services

It's Alive and Kicking: Preparing for TPP11 in 2018

Proving once again that good ideas cannot be killed, the Trans-Pacific Partnership (TPP) is ready to move into force as soon as next year. Companies had largely given up on the TPP after the withdrawal of the United States.  Now firms will need to scramble to figure out how the agreement matters to their business and what steps they should take to maximize the opportunities and minimize the risks arising from the most important trade agreement in decades.  What makes the TPP so relevant is the deep, interlocking nature of the commitments.  Unlike other free trade agreements (FTAs), the TPP doesn’t simply open up trade in some goods or partially address services or investment.  It manages to better reflect the way that firms actually structure business operations today.  It will allow companies to more seamlessly move goods, services, and investments between and across TPP member markets.  This benefits not just the biggest firms that have always had advantages of scale, but smaller firms that often struggle to sort out complex rules in trade deals. 

Advice to RCEP Officials

Perth:  The talks in Perth between the 16 governments negotiating a free trade agreement, the Regional Comprehensive Economic Partnership (RCEP), across Asia represent a curious mixture of building momentum for closure at the end of the year and a growing realization of the distance that has to be crossed to reach the finish line. 

On issue after issue, officials said that they were working towards ambitious goals but then went on the discuss the diversity of members, the complexity of the issues, the challenges of building a suitably enabling environment and so on. 

Each qualifying statement is both true, of course, and disheartening.  There is not much point in crafting yet another trade agreement in Asia that does not really respond to the needs of the business community. 

In Perth, the East Asian Business Council (EABC) got to present their recommendations to the Trade Negotiating Committee (TNC).  This is the top-level negotiating group for RCEP.  EABC also offered up a survey done by JETRO of businesses across the region that highlighted many of the problems companies currently have using existing FTAs.  These challenges will be familiar to any business operating in Asia—uncertain information, lack of benefits, hard to use, and so forth.

For RCEP to avoid making the same mistakes, it has got to involve more businesses into the process.  Allowing the EABC to present recommendations on behalf of companies is a good start.  Australia also included a number of what it terms “stakeholder” events for Perth.  At these sessions, a handful of companies were allowed to present information to different groups of officials. 

The total number of companies represented, however, remained microscopic.  Given the difficulties that businesses often have in getting information exchanged at the domestic level with government officials, it is not good enough to say that officials in the room already know what businesses need or want or do not need or do not want. 

RCEP is meant to close by the end of this year.  Leaders have said it shall be so and have already extended the deadline once.  To do so again would, apparently, be unacceptable.  

This is the truly difficult part of RCEP.  Negotiations are, apparently, accelerating.  But the gaps are still wide and the business community as a whole is going to be very disappointed in the outcomes if the agreement closes without crafting an agreement that is helpful in making it easier to do business across Asia for companies both large and small. 

Officials may decide to hive off a portion of the agreement and do an “early harvest” for 2016.  This is a time honored ASEAN tradition.  It would allow leaders to declare a partial victory in RCEP, meet the deadline, and continue negotiating. 

To be frank, however, it is not really clear what might be harvested.  Of course it is only April and there is still time to conclude more chapters.  At the moment, it looks like only the economic and technical cooperation chapter might be sufficiently teed up for finish by the next round in New Zealand in June.  Probably an SME chapter could be concluded, as such chapters are mostly arm waving around the importance of helping smaller companies with limited commitments for member governments. 

To make the package of benefits better, some tariff reductions will probably be announced.  My favorite examples, of course, of snow removal equipment, will undoubtedly be included in the tariff lines for early harvest.  Makers of snowshoes, snowplows and snow skis will be delighted with the zero tariffs coming from RCEP. 

Given the concentrated levels of trade between member countries, as shown in a new Policy Brief we have just drafted, limited tariff reductions in RCEP (below 90%) will deliver no new net benefits for most businesses.  Market access negotiations will need to continue—and industry will have push hard—before sectors like textiles can expect to see any benefits from this new deal.

The services negotiations are proceeding on the basis of a positive list (except for Australia).  This means that only sectors listed for opening will actually be opened for RCEP member firms.  It could be possible to find a handful of service subsectors that might be gathered up for the early harvest package. 

Positive lists also come with the modes of supply drawn from the World Trade Organization, so RCEP members can open up sectors like travel and tourism, but do so only, for example, for mode 2—for their own citizens to travel to other RCEP countries to use travel and tourism services.  In any case, it would be possible to craft an early harvest list for services that replicate commitments made already at the WTO or within existing ASEAN + 1 deals for most members. 

Investment, by contrast, is done on a negative list basis.  All sectors will be opened for investment, except for those listed.  This is generally more challenging for officials to do the first time, as they have to think more carefully about what specific reservations they might have.  Hence, an early harvest package may have extremely limited investment provisions.  (And, if companies do not push, the final agreement may also be quite modest.)

In short, an early harvest would likely offer up only the most limited benefits for companies while officials continue to wrestle with the hardest issues. 

However, this might actually be a desirable outcome for businesses and certainly, it should be seen as better than a race to conclude the entire agreement by the end of this year given the current status of talks.  As of now, negotiations are not at the point where most companies will be satisfied with the RCEP outcomes.

Recall again that officials are only going to meet once to craft an Asian trade agreement for a good long time—once RCEP is concluded, they will not meet again to have wholesale revisions.  (They might, some people fantasize, turn RCEP/TPP into the Free Trade Area of the Asia Pacific.)  So this is the trade deal that will stick in the region for at least a decade.  It very much matters that they get it right the first time.

We have, as usual, been heavily focused on e-commerce.  We believe this is the most important area for RCEP as the countries involved have a novel opportunity to be innovative and forward looking, especially for mobile.  An ambitious outcome here will unleash new opportunities for smaller firms across the region.

But e-commerce is also challenging as it is cross-cutting and requires sustained attention across different chapters.  We recommend giving responsibility to the e-commerce working group for the topic and letting them ensure that e-commerce provisions are included at the end of the day in various specific chapters, like intellectual property rights or customs or services, that facilitate trade for smaller firms in the e-commerce space. 

To really push RCEP officials to be more ambitious, however, businesses will have to urge governments in and across the region to take the entire project seriously.  This is an important opportunity for companies.  It should not be wasted. 

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

 

Three Reasons for the WTO

As global members of the World Trade Organization (WTO) struggle to figure out where the multilateral trade system ought to go in the future, it is worth reposting an earlier brief on why we all need the WTO to be healthy.

The WTO is needed for at least three broad reasons: for businesses struggling to operate in an increasingly complex environment, for resolving disputes around trade, and for the smallest and most vulnerable countries in the global system.

To address the first issue, consider a question posed to me by my chiropractor.  He wanted to know whether or not trade agreements have made it easier for him to operate a chiropractic clinic in South Korea and Taiwan and whether it is possible to train people to deliver this service in both places. 

This sounds like a relatively straightforward question.  But answering it took me several hours and highlighted the difficulties that companies (and individuals) have in using the existing system of trade agreements. 

To begin with, services like chiropractic care were barely opened in the last, Uruguay round of multilateral trade talks.  Since medical services are often considered a sensitive sector, few governments made any commitments at all.  Chiropractic services do not appear to have been opened for foreign trade by most governments in the WTO.

This means that determining of these markets are open requires examining various preferential trade agreements (PTAs) to see if they have different rules.

Taiwan (Chinese Taipei), thus far, has only two PTAs with New Zealand and with Singapore. Taiwan appears to have taken up quite broad exceptions for medical care: “Foreigners are not allowed to set up clinics, pharmacy, physical therapy clinic, occupational therapy clinic, clinical laboratory, medical radiation clinic, dental laboratory, nursing institution, midwifery institution, hearing therapy clinic, speech therapy clinic, psychological therapy clinic, psychological counselling clinic, or other medical care institutions in Chinese Taipei.”

Companies can often use different PTAs to deliver services. South Korea has signed many PTAs and examining them all takes a lot of time.  South Korea and Singapore are covered by the ASEAN + Korea agreement, which does not appear to open up chiropractic care.   

The most comprehensive agreements signed by Korea have been with the European Union and another bilateral with the United States.  So determining whether the sector is likely to have been opened anywhere is made easier by starting with the most likely suspects.

The situation is still complicated.  The Europeans and the Americans negotiate services differently.  Understanding whether or not chiropractic care is open depends on knowing which approach has been used to schedule (or open) sectors. 

For the European agreement, if chiropractic care is listed, it means it might be opened for foreign competition from EU firms.  However, determining the extent of the openness requires both knowing and understanding four different modes of supply, as different methods for delivering the service might be differently opened.  Then, it requires knowledge of the apparently backwards use of terminology to determine if what appears to mean open really does mean that the sector is open.  (If it says “none” it means fully opened, with no limitations, while "unbound" means no commitments have been taken to open the market and government may impose limitations.)

In the American bilateral, if chiropractic care is NOT listed, it IS opened for foreign competition from American doctors.  Thus, my doctor would have had to find this agreement online, found the relevant annexes for services in the bilateral, and searched for his sector.   However, having not seen the service listed, he might have assumed it would be closed.  But this does not appear to be true in the case of chiropractic care into South Korea.  This situation is, to put it mildly, confusing for a company to sort out.

This takes us back to the need for robust agreements at the multilateral, system level.  A deal that includes 160 countries is infinitely easier to use for companies than a thicket of sometimes overlapping bilateral or regional deals.  It would have been far better for my chiropractor to only have to visit one place to discover the commitments for this service across every WTO member.  (This would be true even if not every member had identical pledges, since they would all at least be in one place with one method of understanding the outcome.)

A second good reason for wanting the global trading system to remain healthy has to do with what is often called the “crown jewel” of the system—the dispute settlement mechanism (DSU).  One thing the WTO has continued to do for the past 20 years while the negotiating function has been stuck is to adjudicate disputes over trade. 

The DSU allows one government to sue another if the rules outlined in the agreement have not been properly followed.  There is plenty to say about this system, but for now, the key point is that the rules and commitments that member states must follow at the global system are getting increasingly archaic.  A government can only sue in areas where a rule actually exists.

As larger and larger segments of the modern economy, including vast swathes of services, new goods, investments and other important aspects of economic life are outside the existing rulebook, the DSU will also become less and less relevant to companies and governments.  It is not possible to use the WTO DSU to argue about provisions contained in preferential trade agreements (unless a violation of the PTA rules is also mirrored by a violation in global rules). 

Finally, while countries are increasingly finding it necessary to open up areas like chiropractic care in bilateral or regional settings, this stampede is deeply problematic to the smaller and poorer countries in the international system.  Not all WTO members make attractive PTA partners.  For some countries, there is just not enough trade between parties to make it worthwhile to negotiate a PTA.  For the excluded parties, they are increasingly stuck with the older, out-of-date rulebook at the WTO and without the preferences that most of their potential rivals might receive into various trading partners.   This puts them further and further at a disadvantage, making it more likely that they remain stuck on the periphery. 

For at least three reasons then—ease of use by companies, increasing challenges in managing disputes and marginalization of the smallest and poorest—it is important that the global trading system continue to function.  Unfortunately, fixing what ails the WTO is a challenging task.

---Increasingly, countries are using regulatory barriers of all types to protect domestic markets.  However, the impact of such policies may be going well beyond what officials intend by dramatically reducing inward foreign investment in unrelated sectors as well.  Join us at the American Chamber of Commerce in Singapore on Monday, March 7, 9:00 am for a panel discussion on “What Investors Want:  Creating the Conditions for Start-Up Success.”  See you there!

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

Initial TPP Impressions: Trade in Services

While market access for goods in the Trans-Pacific Partnership (TPP) remains subject to some exceptions and complications, the TPP exceeds my expectations for the quality of the services commitments. 

TPP member states might have been expected to exclude some services subsectors, but generally this did not happen.  The services elements of the TPP may turn out to be the most ambitious aspect overall.

Services are increasingly important to today’s globalized economy.  Our research shows that even for manufacturing firms, services account for somewhere between 30-70 percent of the total value embedded in supply chains.  Failure to provide market access with minimal conditions attached would have strangled the efforts of many firms trying to compete across the TPP. 

Services are also a critical mechanism for smaller firms or companies in more remote, geographically distant locations to plug into larger supply chains.  Even micro enterprises can deliver services via e-commerce platforms.

Trade in services is divided into 12 sectors and approximately 160 subsectors, ranging from business services to construction to travel to retail.  In many Asian free trade agreements (FTAs), services commitments are woeful.  Members have opted to keep many sectors and subsectors closed to foreign participation or have opened only areas with limited or even zero commercial importance. 

The TPP does not take the same approach.  Companies should find it easier to deliver services across member states, particularly because the TPP does not allow, for example, quantitative limits to be placed on services.  In other FTAs, members frequently allow in foreign medical clinics, but may limit the total number of such clinics to one or two facilities.  Or caps may be placed on the total number of employees or boards of directors. 

In the TPP, by contrast, foreign companies can deliver services without having to have a representative office or be a resident to serve the market.  The TPP requires that members treat foreign service suppliers just like local service suppliers.

To understand TPP commitments, it is necessary to do two things.  First, the text of Chapter 10 applies to all TPP members.  This section lays out the rules and regulations that member states agree to follow for services.  Note that services and investment provisions are often bound together, particularly in the annex schedules, as some services are difficult to deliver without a presence locally.

Second, in cases where members know that they are not in compliance with these sweeping rules and have no aspirations to change the domestic situation to come into compliance, members can schedule, in their annex, any areas where they are out of line with the incoming rules.  This is called a list of non-conforming measures (NCMs) and they are subject to negotiation among all 12 parties.

Reading these schedules to help determine what services can actually be supplied to any TPP market from another TPP market is trickier than it appears.  If your subsector is NOT listed, then it is opened for foreign competition from TPP partners. 

This mechanism for scheduling TPP openness is actually a far more progressive method than the one used in most other FTAs.  Under the “negative list” approach, members are obligated to open everything, unless they specifically note their objections in the annex at the outset. 

Using a negative list does two important things.  First, it ensures that new services are automatically opened for TPP competition without the necessity of tedious negotiations that might take years to conclude.  Second, it helps governments be more ambitious, since every exception to the rule has to be noted in full and new barriers cannot be easily created later. 

Negotiating on a negative list can be intimidating the first time officials try to use this approach.  The automatic response is to simply list all 160 subsectors as closed and then slowly, slowly peel off subsectors from the initial list as negotiations progress. 

Note that, mirroring World Trade Organization (WTO) handling of services, financial services and telecommunications have their own chapters in the TPP.  Both have long been regarded as “backbone” service sectors which warrants special handling.

Some TPP countries appear to have been extremely cautious in their scheduling and to hedge against potential problems and gain future policy space by claiming a broad NCM.  Note that, for some TPP members, these exceptions may not ever be used. 

In other countries, the NCM may not matter overly much, as they are taken in areas of likely limited interest to other members.  For instance, Japan requires that persons in the motor vehicle disassembling repair business must have a business in Japan.  Assuming that electronic repairs do not count, it could be hard to imagine how a person might disassemble a car from overseas.  Individuals engaged in specifying measurement instruments have a host of rules to continue to follow in Japan.

For countries like Vietnam and Malaysia that have never used a negative list before, I would have expected that the peeling off restrictions exercise would have still left an extremely long NCM list.  However, a glance at Annex 1 shows that both members largely matched the ambition levels of other partners. 

For example, Vietnam (like many other TPP member countries) will continue to have some restrictions in place on foreign lawyers.  Tour guides continues to be a sensitive area for some members, with limited (or no) foreign access. 

But an examination of the schedules also throws up some surprises.  Vietnam has an odd rule that appears to make it more difficult to open up a second (or more) retail establishment, although the measure is meant to expire within five years after the agreement takes effect.  Services attached to agriculture, hunting and forestry still require a local partner.  Major anniversaries in Vietnam must be marked with local film screenings only.  Canada has a surprising number of rules around owning duty free shops. 

My personal favorite—so far—is a rule that allows amusement park investors to come into Vietnam, but only if they invest more than US$1 billion.  Less than that and you are subject to onerous criteria that will likely to make it impossible to build the amusement park of your dreams.   

Other restrictions across TPP members could be more problematic, including a host of rules around broadcasting rights, some restrictions on services and investment in energy or mining, and rules on internal land and sea transport that can prevent TPP parties from delivering these services. 

Over time, it is possible that some of these restrictions will be relaxed.  In the meantime, if a country did not schedule a NCM, it cannot easily create a new one to block market access to TPP member countries in the future. 

In short, like other elements of the agreement, the basic texts have to be read carefully with the country-specific annexes.  While the TPP may appear to have extensive carve-outs or broad exceptions in some specific areas, these are actually significantly fewer in number and cover a handful of subsectors that may be viewed as commercially meaningful to some TPP members.  Certainly, compared to other agreements on services, the TPP may be setting the standard for high quality in this area.

[Note that Japan’s market access schedule for goods is now fixed—it no longer ends, as noted in my last post, at chapter 65 but includes all industrial goods.]

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

Bargaining Over Services in TiSA

This week, President Tabare Vazquez agreed to withdraw his country from ongoing negotiations over services.  Uruguay will now notify the other 24 members[1] of the Trade in Services (TiSA).

This presents a good opportunity to examine TiSA.  Negotiations got underway in 2013 out of a shared frustration with a lack of progress in global trade talks for services coupled with a desire to push forward new, better suited rules for today’s interconnected, globalized economy and to give services an improved platform for growth. 

Services are an increasingly vital part of international trade.  The Asian Trade Centre has been part of an ongoing research project to track how much of the content of manufactured items like auto parts, aircraft engines, printer dyes, outdoor jackets, watches, whiskey, or making a table comes from services.  The full project will be out soon, but what has been particularly striking from this case study research is how much value is tied up in services content.

We often think of goods as physical items only—something you can drop on your foot and have to transport across borders in trucks, trains or ships.  But it turns out that for many value or supply chains today, at least half and perhaps as much as 80 percent of the value of a good is actually derived from services.

Such services can include research and product development, managing human resources, cleaning, security, distribution, logistics, warehousing, retail, and even after sales service and repair. 

TiSA members together contribute more than 70% of global trade in services.  For most, services also constitute a significant portion of domestic output contributing substantial numbers of jobs and generating important revenue for companies both large and small.   

Despite the critical importance of services, global rules for services remain underdeveloped and often lacking.  In part this is because services are devilishly hard to see and measure. 

Take examples from the Asian Trade Centre.  Our brochure was designed by a graphic artist in Pakistan, connected to us through an Australian online platform (www.freelancer.com).  Our website is hosted by an American company (Squarespace) and this blog is distributed by a different US company (MailChimp).  [All are receiving unsolicited endorsements.]  The blog content is written by me sitting in my lovely office today in Singapore and distributed to readers all across the globe. 

So how would available data capture all these services?  The short answer is not very well at all. 

In the mid-1980s when government officials were trying to design the first batch of global rules to govern trade in services,[2] most of what I just described would have been unimaginable.  Or, rather, some of the services might have been possible but the methods of delivery, the scale and the scope would not.

Consider Freelancer.  This company currently brings together more than 16 million people in 247 countries to provide a wide range of services from software writing and data development to engineering and accounting.  Connections can happen instantly and millions of files, pages, images, and data points are moving around and across borders daily.

At the time of the Uruguay Round negotiations, however, officials could mostly imagine delivering services via post, land line telephones or, perhaps, fax machines.  Otherwise, the primary methods of getting services to travel across borders meant the movement of people—I might travel to another country for medical treatment or to deliver a stakeholder workshop in Korea for the next RCEP round (currently planned for October 14 in Busan, by the way!  Stay tuned for details).  Or I might invest directly in a company, or travel temporarily as a business employee of a big firm to set up a project.

In short, officials were struggling with how to categorize services and to understand how they might be delivered across borders.  Hence the rules they created in the 1980s and early 1990s were rather crude.  Whenever I have to explain to businesses how services are broken up in the rulebook, I am usually met with blank stares.  In addition, services commitments suffered because governments were reluctant to commit to much, as no one was entirely certain about what might happen.

This is a long way round to explaining why services were part of the “built in” agenda for the start of a new round of global trade negotiations.  These talks started in Doha, Qatar, in November 2001, and have been moribund for a very long time.

Countries that are active in services trade became increasingly unsatisfied with old rules and limited market access commitments.  Unable to push forward the broader global negotiations, a handful of key countries decided to start parallel talks outside the WTO in Geneva.  These parallel talks, now called TiSA, might eventually be brought back into the WTO.

I don’t have room here to delve into trade geek obsessions with how TiSA can be reconnected with the WTO, but suffice to say that officials are trying to craft an agreement that unleashes more economic growth for services for the members while remaining conscious of likely issues and interests from the broader community. 

After 13 rounds of TiSA, the jury remains out on how successful officials are likely to be in meeting their ambitions.  The basic idea is to continue to build on existing commitments at the WTO but expand market access and to try to reduce domestic level regulations that make it hard for services to be competitive.  For example, one goal is to try to get foreign service providers to receive the same treatment as domestic service firms as much as possible.  Many similar rules do exist in various free trade agreements.

Yet TiSA talks are challenging.  Uruguay just became the first country to withdraw from negotiations, citing concerns about its ability to regulate sectors like financial services and telecommunications.  Frankly, this is likely to be overblown, as officials do not give up their right to regulate easily and these sectors are seen as highly sensitive in most countries.  TiSA will not violate a government's right to regulate for health, safety, and environmental outcomes, nor will it alter all qualifications for service providers or allow for unfettered access to job markets.

In a rapidly changing environment, designing appropriate services rules are both necessary and difficult to do well.  We will have to watch and see how successfully TiSA manages the task.

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

[1] Remaining TiSA members include: Australia, Canada, Chile, Chinese Taipei (Taiwan), Colombia, Costa Rica, the European Union, Hong Kong, Iceland, Israel, Japan, Lichtenstein, Mauritius, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Republic of Korea, Switzerland, Turkey, and the United States.

[2] As part of the Uruguay Round negotiations in what was then the Global Agreement on Tariffs and Trade (GATT) and is now the World Trade Organization (WTO).