Free trade in the Asia-Pacific region has received much attention in recent years.   Two major proposed trade agreements are currently center-stage in the region, the Trans-Pacific Partnership (TPP) and the Free Trade Area of the Asia-Pacific (FTAAP).

“The Trans-Pacific Partnership (TPP) is a proposed expansion of the 2005 Trans-Pacific Strategic Economic Partnership Agreement (TPSEP or P4), a trade agreement among Brunei, Chile, New Zealand, and Singapore. It seeks to manage trade, promote growth, and regionally integrate the economies of the Asia-Pacific region.”  The US joined the TPP in 2011.1

“In November of 2009 in Singapore, leaders of the Asia-Pacific Economic Cooperation (APEC) agreed to explore a range of possible pathways to achieve a Free Trade Area of the Asia-Pacific (FTAAP)’.  As APEC outlined: “Trade and investment liberalization and facilitation will continue to be [our] core objective. APEC’s work to strengthen and deepen regional economic integration will be critical to the achievement of this goal.”2

In an exclusive email interview, Eric Emerson, Managing Partner of Steptoe & Johnson LLP’s Beijing office and a partner in the firms International Trade and China practices, explains in detail the nature of the two agreements and the prospects for their future. Below is a transcript of that interview:

Grimley:  What are the essential provisions of FTAAP and TPP and why are they important?

Emerson:  “As a general matter, free trade agreements (FTAs) are important because they tend to reduce trade barriers, both tariff and non-tariff, and provide opportunities for companies in countries party to the FTA to expand their commercial opportunities.  FTAs in Asia are particularly valuable, given that this region has and will continue to have the fastest growing  economies in the world, with the greatest commercial opportunities.

At this stage, FTAAP is only a proposal that has been advanced in the context of APEC.  It was formally adopted by APEC as a goal in 2009, and China – which is this year’s APEC host – is trying to revive interest among the APEC economies in pursuing the agreement.  But to date, no negotiations have been held, and no proposals have been tabled.  TPP, by contrast, has been the subject of nearly 20 minister-level negotiations and countless working group level meetings since negotiations began in 2009, and is far down the road to completion.  While the current text of the agreement has not been publicly released, it is generally understood that the agreement will, among other things, liberalize trade in goods (through lower tariffs as well as through greater limitations on parties’ ability to maintain non-tariff barriers), liberalize trade in services, require that parties meet international environmental and labor standards, enhance investment rights (including, possibly, providing the for investors to take governments to arbitration to resolve disputes), improve intellectual property standards, and open markets for government procurement opportunities.  TPP is also likely to address certain issues that have not previously been subject to FTA agreements, such as imposing limits on the commercial activities of state-owned enterprises (SOEs).  If concluded and ratified, TPP will set the standard for any future FTA, and likely for the WTO itself.”

Grimley:  “What is the likelihood that either – or both – will be adopted?”

Emerson:   “While the TPP negotiations have been extremely difficult, and have stretched far longer than any of the parties likely anticipated, I am an optimist on TPP.  I believe that each of the leading TPP countries has its own reasons for wanting TPP to be completed, and none of them will want to see nearly 6 years of negotiations wasted.  The next few weeks will be critical, as the United States and Japan seek to resolve their key disagreements, namely, access to the Japanese market for agricultural products and for autos.  If they can reach an agreement – and I believe they will – I expect to see the TPP negotiations completed by the end of 2014.

FTAAP, by contrast, will be a far longer term effort.  At this point, it’s not even clear that all of the APEC economies support such an agreement.  If it did proceed, the scope of FTAAP would likely be far more limited than TPP.  It would likely cover trade in goods and trade in services, investment protections, dispute settlement, and possibly some limited enhanced IP protections.  Particularly given the economies involved, it would be unlikely to include some of the non-trade issues contained in TPP, such as enhanced labor and environment requirements, or limits on SOE activities.”

Grimley:  “Should either be adopted – how will the agreements impact foreign companies and investors seeking to do business in the Asia-Pacific region?”

Emerson:  “Either agreement would be a net benefit for companies doing business in one of the countries subject to the agreement.  Companies would see enhanced export opportunities from reduced duty rates, enhanced protection for investments in countries covered by the agreement, and an improved regulatory environment.  I say “net” benefit, though, because those same companies will also experience increased competition in their domestic markets from companies in other countries subject to the agreement, who will be entitled to identical benefits.

By contrast, companies operating in countries outside of these agreement are likely to experience some trade diversion and reduced commercial opportunities.  For example, if TPP is concluded and ratified, we would expect to see some export activity diverted away from China – which is not a TPP member – and toward countries who are parties to the TPP, like Vietnam and Malaysia.  This is no accident:  the intended outcome of a FTA is to favor countries who are party to an agreement relative to companies who are not.”

Grimley:  “How should foreign investors and companies be preparing now for the potential adoption of either agreement?”

Emerson: “FTAAP is still so embryonic that I don’t believe that any company in the region can or should start making preparations for it.  By contrast, TPP negotiations are nearing their final stages, and if companies in the region have not yet started to analyze the potential impact of this critical agreement on their business, they should start to do so immediately.

Since each company’s situation is unique, it’s difficult to generalize how TPP will impact a particular business; the analysis must be much more customized.  Companies should identify their trade flows, their production bases, their supply chains and their competitors, and make some predictions about how all of these would change if (for example) duty rates for their products are reduced among the TPP countries.  Similarly, companies contemplating investments in the region should take into account the potential enhanced investment protections likely available under TPP as another factor in their decision about where to site their investment.  Because the draft agreement has not yet been released, making these assessments is difficult and necessarily somewhat uncertain.  But by working with professionals who are following TPP closely, many companies are already making educated guesses about how TPP will affect their business, and are taking steps accordingly.  And companies with significant interests in the region should certainly be working closely with their governments to make sure that their concerns are reflected in the TPP agreement itself.”

To view Eric Emerson’s biography and contacted details, please follow this link on the Steptoe & Johnson LLP website:   Footnotes: 1.  Wikipedia, Trans-Pacific Partnership. 2. APEC, Pathways to FTAA Yokohama, Japan, 14 Nov 2010

Posted by John Grimley

John Grimley edits and publishes Asia Law Portal

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