Monday, December 16, 2013

Disagreements Between US and Japan Stall TPP Negotiations

Last week the Trans-Pacific Partnership (TPP) trade ministers met in Singapore and, as had been anticipated, failed to conclude even a “framework” or “outline” agreement.  However, they declared in a joint statement that they engaged in actual negotiating and made significant progress, having determined “landing zones” for some of the contentious issues which they will now direct their negotiators to work out in detail. The ministers did not set a new time table for conclusion of a full or a framework agreement, though many assume that they will aim to have an accord completed by the time President Obama travels to Asia in April.

The ministers announced their intention to meet again in January, though with the coming holidays, that doesn't leave much time for the negotiators to move things forward.  Some sources suggested they might get together during the World Economic Forum (WEF) annual meeting in Davos, set for the end of January, as many ministers generally attend the event and there are often trade “mini-ministerials” on the sidelines.  However, others report that it may be too late to arrange a gathering there (since it is impossible to find accommodations for all the officials who accompany trade ministers at negotiations or to find free time) and said instead that the ministers are considering meeting in London after the WEF (e.g., on 1/27, the day after the forum ends).  Although it would be strange to have a TPP meeting in Europe, it seems that all negotiating countries want to complete an outline as soon as possible.

According to Mexican sources, about 75% of outstanding differences have now been settled.  Cabinet Office Senior Vice Minister Yasutoshi Nishimura commented to the press that about 65% was done, but the Abe government issued a clarification saying he wasn’t referring to overall progress.  Nonetheless, these statements suggest that the agreement is far from complete, even as a “framework.”  The Malaysian Trade Ministry stated after the meeting that, “There is a lot more work to be done,” pointing out incomplete chapters on state-owned enterprises (SOE), environment, intellectual property (IP), and market access.

It has been reported that the key to a deal is a US-Japan agreement on market access issues.  If that falls into place, then other sticking points will be worked out.  That's because market access is not just between the US and Japan, as others are highly interested in gaining greater access to the US and Japanese markets and are reportedly waiting to see how much they get before they make their own concessions on the various rules issues (including IP, disciplines on SOEs, the investor-state dispute mechanism, labor/environmental standards, and so forth).

US Trade Representative Michael Froman and Nishimura met twice during the ministerial to consult over the bilateral “parallel talks” issues, but again reported no breakthrough.  This will have to change if there is to be renewed momentum for a deal early in 2014.

Some sources told the press that they believe Tokyo wants to comply with easing its farm protections by instituting a tariff-rate quota system (low/no tariffs on a set amount of imports, very high tariffs on imports above that amount).  That would be one way to provide some significant opening while still controlling the potential disruption to Japanese agriculture.  However, sources also say that the US is, at this point, not interested in this plan.  Moreover, this scheme would go in the opposite direction from most recent trade liberalization – the Uruguay Round Agreement moved away from quotas and urged tariffication (replacing quotas with tariffs) instead.

Japan's position on market access is seen as important here for reasons that go beyond the trade negotiations.  The pull-back from full endorsement of a high-ambition TPP with everything on the table – that is, willingness to meaningfully open the farm sector – raises concern that the “third arrow” of Abenomics, economic reform, will not be carried out.  In turn, if members of Congress don't think Tokyo is putting enough on the TPP table, they will be further encouraged to demand that currency manipulation be included in the TPP.

Australian Trade Minister Andrew Robb and New Zealand Trade Minister Tim Groser, at a concluding press conference, said that the “landing zones” the ministers discussed were only options – none has been agreed upon yet.  They did consider this to be progress, however, and stressed that both their countries could make concessions in other areas if they get the market access they seek in the US and Japan.  Groser did warn reporters that “there is a risk of failure,” and called out Japan specifically, saying the main impediment to a deal is Japan's highly protected agriculture.

One danger that stems from having held a ministerial that was pumped up in advance as likely to lead to a deal this year is that the failure to do so, no matter how much “progress” was made, will cause the TPP to lose momentum.  That is especially worrisome with the US heading into what will be a very busy year, with many distractions and higher priorities.  The loss of momentum will be even greater if Congress doesn't soon pass a Trade Promotion Authority (TPA) bill renewing the President fast-track mandate for conducting trade negotiations (Although the drafting of a bipartisan TPA bill has reportedly now been completed).

All of this shows that the TPP still has a long way to go.  Just how far was indicated with two new leaks from Wikileaks last week, one charting the positions of TPP countries on the various issues under negotiation and one an internal memo from one of the participants.  As was the case with the previous Wikileaks leak of the IP chapter, positions between countries remain far apart on a number of issues and the US seems quite isolated on many, in particular with its strong push for greater patent and copyright protections.

I digress. In conclusion, the TPP appears to hinge on US and Japan market-opening.  Tokyo is demanding US flexibility in its demands on Japan.  Considering the domestic realities in Japan, the Abe government is not expected to agree to tariff elimination on the five most sensitive products.  But sources say there is wriggle room.  First, if the US were to end its car tariff and (with a long phase-out) its truck tariff, and if it were to support a very long phase-out for Japan's sensitive farm tariffs, a deal might be possible.  The problem is that other TPP countries are counting on access to the Japanese market to make the TPP worthwhile and sellable to their populations, who will be asked to give up their own protections.  This is of course typical of trade negotiations.  But the TPP differs in that it depends on a US-Japan deal that will involve politically difficult market-access concessions from both sides that are also of interest to the rest of the participating countries.

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