TPP Shaping Up to Be a Mixed Bag for Developing Countries

TPP Update

I was out of town while trade negotiators were in Maui trying to bring the Trans-Pacific Partnership agreement to a close, but apparently I didn’t miss much. Although the twelve Pacific-rim countries involved are purportedly trying to negotiate a 21st Century trade agreement, the negotiations foundered over old-fashioned concerns about protecting favored industries—autos for Mexico, sugar for the United States, dairy for Canada and Japan, among others. The US demand for 12 years of extra protection for biologic drugs was also unacceptable for many other countries, as it should be.

After initial reports that negotiators might try to meet again in August, Inside U.S. Trade (gated) reports that Assistant US Trade Representative Barbara Weisel told a Hill briefing that was unrealistic. Given the procedural rules for approving trade agreements in the United States, along with electoral politics next year, that likely means that it will be up to the next president to close the deal and get Congress to approve it. Deborah Elms of the Asian Trade Centre has a good analysis here.

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Representatives from the 12 countries negotiating the Trans-Pacific Partnership (TPP) trade agreement are in Hawaii this week trying to close the deal. For trade wonks like myself, there are some wryly amusing twists to the endgame. One of my favorites is US negotiators insisting that Canada must reform its supply management system for dairy and allow more imports, while conceding that maybe the United States could let in just a wee bit more foreign sugar, as long as it doesn’t disrupt the US supply management program for sugar! Being a big, powerful country is great.

But if you’re a small country, and particularly a relatively poor one, trade negotiations are trickier. And if you are a poor country outside the negotiations, you have no say at all on how the negotiations will affect your interests.

Vietnam and Market Access

Of the 12 countries negotiating the TPP, Vietnam is the poorest by far. (Peru, the next poorest, has a per capita income three times as high as Vietnam’s $1,890, according to World Bank data.) And in a recent Pew Research poll, 89 percent of Vietnamese surveyed thought a TPP agreement would be good for the country, more than any other country involved in the talks.

But calling these regional deals “free trade agreements” is a misnomer, and Vietnam is likely to get less new market access in key areas, therefore creating fewer jobs, than it hoped. Clothing accounts for almost one-third of total Vietnamese export to the United States, but previous experience tells us that some of the liberalization gained through tariff cuts will be lost to restrictive provisions known as rules of origin.

These rules are among the technical, nitty-gritty details of trade agreements to which few pay attention, but they are critical in determining real-world market access. Here’s how it works.

When negotiating trade agreements, US negotiators insist on a “yarn forward” rule of origin for clothing items. What that means is that all the components, from the yarn to the fabric to the final item, must be produced in one of the parties to the agreement. But many poorer developing countries participate in the final stage of clothing supply chains, assembling the final item from imported components, often from China.

Since that is also true of Vietnam, the yarn forward rule would means its producers would have to buy their fabric and other components from the United States (or maybe Mexico), ship them across the Pacific to their clothing factories, and then ship them back across the Pacific to their American buyers. The higher input and transportation costs would often more than offset any lower costs for Vietnamese exports arising from tariff reductions.

The likely outcome of the TPP talks on clothing is that Vietnamese producers will (eventually) get duty-free access for their clothing exports, but they will be limited by quotas on how much fabric, and what type, they can use from outside the TPP region. That in turn will effectively cap the increase in clothing exports that Vietnam can expect as a result of the TPP.

Intellectual Property and Access to Drugs

US demands for stronger intellectual property protections in trade agreements is another area of concern in many developing countries — as it should be in the United States. Many in Congress and the executive branch have fallen for industry arguments that the strongest possible IP protection should be the goal. That may be true for IP owners, but it is absolutely not true for society as a whole, in this country or any other. Rather, IP rules should strike a balance between offering incentives for innovation, via the temporary monopoly of patents and copyrights, and ensuring the broadest possible diffusion of beneficial new technologies. And the balance that is appropriate for the United States is highly unlikely to be appropriate for a developing country with little or no innovative activity to protect.

At least in this area Vietnam is not alone. Other TPP parties oppose US demands in this area and the outcome will be less far-reaching than US negotiators wanted, and provide more flexibility for developing country parties than they originally envisioned. Nevertheless, it would have been better if the Obama administration had stuck with the deal that President George W. Bush reached with the Democratic majority in Congress in May 2007, as some in Congress are recommending. That deal essentially preserved the flexibilities contained in the WTO agreement allowing countries to adapt the degree of intellectual property protection they provide to their level of development.

Protecting Other Poor Countries from Harm

While Vietnam’s gains in market access for clothing and other exports will probably be less than they want, it is important to ensure that additional access for Vietnam does not come at the expense of even poorer countries in the region. The United States has agreed on multiple occasions at the World Trade Organization (WTO) that it should provide duty-free, quota-free market access for the world’s poorest and most vulnerable countries, as all other rich countries have done. Yet it has failed to follow through for a number of Asia’s least developed countries, including Bangladesh, Cambodia, and Nepal. Finally, doing so as part of a legislative package to implement the TPP agreement would help to mitigate any negative impact on Vietnam’s poorer neighbors.

Strengthening the multilateral trade system is an even more important step for the majority of developing countries that are outside this and other regional deals. Even if Hawaii turns out not to be the endgame for TPP after all, the time and political capital already spent will keep the negotiators from giving up. I can only hope that the TPP negotiators will be as committed to reaching agreement on a WTO work program in Nairobi later this year.