Considering the TPP

With the recent fall in commodity prices, public debate in Canada has shifted to emphasize the need for the Canadian economy to insulate itself from price shocks by improving economic diversity. This includes a more robust conversation around Canada’s role in global value chains, and the country’s international trade relationships. Understandably, renewed interest in trade has drawn more attention to the recently signed Trans-Pacific Partnership (TPP).

As the TPP covers roughly 60% of the world’s economy, Canada’s inclusion in the agreement will allow its exporters to reach key Asian economies, while also protecting its trade relationships within North America. As Canada looks to improve its position in global value chains, it has made a concerted effort over the past ten years to improve its diversity of trade relationships through the signing of numerous trade agreements in Asia, Latin America, and Europe. This coincides with the expansion of the Trade Commissioners Service provided by the Department of Foreign Affairs and Trade, which aims at giving Canadian business points of contact abroad who can act as facilitators for trade and investment. The signing of the TPP follows this trend of “economic diplomacy” by improving Canadian access to rapidly emerging markets across the Pacific Rim, notably Singapore and Malaysia. The TPP also lowers tariffs in trade with Japan, Canada’s 4th largest export market.

With that being said, Canada’s trade relationship with the United States is by far and away its most important, as 76.8% of Canada’s exports find their way to the US market. Canada, the United States, and Mexico have enjoyed the gains from trade brought on by the North American Free Trade Agreement (NAFTA), which saw a massive increase in trade in goods and services across the region since its ratification in 1994. As of 2011, trilateral trade among NAFTA partners surpassed the US$ 1 trillion threshold, and in 2014 total intra-NAFTA trade reached 50% of total exports across the three partners. The market access afforded to Canada under NAFTA has been a major contributor to its export market, which is why joining the TPP was so crucial.

Many have noted that while the access to emerging markets and Japan was a key incentive for Canada to join the TPP negotiations, preserving its NAFTA benefits is definitely another driver. The defensive imperative for joining the TPP, particularly in terms of the automotive sector, may have very well forced the hand of Canadian and Mexican negotiators.

The automotive industry is an area where Canada and Mexico had to make concessions in order to ensure that their market advantages gained through NAFTA were not completely undermined. This is the main crux of the aforementioned defensive imperative for joining the TPP. Prior to the TPP, NAFTA partners agreed to local content policies that stipulated vehicles sold in North America must contain at-least 62.5% content from the three partner countries. The TPP is set to lower these thresholds to 45%. For vehicle parts the threshold is even lower, standing at 40% local content. If Canada and Mexico had not agreed to the TPP and its automobile industry policies, the benefits afforded to each country in the American market would have been significantly eroded.

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Ford Plant in Oakville, Ont

This change will likely cause adjustments in Canadian automotive manufacturing, but many industry experts have noted that while assembly might shift, Canadian automotive parts manufacturers may very well gain from the agreement. As someone who hails from beautiful Aurora, Ontario, a town dominated by the presence of Magna, one of the world’s largest automotive parts manufacturers, I see the potential to capitalize on Canada’s high skilled labour market in this space. Overall, if investment increases based on the attraction of Canada’s high value added manufacturing capabilities, the Canadian automotive industry may very well make considerable gains because of TPP, particularly compared to its competitors outside of the agreement. That however might require greater public sector involvement and investment in the industry, an idea which has come under fire recently after the Canadian taxpayers were called to bailout the automotive sector after 2008, and now Bombardier in 2016 . On the consumer front, recent studies of the agreement have argued that Canadian consumers stand to gain significantly because of the agreement, as Japanese automobiles will become considerably more affordable.

Debate and public discussion is heightened by the fact that the TPP was negotiated and agreed to in principle during the last Canadian election, which the incumbent Conservative Party government lost. This left the incoming Liberal Party government with the task of ratifying a trade agreement in the House of Commons which they had no hand in negotiating. While the Liberal Party has avowed a pro-trade platform, the fact that the agreement was finalized without their input has allowed the government to distance itself from the agreements constituent parts to some degree, while also giving the government space to emphasize the need for proper and robust consultation with Canadians on the deal’s specifics. The Canadian Minister for International Trade, Chrystia Freeland, has stated publicly that only after consultation and thorough economic study will the Canadian government ratify the agreement. Freeland has also requested an examination of the agreement by a parliamentary committee.

With that being said, Canada is not expected to ratify the agreement before the United States does. There are two reasons for this; the first being that the ratification process for the TPP requires that at least six countries – that account for 85 percent of the combined gross domestic production of the 12 TPP nations – must approve the final text for the deal to be implemented. This would necessarily require the United States and Japan to ratify the agreement for it to have a chance of passing the agreed threshold. This leads to the second reason we can expect a Canadian delay, gridlock in Washington makes many onlookers questions whether or not the TPP will gain enough support to pass through congress. Without American support, the TPP may be dead on arrival. Canada will still consider its options, and may indeed come to the conclusion after consultation and deliberation that the TPP is not in its best interest, but with American support being a non-starter, the Canadian government has ample opportunity to thoroughly consider the implications of the agreement.

One of the main reasons that more time and deliberation is needed when considering the TPP is that it isn’t your grandfather’s trade agreement. In making this a “21st Century” agreement, TPP countries have attempted to set the rules for not only traditional trade in physical goods and services, but also digital trade and data flows. The latter being deemed deep integration by some.

Traditional trade agreements have focused on the elimination of tariffs and non-tariff barriers in order to promote free-trade. Canada has numerous Free Trade Agreements, which for the most part focus exclusively on these barriers to trade. The TPP is no different in that the main thrust of the agreement is focused on the promotion of free-trade. Canada will make big inroads in a number of sectors, namely; agriculture, forestry, financial services, and industrial and consumer goods. Most of these gains will be made in the removal of tariffs on goods entering Japan, one of Canada’s largest importers. Canada had to give something in order to get something from this agreement too, notably the aforementioned changes to local content in the automotive sector, and changes to Canada’s supply management system for dairy, eggs, and poultry.

Not your Grandfather’s Trade Deal

While some would argue that removal of tariffs and barriers to trade like local content policies already constitutes integration, these types of provisions are not new and are covered in all of Canada’s previous trade agreements. The real difference is in the TPP’s inclusion of some “21st Century” provisions. These include provisions for patents, intellectual property, data flows, and e-commerce, as well as some provisions that impact more traditional issues such as environmental and labour policies.

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Michael Froman, U.S. Trade Representative 

Beginning with two largely uncontentious sections, the TPP includes provisions for both labour and the environment. On labour, the TPP establishes enforceable labor standards that must be met by all TPP countries, which are in line with the International Labor Organization’s (ILO) Declaration on Fundamental Principles and Rights at Work. These labor standards include the freedom to form unions and bargain collectively; prohibitions against child labor and forced labor; requirements for acceptable conditions of work such as minimum wage, hours of work, and safe workplace conditions; and protections against employment discrimination. These requirements will help to bring labour standards to emerging markets across the TPP region, while also ensuring that employees in developed signatories to the agreement are not at a grossly disproportionate competitive disadvantage.

On the environment, The TPP agreement upgrades NAFTA, by putting environmental protections within the main agreement, rather than side agreements that lack fully enforceable obligations. The TPP requires all members to combat wildlife trafficking, illegal logging, and illegal fishing, as well as prohibit some of the most harmful fishery subsidies and promote sustainable fisheries management practices. TPP also requires that the 12 countries promote long-term conservation of whales, dolphins, sharks, sea turtles, and other marine species, as well as to protect and conserve species like rhinos and elephants. And TPP cracks down on ozone-depleting substances as well as ship pollution of the oceans, all while promoting cooperative efforts to address energy efficiency. While many will praise the agreements environmental provisions, some advocates have argued that investor state settlement dispute mechanisms may allow for firms to challenge country level regulation, which may detract from environmental aims (a topic too large to go over in detail here).

The 21st century aspects of the TPP include copyright term extension, patent term extension, internet service provider copyright provisions, data flow provisions, digital product provisions, and e-commerce provisions. Here are just a few of the points of contention brought up by the TPP’s non-traditional provisions:

Copyright Term Extensions

For Canada, the TPP will require that Canadian legislation on copyright change from life of the author plus 50 years, to life of the author plus 70 years. This is in line with the American legislation that this portion of the TPP was modeled after. Some have argued that extension of copyright will cost consumers, as fewer goods will enter the public domain each year, however the flip side to that is Canadian copyright holders will be able to profit from their works for longer. At a high level, these extensions do not make a considerable difference in consumption of copyrighted material, as the demand for works entering the public domain is marginal. Many will try to make mountains out of mole hills with this issue, and I just do not see it as a deal breaker.

Patent Term Extensions

The TPP will grant patent term extension to patent holders that incur delays in processing of their patent applications at the patent office, and specifically for pharmaceutical patents, extension owing to delays in obtaining marketing or regulatory approval. Critics argue that this will lengthen the time under patent for products like pharmaceuticals, which will increase the already growing costs of pharmaceuticals in Canada. Others will argue that this ensures that research and development costs can be fully recovered by firms seeking to develop new products.

The TPP also includes patent extensions on so called “biologics”, pharmaceuticals that involve complex molecules that are made of biological sources within a living system. The United States sought to have a 12 year patent protection put in place for biologics, but the final agreement gives patent holders 8 years of protection. This is in line with existing Canadian patent law, but some advocacy groups argue that even this reduced protection period is too long and makes this class of medicines too expensive for consumers in developing countries. Here I think advocates may be onto something, particularly on the impact this may have on drug prices in this country, which have outpaced many other developed nations. I am wading into my ignorance here, but many people in this space have raised concerns about how even generic drugs are currently being targeted for price increases in Canada and elsewhere, so the impact of the TPP in this area is something that should be of great interest to even average Canadians if the deal is ratified.

Notice and Notice vs. Notice and Takedown

The TPP will require internet service providers to address allegations of copyright infringement on their networks and sites by requiring TPP countries to comply with the United States’ Digital Millennium Copyright Act (DCMA) standards. DCMA has a system of “notice and takedown” wherein copyright holders who believe that their intellectual property is being used without their expressed consent can send a notice to service providers requiring such content be taken off their sites and or networks. Service providers comply so as to avoid being brought to court over copyright violations. In Canada, copyright holders have the right to send a notice to service providers, who then pass it on to their consumers, but the immediate recourse of takedown is not built into Canadian legislation. Canadian copyright holders must take such actions to court, and may use the notices as evidence in their case. Canada passed legislation to preserve this prior to the TPP, as the TPP has carve outs that allow countries with established systems to keep them even after ratification, however some in Canada have argued that this system has the potential to weaken the online privacy of individuals in the TPP region and as such should not have been included in the agreement. Copyright holders view it as necessary in the face of growing online piracy. This is an area where the US was able to extend its policy influence. Luckily Canada had regulations in place before the deal was agreed to in principle so we will be exempt from such policy laundering, but other countries won’t be so lucky.

Data Localization

The TPP has provisions that restrict the ability for ratifying countries to require data localization. Article 14.13 of the text gives restrictions on requirements that local computing facilities be preconditions for business to be conducted in a given country. Essentially, this provision restricts the ability for countries to require that “server farms” or data centers be located within their borders as a precondition for conducting business. For example, this would restrict the Canadian government from requiring that all Canadian user data on sites like Facebook or Google be housed in data centers in Canada. However, there are carve outs for government data and financial services, as these constitute systemically important data flows. Proponents of free data flows argue that data localization limits the ability to transfer data freely across jurisdictions, and places high barriers to entry for companies wishing to offer services to international clients, which ultimately hurts consumers. Privacy advocates on the other hand will argue that data localization is necessary to ensure that their information is not easily accessible to foreign governments and or corporations. After the Snowden leaks, I’m increasingly tempted to side with localization, although I understand where the proponents of data flow liberalization are coming from. Again, wading into my ignorance, but I have reservations.

Where do we go from here?

With the Canadian economy looking for greater diversity, and new markets for its goods and services, the Trans Pacific Partnership offers a multitude of market opening opportunities. While some will argue that the impact on Canada’s automotive sector, supply management system, and patent and copyright regulations are too high a price to pay for such opportunities, on balance Canada has both offensive and defensive imperatives for joining the TPP. In terms of offensive, market opening imperatives, access to agriculture markets in Asia, as well as reduced tariffs for industrial and consumer goods will help Canada to exercise its comparative advantage in those sectors. Additionally, the service sector will also have new market opportunities that were previously unavailable to it. On the defensive side, losing market advantages gained under NAFTA would have been much more harmful to Canada’s automotive sector than a revamping of the local content policies. Furthermore, the TPP may actually increase investment in this sector which may make the industry more competitive in the future, especially vis-à-vis competitors in Europe and elsewhere.

With that being said, I think the real concern when thinking about the TPP is what the future of trade looks like, and furthermore what the future of the Canadian economy looks like. I have lots of questions and concerns about what our automotive sector will look like when Google rolls out its almost inevitable fleet of driverless cars. I wonder what shifts and redistributions will take place as we continue to automate our manufacturing sector. When we talk about automation, we are talking about the removal of tasks from a job, but undoubtedly that task automation also comes with a shift in the structure of our labour force. Sure, we might need technical workers to ensure the machines are running, but the displacement of lower skilled labour is something we need to consider. And in terms of data flows, how far are we willing to expose ourselves to surveillance conducted by the United States? Without the commitment of the US to ensure that the privacy and security of both American and non-American data passing through US based servers is in line with liberal democratic values (and basic decency to some degree) I understand why some non-US firms and consumers are hesitant to back away from the data localization fight.

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Google’s adorable driverless car

The latter point is also illustrative of the real future of trade, and trade agreements. Sure, physical goods and services will always be traded. The fact is we in Canada can’t grow coffee, and maple syrup isn’t available in Costa Rica without exports from Quebec. But we need to strongly consider the rules we are creating for not only the future of trade, but also the digital economy. A recent McKinsey Global Institute study shows that data globalization has added roughly US$2.8 trillion to global GDP over the last ten years. The same study shows the plateau in the flow of trade in physical products and services, and an incredible rate of growth in data flows between countries. If we lock in bad policies, we lock in the effects they will have on an increasingly important part of not only Canada’s economy, but the global economy. To that end, I fear that while the US policies have done well to boost digital economic development south of the border, some of the policies in the TPP may expose Canadian consumers and firms to unpalatable privacy issues that are apt to change the behest of US domestic politics. With that being said, the rise in personal encryption may very well do away with many of my concerns about the privacy issues related to these data flows. Again, wading into my ignorance here.

On the whole, I am cautiously optimistic about the TPP, but it is important to consider whether or not all of the provisions are beneficial to end consumers, and how trade agreements should be thought of in the future. The TPP is unique for Canada because of the involvement of the US, but as we look to ratifying CETA, and the similar questions brought up about that trade agreement with regards to “21st Century” provisions, as Canadian citizens we should be paying more attention to what this could mean for our future. Particularly as we look to stay competitive in the 21st century.

 

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