# The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/crs%3AR44489 ## Record - **Collection:** Congressional research report - **Document type:** CRS Report - **Published:** June 14, 2016 - **Citation:** R44489 ## Text The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress (name redacted), Coordinator Specialist in International Trade and Finance (name redacted), Coordinator Analyst in International Trade and Finance June 14, 2016 Congressional Research Service 7-.... www.crs.gov R44489 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Summary The Trans-Pacific Partnership (TPP) is a proposed free trade agreement (FTA) among 12 AsiaPacific countries, with both economic and strategic significance for the United States. The proposed agreement is perhaps the most ambitious FTA undertaken by the United States in terms of its size, the breadth and depth of its commitments, its potential evolution, and its geo-political significance. Signed on February 4, 2016, after several years of negotiations, if implemented, TPP would be the largest FTA in which the United States participates, and would eliminate trade barriers and establish new trade rules and disciplines on a range of issues among TPP partners not found in previous U.S. FTAs or the World Trade Organization (WTO). In addition, the TPP is designed to better integrate the United States into the growing Asia-Pacific region and has become the economic centerpiece of the Administration’s “rebalance” to the region. Congress would need to enact implementing legislation for the agreement to enter into force for the United States. Such legislation would be considered under Trade Promotion Authority (TPA) procedures, unless Congress determines the Administration has not met TPA requirements. TPP Members Currently, the TPP includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam, which together comprise 40% of the world’s GDP. TPP is envisioned as a “living agreement,” potentially addressing new issues and open to future members, including as a possible vehicle to advance a wider Asia-Pacific free trade area. The United States currently has FTAs with six TPP partner countries. Japan is the largest economy and trading partner without an existing U.S. FTA. Malaysia and Vietnam also stand out among TPP countries without existing U.S. FTAs, given the rapid growth in U.S. trade with the two nations over the past three decades and their generally higher level of trade restrictions. Potential Outcomes of TPP The TPP would provide several principal trade liberalization and rules-based outcomes for the United States. These include the following:       lower tariff and nontariff barriers on U.S. goods through eventual elimination of all tariffs on industrial products and most tariffs and quotas on agricultural products; greater service sector liberalization with enhanced disciplines, such as nondiscriminatory and minimum standard of treatment, along with certain exceptions; additional intellectual property rights protections in patent, copyrights, trademarks, and trade secrets; first specific data protection provisions for biologic drugs and new criminal penalties for cybertheft of trade secrets; investment protections that guarantee nondiscriminatory treatment, minimum standard of treatment and other provisions to protect foreign investment, balanced by provisions to protect a state’s right to regulate in the public interest; enforceable provisions designed to provide minimum standards of labor and environmental protection in TPP countries; commitments, without an enforcement mechanism, to avoid currency manipulation, provide transparency and reporting concerning monetary policy, and engage in regulatory dialogue among TPP parties; Congressional Research Service The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress    digital trade commitments to promote the free flow of data and to prevent data localization, except for data localization in financial services, alongside commitments on privacy and exceptions for legitimate public policy purposes; enhanced regulatory transparency and due process provisions in standardssetting; and the most expansive disciplines on state-owned enterprises ever in a U.S. FTA or the WTO, albeit with exceptions, to advance fair competition with private firms based on commercial considerations. The U.S. International Trade Commission (USITC) has estimated that the TPP would bring modest overall benefits to the U.S. economy once implemented, slightly increasing both output (0.15%) and employment (0.07%) above a baseline scenario without the agreement. According to the USITC study, most agriculture and services sectors would see expansions, while some manufacturing and natural resources sectors would be expected to contract relative to baseline projections as resources shifted within the U.S. economy. TPP Debate Views on the likely effects of the agreement vary. Proponents argue that the TPP is in the national interest and has the potential to boost economic growth and jobs through expanded trade and investment opportunities in what many see as the world’s most economically vibrant region. Opponents of TPP voice concerns over possible job loss and competition in import-sensitive industries. Other concerns include how a TPP agreement might limit the government’s ability to regulate in areas such as health, food safety, and the environment. The Obama Administration and others have argued that the strategic value of a TPP agreement parallels its economic value, while others argue that past trade pacts have had a limited impact on broad foreign policy dynamics. In analyzing the agreement and its implementing legislation, Congress may consider the agreement from several of these perspectives, as well as how the TPP promotes progress on U.S. trade negotiating objectives. Congressional Research Service The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Contents Introduction ..................................................................................................................................... 1 Background ..................................................................................................................................... 1 Congressional Consideration .................................................................................................... 2 TPP’s Strategic Context ............................................................................................................ 4 Economic Significance.............................................................................................................. 6 U.S.-TPP Trade and Investment .......................................................................................... 9 Relationship to Existing Trade Organizations and Agreements ............................................... 11 TPP and the WTO .............................................................................................................. 11 The TPP and Other Asia-Pacific Trade Agreements ......................................................... 12 Core Provisions ............................................................................................................................. 14 Goods ...................................................................................................................................... 15 Tariffs ................................................................................................................................ 15 Rules of Origin (ROO)...................................................................................................... 20 Textiles, Apparel, and Footwear ....................................................................................... 21 Motor Vehicles .................................................................................................................. 25 Services ................................................................................................................................... 29 Cross-Border Trade in Services ........................................................................................ 31 Express Delivery ............................................................................................................... 32 Financial Services ............................................................................................................. 33 Temporary Entry for Business Persons ............................................................................. 34 Telecommunications ......................................................................................................... 35 Stakeholder and Industry Views ....................................................................................... 35 Agriculture .............................................................................................................................. 36 Background ....................................................................................................................... 36 Specific Market Access Commitments ............................................................................. 38 Other Agriculture Provisions ............................................................................................ 40 Stakeholder and Industry Views ....................................................................................... 42 Government Procurement ....................................................................................................... 43 Intellectual Property Rights (IPR) ........................................................................................... 46 Investment ............................................................................................................................... 54 Labor ....................................................................................................................................... 60 Environment ............................................................................................................................ 62 E-Commerce, Data Flows, and Digital Trade ......................................................................... 65 State-Owned Enterprises ......................................................................................................... 66 Currency .................................................................................................................................. 69 Nontariff Barriers .................................................................................................................... 70 Technical Barriers to Trade ............................................................................................... 70 Regulatory Coherence ....................................................................................................... 71 Transparency and Pricing of Health Care Technology and Pharmaceuticals Annex ........ 72 Customs and Trade Facilitation ............................................................................................... 73 Other Provisions ...................................................................................................................... 74 Competition Policies ......................................................................................................... 74 Transparency and Anti-Corruption ................................................................................... 75 Trade Remedies................................................................................................................. 75 Development and Capacity Building ................................................................................ 76 Small- and Medium-Sized Enterprises ............................................................................. 77 Congressional Research Service The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Institutional Issues ......................................................................................................................... 78 Secretariat................................................................................................................................ 78 Dispute Settlement (DS) ......................................................................................................... 78 A “Living Agreement” ............................................................................................................ 79 Relationship to Existing Agreements ...................................................................................... 80 Issues for Congress ........................................................................................................................ 80 Comprehensive, High-Standard Agreement ............................................................................ 80 Role and Timing of TPA and Negotiating Objectives ............................................................. 81 Potential Economic Impact ..................................................................................................... 81 The TPP and U.S. Trade Policy ............................................................................................... 82 Strategic Considerations.......................................................................................................... 82 Potential Consequences of Not Ratifying the TPP .................................................................. 83 Implementation, Future Expansion, and Institutional Issues .................................................. 83 Conclusion ..................................................................................................................................... 84 Figures Figure 1. Trans-Pacific Partnership Countries ................................................................................. 3 Figure 2. U.S.-World, TPP, and FTA Partner Merchandise Trade ................................................... 9 Figure 3. Largest U.S. FTAs .......................................................................................................... 10 Figure 4. Existing FTAs among TPP Countries ............................................................................ 13 Figure 5. U.S. Collected Duties and Effective Duty Rates ............................................................ 17 Figure 6. TPP Tariff Commitments between the U. S. and Non-FTA Countries ........................... 19 Figure 7. Growth in Global Data Flows ........................................................................................ 65 Tables Table 1. TPP Country Tariff and Trade Agreement Statistics ........................................................ 16 Table 2. TPP Signatories with Vehicle Production ........................................................................ 25 Table 3. Tariff Elimination Schedule for Selected Food and Agricultural Products in Selected TPP Countries .............................................................................................................. 40 Table A-1. U.S. Goods Trade with TPP Countries, 2015 .............................................................. 85 Table A-2. U.S. Private Services Trade with TPP Countries, 2014 ............................................... 86 Table A-3. U.S. Foreign Direct Investment (FDI) with TPP Countries, 2014 ............................... 86 Appendixes Appendix. ...................................................................................................................................... 85 Contacts Author Contact Information .......................................................................................................... 88 Congressional Research Service The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Introduction The Trans-Pacific Partnership (TPP) is a proposed free trade agreement (FTA) among the United States and 11 Asia-Pacific countries. The U.S. Trade Representative (USTR) has described it as a “comprehensive and high standard” agreement, designed to eliminate and reduce trade barriers and to establish and extend the rules and disciplines of the trading system among the parties to the agreement (see Figure 1).1 If implemented, it would be the largest plurilateral FTA by value of trade, encompassing roughly 40% of world GDP, and could serve further to integrate the United States in the dynamic Asia-Pacific region. As a “living agreement,” it has the potential to negotiate new rules and expand its membership. It could also mark a shift to the negotiation of “mega-regional” trade liberalization agreements in lieu of bilateral FTAs and broader multilateral trade liberalization in the World Trade Organization (WTO). The 12 countries concluded the TPP negotiations and released the text of the agreement in late 2015. Trade ministers from the TPP countries signed the final agreement text on February 4, 2016, and several countries are seeking to ratify the agreement this year. TPP draws congressional interest on a number of fronts, and Congress must approve implementing legislation for U.S. commitments under the agreement to enter into force. The TPP would be eligible to receive expedited legislative consideration under Trade Promotion Authority (TPA), P.L. 114-26, unless Congress determines the Administration has failed to advance TPA negotiating objectives, or has not met various notification and consultation requirements.2 Furthermore, the TPP may affect a range of sectors and regions of the U.S. economy and could influence the shape and path of U.S. trade policy for the foreseeable future. It may also serve strategic goals of the United States by strengthening regional alliances and extending U.S. influence in the Asia-Pacific region. This report examines the key provisions of the proposed TPP, related policy and economic contexts, and issues of potential interest to Congress. Background The precursor to the TPP was the Trans-Pacific Strategic Economic Partnership (P-4). It was conceived in 2003 by Singapore, New Zealand, and Chile as a path to trade liberalization in the Asia-Pacific region—Brunei joined in 2005—and the P-4 agreement was concluded in 2006. U.S. trade policymakers took notice of the P-4’s relative ambition as a possible template for a wider Asia-Pacific free trade agreement. President Bush notified Congress of his intention to negotiate with the existing P-4 members on September 22, 2008, along with Australia, Peru, and Vietnam, on December 30, 2008, as required under past and current TPA. President Obama recommitted to the TPP negotiations in November 2009 and renotified Congress of the Administration’s intention to negotiate the renamed Trans-Pacific Partnership. In October 2010, the TPP participants agreed by consensus to the inclusion of Malaysia as a negotiating partner. The negotiating partners announced a framework for the agreement at the sidelines of the AsiaPacific Economic Cooperation (APEC) Ministerial in Honolulu, HI, November 8-13, 2011. Thereafter, Canada, Mexico, and Japan consulted with the existing TPP partners on joining the 1 TPP negotiating parties include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. 2 For more information on TPA see CRS In Focus IF10297, TPP-Trade Promotion Authority (TPA) Timeline, by (name r edacted) ; CRS Report RL33743, Trade Promotion Authority (TPA) and the Role of Congress in Trade Policy, by (nam e redacted) ; and CRS Report R43491, Trade Promotion Authority (TPA): Frequently Asked Questions, by (name r edacted) and (name redacted) . Congressional Research Service 1 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress negotiations. The North American Free Trade Agreement (NAFTA) partners—Canada and Mexico–acceded to the negotiations in December 2012, followed by Japan in July 2013.3 During the course of the negotiations, others countries, such as South Korea, Taiwan, and the Philippines expressed varying degrees of interest in joining, but the parties decided to conclude the agreement before contemplating new members. The agreement must be ratified by all parties to enter into force in the first two years from its 2016 signing. Thereafter, it requires at least six countries representing 85% of the bloc’s 2013 gross domestic product (GDP) to accede to the agreement for it to take effect, thus requiring ratification by the United States and Japan for entry into force to occur. Congressional Consideration The Bipartisan Comprehensive Trade Priorities and Accountability Act of 2015 (P.L. 114-26), the current grant of TPA (TPA-2015), sets the procedures governing congressional consideration of the proposed TPP. TPA is the authority by which Congress, for specific periods of time, sets trade negotiating objectives, establishes notification and consultation requirements, and enables implementing legislation for reciprocal trade agreements to be considered under expedited procedures if it meets certain statutory requirements. TPA-2015 was enacted into law on June 29, 2015, and expires in 2018, with a possible extension to 2021. Legislation to implement the TPP can be considered under the expedited procedures of TPA, since the TPP was signed during the time TPA has been effect. The TPP could be considered under expedited procedures during this Congress, the next Congress, or even after the present grant of TPA expires. TPP was signed and the final text of the agreement was released on February 4, 2016. Following signature, under TPA, implementing legislation can be introduced 30 days after the release of the final text of the agreement on a day when both Houses are in session. That day was March 14, 2016. The President notified Congress of the changes to U.S. law that TPP implementation would require on April 1, 2016. A TPA-required report by the U.S. International Trade Commission (USITC) on the potential economic effects of the agreement was released on May 18, 2016. Once the President submits the legislation for introduction, TPA sets a 90-legislative-day deadline for congressional consideration with set periods for committee and floor consideration by the House and Senate.4 3 NAFTA is an FTA between the United States, Canada, and Mexico. For more information see CRS In Focus IF10047, North American Free Trade Agreement (NAFTA), by (name redacted) . 4 See CRS In Focus IF10297, TPP-Trade Promotion Authority (TPA) Timeline, by (name redacted) and CRS Report R43491, Trade Promotion Authority (TPA): Frequently Asked Questions, by (name redacted) and (name redacted) . Congressional Research Service 2 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Figure 1.Trans-Pacific Partnership Countries (in billions of dollars) Source: Analysis by CRS. Population and GDP data from IMF, World Economic Outlook, October 2015. Trade data from the U.S. International Trade Commission (USITC). Notes: Trade data only includes goods trade, and are from 2015. GDP and population data are from 2014. Congressional Research Service 3 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress TPP’s Strategic Context5 The TPP could have significant implications beyond its direct economic impact, in what many term as broader “strategic” contexts. Obama Administration officials and other TPP proponents argue that these implications would be positive and felt in several ways, both geo-economic and geo-political. Though such implications are hard to define precisely, proponents of the TPP’s strategic importance suggest that the United States could use the agreement as a tool to exert influence in the region and beyond, in not only economic, but also broader political and security spheres. Administration officials regularly emphasize the TPP’s strategic value in arguing for its approval. USTR Ambassador Froman said in a 2014 speech: TPP is as important strategically as it is economically. Economically, TPP would bind together a group that represents 40 percent of global GDP and about a third of world trade. Strategically, TPP is the avenue through which the United States, working with nearly a dozen other countries (and another half dozen waiting in the wings), is playing a leading role in writing the [trade] rules of the road for a critical region in flux.6 Secretary of State John Kerry wrote in 2015: TPP also matters for reasons far beyond trade. The Asia-Pacific includes three of the globe’s four most populous countries and its three largest economies. Going forward, that region is going to have a big say in shaping international rules of the road on the Internet, financial regulation, maritime security, the environment, and many other areas of direct concern to the United States. Remember that, in our era, economic and security issues overlap; we can’t lead on one and lag on the other. 7 Overall, proponents maintain that through the TPP, the United States can further a wide range of goals, including the following:       liberalizing trade, encouraging market-oriented reforms, and driving economic growth; establishing and updating regional trade rules and disciplines consistent with U.S. interests and modern commercial realities; potentially strengthening the global trade architecture; strengthening regional alliances and partnerships; maintaining U.S. leadership and influence in the Asia-Pacific region; and enhancing U.S. national security. In terms of economic influence, some observers argue the TPP may present an alternative to FTAs constructed by other countries, especially in the Asia-Pacific region. Such agreements often exclude or have less extensive provisions on agriculture, services, investment, and intellectual property rights (IPR), which some see as among the most important FTA provisions for certain 5 This section written by (name redacted) and Brock Williams. For more information on the strategic aspects of TPP see CRS Report R44361, The Trans-Pacific Partnership (TPP): Strategic Implications, coordinated by (name redacted) and (name redacted) . 6 USTR, “Remarks by Ambassador Michael Froman at the Council on Foreign Relations: The Strategic Logic of Trade,” June 16, 2014, http://www.ustr.gov/about-us/press-office/speeches/transcripts/2014/June/Remarks-USTRFroman-at-Council-Foreign-Relations-Strategic-Logic-of-Trade. 7 State Department, “Secretary’s Remarks: U.S. Foreign Policy in a Changing World,” October 17, 2015. http://www.state.gov/secretary/remarks/2015/10/248302.htm. Congressional Research Service 4 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress U.S. sectors; moreover, these agreements generally have few if any binding protections for worker rights and the environment. The TPP could provide participating governments political cover to enact reforms relating to these and other provisions, presenting them as a tradeoff for greater access to the large U.S. market. While debate continues, both in the United States and abroad, over the appropriate scope of various TPP provisions and the degree to which they differ from other regional pacts, some policymakers argue that the TPP would provide the United States with leverage to help shape regional and, perhaps, broader multilateral economic norms.8 In the geo-political realm, some analysts consider the TPP to be a litmus test for U.S. credibility in the Asia-Pacific region. Proponents argue the TPP signals the primacy of U.S. integration into Asia’s economic and diplomatic structures, suggesting that congressional inaction or rejection of the TPP would make the Administration’s rebalancing strategy look relatively weak and the United States look divided on how important it considers its leadership role in the region.9 Similarly, many Asian policymakers—correctly or not—could interpret a failure of the TPP in the United States as a symbol of declining U.S. interest in the region and its inability to assert leadership.10 Some critics of the TPP assert that such arguments are overstated, and that the strength or weakness of broader bilateral political and security relationships depend more on countries’ assessment of their political and security interests than on whether they have a trade agreement with the United States.11 China is not a TPP member, but its emergence as a regional economic power with active overseas trade and investment initiatives forms an important backdrop to the TPP’s consideration. Those championing the TPP, including President Obama, often cast it as a vehicle for maintaining U.S. leadership in Asia in the face of China’s rise, arguing that through the agreement, the United States can “write the rules” for regional trade and investment and help foster a broader, rulesbased regional order.12 Others contend that casting the TPP as an effort to “counter” Chinese initiatives is unproductive, and could create negative perceptions of U.S. intentions, both in China and elsewhere in the region. Some also argue that in many ways U.S. and Chinese goals for trade liberalization and rules and norms in the region could be mutually reinforcing, rather than competing, by promoting the goal of free trade in the Asia-Pacific region13 Trade agreements, and trade policy in general, inevitably exist at the intersection of domestic and foreign policy and include both economic and political elements. This can create a tension in balancing various policy priorities, particularly for those policymakers who may support the TPP on some grounds but not others. Some opponents of the agreement argue that focusing on the strategic elements of the TPP distracts the debate from what they view should be its main criteria: the agreement’s potential impact on the U.S. economy. While both TPP critics and supporters cite different estimates of economic outcomes to support their positions, the broader strategic 8 Jonathan Soble, "Failure of Obama's Trans-Pacific Trade Deal Could Hurt U.S. Influence in Asia," New York Times, June 16, 2015. 9 Jeffrey A. Bader and David Dollar, “Why the TPP Is the Linchpin of the Asia Rebalance,” Brookings.edu, July 28, 2015. 10 See, for instance, Prime Minister’s Office of Singapore, “Transcript of Keynote Speech by Prime Minister Lee Hsien Loong at the Shangri-La Dialogue 29 May 2015.” http://www.pmo.gov.sg/mediacentre/transcript-keynote-speechprime-minister-lee-hsien-loong-shangri-la-dialogue-29-may-2015. 11 Daniel Slane and Michael Wessel, “The TPP: Why It Won’t Address Security Concerns with China,” Renewing America blog, Council on Foreign Relations, May 15, 2015. 12 White House, “Statement by the President on the Trans-Pacific Partnership,” press release, October 5, 2015, https://www.whitehouse.gov/the-press-office/2015/10/05/statement-president-trans-pacific-partnership. 13 Simon Lester, Chinese Free Trade is No Threat to American Free Trade, Cato Institute, April 22, 2015. Congressional Research Service 5 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress implications are highlighted largely by proponents, and can be difficult to quantify despite their potential significance.14 Economic Significance15 Preferential multi-country trade agreements, such as the TPP, generally are expected to alter trade relations among the participants by lowering tariffs on traded goods and by reducing nontariff barriers within countries. Most economists agree that reducing trade barriers enhances productivity by allocating resources towards their most efficient uses, increases consumer choice and lowers costs, stimulates economic growth, and at the national level improves economic welfare. The Japanese government, for example, hopes to use increased international competition achieved by TPP to revitalize its less productive sectors, including agriculture and services, and lower costs for consumers.16 The gains of trade, however, are not necessarily distributed equally throughout an economy, and the resource reallocation that can lead to efficiency and job gains in some sectors may reduce production in other industries and can cause worker dislocation and job losses, a concern for policymakers and workers and firms in certain industries.17 Removing formal barriers to trade, primarily tariffs and quotas, directly lowers the price of traded goods. For example, the 20% tariff on certain Vietnamese-made shoes imported into the United States would be eliminated, while U.S.-grown walnuts would receive a 10% tariff discount in Japan, once eliminated. In turn, lower prices may impact trade patterns by increasing the overall amount of trade that occurs (trade creation) and by shifting trade away from countries that are not party to the agreement to those that are in the agreement (trade diversion). At times, countries are motivated to participate in trade agreements to prevent this type of trade diversion. The magnitude of the trade creation and trade diversion effects that arise from TPP likely will be affected by a number of factors, including: the difference between pre-and post-agreement tariff rates, the speed with which tariff cuts are implemented, and a range of other external economic factors that affect global trade as a whole. For instance, the 2008-2010 global economic slowdown and the sharp drop in commodity prices and changes in exchange rates from 20142016 arguably had a greater impact on the volume of global trade and trade flows between countries than any FTA trade liberalization measures that might have gone into effect during this period. In addition, the impact of tariff cuts under the TPP may be muted to some extent due to the multiplicity of trade agreements that already exist among the participants and the already low tariff rates that are characteristic of trade among a number of the participants. (See “Tariffs” section below for more detail.) In addition to the economic effects expected to result from cuts in tariffs, the TPP may offer longterm benefits to bilateral and regional trade through changes in domestic nontariff barriers that form the structure under which trade is conducted. In broad terms, the TPP incorporates rules and disciplines for open, nondiscriminatory treatment for participants. These rules are expected to 14 For more information concerning the strategic aspects of TPP, CRS Report R44361, The Trans-Pacific Partnership (TPP): Strategic Implications, coordinated by (name redacted) and (name redacted) . 15 This section was written by James Jackson and Brock Williams, with assistance from Gabriel Nelson. For more information, see CRS Report R42344, Trans-Pacific Partnership (TPP) Countries: Comparative Trade and Economic Analysis, by (name redacted) . 16 Sheila A. Smith, “Trans-Pacific Partnership Trade Deal,” Council on Foreign Relations, event transcript, October 6, 2015, at http://www.cfr.org/asia-and-pacific/trans-pacific-partnership-trade-deal/p37091. 17 For more information on trade and employment, see CRS In Focus IF10161, International Trade Agreements and Job Estimates, by (name redacted) . Congressional Research Service 6 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress reduce market-distorting activities that not only may reduce the overall level of trade, but also may create market distortions and inefficiencies. Analysts have indicated that some TPP participants, such as Vietnam, may use the rules and disciplines incorporated in the TPP to support a market-oriented reform agenda within their economies.18 To the extent that countries undertake such reforms, the TPP could provide long-term economic benefits to the countries themselves and to other TPP participants. Other rules such as aspects of IPR protections and certain labor and environmental commitments are, in effect, less about economic openness and more about ensuring economic activity meets certain requirements. As such, the rationale behind them (i.e., encouraging innovation, protecting worker rights, and safeguarding the environment) can differ from the traditional economic arguments for trade liberalization. TPP Economic Impact Predictions A critical aspect of the debate on the TPP is the agreement’s potential economic impact on countries both within and outside its current membership. The U.S. International Trade Commission (USITC) released a study on May 18, 2016, as required by TPA, to estimate the effect of the agreement on individual sectors in the U.S. economy.19 The study uses a computable general equilibrium (CGE) model, a standard tool to estimate adjustments in consumption and production decisions in response to tariff changes. TPP commitments, however, include complex provisions that affect a broad array of issues going beyond just tariff schedules. While the USITC study also attempts to measure the impact of changes in nontariff barriers (NTBs), precisely modeling such changes is a challenge, requiring estimations in order to quantify both the existing NTBs and the rate and degree of their removal. Economic models by their nature, require simplification from the actual economic activity they attempt to represent and should be interpreted with careful consideration of their underlying assumptions and methodology. Below we examine the estimates from the USITC and other recent studies on the TPP. USITC Study Like most CGE models, the USITC study uses the Global Trade Analysis Project (GTAP) database hosted by Purdue University for its baseline data and projections. The study compares a scenario with the TPP provisions in effect relative to a projected baseline with no TPP, focusing largely on 2032 when most commitments would be phased in. Overall the study predicts a small positive benefit for the U.S. economy from participation in TPP in 2032 relative to the baseline—a 0.15% increase in GDP ($42.7 billion) and a 0.07% increase in employment (128,200 full time equivalents). The study breaks down its analysis by sectors, with agriculture and services sectors predicted to grow both in output (0.5% and 0.1%, respectively) and employment (0.5% and 0.1%, respectively). Output and employment in the manufactured goods, natural resources, and energy sector is estimated to decline slightly from the baseline (-0.1% and -0.2%, respectively) as TPP is expected to shift resources towards services and agriculture production. Peterson Institute for International Economics Study This study by Peter Petri and Michael Plummer is notable partly for its attempt to model liberalization of nontariff barriers (including those applied to trade in services) using tariff-equivalency estimates. 20 These nontariff changes, which are the most difficult to model precisely, drive the results of the study, with changes in tariffs accounting for only 12% of the economic benefits of the agreement—a point critics emphasize when questioning the validity of the study’s results.21 The Peterson study also estimates modest net gains for the United States and other TPP partners. Small net losses are anticipated for some countries not participating in TPP including mainland China, India, South Korea, the Philippines, Thailand, and Indonesia. By 2030, the authors project the United States will see real annual income gains of about $131 billion above a baseline projection (or 0.5% above baseline GDP). These gains will not be spread uniformly throughout the economy, according to the model. The authors project some U.S. manufacturing industries to experience a drop in production from baseline, and the agriculture and any mining sectors to see a small increase. The service sector, however, is projected to see large relative gains, offsetting the negative impact on manufacturing. The model assumes TPP will not 18 Ben Bland and Shawn Donnan, "Vietnam looks for reform and investment boost from TPP deal," Financial Times, October 6, 2015. 19 USITC, TPP Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors, Publication 4607, May 2016. 20 Peter Petri and Michael Plummer, “The Economic Effects of the Trans-Pacific Partnership: New Estimates,” Peterson Institute for International Economics, January 2016, at http://piie.com/publications/wp/wp16-2.pdf. 21 Dani Rodrik, “The Trade Numbers Game,” Project Syndicate, blog post, February 10, 2016, at https://www.projectsyndicate.org/commentary/tpp-debate-economic-benefits-by-dani-rodrik-2016-02. Congressional Research Service 7 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress affect the overall level of employment, but may result in shifts from one sector to another. A January 2016 World Bank CGE analysis, prepared together with Petri and Plummer and based on a similar model, arrives at similar conclusions.22 A complementary study from the Peterson Institute estimates the resultant adjustment costs from TPP induced-employment shifts.23 Between 2017 and 2030, when the agreement is assumed phased in, the authors estimate total adjustment costs would be no more than 8% of TPP gains, providing ample means to compensate dislocated workers, potentially through an expanded Trade Adjustment Assistance program recommended by the authors. Tufts Global Development and Environment Institute Study Using nonstandard trade models, other researchers have produced studies suggesting the TPP will have overall negative effects on the U.S. and other economies. For example, a study published by the Global Development and Environment Institute at Tufts University projects the United States to experience a 0.54% reduction in GDP from baseline estimates by 2025, as well as the loss of 448,000 jobs from a baseline employment level.24 In this study, all TPP participants are predicted to incur net employment losses due to the agreement, a result that runs counter to international trade theory, leading some economists to argue the methodology is ill-suited to examine a trade agreement.25 TPP would be significant among U.S. trade agreements, due to its size and the commitments reached. TPP would be the largest U.S. FTA by the number of parties and trade flows, though the majority of that trade is with countries with an existing U.S. FTA (Figure 2). Japan's participation has greatly increased the potential economic significance of the agreement. Among the U.S. negotiating partners in the TPP, Japan is the largest economy and largest trading partner without an existing U.S. FTA (and hence, with greater scope for trade liberalization with the United States). In 2015, Japan was the United States’ fourth largest goods export ($63 billion) and import ($131 billion) market. Malaysia and Vietnam also stand out among the TPP countries without existing U.S. FTAs, both in terms of their current trade and investment with the United States and their potential for future growth. Both countries have young, relatively large populations (above 30 million in Malaysia and 90 million in Vietnam) and their economies have experienced rapid growth in recent years.26 Moreover, Malaysia's and Vietnam's average applied most-favored nation tariffs—the average tariff on imports—are 6.1% and 9.5%, respectively, two of the highest levels among TPP members. Removal of various nontariff barriers in both countries is also a primary U.S. goal. Both nations also have substantial state sectors, which may be affected by TPP outcomes. U.S.-TPP and FTA Trade Statistics  TPP countries collectively represent the largest U.S. trading partner, accounting for 41% of total U.S. goods trade in 2015 and 23% of total U.S. services trade in 2014;27 22 World Bank Global Economic Prospects, “Potential Implications of the Trans-Pacific Partnership Agreement,” January 2016, at http://www.worldbank.org/en/publication/global-economic-prospects/GEP-Jan-2016-ImplicationsTrans-Pacific-Partnership. 23 Robert Z. Lawrence and Tyler Moran, Adjustment and Income Distribution Impacts of the Trans-Pacific Partnership, Peterson Institute for International Economics, Working Paper WP 16-5, March 2016, at http://piie.com/publications/wp/wp16-5.pdf. 24 Jeronim Capaldo and Alex Izurieta with Jomo Kwame Sundaram, “Trading Down: Unemployment, Inequality and Other Risks of the Trans-Pacific Partnership Agreement,” Tufts University Global Development and Environment Institute, January 2016, at http://www.ase.tufts.edu/gdae/Pubs/wp/16-01Capaldo-IzurietaTPP.pdf. 25 Robert Z. Lawrence, “Studies of TPP: Which is Credible?”, Trade and Investment Policy Watch, Peterson Institute for International Economics, blog post, January 29, 2016, at blos.piie.com/trade/?p=553. 26 According to the International Monetary Fund’s October 2015 World Economic Outlook, both countries had a GDP growth rate of 6% in 2014. For the ten years prior, growth averaged 5% annually in Malaysia, and 6.4% annually in Vietnam. 27 TPP accounts for a smaller share of U.S. services trade because of the large U.S.-EU services trade relationship. Congressional Research Service 8 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress  U.S. FTAs already exist with 6 U.S. trading partners among TPP participants, which account for 81% of U.S. goods trade with TPP partners in 2015 and 69% of U.S.-TPP services trade in 2014; and  TPP countries together with all existing U.S. FTA partners, and the European Union, which is currently negotiating an FTA with the United States, account for 66% of U.S. goods trade. China accounts for nearly half of all U.S. goods trade with countries not currently negotiating or without an existing U.S. FTA. Figure 2. U.S.-World, TPP, and FTA Partner Merchandise Trade Source: CRS analysis. Data from the U.S. International Trade Commission. U.S.-TPP Trade and Investment28 U.S. trade with TPP countries was more than $1.5 trillion in merchandise in 2015 and more than $276 billion in services in 2014, the most recent periods for which data are available (Table A-1 and Table A-2, in Appendix). The flow of U.S. foreign direct investment (FDI) into TPP countries totaled $61 billion in 2014, while TPP countries invested nearly $59 billion in the United States (Table A-3). The TPP would become the largest U.S. FTA by trade flows (Figure 3). The TPP group of 12 countries is diverse in population, geographic location, and economic development, and U.S. trade relations with the countries reflect this diversity. The major U.S. merchandise exports are fairly similar to most TPP countries and include motor vehicles and parts; petroleum and coal products; computer equipment, semiconductors, and electronic components; agriculture and construction machinery; and aircraft. However, the top U.S. merchandise imports vary greatly by country. Agriculture and natural resources products are key U.S. imports from Australia, Chile, New Zealand, and Peru, while apparel products are the main U.S. imports from Vietnam. Canada and Mexico are both major suppliers of crude oil to the United States, but they also supply manufactured products like motor vehicles and motor vehicle 28 For more see CRS Report R42344, Trans-Pacific Partnership (TPP) Countries: Comparative Trade and Economic Analysis, by (name redacted) . Congressional Research Service 9 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress parts. U.S. imports from Malaysia and Singapore consist primarily of manufactured products such as computers, semiconductors, and electronic components. Motor vehicles and motor vehicle parts make up nearly 35% of U.S. goods imports from Japan. Figure 3. Largest U.S. FTAs Source: Analysis by CRS. Data from BEA and USITC. Notes: Services trade data not available for all FTA partners. T-TIP is the Trans-Atlantic Trade and Investment Partnership between the United States and European Union. CAFTA-DR is the U.S.-Central AmericanDominican Republic FTA including Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. In terms of value, Canada and Mexico are by far the largest U.S. trading partners among TPP countries in goods. Both countries share a long border with the United States and are among the oldest U.S. FTA partners. Japan is the third-largest U.S.-TPP goods trading partner, and secondlargest services trade and investment partner. Among the other eight TPP partners, Singapore and Australia are the top U.S. goods export markets and top overall services trade and investment Congressional Research Service 10 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress partners with the United States, while Malaysia, Vietnam, and Singapore are the top sources of U.S. goods imports. Relationship to Existing Trade Organizations and Agreements TPP and the WTO Though designed as a regional trade agreement, the TPP could have a number of implications for the multilateral trading system represented by the WTO. Fundamentally, the proliferation of FTAs over the past two decades calls into question the multilateral system’s ability to negotiate and implement new trade disciplines and further international trade liberalization. Although WTO members agreed to a number of customs-related commitments as part of the Trade Facilitation Agreement in 2013, the goal of concluding a major multilateral trade round remains elusive nearly 15 years after the launch of the Doha Development Agenda negotiations in November 2001. Persistent differences among members about the extent and balance of trade liberalization continue to stymie progress in this forum and major issues, such as services trade liberalization are being negotiated among a subset of WTO members outside the body. The United States has pushed for the Doha Round to end and to be replaced by a more attainable package, but at the most recent WTO Ministerial in Nairobi, trade ministers were unable to agree on declaring an end to the Doha agenda, since developing countries fear that abandoning the Doha agenda may result in agricultural issues receiving less priority. The last major round of global trade negotiations—the Uruguay Round—was concluded in 1994. Since then, global commerce has adapted to rapid advances in technology, with the result that current multilateral trade rules do not address some critical aspects of today’s trading environment, including digital trade and e-commerce. New trade patterns have emerged and new obstacles to the flow of goods and services have appeared. This has left countries, including the United States, to pursue new or advanced trade rules and further liberalization through bilateral and regional agreements like the TPP. Debate continues over whether or not bilateral and now “mega-regional” trade agreements help or hinder broader multilateral initiatives. On one hand, “mega-regionals,” such as the TPP or the Trans-Atlantic Trade and Investment Partnership (T-TIP) negotiations between the United States and the European Union, could serve as alternative venues for establishing new rules and disciplines for the trading regime, and their size and economic significance could help spur negotiations at the multilateral level, influencing their direction. Some argue, for example, that the conclusion of the North American Free Trade Agreement (NAFTA), among the United States, Canada, and Mexico, effective since 1994, did in fact push the multilateral Uruguay Round negotiations to conclusion.29 On the other hand, if the locus of trade negotiations primarily shifts to “mega-regional” agreements, it could limit the overall effectiveness of the multilateral system. If the rules of the WTO no longer reflect the standards of trade policy to which much of the world has evolved, it could endanger the legitimacy of the organization in other aspects of its work, such as dispute settlement. A two-tier trading system, one working on more extensive rules and disciplines and one essentially dormant, could raise tensions by alienating those countries that feel they had no part in developing the new rules. Overlapping in membership with differing rules, these “mega29 The Uruguay Round agreement was signed in April 1994, nearly seven years after it was launched but less than a year after legislation implementing NAFTA was signed by the U.S. Congress. Congressional Research Service 11 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress regional” agreements and other trade agreements could also add to the complexity of engaging in international commerce, as opposed to rules established at the WTO, which are applicable to nearly all world trading partners. They could also reduce economic efficiency in the global trading system if trade is diverted into these trading blocs due to preferential tariff treatment. The TPP and Other Asia-Pacific Trade Agreements The current 12 TPP countries form part of a growing network of Asia-Pacific FTAs (Figure 4). All TPP countries have at least one FTA with a TPP partner country, although the extent of trade liberalization varies among them. The United States has FTAs with six TPP countries, including Australia, Canada, Chile, Mexico, Peru, and Singapore. Four TPP countries—Brunei, Malaysia, Singapore, and Vietnam—are part of the Association of Southeast Asian Nations (ASEAN), which has a free trade area among its membership as well as several external FTAs.30 New FTAs involving key markets in the region have been concluded in recent years. For example, Australia recently implemented FTAs with China, Japan, and South Korea, and the European Union has concluded FTAs with Canada, and, most recently, Vietnam. As tariffs fall for the countries party to these agreements, it could put U.S. firms at a disadvantage in those markets without existing U.S. FTAs. This is the idea of “competitive liberalization” in practice, whereby new trade agreements spur other countries to enter into similar pacts in order to maintain their firms’ competiveness in foreign markets. If the TPP were to enter into force, such motivation would likely be a major factor in drawing other countries’ interest in joining the agreement. All 12 TPP partners are also members of the Asia-Pacific Economic Cooperation (APEC) forum, which does not negotiate FTAs but serves as a forum for dialogue on, and establishes nonbinding commitments toward, the goals of open trade and investment within the region.31 In the context of this forum for dialogue and nonbinding commitments, APEC Leaders have repeatedly agreed to push forward the creation of a Free Trade Area of the Asia-Pacific (FTAAP). Twelve countries in APEC, seven of which are also in TPP, are currently negotiating the Regional Comprehensive Economic Partnership Agreement (RCEP). ASEAN leads the negotiations for this proposed FTA among its members and six ASEAN FTA partners (Australia, China, India, Japan, New Zealand, and South Korea).32 Both the RCEP and the TPP would encompass a significant share of regional economic activity, but each currently includes only one of the region’s two economic leaders, the United States and China. The breadth and depth of trade liberalization resulting from two potential agreements is likely to differ. In their 2015 Declaration, APEC Leaders recognized both the TPP and the RCEP, which includes China, but not the United States, as “ongoing regional undertakings” on which to eventually achieve an FTAAP.33 As noted above, the TPP could not enter into force without the United States and Japan. It is conceivable, however, that the other 11 countries, after spending five years negotiating an agreement not only with the United States, but among themselves as well, could conclude a replacement agreement without the United States. It would not have the economic heft of an 30 The 10 ASEAN members are Brunei, Burma (Myanmar), Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. 31 In addition to the 12 TPP countries, APEC includes China, Hong Kong (officially Hong Kong, China), Indonesia, Papua New Guinea, the Philippines, Russia, South Korea, Taiwan (officially, Chinese Taipei), and Thailand. 32 For more information see CRS In Focus IF10342, What Is the Regional Comprehensive Economic Partnership?, by (name redacted) et al. 33 Asia-Pacific Economic Cooperation, 2015 Leaders’ Declaration, November 2015. Congressional Research Service 12 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress agreement with the United States, but it still would contain the third-largest economy (Japan) and could serve as a vehicle for further Asian integration. Figure 4. Existing FTAs among TPP Countries Source: WTO FTA database and websites of TPP countries’ trade ministries. Trade data from IMF. Notes: Aggregate TPP goods trade, both imports and exports, as reported above. ASEAN also includes countries outside the TPP: Burma (Myanmar), Cambodia, Indonesia, Laos, the Philippines, and Thailand. TPP goods trade covered by existing FTAs, as depicted above, reflects all goods trade between FTA partners. This measure slightly overstates trade covered under FTAs, as most FTAs exclude market access for some goods. Congressional Research Service 13 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Core Provisions The text of the TPP agreement spans 30 chapters. The main goal as stated by the negotiating countries is “to establish a comprehensive, next-generation regional agreement that liberalizes trade and investment and addresses new and traditional trade issues and 21st-century challenges.”34 FTA provisions are often discussed in two different categories: (1) the market access component addressing tariff and nontariff barriers to trade in goods, services, and agriculture, and government procurement; and (2) the rules component covering the procedures, standards, and regulatory considerations that relate to international trade, including such issues as investment and intellectual property rights. Market access can be affected by the process by which trade is conducted, and, hence, the distinction between these two categories is not always clear. While tariff negotiations are perhaps the most well-known component of trade agreements and the easiest to measure and verify, U.S. firms are often most competitive in the international trade of services and products involving high levels of research and development. These industries face mostly nontariff, behind-the-border barriers, making rules commitments such as transparent regulatory procedures or IPR protection particularly important for U.S. access to and ability to compete in overseas markets. U.S. FTAs also attempt to ensure that U.S. FTA partners meet certain requirements. In particular, internationally-recognized and other core principles for the protection of worker rights and the environment have become a significant aspect of U.S. trade agreement negotiations. In addition, the TPP includes an entirely new chapter that seeks to establish disciplines on how state-owned enterprises engage in international trade, with a goal of limiting potential negative impacts on private actors from nonmarket practices. The 12 TPP countries have varying competitive advantages, sensitivities, and levels of economic development. As a result of these differences and the “give and take” of trade negotiations, achieving common TPP rules and disciplines also involves certain exceptions in different forms, and phase-in periods of varying lengths. When examining the specific commitments of the agreement it is important to examine these exceptions, as they may impact the agreement’s practical application. This section examines the major issues addressed in the TPP negotiations, beginning with the treatment of trade in merchandise goods. For each issue the report provides background information, a discussion of the provisions in the text, particularly as they relate to previous trade agreements, and a summary of the debate on the topic, including, where relevant, U.S. trade negotiating objectives. Stakeholders’ views on the TPP agreement vary. Some groups generally oppose or support trade liberalization; others’ positions hinge on specific provisions in the TPP text. Most business groups generally support the agreement, while most labor unions and certain nongovernmental organizations (NGOs) are generally opposed.35 The discussion that follows focuses on specific commitments in the agreement and debate over those measures. 34 “TPP Leaders Statement,” November 2, 2011, https://ustr.gov/about-us/policy-offices/press-office/pressreleases/2011/november/trans-pacific-partnership-leaders-statement. 35 Business associations supporting the agreement include: U.S. Chamber of Commerce, National Association of Manufacturers, and the American Farm Bureau. Unions opposed to the agreement include: American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), United Steelworkers (USW), and Teamsters. NGO’s opposed to the agreement include: Doctors without Borders, Public Citizen, and Sierra Club. Congressional Research Service 14 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Goods Although services are an increasingly important aspect of international trade, physical goods still account for the bulk of such activity. In 2015, merchandise trade accounted for over 75% of the nearly $5 trillion in U.S. trade. Expanding opportunities for trade in goods by reducing and eliminating tariff and nontariff barriers remains a top priority for U.S. trade negotiations, highlighted by Congress in its first principal negotiating objective in the TPA-2015. Tariffs36 Background Like previous U.S. FTAs, TPP would eventually eliminate all industrial goods tariffs and most agriculture tariffs and quotas. These commitments would be phased in over varying periods. For some of the most sensitive agriculture products, tariff and quota protections would remain in place or only be partially removed. Each of the 12 TPP countries has its own unique tariff schedule laying out its product-specific tariff commitments.37 These schedules list each country’s individual tariff lines (i.e., a list of products described by Harmonized Tariff Schedule (HTS) product codes at the 8-10 digit level of aggregation) and include the current tariff rate (base rate), the relevant staging category, and the post-TPP annual tariff rates.38 The staging categories explain the speed and scope of tariff elimination for a specific product. For example, “entry-into-force” signifies a removal of that product’s tariff immediately when the agreement becomes effective. The categories may be simple, such as an annual equal decrease until the tariff is eliminated, or more complex, such as staying at current levels for a period of years before decreasing by varying amounts. The United States has 36 unique staging categories that apply to its tariff commitments, surpassed only by Japan, which has 60. The United States has the longest phase-out period of any TPP country, and longer than any previous U.S. FTA; it would delay the complete removal of tariffs on light trucks from Japan, for example, and certain dairy products from New Zealand for 30 years.39 While most TPP countries negotiated a single TPP tariff schedule with their partners, the United States negotiated bilaterally such that for certain import-sensitive products, U.S. tariff and quota commitments differ by partners. As a result, U.S. tariffs on some products may be eliminated according to different staging categories for different countries. This bilateral approach to tariff commitments within a multi-party agreement stands in contrast to the most-favored nation (MFN) approach in the WTO, which achieves a single tariff schedule for all trading partners. U.S. negotiators argue that this bilateral approach allows for more complete liberalization overall, but some observers question this assertion and raise concerns over setting this precedent for multiparty negotiations.40 36 This section was written by Brock Williams and Gabriel Nelson. Updated tariff schedules have been posted by New Zealand, the depository for the TPP, at https://www.mfat.govt.nz/en/about-us/who-we-are/treaty-making-process/trans-pacific-partnership-tpp/text-of-thetrans-pacific-partnership. 38 HS codes become increasingly disaggregated with each additional digit and are uniform across countries only up to 6 digits. Product descriptions in the TPP tariff schedules, which are at the 8-10 digit level, may vary by country. 39 See U.S. staging categories, US17 and US24, in the U.S. General Notes to the Tariff Schedule in the TPP text. 40 Caroline Freund, Tyler Moran, and Sarah Oliver, “Tariff Liberalization” in Assessing the Trans-Pacific Partnership: Market Access and Sectoral Issues, Peterson Institute for International Economics, PIIE Briefing 16-1, February 2016, (continued...) 37 Congressional Research Service 15 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Key factors impacting the potential significance of TPP tariff commitments include the following:     Current Tariff Levels. Average MFN applied tariff rates among TPP countries currently range from 0.2% in Singapore to 9.5% in Vietnam (Appendix 1). Given the already low simple U.S. average tariff rate (3.5%), U.S. rates would change less through TPP than those for some other countries, especially Vietnam and Malaysia. Existing Trade Agreements. Each TPP country has existing FTAs with at least four other TPP countries, and Chile has existing FTAs with all 11 other TPP countries. In 2014, 85% of goods trade among TPP parties occurred between partners with existing trade agreements.41 Depending on the degree of tariff liberalization in these existing agreements, the tariff commitments in TPP may not require a significant adjustment for some TPP parties. For example, under NAFTA, the United States, Canada, and Mexico have eliminated nearly all tariffs on trade between the three countries. In cases where existing agreements offer different tariff rates than the TPP, exporters would be able to choose which agreement to utilize as long as they also met the relevant rules of origin. Product Mix. While tariffs are below 10% on average in all TPP countries, product-specific peaks can be much higher, above 100% on certain sensitive items. TPP tariff commitments may have a larger impact on countries that trade heavily in these high-tariff products. For example, U.S. imports from Vietnam are concentrated in high-tariff footwear and apparel products. U.S. exports facing relatively high tariffs in certain TPP markets include autos, agricultural products, and heavy machinery. Effective Tariff Rates. Calculated by dividing collected duties by the value of imports, this measure effectively incorporates the factors discussed above to provide an indication of the average duty actually paid on imports from a particular country. Among TPP countries, U.S. effective duty rates in 2015 were highest on imports from Vietnam (Figure 5). Without readily available data on duties collected by other TPP countries, a similar calculation cannot be made for effective duty rates on U.S. exports. Table 1. TPP Country Tariff and Trade Agreement Statistics MFN Average Applied Tariff (%) Unique TPP Staging Categories Longest TPP Phase-Out Period (Years) Existing FTAs with TPP Partners TPP Trade with Existing FTA Partners (%) Australia 2.7 7 4 8 96.5 Brunei 1.2 10 11 6 93.0 Canada 4.2 7 12 4 95.0 Chile 6 3* 8 11 100.0 Japan 4.2 60 21 9 45.9 Malaysia 6.1 6 16 7 76.8 Country (...continued) p. 31, http://www.iie.com/publications/briefings/piieb16-1.pdf. 41 Based on 2014 trade data from IMF DOTS. Congressional Research Service 16 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress MFN Average Applied Tariff (%) Unique TPP Staging Categories Longest TPP Phase-Out Period (Years) Existing FTAs with TPP Partners TPP Trade with Existing FTA Partners (%) Mexico 7.5 20 16 5 97.9 New Zealand 2.0 4 7 6 54.7 Peru 3.4 6 16 6 96.4 Singapore 0.2 1 0 9 97.5 United States 3.5 36 30 6 82.0 Vietnam 9.5 36 21 7 57.8 Country Source: WTO Tariff Profiles, TPP tariff schedules, and IMF Direction of Trade Statistics. Notes: (a) For a list of trade agreements among TPP countries see Appendix Table A-1 in CRS Report R42344, Trans-Pacific Partnership (TPP) Countries: Comparative Trade and Economic Analysis, by (name redacted) . (b) The number of staging categories excludes agriculture products covered under TRQs. (*) Chile’s tariff schedule also includes 17 categories matching TPP commitments to commitments in its previous FTAs. Figure 5. U.S. Collected Duties and Effective Duty Rates (2015) Source: Analysis by CRS. Data from USITC. Notes: Effective duty rates calculated by dividing imports for consumption by collected duties. Key Provisions with Non-U.S. FTA Countries Given the existing U.S. FTAs with Australia, Canada, Chile, Mexico, Peru, and Singapore, which include comprehensive tariff coverage, this section focuses only on TPP tariff commitments Congressional Research Service 17 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress between the United States and the five TPP countries without an existing U.S. FTA (Brunei, Japan, Malaysia, New Zealand, and Vietnam).42 Key aspects of TPP tariff commitments among these countries include (see Figure 6):       More than one-third of tariff lines are already duty-free in each country: U.S. (37%), Brunei (76%), Japan (39%), Malaysia (65%), New Zealand (58%), and Vietnam (32%). Most tariff elimination would occur in the first years after the agreement’s entry into force, with more than 80% of tariff lines duty-free in each country after three years, rising to approximately 90% after ten years. Eventually 95% or more tariff lines in each country would be duty-free. U.S. commitments would be phased in over the longest period, with tariff phase outs on two products up to 30 years after the agreement’s entry into force, although on average U.S. tariff commitments are similar to the other countries. In terms of U.S. exports, more than 99% of tariff lines would eventually be dutyfree in Brunei, New Zealand and Malaysia. Japan and Vietnam would maintain some level of tariff protection on more than 2% of their tariff lines (approximately 200 lines in Vietnam, mostly agricultural products like sugar, as well as used autos, and more than 400 lines in Japan comprised mostly of agricultural products, including pork and dairy). In terms of U.S. imports, more than 99% of tariff lines would eventually be dutyfree for all five countries. The United States would maintain tariffs on some products from each country, with the highest number of tariffs remaining on imports from New Zealand (approximately 100 tariff lines, mostly dairy products). These rates of duty elimination are similar to previous U.S. FTAs, but with somewhat longer phase out periods and a slightly higher share of tariff lines excluded from liberalization. For example, in the KORUS FTA, both South Korea and the United States committed to eventually eliminate duties on more than 99% of tariff lines, with more than 92% of tariff lines duty-free within five years.43 42 CRS analysis focuses on the share of liberalized tariff lines. This metric allows for comparison across countries and previous trade agreements, but it has limitations. In particular, each country has a unique number of tariff lines, which it determines, making the share of liberalization achieved, in effect, endogenous (i.e., a country can affect its liberalization share by changing the number of total tariff lines in its tariff schedule). Unique tariff lines range from nearly 7,500 in New Zealand to more than 10,000 in the United States. Japanese tariff commitments are particularly complex among the TPP countries, including some cases with multiple tariffs associated with the same HTS code. In these cases, the authors’ included only the least liberalized tariff in their calculations. Some HTS codes also appear to apply to only a subset of TPP countries. Those not applicable to the United States were excluded from the calculations. Finally, approximately 50 tariff lines in the Japanese schedule refer to non-originating goods, and were also excluded. 43 USITC, U.S.-Korea Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects, Publication 3949, September 2007, p. 1-8. Congressional Research Service 18 Figure 6. TPP Tariff Commitments between the U. S. and Non-FTA Countries Source: CRS analysis of TPP tariff schedules. Note: Japanese tariff commitments on more than 1% of tariff lines are of a complexity that required some judgement by the authors to determine whether they would be completely liberalized for U.S. products, including some cases with multiple tariffs associated with the same HTS code. In these cases, the authors’ included only the least liberalized tariff in their calculations. Some HTS codes in the Japanese tariff schedule also appear to apply to only a subset of TPP countries. Those not applicable to the United States were excluded from the calculations. Finally, approximately 50 tariff lines in the Japanese schedule refer to non-originating goods, and were also excluded—this updated methodology from an earlier version of the report increased the share of Japanese tariff lines eventually becoming duty free from 94.4% to 95.0%. CRS-19 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress TPP Product-Specific Tariff Commitments: Illustrative Examples U.S. Imports Shoes. HS Code (6404.11.90) Current Tariff (20%) In 2015, this type of athletic shoe was the top U.S. footwear import from TPP countries ($797 million). The current 20% U.S. import tariff on this type of shoe would be immediately eliminated for all TPP countries. Light Trucks. HS Code (8704.31.00) Current Tariff (25%) In 2015, the U.S. imported $12.8 billion in light trucks from TPP countries. Currently these imports come almost exclusively from Mexico, an existing U.S. FTA partner. Through TPP, the 25% light truck tariff would be eliminated immediately for the 6 current U.S. FTA partners (as is already the case under the bilateral agreements), and after ten years with ten equal annual reductions for the non-FTA partners, except for Japan. For Japan this tariff would remain at 25% until eliminated in year 30 of the agreement. Luggage and Handbags. HS Code (4202) Current Tariff (0-20%) In 2015, the U.S. imported $1.2 billion of luggage and handbags from TPP countries, primarily from Vietnam and Mexico. Tariffs are already eliminated for Mexico under NAFTA. Most U.S. tariffs on these products for other countries, currently as high as 20%, would be immediately eliminated, and all such tariffs would be eliminated by year 6 of the agreement. U.S. Exports Heavy Equipment - Malaysia. HS Code (8429) Current Tariff (5-25%) In 2015, the United States exported $3.1 billion of heavy machinery (e.g., scrapers, bulldozers, graders) to all TPP countries, including $11 million to Malaysia. Under TPP, Malaysia would eliminate all tariffs on such equipment, currently as high as 25%, by year six of the agreement’s entry into force. Nuts - Japan. HS Code (0802.32.00) Current Tariff (10%) In 2015, the United States exported $309 million of walnuts to TPP countries, including $116 million to Japan. Under TPP, Japan would immediately eliminate the 10% tariff on imports of walnuts from the United States. Motorcycles - Vietnam. HS Code (8711.50) Current Tariff (77-85%) In 2015, the United States exported less than $1million of large-engine motorcycles to Vietnam, but more than $461 million to all TPP partners. Under TPP, Vietnam would eliminate tariffs on these imports, as high as 85%, from the United States in eight annual stages. Sources: U.S. trade data from the Census Bureau accessed through the ITC’s trade dataweb. Tariff data from the official TPP tariff schedules. Rules of Origin (ROO)44 Rules of origin (ROO) determine whether products “originate” within an FTA area and, therefore, are eligible to receive the benefits when imported into an FTA member state. Thus, they are used to ensure that the parties to an FTA receive the tariff liberalization benefits and to prevent transshipments. In practice, however, restrictive rules of origin can also be used to limit the impact of FTAs on import-sensitive sectors. In the TPP, as in other FTAs, rules of origin are laid out in detail in the agreement and would need to be approved by Congress as part of the implementing legislation. All FTAs and preference programs have distinctive ROO, but the ways that they are developed are similar. One ROO type requires that a product illustrate that it is “substantially transformed” (i.e., made into a “new and distinct” product) by showing a “tariff shift,” a change in its HTS tariff classification. The degree of change required varies by product. The “yarn forward” rule, a tariff-shift rule that is a guiding principle in TPP for textiles and apparel, requires that all 44 This section written by (name redacted), Specialist in International Trade and Finance. Congressional Research Service 20 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress qualifying products must be produced in the FTA region beginning with the yarn. Some productspecific ROO in TPP and other FTAs require that a minimum ad valorem (value) percentage of the product must be produced in the FTA region. TPP uses regional value content rules for many products, including automobiles, appliances, and machine tools. Another kind of ROO specifies that the value of foreign content must not exceed a certain maximum percentage (i.e., a de minimis rule, which in TPP is 10%). Third, ROO for some products require that some kind of manufacturing or processing operation (e.g., a chemical reaction) must be completed in the region. TPP ROO allow for cumulation among TPP countries. This means a TPP country manufacturer can use unlimited inputs from other TPP partners and have the finished product qualify for TPP tariff benefits. This could provide an incentive for creation of new regional supply chains within the TPP area, and may encourage other countries to join the TPP to avoid being left out of supply chains. For the majority of goods, the ROO in most U.S. FTAs, including TPP, are quite similar in most areas. However, TPP ROO pertaining to certain import-sensitive manufacturing industries, especially in the textile, apparel, and footwear sectors and the automotive industry, have important distinctions from previous FTAs (see below). Textiles, Apparel, and Footwear45 Background While the United States continues to produce certain yarns and fabrics, some of which are used in apparel production abroad, nearly all apparel sold in the United States is imported and most U.S.headquartered apparel companies have limited or no U.S. manufacturing capabilities.46 Instead, they rely on extensive global supply chains, which, in turn, depend on costs, lead times, and other considerations. As a result of these dynamics, the U.S. textile industry generally supported gradual TPP textile and apparel tariff reductions, but only if the imported products are assembled using yarn produced in a TPP country (i.e., the “yarn-forward” rule of origin). Meanwhile, trade organizations representing U.S. apparel companies and retailers generally supported the immediate elimination of textile and apparel tariffs upon implementation of the TPP agreement, opposing the yarn-forward rule of origin as too restrictive. As with apparel products, most footwear consumed in the United States is imported from abroad, with import penetration in the industry well above 90%.47 Over a decade ago, the U.S. footwear industry reached a general agreement supporting immediate elimination of nearly all footwear tariffs in future trade agreements, except for a number of sensitive items determined still to be manufactured in the United States.48 45 This section prepared by (name redacted). American Apparel & Footwear Association (AAFA), “ApparelStats 2014 and ShoeStats 2014 Reports,” press release, January 9, 2015, https://www.wewear.org/apparelstats-2014-and-shoestats-2014-reports/. 47 Ibid. 48 Letter from Kevin M. Burke, President & Chief Executive Officer, AAFA, to Donald Evans, Secretary of Commerce, February 21, 2003. In the TPP, these footwear types include 18 items such as certain waterproof footwear with rubber or plastic soles that are glued together (Harmonized Tariff Schedule (HTS) 6401.10.00) and sports and certain athletic footwear with outer soles of rubber or plastics, valued over $12 per pair (HTS 6402.91.990). The Footwear Distributors and Retailers of America (FDRA) describes the specific sensitive tariff lines in its TPP Footwear Duty Guidebook. 46 Congressional Research Service 21 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Vietnam has been a major focus of U.S. negotiations over TPP commitments on textile, apparel, and footwear. Vietnam accounted for 12% of apparel and 15% of footwear imported by the United States in 2015, and was the second-largest supplier of apparel and footwear to the United States after China.49 It is the only large apparel and footwear producer among TPP partners without an existing FTA with the United States. Currently, Vietnam’s apparel sector sources the overwhelming majority of its yarns and fabrics from non-TPP members, mainly China, Taiwan, and South Korea, and it purchases only a small amount of yarns and fabrics (about $100 million in 2015) from the United States.50 Although associations representing the U.S. textile industry ultimately support the TPP, domestic industry raised concerns over the potential for Vietnamese-made apparel displacing garments manufactured with U.S. fabric in Western Hemisphere countries such as Mexico, El Salvador, Honduras, and Nicaragua, where garment makers currently must use U.S. inputs to obtain dutyfree access to the U.S. market under NAFTA and the U.S.-Central America-Dominican Republic FTA (CAFTA-DR).51 They also raised concerns over Mexico and Peru, both TPP members, potentially shifting sourcing of textile inputs from the United States to Vietnam should it develop an industry that can produce large quantities of textiles.52 On the other hand, proponents of FTAs as a tool for economic development would argue that encouraging movement up the value chain, such as from apparel to textile production, in a developing country like Vietnam is a goal of U.S. FTAs. Textile, apparel, and footwear tariffs differ considerably among TPP countries.53 The TPP countries currently face U.S. tariff rates as high as 25% on textiles, 32% on apparel, and up to nearly 50% on footwear. Other TPP countries also maintain high tariffs, including Vietnam, whose apparel tariffs range from 5% to 20%. USITC Estimated Economic Impact The USITC, in its May 2016 report on the economic impact of TPP, estimated sector-specific outcomes for textiles and apparel, and footwear.54 Their study, which compares a TPP scenario in 2032 against a non-TPP baseline, estimated that the apparel industry would see an increase in imports over the 2032 baseline of 1.4% or $1.9 billion, and a smaller increase in exports of 0.3% or $10 million. Vietnam would account for much of this import growth, while imports from China would be expected to decline. Textile imports and exports would also be expected to increase over the baseline, by 1.6% ($869 million) and 1.3% ($257 million), respectively. The study estimated output and employment slightly above the baseline for the apparel industry (an increase of 1.0% and 0.9%, respectively), and slightly below for textiles (a decrease of 0.4% for both output and employment). Regarding footwear, USITC estimated a slight overall rise in total U.S. 49 Import data are from the Department of Commerce’s Office of Textiles and Apparel (OTEXA), accessed February 22, 2016. 50 OTEXA, Vietnam, U.S. Export Markets, February 22, 2016, http://otexa.trade.gov/exports/e5520.htm. 51 The majority of yarns and fabrics exported from the United States are sold to Canada and Mexico (TPP partners), CAFTA-DR countries, and Peru and Colombia, South American FTA partners. 52 CRS Report R42772, U.S. Textile Manufacturing and the Trans-Pacific Partnership Negotiations, by (name redact ed) . 53 The United States negotiated special rules for certain textile, apparel, and footwear products to account for different tariff rates and prevent circumvention of high tariffs in some TPP countries. See, U.S. Appendix C, Tariff Differentials, https://ustr.gov/sites/default/files/TPP-Final-Text-US-Appendix-C-Tariff-Differentials.pdf. 54 USITC, TPP Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors, Publication 4607, May 2016, pp. 254, 273. Congressional Research Service 22 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress imports of 2.7% or $1.1 billion, but a major shift in sourcing toward TPP countries with imports from the region increasing by 23.4% or $1.6 billion. As most U.S. footwear is already imported, the agreement is not expected to have a significant impact on the U.S. industry, although the study estimated an increase above baseline in exports to Vietnam, mostly in intermediate components, and shows a slight (0.5%) increase in U.S. footwear output. Key Provisions Tariffs. All textile, apparel, and footwear tariffs will either be eliminated immediately or phased out in various stages over a decade or more following implementation of the TPP agreement. The United States has eight different tariff phase out schedules for textiles, apparel, and footwear. The longest phase out periods apply to the most sensitive products, such as certain men’s and boys’ overcoats, some women’s and girls’ blouses and skirts, men’s leather boots and work shoes, and women’s pumps. Tariffs on these products will be fully eliminated at the end of year 10 or 12, after an initial reduction of 50% or 55% when the pact enters into force. Safeguard. Like most U.S. FTAs, the TPP includes a textile and apparel safeguard that will allow the United States to reimpose tariffs if import surges cause or threaten to cause serious damage to domestic industry. This option will be available for five years after the agreement enters into force, and each safeguard action may last for two years with a possible two-year extension. In addition, the United States may unilaterally suspend future tariff phase outs after five years of implementation if it determines that Vietnam has failed to allow independent unions and grant them the right to strike by that time (see below section on labor provisions).55 Rules of Origin. To qualify for favorable tariff treatment, textiles and apparel must meet a yarnforward rule of origin, which requires the use of U.S. or other TPP country yarns and fabrics, with only a few exceptions, in textile and apparel products traded within the TPP area.56 Footwear manufacturers can qualify their shoes as TPP-originated under (1) a tariff shift method, requiring that sufficient production occurred entirely within the TPP region to change the tariff classification of the goods, or (2) one of two different methods of measuring the share of a product’s value that was added within the TPP region.57 These ROO may give Vietnamese producers of footwear an advantage in the U.S. market over producers in other Asian countries that do not benefit from tariff preferences. Short Supply List. Like other U.S. FTAs with a yarn-forward rule of origin for textiles and apparel, the TPP provides an exception for products that are deemed to be in “short supply” within the TPP region. The TPP short supply list includes 187 fibers, yarns, and fabrics, such as cashmere, certain wool yarns for sweaters, and polyester/wool blend fabrics.58 The agreement would allow goods made within the TPP region using non-TPP inputs from the short supply list to qualify for privileged access when exported to other TPP countries.59 Other exceptions to the 55 See, Letter from Ambassador Michael B.G. Froman, United States Trade Representative, to Vu Huy Hoang, Minister of Trade and Industry, November 2015, https://ustr.gov/sites/default/files/TPP-Final-Text-Labour-US-VN-Plan-forEnhancement-of-Trade-and-Labor-Relations.pdf. 56 The yarn-forward rule of origin is included in most US FTAs, such as NAFTA, CAFTA-DR, and agreements with Australia, Chile, Colombia, Panama, Peru, and Singapore. 57 The RVC test for footwear requires TPP content of 45% using the build-up rule or 55% using the build-down method. The calculation includes labor, material, and manufacturing costs. 58 Eight of the 187 items will only be on the short supply list for 5 years after the agreement takes effect. 59 OTEXA, The Transpacific Partnership (TPP): An Overview of the Rules of Origin and Market Access Commitments for Textiles and Apparel, February 2, 2016, pp. 15-16, http://otexa.trade.gov/PDFs/OTEXA_Webinar_TPP_Feb_2016.pdf. Congressional Research Service 23 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress textile and apparel ROO allow synthetic knit and woven baby clothes and brassieres cut and sewn in other TPP countries to be exported to the United States even if the yarn and fabric are not produced within the TPP region. Earned Import Allowance. The TPP pact includes a program called the Earned Import Allowance Program to encourage the use of American fabrics in Vietnamese-manufactured jeans and khaki pants. The provision exempts some U.S. apparel imports from Vietnam from the TPP yarn-forward rule provided Vietnam imports a specific quantity of U.S. fabrics. This would allow a limited amount of apparel cut, sewn, and assembled in Vietnam to enter the United States dutyfree even if the garments include fabric from non-TPP countries.60 Importantly, because both the ROO and the Earned Import Allowance program are complex and have substantial compliance and reporting requirements, some manufacturers in previous FTAs have opted to simply pay import duties rather than prove a product meets the specified requirements.61 Customs Enforcement and Implementation. The TPP includes specific customs procedures to enforce each TPP country’s commitments, such as visiting textile and apparel factories to conduct verification activities. A Committee on Textile and Apparel Matters is to be established under the TPP, where industry can raise concerns and issues can be resolved on trade in these products. Industry Views The Industry Trade Advisory Committee (ITAC) on Textiles and Clothing (ITAC 13) summarizes the industry’s divergent views.62 Committee members generally applauded the greater opening of global markets, but they differed sharply “over how that should be accomplished, whether that involves greater U.S. market access for foreign products, and what role consumer perspectives should play in this debate.”63 There were also strong differences over how the trade negotiations could best accommodate industry adjustments to additional competition. The National Council of Textile Organizations (NCTO), the industry group representing the domestic textile industry, 64 the American Apparel and Footwear Association (AAFA), the national trade association of the apparel and nonrubber footwear industries, and the Footwear Distributors and Retailers of America65 have endorsed the TPP. In contrast, Patagonia, an apparel retailer, has stated its opposition to the TPP, as has New Balance, a footwear company that maintains some production in the United States.66 60 Similar programs are included in the CAFTA-DR FTA and Haiti Trade Preference Programs. The TPP program is detailed in Appendix E of the U.S. tariff schedule applicable to imports from TPP member states, https://ustr.gov/sites/default/files/TPP-Final-Text-US-Appendix-E-Earned-Import-Allowance-Program.pdf. 61 Rachel Horowitz, Nicole Lorden, and Sophie Miyashiro, Best Practices Manual: How to Import Cotton Apparel Under the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), Fashion Institute of Technology, March 2013, p. 5. 62 Industry Trade Advisory Committee (ITAC 13) on Textiles and Clothing on the Trans-Pacific Partnership Agreement, December 2, 2015, https://ustr.gov/sites/default/files/ITAC-13-Textiles-and-Clothing.pdf. 63 Ibid., p. 5. 64 NCTO, “U.S. Textile Manufacturers Endorse Trans-Pacific Partnership,” press release, January 21, 2016, http://www.ncto.org/category/press-releases/. 65 See, AAFA, “Apparel & Footwear Association Releases Statement of Support for the Trans-Pacific Partnership,” press release, February 1, 2016, and Footwear Distributors and Retailers of America (FDRA), “Pre-hearing Statement for the public hearing on the Trans-Pacific Partnership: Likely Impact on the U.S. Economy and on Specific Industry Sectors,” p. 10, December 21, 2015. 66 See, Rose Marcario, “Patagonia Opposes TPP,” Patagonia, November 13, 2015, (continued...) Congressional Research Service 24 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Motor Vehicles67 Background The United States and Japan are the second- and third-largest auto manufacturing nations, respectively, which made motor vehicle market access issues central to the TPP negotiations (Table 2). Other TPP signatories that produce motor vehicles are Canada, Mexico, Malaysia, and Vietnam. Japan, Mexico, the United States, and Canada all export large numbers of vehicles. As a result of market forces and the elimination of vehicle trade barriers in NAFTA, the North American auto industry has become highly integrated. The largest source of U.S. imports from outside the NAFTA region is Japan, which shipped over 1.5 million vehicles to the United States in 2014.68 U.S. vehicle exports have steadily risen since the 2007-2009 recession and exports to other TPP countries could grow further as tariffs fall and nontariff barriers (NTBs) are reduced or eliminated.69 In 2014, U.S. vehicle exports exceeded two million units for the first time, having doubled since 2009. Nearly half of those exports were sold in Canada (870,025 units). Other TPP destinations for U.S. vehicle exports were Mexico (151,902), Australia (61,052), Japan (19,003), Chile (16,631), Peru (6,354), and New Zealand (5,013).70 However, while TPP markets accounted for 56% of U.S. vehicle exports to the world,71 most of those exports already benefit from dutyfree access under various regional and bilateral trade agreements. Japan is the only large vehicle market among TPP countries that is not covered by an FTA with the United States. Table 2. TPP Signatories with Vehicle Production 2015 Country Units Produced Units Sold Domestically United States 12,100,095 17,470,659 Japan 9,278,238 5,562,887 Mexico 3,565,469 1,351,648 Canada 2,283,474 1,939,949 Malaysia 614,671 666,674 Vietnam 50,000 209,804 Source: International Organization of Motor Vehicle Manufacturers, www.oica.net. Notes: Vehicles include passenger cars and commercial vehicles. (...continued) http://www.thecleanestline.com/2015/11/patagonia-opposes-tpp.html and “New Balance renews opposition to TPP,” by Matthew Korade, Politico Pro, April 12, 2015. 67 This section prepared by (name redacted). 68 Automotive News, Data Center, U.S. Car and Light-Truck Sales by Make, 2014, January 5, 2015. 69 Vehicles are exported from U.S. plants not only by General Motors, Ford, and Fiat-Chrysler, but also by Japanese, German, and Korean automakers. U.S. Department of Commerce, Office of Transportation and Machinery, Trends in U.S. Vehicle Exports, August 2015, pp. 4 and 6. http://trade.gov/mas/manufacturing/OAAI/build/groups/public/@tg_oaai/documents/webcontent/tg_oaai_004086.pdf. 70 Ibid., p. 9. 71 Other major non-TPP export markets (in terms of units sold) for U.S. vehicles in 2014 were China (307,425), Germany (147,680), and Saudi Arabia (104,074). Congressional Research Service 25 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress TPA-2015 did not spell out specific TPP objectives for trade in motor vehicles. Rather, motor vehicle industry goals were subsumed under general objectives to reduce tariffs and NTBs and to refrain from foreign currency manipulation. TPP auto manufacturing countries sought the elimination or reduction of U.S. vehicle tariffs, which are currently 2.5% on passenger vehicles and 25% on pick-up trucks. A related goal was to develop rules of origin for TPP vehicle trade that would ensure parts supply chains could operate smoothly but with strong verification and enforcement procedures. Some of the rules for vehicle trade in NAFTA and the U.S.-South Korea FTA (KORUS) served as reference points for TPP negotiators. USITC Estimated Economic Impact The USITC study estimated impacts on the passenger vehicle industry over 30 years given the long phaseout period for tariffs in this sector.72 The study highlights three significant periods during this transition: (1) after year 6, Canada, the top U.S. export market, would eliminate tariffs on imports from Japan potentially increasing competition for U.S. auto producers in that market; (2) by year 13 Malaysia and Vietnam would eliminate auto import duties, making U.S. exports more competitive in those markets; and (3) by year 30 the United States would eliminate its import tariffs on Japanese autos potentially increasing competition in the U.S. market for U.S. producers. Ultimately, the study predicts an increase from the 2047 baseline in vehicle and parts exports of 2% ($2.9 billion) and 1.5% ($2.1 billion), respectively. Imports are expected to be above baseline by 1.1% ($4.3 billion) for vehicles and 1.5% ($4.5 billion) for parts. Relative to the baseline, output and employment are expected to increase slightly for autos (2% for each), and decline slightly for parts (-0.2% for output and -0.3% for employment). Key Provisions Tariffs. If the TPP agreement comes into force, member countries will eventually eliminate import tariffs on most vehicles and parts. U.S. tariff commitments, including for motor vehicles, are on a bilateral basis, so tariff reduction speeds differ with respect to each country. 73 The longest tariff phaseouts are applied to vehicle shipments from Japan to the United States. In that case, the 2.5% tariff on passenger cars will remain in place until year 15, after which it will be eliminated gradually through year 25 after the agreement’s entry into force. The 25% U.S. light truck tariff with Japan is not phased out, but eliminated only in year 30 of the TPP. The U.S. rationale for longer tariff phase outs on Japanese vehicles than on those from other countries is that a longer transition is necessary for Japan to remove its own NTBs and move toward a “more open automotive market.”74 The reduction in foreign barriers to U.S. vehicles is likely to be most significant in Malaysia and Vietnam, where current high tariff levels make imported vehicles costly. Malaysia’s vehicle tariffs are as much as 40%; Vietnam’s as much as 70%. Nontariff Barriers. NTBs in the vehicle industry fall into two categories: (1) suppression of imports through tax breaks for local vehicles and local content requirements for domestically 72 USITC, TPP Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors, Publication 4607, May 2016, pp. 232. 73 For six TPP countries (Australia, Canada, Chile, Mexico, Peru, and Singapore, with which the United States already has FTAs), the TPP vehicle duties are zero when the agreement takes effect. For Brunei, Malaysia, and New Zealand, vehicle duties are cut in half when the agreement takes effect with the remaining duty removed in year 13 of the agreement. Vietnam will also remove most auto tariffs by year 13 of the agreement, but tariffs on used vehicles (representing nearly one-third of Vietnam’s auto tariff lines) will remain in place. 74 ITAC 2 Advisory Committee Report to the President, the Congress, and the United States Trade Representative on the Trans Pacific Partnership Trade Agreement, December 22, 2015, p. 5. Congressional Research Service 26 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress produced cars and parts; and (2) safety and environmental regulations that limit vehicle trade because the regulatory requirements differ among countries.75 Although Japan does not assess tariffs on vehicles, its consistently low level of vehicle imports has led to assertions that NTBs are used to restrict sale of foreign-made vehicles. Bilateral U.S.-Japan side letters to the TPP agreement establish a special joint dispute resolution process and commit Japan to     adopt a more open automotive rulemaking process; accept a limited number of U.S. motor vehicle safety regulations on an equivalency basis with similar Japanese standards; reduce barriers to establishing vehicle distribution centers; and apply financial incentives equally to imported as well as domestic vehicles.76 Rules of Origin. The motor vehicle rules of origin, while focused to some extent on U.S.-Japan vehicle trade, are also of interest to Canada and Mexico, which seek to maintain their own large auto-making industries in the face of increased competition from Asian production. The NAFTA rules served as a model for the TPP. To receive reduced tariffs under NAFTA, 62.5% of a vehicle’s content must be manufactured in the United States, Canada, or Mexico. The NAFTA net cost method takes total vehicle manufacturing costs, then subtracts costs of promotion, marketing, shipping and other factors. The resulting figure is then divided into the value of regional content—determined by subtracting the value of all the parts originating outside of the NAFTA area from the net cost—to find the percentage of regional content. In its own bilateral trade agreements, however, Japan has used a different calculation, known as the build-down method, and it argued that this should be the basis of vehicle rules of origin in the TPP. The build-down method does not subtract shipping and marketing before making the regional content determination, so cars using this method would have higher regional content than if the net cost method were used. The formula in the TPP allows either approach, requiring vehicles to have 45% TPP content using the net cost method or 55% using the build-down method to qualify for tariff preferences. The 45% net cost RVC in TPP is lower than the 62.5% level in NAFTA, but above the 35% level in KORUS. Vehicle and parts manufacturers producing and exporting within North America would be able to choose whether to use the NAFTA or TPP rules of origin. While the rules of origin differential between NAFTA and TPP may not impact vehicle trade, it may affect trade in auto parts. That is because the required TPP share of value for auto parts to receive preferential treatment is significantly lower than the threshold for vehicles, ranging from 35% to 45%, depending on the type of accounting used. While different regional value content standards for vehicles and parts were used in NAFTA—62.5% for vehicles and 60% for parts—the standards were closer than they are in TPP.77 Under TPP rules, some auto parts whose value was added mainly outside the TPP region may be able to enter the United States duty-free. This differential led ITAC 2 to note that its auto industry members “acknowledge the real concerns raised by some that the 75 Sarah Oliver, Assessing the Trans-Pacific Partnership: Auto Sector Liberalization, Peterson Institute for International Economics, PIIE Briefing 16-1, February 2016, p. 60, http://www.piie.com/publications/briefings/piieb16-1.pdf. 76 Motor Vehicle Trade Appendix between United States and Japan, available at https://ustr.gov/sites/default/files/TPPFinal-Text-Japan-Appendix-D-Appendix-between-Japan-and-the-United-States-on-Motor-Vehicle-Trade.pdf; Also see U.S.-Japan letter exchange, https://ustr.gov/sites/default/files/TPP-Final-Text-US-JP-Letter-Exchange-on-CertainAuto-NTMs.pdf; and https://ustr.gov/sites/default/files/TPP-Final-Text-JP-to-US-Letter-on-Motor-VehicleDistribution-Survey.pdf. 77 In the U.S.-Korea FTA several types of content calculations are allowed: for both vehicles and parts: 35% (net cost) or 55% (build down). Congressional Research Service 27 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress automotive origin RVC [regional value content] is not sufficiently strong, particularly for automotive parts.”78 Industry Views The motor vehicle industry does not have a unified position on the TPP; some automakers support it,79 others have raised concerns,80 and one company opposes it.81 The United Autoworkers union (UAW) opposes it.82 Concerns include the following:    Currency Manipulation. Some automakers (as well as some other manufacturers) recommended that the TPP include an enforceable commitment to prohibit currency manipulation. Instead, the TPP establishes a Macroeconomic Policy Authority Forum (see below section on currency), which the International Trade Advisory Committee for autos (ITAC 2) says falls short of its recommendations, but which “could help mitigate the misuse of exchange rate policies and the adverse economic impact this policy practice has had on the United States....”83 U.S.-Japan Side Letters and Appendix. ITAC 2 considers Japan’s vehicle NTB commitments as marginal improvements, but expects that they “will not lead to a substantially larger U.S. presence in the Japanese motor vehicle market.”84 It contends that these commitments are not enforceable under the TPP’s dispute resolution provisions.85 Long Phase out of U.S. Tariffs on Imported Japanese Cars and Trucks. With up to 30 years before these tariffs are eliminated completely, some experts alleged that the TPP tends to emphasize protection over liberalization.86 ITAC 2 sees the long phase out period as appropriate to provide Japan with a “sufficient transition period to a more open automotive market.”87 78 ITAC 2, p. 7. Supporters of the TPP agreement include: Toyota North America, Honda North America, Association of Global Automakers, and Motor and Equipment Manufacturers Association. 80 Industry Trade Advisory Committee on Automotive Equipment and Capital Goods, ITAC 2 Advisory Committee Report. 81 Ford Motor Company has announced its opposition to TPP and also publicly announced in January 2016 that it was withdrawing from the Japanese (and Indonesian) markets, stating that in those markets it does not see a “path to profitability” and that “market dynamics prevent us from being competitive. Ford’s press release also singled out the TPP’s effect: “Japan is the most closed, developed auto economy in the world, with all imported brands accounting for less than 6% of Japan’s annual new car market. The overall industry in Japan is projected to decline in coming years, leaving even less opportunity for success. In addition, in its current form, the Trans Pacific Partnership will not materially improve our ability to compete effectively in the market.” Ford Motor Company, “Ford Announces Closure of Operations in Japan and Indonesia Later This Year,” press release, January 25, 2016, http://www.at.ford.com/news/cn/Pages/Important%20Announcement.aspx. 82 See the UAW press release outlining its reasons for opposition. International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), “United Auto Workers Leadership Statement of Opposition to the TPP—Statement from UAW President Williams,” press release, December 3, 2015, http://uaw.org/united-autoworkers-leadership-statement-of-opposition-to-the-tpp-statement-from-uaw-president-williams/. 83 ITAC 2 report, p. 17. 84 Ibid., p. 8. 85 Ibid., p. 15. 86 Sarah Oliver, Assessing the Trans-Pacific Partnership: Auto Sector Liberalization, p. 65. 87 ITAC 2, p. 5. 79 Congressional Research Service 28 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress    Slow Liberalization Schedule for Malaysia and Vietnam. These countries will complete their vehicle and parts tariff reductions in year 13 year of TPP’s implementation, although some of Vietnam’s restrictions will remain after full implementation.88 (Almost all auto parts from TPP countries will be able to enter the United States duty free as soon as the TPP takes effect, as long as they meet the rules of origin.) Tracking and Enforcing Complicated Rules of Origin. TPP methods permit automakers to import vehicles and parts that contain some non-TPP content (from China or Thailand, for example). While supply chain sourcing is increasingly global, the impact on smaller U.S. parts manufacturers is not clear. ITAC 2 report calls for the U.S. government to monitor and enforce these rules to prevent non-TPP countries from benefiting from the preferential tariff benefits.89 Lack of Regulatory Harmonization. There are no obligations to require TPP countries to accept motor vehicle imports engineered to U.S. regulatory standards. This means that U.S. producers may need to modify their vehicles before selling them in other TPP member countries. This can be costly, especially in countries where the prospective demand for U.S.-made vehicles is small. ITAC 2 calls the lack of recognition of U.S. standards a “retreat from the longstanding U.S. practice of securing concessions in new agreements that go beyond what had been achieved in prior pacts. As such, this represents a significant missed opportunity.”90 Services91 Background A major priority for the United States in its negotiations of bilateral and regional FTAs is increased market access for services providers.92 Congress identified expanded market opportunities in services trade as a principal negotiating objective in the TPA-2015. Cross-border trade in services represents slightly less than one-fourth of total U.S. trade, and is an area of focus for the United States due to U.S. firms’ competitiveness in these sectors. Services accounted for 78% of U.S. private sector gross domestic product (GDP) and 87 million (82%) private sector employees in 2013. 93 The United States consistently runs a surplus in services trade; U.S. services exports surpassed imports by $233 billion in 2014. Some economists argue that the expanded commitments in international services may represent the greatest benefit for the United States in the TPP.94 The United States sought to expand on previous commitments the 11 partner countries have made on trade in services, particularly with the five countries with whom the United States does not 88 CRS calculations based on the legally verified TPP Tariff Elimination Schedules. ITAC 2, p. 7. 90 ITAC 2, p. 14. 91 This section written by Rachel Fefer and Brock Williams. 92 For more information see CRS Report R43291, U.S. Trade in Services: Trends and Policy Issues, by (name redacted). 93 Meredith M. Broadbent, Chairman, Recent Trends in U.S. Services Trade: 2015 Annual Report, United States International Trade Commission, May 2015, http://www.usitc.gov/publications/332/pub4526.pdf. 94 David Autor, David Dorn, and Gordon H. Hanson, "Why Obama's Key Trade Deal with Asia Would Actually be Good for American Workers," Washington Post, March 12, 2015. 89 Congressional Research Service 29 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress have existing U.S. FTAs (Brunei, Japan, Malaysia, New Zealand, and Vietnam). For these countries, existing commitments with the United States are based on the multilateral WTO General Agreement on Trade in Services (GATS). Another major U.S. objective was to address new services trade barriers not covered, or covered only partially, in previous trade agreements, and in doing so, potentially influence other ongoing U.S. services trade negotiations, including the Trans-Atlantic Trade and Investment Partnership (T-TIP) with the EU and the plurilateral Trade in Services Agreement (TiSA) on the sidelines of the WTO.95 Emerging issues in services trade include the prohibition of restrictions on data flows and data localization requirements and treatment of electronic payment card systems. Unlike tariff barriers, nontariff barriers (NTBs) on services trade that the TPP seeks to reduce and eliminate can take many different forms, making them difficult to quantify and compare across countries. The Organization for Economic Cooperation and Development (OECD) has created indices that provide some measure of services trade restrictiveness.96 These indices, available for OECD countries and some selected other countries across 18 different services sectors, show considerable variation in services trade restrictiveness among TPP OECD countries (Australia, Canada, Chile, Japan, Mexico, New Zealand, and the United States) and hence the opportunity for liberalization through TPP negotiation efforts. For example, in telecommunications, the index, which takes a value from 0 to 1 (most restrictive), ranges from 0.12 for the United States to 0.30 for Japan and 0.34 for Mexico. Such restrictions are likely even greater among some of the lesser developed TPP countries not included in the OECD database. Similar work by researchers at the World Bank, which covers more countries but in less detail, supports this hypothesis. Their index for overall services trade restrictiveness, which takes a value from 0 to 100, ranges from 11 for New Zealand to 41.5 for Vietnam and 46.1 for Malaysia, although the middle income country of Peru (16.4) scores lower than the United States (17.7).97 Due to the complexity of services trade barriers, TPP commitments in several chapters may affect services trade. Chapters with a focus on services-related commitments discussed in more detail below include: Cross Border Trade in Services (Chapter 10), Financial Services (Chapter 11), Temporary Entry (Chapter 12), and Telecommunications (Chapter 13). USITC Estimated Economic Impact The USITC predicts generally positive results for U.S. services industries from the TPP.98 The May 2016 study estimates that both services sector output and employment would see increases above a 2032 baseline as a result of the TPP. These gains are small in relative terms (0.1%), but large in absolute terms ($42.3 billion increase in output) given the scale of the U.S. services sector. Both exports and imports are expected to increase above the baseline ($4.8 billion and $7.0 billion, respectively) but the estimated larger growth in imports would lead to an overall decline in net U.S. exports of services. The authors attribute this to a few factors: increased 95 For more information see CRS Report R43387, Transatlantic Trade and Investment Partnership (T-TIP) Negotiations, by (name redacted), (name redacted), and (name redacted) ; and CRS In Focus IF10311, Trade in Services Agreement (TiSA) Negotiations, by (name redacted). 96 OECD Services Trade Restrictiveness Index available at http://www.oecd.org/tad/services-trade/services-traderestrictiveness-index.htm. 97 Ingo Borchert, Batshur Gootiiz, and Aaditya Mattoo, Policy Barriers to International Trade in Services: New Empirical Evidence, World Bank Policy Research Working Paper (WPS6109), 2012, http://iresearch.worldbank.org/ servicetrade/home.htm. 98 USITC, TPP Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors, Publication 4607, May 2016, pp. 319. Congressional Research Service 30 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress expenditures on tourism abroad (a U.S. services import), due to higher U.S. incomes post TPP; a shift in U.S. productive resources to sectors experiencing greater liberalization in foreign markets, including food and agriculture; and increasing U.S. demand for services imports given output capacity constraints and greater demand for U.S. services exports in TPP countries. The increase in U.S. services exports is estimated to go largely to TPP countries without an existing FTA while the increase in U.S. services imports would come from non-TPP countries, particularly the EU. Examples of TPP Services Liberalization A key component of services trade commitments in TPP is liberalization of specific industries. Most U.S. service sectors are already open to international competition and the United States made few commitments that went beyond existing trade agreement obligations. Longstanding restrictions on maritime shipping services, for example, would not be affected by the TPP. Other TPP countries, particularly the five countries without existing U.S. FTAs, opened additional services sectors to U.S. competition. Examples include  Japan would remove preconditions to provide express delivery and insurance services, and allow competing insurance providers access to the distribution network of Japan Post, the Japanese postal provider.  Malaysia would eliminate its foreign capital cap in telecommunications services and all joint venture and performance requirements for 12 service sectors in the upstream oil and gas industry, including drilling services, turbine repair and maintenance, and seismic data acquisition.  Vietnam would remove foreign equity restrictions on freight agency, warehousing, and customs clearance, and eliminate joint venture requirements for freight brokerage and related cargo logistics services. Cross-Border Trade in Services The TPP chapter on cross-border trade in services commits parties to provisions governing situations in which the buyer and seller are located in different territories. As with previous U.S. FTAs, the TPP employs the “negative list approach,” that is, the provisions are to apply to all types of services, unless specifically excluded by a partner country in the chapter annex on NCMs. This approach is generally considered more comprehensive than the “positive list approach” used in the GATS, which requires each covered service to be identified. The negative list approach also implies that any new type of service that is developed after the agreement enters into force is automatically covered unless it is specifically excluded. Key provisions include the following:       nondiscriminatory treatment of services from partner-country providers, including national treatment and MFN treatment; no limitations on the number of service suppliers, the total value or volume of services provided, the number of persons employed, or the types of legal entities or joint ventures that a foreign service supplier may employ; prohibition on locality requirements that a TPP-based service provider maintain a commercial presence in the country of the buyer; support of mutual recognition of professional qualifications for certification of service providers; transparency in the development and application of government regulations; and allowance for payments and transfers of capital flows that relate to the provision of services, with permissible restrictions in some cases including bankruptcy and criminal offences. Congressional Research Service 31 The Trans-Pacific Partnership (TPP): Key Provisions and Issues for Congress Examples of TPP Services Nonconforming Measures (NCMs) Each TPP party, including the United States, has a list of specific industries or practices it would exempt from its TPP services trade obligations. Examples include  Accounting: An accountant in Japan is required to be qualified as a certifi [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/crs%3AR44489. Public record. Not legal advice.