 billion were led by meat, dairy products, wine, fish, sawmill products, and chemicals. U.S. exports of $2.4 billion were led by aircraft and parts, agricultural equipment, motor vehicles, navigational instruments, and chemicals. (See Appendix, below.) The United States also conducts extensive services trade with New Zealand, including exports of $1.5 billion and imports of $1.7 billion in 2007. Brunei is a relatively minor trading partner of the United Congressional Research Service 7 The Trans-Pacific Strategic Economic Partnership Agreement States (137th largest) with total trade of $227 million in 2008 ($106 million in exports, $121 million in imports). Table 2. U.S. Private Services Trade with TPP Members, 2008 ($million) Country Exports Imports Total Balance Chile 1,943 1,034 2,977 909 New Zealand 1,787 1,705 3,492 82 Singapore 9,011 4,168 13,179 4,848 Australia 11,826 6,077 17,903 5,749 Total 24,567 12,984 37,551 11,583 Source: Bureau of Economic Analysis, Survey of Current Business Notes: BEA does not collect services trade data from every partner country; Countries who have expressed an interested in joining the TPP are italicized. The United States also maintains extensive services trade with current and potential TPP countries. Generally, the United States has maintained consistent surpluses with these countries except for New Zealand, which also swung into surplus in 2008. 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. 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 involve New Zealand and Brunei, or issues related to the implementation of FTAs that the United States currently has with Chile, Singapore, Australia, and Peru. Agricultural Products Dairy The National Milk Producer’s Federation (NMPF) has sought an exclusion for the dairy industry in any potential FTA negotiations with New Zealand. At issue is the N.Z. dairy cooperative Fonterra, which NMPF claims acts as a monopoly and controls 90% of milk production in New Zealand. The concern is that if Fonterra acts as a monopoly it can exert pricing power through cross-subsidization and provide marketing and other subsidized services. New Zealand officials contend that Fonterra has no monopoly powers and that producers are free to sell their product to Congressional Research Service 8 The Trans-Pacific Strategic Economic Partnership Agreement whom they wish.26 According to the most recent WTO Trade Policy Review, New Zealand no longer holds a statutory monopoly, but the company does hold exclusive licenses to export to some markets for periods up until 2010.27 Dairy products were included in the U.S.-Australian FTA but were subject to an 18-year phase-out period. New Zealand Trade Minister Philip Goff commented that the effect of New Zealand’s access to the U.S. dairy market “would be relatively 28 minor.” It has also been argued that the U.S. dairy industry could stand to gain more than it might lose through expanded market access that the TPP could provide should it attract additional members. Beef 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. 29 For its part, Brunei maintains a rigorous halal certification process, requiring on-site inspection for every establishment seeking to export meat and poultry into Brunei.30 Other Issues Several other areas may prove to be contentious in negotiations with TPP member countries. These issues have proved to be sticking points in past U.S. FTA negotiations. Intellectual Property Rights The United States has sought increased intellectual property rights (IPR) protection in its FTAs. Two broad IPR negotiating objectives were elucidated in the last U.S. trade promotion authority (P.L. 107-210) in effect between 2002-2007: (1) to apply the existing IPR protection to digital media and (2) to negotiate trade agreements in terms of IPR that “reflect a standard of protection similar to that found in U.S. law.” This phrase opened the door to the negotiation of provisions that go beyond the level of protection provided in the WTO Trade Related Aspects of Intellectual Property (TRIPS) agreement. For example, the United States has sought to have its partner countries sign onto the World Intellectual Property Organization’s (WIPO) Performances and Phonograms Treaty, an agreement to which New Zealand is not a party. USTR’s 2009 U.S. Foreign Trade Barriers Report (FTB) noted that New Zealand is an active participant in efforts to strengthen international IPR enforcement by participating in the negotiations on a multilateral 26 Discussions with New Zealand embassy officials, November 2008. World Trade Organization, Trade Policy Report: New Zealand, Report by the Secretariat (WT/TPR/S/115), April 14, 2003. 27 28 29 “USTR-Announced New Zealand FTA Gets Cool Agriculture Reaction,” Inside U.S. Trade, September 26, 2008. ibid. 30 U.S. Trade Representative, 2009 National Trade Estimate Report on Foreign Trade Barriers, Brunei, p. 47, available at:[http://www.ustr.gov/Document_Library/Reports_Publications/2009/2009_National_Trade_Estimate_Report_on_Fo reign_Trade_Barriers/Section_Index.html] (hereinafter, FTB report). Congressional Research Service 9 The Trans-Pacific Strategic Economic Partnership Agreement Anti-Counterfeiting Agreement, and that it had passed a new copyright protection act in April 2008.31 Conversely, the FTB criticized Brunei for its alleged high piracy rates and the weak governmental track record on enforcement. 32 In addition, the U.S. Special 301 report for 2008 put Chile in the “priority watch category,” noting that “Chile’s IPR performance continues to fall well 33 below expectations for a U.S. FTA partner.” 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, puts “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. Government Procurement The United States is a member of the plurilateral WTO Government Procurement Agreement (GPA) and has sought the inclusion of government procurement provisions in its FTAs. New Zealand is not a member of the GPA. However, New Zealand officials assert that the country maintains a more liberalized procurement regime than is specified by the GPA. New Zealand maintains certain government procurement preferences for its Maori population pursuant to the Treaty of Waitangi. In previous FTA negotiations, the United States had sought concessions from negotiating partners on government procurement preferences designed to assist the Malay population in Malaysia, for example, or for the Black Economic Empowerment initiative in South Africa. U.S. FTAs with Australia, Peru, Chile, and Singapore include sections on government procurement, which provide opportunities for firms of each nation to bid on certain federal, state, and municipal contracts over a set monetary threshold. Environment and Labor Some Members of Congress have sought the expansion of labor and environmental provisions in U.S. FTAs. The TPP contains a labor memorandum of understanding (MOU) and an environmental cooperation agreement between the parties. These agreements pledge the parties to work together to promote sound labor and environmental practices, while respecting the right of parties to set, administer, and enforce their own labor and environmental laws. It commits the parties not to set or use labor or environmental laws or practices either for trade protectionist purposes nor to weaken such laws or practices to encourage trade and investment. This language is generally consistent with the language that the United States negotiated in its FTAs with Chile, 31 FTB report, New Zealand, p. 349. FTB Report, Brunei, p. 48. 33 U.S. Trade Representative, 2008 Special 301 Report, [http://www.ustr.gov/assets/Document_Library/Reports_Publications/2008/2008_Special_301_Report/asset_upload_fil e553_14869.pdf] Countries placed on the Priority Watch List are the focus of increased bilateral attention concerning IPR protection, enforcement, or market access for persons relying on intellectual property. 32 Congressional Research Service 10 The Trans-Pacific Strategic Economic Partnership Agreement Singapore, and Australia. Subsequently in the 110th Congress, the administration and congressional leaders agreed to strengthen certain provisions of the environmental and labor provisions for certain outstanding trade agreements. This agreement was reflected in the U.S.Peru FTA which entered into force on February 1, 2009. 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 Congress. 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 FTAs under the TPP framework, will be difficult to negotiate in the absence of TPA. Congressional Research Service 11 The Trans-Pacific Strategic Economic Partnership Agreement Appendix. U.S. Merchandise Trade with New Zealand, 2008 Table A-1. U.S. Merchandise Trade with New Zealand 2008 North American Industrial Classification System (NAICS)-4 Product Description U.S. Exports Aerospace Products/Parts Special Classification Agriculture/Construction Machinery Value (Million $) U.S. Imports Value (Million$) 356 Meat Products 838 253 Dairy Products/Cheese 569 165 101 Motor Vehicles 100 Navigational/Control Instruments 92 Basic Chemicals General Machinery 86 66 65 Pharmaceuticals 62 Computer Equipment 55 Engines/Turbines/Power Transmission Eqpt. 54 Resin/Synthetic Rubber, Fibers and Filament 48 46 Medical Equipment 46 Petroleum/Coal Products 849 2,444 Communications Equipment Returned/Reimported Beverages/Wines Fish/ Fresh or Frozen Sawmill Products Basic Chemicals Medical Equipment Petroleum/Coal Products 158 157 124 120 110 108 76 69 Aluminum 63 Fruits and Tree Nuts 51 General Machinery 51 Iron and Steel 47 Foods, NESOI 38 Special Classification 573 Other 3,152 Total Misc. Manufactured Commodities Other Total Source: U.S. International Trade Commission Notes: NAICS-4 Product Description Congressional Research Service 12 Figure A-1. TPP States and Potential Additional Members CRS-13 The Trans-Pacific Strategic Economic Partnership Agreement Author Contact Information Ian F. Fergusson Specialist in International Trade and Finance ifergusson@crs.loc.gov, 7-4997 Congressional Research Service Bruce Vaughn Specialist in Asian Affairs bvaughn@crs.loc.gov, 7-3144 14