investment

TPP: Investor FAQs

I have spent an amazing amount of time in the past week talking with investors, investment companies, hedge funds and the like about the Trans-Pacific Partnership (TPP).  I thought it might be useful to share some of the frequently asked questions (FAQs) about what the TPP does and does not deliver for investors.

As always, for more details or help figuring out what the TPP might do for your company, please contact us at the Asian Trade Centre.

Who is in the TPP?

12 countries are currently members:  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam

Who is not in the TPP?

Notably: China, South Korea, Taiwan and 6 ASEAN countries including Indonesia, Thailand and Philippines

Who might be in the TPP later?

I am projecting up to 20 members in total, with the addition of South Korea, China, Hong Kong, Taiwan, Philippines, Columbia, Costa Rica and Panama

When will expansion take place?

First we have to get the TPP approved and implemented with the current membership.  Then it will likely need to run for at least a year before anyone is able or willing to talk about expansion.  But if you do the math, expansion is possible in 3-5 years.

Can I see what is in the TPP?

Yes.  The complete 1200 page set of texts, plus 5000 pages of country-specific schedules, and more than 100 side letters are available for your reading pleasure.  Check out your favorite TPP member’s trade website for details or use the official repository documents from New Zealand at: http://www.mfat.govt.nz/Treaties-and-International-Law/01-Treaties-for-which-NZ-is-Depositary/0-Trans-Pacific-Partnership-Text.php

Wow.  That’s a complicated agreement

Yes it is.  Note that the benefits for your specific firm or industry are likely to be scattered across multiple places in the agreement, so you cannot simply check one chapter.  I would note, however, that while the texts are dense, the possible savings or increased business opportunities for most companies makes it worthwhile to invest time and money in figuring out this deal. 

When will it take effect?

Ah.  This gets more complicated still.  The short answer is that the United States has to approve the TPP by a majority vote in both houses of Congress before the TPP can enter into force and companies can start enjoying the benefits of the agreement.  Thus, the timing is really dependent on how fast the Americans can get approval.  Other TPP members are likely to wait until the United States has finished its messy internal procedures before they act.  In a world of miracles, the TPP could come into effect by next fall.  The second default option is entry into force in April 2018.  The third default is any time after this date when the United States joins Japan and at least four other members. 

Do you have to be a TPP registered company or pay local taxes or something to get the benefits of the TPP?

Not necessarily.  The TPP is intended for use by TPP member firms for use in buying and selling goods and services with other TPP members.  But what constitutes a TPP member firm is not the location of the headquarters or the tax domicile address.  It gets a bit complicated, but basically what matters most is where, in geographic space, a firm creates and delivers products or services.  A firm that makes orange juice inside Malaysia is likely to be a covered entity even if the headquarters of the firm is in Amsterdam. 

Can I link up the TPP with other trade agreements?

No.  You cannot take orange juice made in Malaysia and sell it in Europe using the TPP.  The TPP is intended for companies buying and selling from TPP member countries into other TPP member countries.  While member firms are likely to receive the greatest benefits from sourcing from TPP countries, note that the content in goods need not be 100% from TPP countries.

What does the TPP do for investors that they don’t get otherwise?

Please review the specific provisions of the investment chapter (also read my blog post from November 11).  In brief, there are several key elements that make the TPP extremely helpful for investors.  First, TPP investors have significantly enhanced market access.  Basically, in the TPP, if a sector is NOT listed, it is opened for investment.  Across all 12 members, the number of closed sectors or areas is extremely small and many of the closed areas are unlikely to be of much commercial interest to investors in any case.  Second, TPP investors receive better protection of investments.  The details are many but basically investors should have less risk and uncertainty arising from TPP investments in the future.

So, who wins and who loses in the TPP?

This is sneaky.  If you are sitting in a big investment company, bank or hedge fund, you should be paying for this kind of information!  All I will say here is that previously protected sectors may offer the most substantial benefits and market opportunities.  Countries that were less open in the past will likely reap more benefits, all else being equal, than countries that have been extremely open.

What about non-members?

The potential implications of the TPP are substantial.  Savvy firms will be carefully combing through the agreement to determine what benefits might apply and thinking hard about how to structure the company to take the greatest advantage of this deep and broad set of commitments.  Not everything changes, of course.  Firms that had substantial markets outside the TPP may continue to operate without impact.  But the competitiveness of some firms may shift and create new opportunities that weren’t present before.  Trade and investment may well be shifted from non-TPP members to TPP countries in the future.  Whole factories could be unbolted and moved, however the more likely outcome is a gradual change in suppliers or customers or increased investments in member countries and a decrease in investment in non-members. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

TPP First Impressions: Investment

Hanoi--Chapter 9 of the Trans-Pacific Partnership (TPP) addresses a critical issue for many firms:  the rules of the game that apply to foreign investors in TPP countries.  Currently, TPP investors can face a complicated thicket of regulations, shifting rules, and informal practices that make it difficult or even impossible to open and maintain businesses and investments in some TPP member countries. 

This chapter aims to simplify and clarify the rules for inward investment by TPP firms.  Doing so should make it easier for firms to operate across TPP countries and help unleash new growth for member countries.  It may ultimately be the most important chapter for a member like Vietnam.

While most of the attention has been given to one aspect of this chapter, Investor-State Dispute Settlement (ISDS), let me begin by highlighting the rest of the rules in the chapter before turning to ISDS specifically.  As in many TPP chapters, the legal language can be dense and should be used with guidance from a good legal team that has experience decoding other trade agreement provisions.

When TPP parties speak of investments that are covered, they have a broad range of activities in mind, including: an enterprise; shares, stock and other forms of equity participation in an enterprise; bonds, debentures, other debt instruments and loans;  futures, options and other derivatives; turnkey, construction, management, production, concession, revenue-sharing and other similar contracts; intellectual property rights; licences, authorisations, permits and similar rights conferred pursuant to the Party’s law; and other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages liens and pledges.

The basic point of the chapter is to ensure that investors are granted greater certainty with fewer risks of government action that could negate or destroy their investments. 

Investors are also promised free transfers of things like profits, dividends, proceeds, and payments from the investment in and out of the member country.  Investors are also granted the ability to invest without being subject to certain performance requirements, such as a possible demand that investors export a certain amount, or include a certain percentage of local content, or transfer technology as a condition for investment permission. 

The rules create opportunities for firms, but are not a guarantee of success.  Nothing in the chapter promises profits or will compensate investors for normal business risks and losses. 

What is spelled out in detail, however, are the rules regarding what happens when a TPP member government directly or indirectly seizes property through expropriation (nationalization). Government can, it should be emphasized, continue to make policy in the public interest and render decisions that could invalidate investments.  For instance, a government can legitimately order the demolition of shops if these stand in the way of land needed for new roadways.  However, the TPP makes clear that the government must follow certain policy steps prior to expropriation and provide adequate compensation.   

In most of the rest of the TPP agreement, member states are legally bound to follow the rules.  If they do not, other member governments can challenge their behavior, using the provisions in the dispute settlement chapter. 

Investors also have recourse to another mechanism for ensuring compliance.  Section B of the chapter spells out in detail the rules around ISDS that allows investors to directly sue a government for breach of the agreement (illegal seizure of property).  The lengthy passages devoted to ISDS spell out in detail how investors can claim arbitration to resolve the dispute.

Investors, like all business owners, also have the right to use domestic court procedures to resolve issues.  However, if the government seizes property, it is not unreasonable to assume that some court systems in some countries might not view the matters of the case dispassionately or may hesitate before deciding against their own government.  In these situations, investors have the ability under the TPP to have the matter dealt with by arbitration. 

The concerns about ISDS generally involve a few points.  First, it means that domestic government decisions could be overturned by a foreign entity.  TPP officials were keenly aware of this possibility and have tried to ensure that governments maintain their right to regulate and make laws in the public interest while balancing the needs of investors.  Early versions of ISDS, as found in many of the nearly 3000 bilateral investment treaties (BITs) and free trade agreements (FTAs), had much less precise rules around the use of ISDS.

Second, firms could use ISDS to sue governments with great regularity.  In practice, this has not happened.  Companies do not launch complaints very often.  I would argue that ISDS is a bit like a “nuclear option.”  This is an approach that can only be used when all other approaches have been tried and found lacking, because a company that complains about a foreign government is not likely to find a hospitable environment for doing business in the country in the future. 

Third, ISDS can be used for any type of breach.  This is not correct for the TPP, which takes great care to detail the conditions that warrant the use of ISDS.  Annex 9B spells out in detail exactly what constitutes an expropriation for the TPP. 

Just like the services commitments discussed in yesterday's post, understanding TPP investment provisions requires carefully reading the specific text with the rules that apply to all 12 parties and then sorting through the annexes.  Note that Chapter 9 contains several short annexes in the text—several of which are country specific or applicable to, for instance, Peru, Mexico or Canada.

Investors or potential investors will also need to carefully review the country-specific annexes that list all non-conforming measures (NCMs).  Just like the services negotiations, investment commitments were made on the basis of a negative list.  If your sector or industry is NOT listed, it means you have access.

The list of NCMs for investment also contains a range of prohibited investments or restrictions on full access for TPP members.  Some of these restrictions may be problematic as the exemption can be deep and broad while others are likely to be of limited commercial significance. 

Canada, for instance, maintains the right to regulate the sales and marketing for air transportation services, as well as many rules around maritime services and transport, and maintains a possible cultural exception that allows the government to create rules or subsidize books, videos, music and other forms of cultural expression.  Malaysia reserved the right to review materials for consistency with domestic decency standards.

Japan has an odd commitment that allows it to create any measure it wants for “telegraph services, betting and gambling services, manufacture of tobacco products, manufacture of Bank of Japan notes, minting and sale of coinage, and postal services in Japan.”  Vietnam bundled together potential restrictions on the manufacturing of paper and buses with more than 29 seats.  The complicated nature of these commitments—combining things that may not appear logically connected—highlights the importance of reviewing the entire TPP document for hidden barriers.

Malaysia has scheduled a broad exception for Bumiputera policies.  These are the programmes that provide advantages for Malay citizens, somewhat akin to affirmative action programmes used elsewhere.  While considerably less sweeping, several other TPP members also lodged NCMs to protect native peoples.

How much these measures will affect your potential investment depends on whether you had hoped to manufacture buses with more than 29 seats or planned to operate a taxi or create movies you wanted to show in some local theaters.  For most investors, however, the TPP will grant significant new access to investment markets.  Equally important, the investment chapter and its provisions help ensure that the rules that allow such foreign investment will not shift overnight in the future.  For most investors, greater certainty and less risk are always helpful.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Restoring the Multilateral Trading System?

BEIJING—I have not participated in a workshop on the multilateral trading system in a while.  But this week, I was invited to Beijing by UIBE, the South African Institute of International Affairs, and the Cordell Hull Institute to discuss the restoration of a multilateral trade cooperation dialogue. 

The discussion this morning has focused on particularly on how to conclude the Doha Development Agenda (DDA) at the World Trade Organization (WTO).  While I knew there was a large gap between the multilateral system and what I would call  “the real world,” I was struck all over again by how wide it appears to have grown.

The workshop opened with some remarks by one of the best WTO trade ambassadors I have ever met—savvy, knowledgeable, and experienced.  He discussed what was on the table for discussions in Geneva and urged WTO members to work together to be as cooperative and accommodating as possible to get the round done. 

We’ve been meeting with 4-10 companies a week since we set up the Asian Trade Centre last August.  In all those meetings, I could not recall a single company mentioning the WTO.  Not once.  These are meetings with some of the biggest companies in the world as well as some of the smallest.  All are active in Asia, but are otherwise engaged in a wide range of economic sectors from manufacturing to services to investment and finance.  They are nearly all oriented outward, in that they either already trade across borders or would like to do so.

No one has raised the WTO. 

But it actually gets even worse.  I am similarly struggling to think about any of the companies mentioning any of the issues under discussion or negotiation in Geneva.  Of course, companies that face tariff barriers, for example, will perhaps discuss the lowering of these obstacles.  But they do not look to Geneva to solve these problems.  Partly this is because they have given up after waiting so long for an outcome from talks that started in earnest in 2001 building on an agenda started even longer ago.  This problem has been compounded by the fact that many companies think that the tariff cuts they might want are unlikely to come from the resolution of the DDA. 

Many of the issues that companies raise repeatedly as major challenges, like incompatible standards, labeling barriers, complex domestic rulings at borders, opening of services markets, inadequate protections of investments, and repeated backsliding from existing commitments in some markets, are not on the table at all.  They were either not on the agenda in the DDA or, in some cases like competition policy, were tossed off the list early on.

Again, I would argue that the situation gets worse.  It is not just that these issues are not on the agenda, but there seems to be no desire to put most of these items on a future agenda either.  For example, many of the least developed countries (LDC) often argue that the WTO agenda has to include provisions to help the poorest members of the system compete.  Most of the issues mentioned in my company discussions are likely to be viewed as “too hard” or “too complex” or “too biased in favor of developed economies” and would not be helpful to LDC members.  Thus the very issues that may be necessary to get companies reengaged are likely to be kept off the agenda in the future. 

It’s also not only the least developed members that may make these sorts of arguments.  There are all sorts of members in the “developing” country basket who would and will make similar complaints.  Recall that, unlike the LDC classifications that are set by the United Nations, WTO members are allowed to self-certify as developed.  This means that countries like Singapore and South Korea remain, officially, developing country members in Geneva. 

Of the 161 members of the WTO, the vast majority are now classified as developing.  Nearly a quarter of the membership are LDCs.  Clearly, their needs and interests are important and need to be considered in setting the rules and outcomes of the WTO.

My own bias (or at least one of them) is that the global trading system ought to be beneficial for trade.  This means that it is critical that company interests be placed front and center in creating a trade agenda.  Other issues certainly matter and do play a role, but ignoring the needs of business in this century is not a recipe for multilateral success either.  How can multilateral trade agreements better provide the platform for businesses of all sizes in all members to engage in global trade arrangements?

Over the years, lots of very smart and clever people have suggested methods to bridge gaps in the system.  These range from restarting dialogue in Geneva in a non-negotiating setting to tweaking the rules for decisionmaking to adjusting the agenda by grouping issue areas differently in the hopes of overcoming entrenched divisions between members.

Yet, listening to the range of interests just around this table in Beijing presented by some of the best global trade policy experts, I can clearly see why governments that have options are increasingly just leaving the multilateral system behind.  It does not appear to be possible to move on and address the issues that matter in the real world until the past agenda is completed.  But this past agenda is largely irrelevant to many key potential stakeholders.  Thus, if I were a government official, I am not sure why I would invest important political capital in pushing through a potential deal in Geneva that my own stakeholders are largely not interested in supporting.

This has been, frankly, a very depressing morning.  I think I can make a powerful argument for why trade cooperation at the multilateral level is best.  The WTO rules serve as the foundation for every bilateral and regional trade deal.  Transparency and non-discrimination remain key fundamental principles.  Global trade rules benefit the largest number of people in the greatest set of members.  It helps companies—especially the smaller firms that struggle to make sense of a complex, overlapping world of smaller bilateral and regional deals.  Global trade can serve as a driver for economic growth. 

The race to regional agreements will leave many potential participants on the sidelines.  As I frequently say, not every country is an attractive dance partner when searching for new agreement partners.  Thus, the stampede to smaller deals will leave some countries completely outside the dance hall. 

One participant just mentioned the worries of his country for trade and investment diversion as a result of regional and bilateral trade agreements.  I think this is a likely outcome, particularly from some of the deeper, more meaningful megaregional agreements.  To cite just one example, the creation of the Trans-Pacific Partnership (TPP) in textiles is likely to change trade patterns around textiles and apparel into the future.  Countries that are not members of the TPP will struggle to keep market share in major economies like the United States because their exports will not get the same benefits (reduced tariffs and other issues) as competitor, TPP-enhanced firms will receive.

So where do we go from here?  It is not clear at all, other than being depressing.  The situation is currently impossible—many members are refusing to budge on anything until the old agenda is addressed while other members have zero interest in the old agenda.  There is no way to satisfy these two positions.  As a negotiator, I can only reach agreement when there are some (even if quite small) overlapping interests.  I don’t see these overlapping interests taking place at the moment.

Perhaps, if I might make my own contributions to a growing set of reform proposals, it is that the business community must reengage with the multilateral system.  In this case, it is necessary to explain to officials in Geneva what are the issues that matter to large and small firms and why these concerns must be discussed in the WTO as the most suitable venue.  Companies have increasingly just left the building and it appears to me that their absence alone is not making the point.  No government officials are going to be ambitious if they do not think they have sufficient input and endorsement from businesses.  To get a trade agenda underway that matters to companies operating globally now, firms need to clearly and regularly articulate what ought to be on this agenda.

If this group of experts meeting in Beijing comes up with some outstanding, creative ideas of what else ought to be tried, I’ll write another post about it next week. 

***Talking Trade is a blog post by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***