Will the RCEP morph into another TPP?
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Third World Resurgence | October-November 2016

Will the RCEP morph into another TPP?

During Donald Trump’s campaign to become US president, he had repeatedly said that he would withdraw the US from the Trans-Pacific Partnership (TPP) on his first day in office. After he won the election in November, he repeated this pledge. In light of this, many are declaring the TPP dead. However, the TPP provisions have been proposed in a number of other trade negotiations, including those on the Regional Comprehensive Economic Partnership (RCEP), on the Trade in Services Agreement (TiSA) and at the World Trade Organisation (WTO). This article looks at some of the TPP provisions which have been proposed in the RCEP and their implications.

Sixteen countries are negotiating the RCEP: the 10 countries of the Association of South-East Asian Nations (ASEAN) - Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam - and the six countries that have free trade agreements (FTAs) with ASEAN - Australia, China, India, Japan, New Zealand and South Korea. Of these 16 RCEP countries, seven are also in the TPP1 and three are least developed countries (LDCs): Cambodia, Laos and Myanmar. Therefore, if the TPP provisions are agreed to in the RCEP, LDCs will have to comply with rules that Canada and the US (TPP but not RCEP countries) do not have to agree to.

The RCEP is being negotiated in secret and no texts of the chapters being negotiated have been officially released. However, a number of RCEP chapters have been leaked - those on intellectual property, investment, goods, services, telecommunications and the e-commerce terms of reference - and this article is based on these leaked chapters. As of the date of the leaked texts, most of the provisions were still proposals that had not yet been agreed to by all RCEP countries. This article looks at some of the main proposals that go beyond the WTO rules.

Goods chapter

FTAs are typically thought of as being about reducing or removing tariffs (taxes) on imported products. However, since ASEAN already has FTAs with all the other countries in the RCEP, there is not much more ASEAN countries can expect to be able to export via lower tariffs in the RCEP. For example, Australia and New Zealand have already committed to removing all their tariffs on all ASEAN products coming into their countries, so ASEAN cannot increase its exports to Australia and New Zealand via the RCEP. However, Indonesia only removed tariffs on 49% of Indian exports to Indonesia under the existing ASEAN-India FTA (and India only removed tariffs on 79% of Indonesian exports), so there is some room for further removal of tariffs between those two countries in the RCEP.

There are some RCEP countries that do not have FTAs between them, e.g., China-India and China-Japan, so they will be liberalising for the first time via the RCEP. It is not yet clear what percentage of tariffs will be removed under the RCEP (e.g., whether it is 100% or 90% etc).

In addition, there is a proposal in the leaked RCEP goods chapter to ban export taxes between RCEP countries. Export taxes on raw materials such as crude palm oil, timber, minerals etc are used by a number of RCEP countries to encourage value-added processing. In the TPP, Malaysia and Vietnam were given exceptions to the ban on export taxes for listed products. No such exceptions have been proposed in the RCEP.

Investment chapter

Basically all the TPP’s substantive investment chapter rules and main investor-state dispute settlement (ISDS) provisions have been proposed in the leaked RCEP investment chapter. So apart from a few safeguards proposed by some countries, almost the whole proposed text in the leaked RCEP chapter is the TPP investment chapter.

For example, the broad definition of foreign investment that gets protected by the investment chapter has been copied from the TPP into the RCEP. Thus, there are proposals in the RCEP to give protection to:

existing investments in RCEP countries by investors from other RCEP countries as well as investment that enters the RCEP country after the RCEP starts operating
companies, shares, debt, contractual rights, permits, intellectual property and many other things.

Restrictions on performance requirements

The leaked RCEP investment chapter also includes proposals to restrict the ability of RCEP governments to require investors from any country (including investors from non-RCEP countries such as the US or European Union) to undertake activities that benefit the country they are investing in, such as hire local workers, transfer technology etc. This restriction on ’performance requirements’ makes it harder for RCEP governments to make sure foreign investment benefits their economy by linking to local suppliers (e.g., of services such as banking, accounting, advertising etc), using local workers and transferring technology. The proposed restrictions on RCEP governments requiring investors to hire local workers, do research and development locally and have regional/global headquarters located in their country were not in the TPP. The RCEP proposals thus give even more rights to investors and restrict governments more tightly than in the TPP.

Furthermore, the proposed restrictions on performance requirements could constrain the use of laws such as Malaysia’s which require locally made programmes to be broadcast on television and radio for a certain number of hours per day to ensure local culture and languages are still seen and heard instead of cheaper American programming.

These rules could also restrict the use of export taxes on products to all countries, even though many RCEP countries have successfully used export taxes on natural resources to develop value-added processing of their raw materials, e.g., palm oil, minerals, timber (into furniture), leather (into bags and shoes) etc.

The proposed restrictions on performance requirements would be on a ’negative list’ basis, i.e., they would prevent the government from imposing these performance requirements in all sectors except those listed (and even these exempted sectors will presumably be heavily negotiated and all RCEP governments will have to agree to give the exceptions).

The Japanese government is even proposing that RCEP governments cannot set maximum royalties on voluntary licences (to keep medicines, climate change technology and other technology affordable and to minimise transfer pricing and tax evasion), unless an exception has been agreed to by all RCEP governments. This RCEP proposal does not even have the slight exceptions which Japan agreed to in the TPP.

No exceptions for LDCs were evident in the leaked version of the RCEP investment chapter, even though LDCs still have a transition period at the WTO before they have to comply with the WTO’s minimal restrictions on performance requirements.

Fair and equitable treatment

The leaked RCEP text contains a proposal to give investors from other RCEP countries ’fair and equitable treatment’ (FET). Failure to accord FET is the most commonly invoked ground for investors to sue under investment treaties.

FET has been given a wide range of meanings by international tribunals, including a ’standstill’ on laws and regulations. This would mean that RCEP governments cannot amend their laws if it harmed investors from other RCEP countries.

Such a standstill would be problematic for any government as they often need to change their laws in response to changes in external circumstances such as financial crises, climate change or new information (e.g., that a chemical has now been found to be dangerous, such as BPA in baby bottles). However, developing countries and LDCs need to change their laws even more as they often do not yet have the laws they need in place (e.g., controls on noise pollution). As they develop and the regulatory capacity of their governments changes, they will need to adjust their laws. Therefore a standstill would be even more risky for them.

FET has become so controversial that even the US agreed in the TPP to some slight safeguards, but these were not proposed in the RCEP at the time of the leaked text, even though it was already after the TPP had been concluded. Canada and the EU have greatly restricted the scope of FET in their recently concluded Comprehensive Economic and Trade Agreement (CETA), while other countries (such as Brazil) have excluded FET from their recent investment treaties altogether.

Expropriation

The leaked RCEP investment chapter proposes compensation at fair market value for direct and indirect expropriation. Direct expropriation (or nationalisation) is when a government takes over a foreign investment (e.g., a factory) and becomes the owner of it. Indirect expropriation is when a government action or series of actions substantially or permanently reduces the value of the investment.

Since investment is broadly defined (see above) to include patents and licences etc, compulsory licences (to make/import a cheaper generic version of a patented medicine) and taxation can possibly be deemed to be expropriation. An exception has been proposed for compulsory licences and other limitations on intellectual property rights, but this, problematically, is only if it complies with WTO rules on intellectual property (and the RCEP’s intellectual property chapter) - which makes the WTO’s intellectual property rules enforceable via ISDS (see below).

Since the RCEP’s chapter on general exceptions has not been leaked, it is unclear if there will be a taxation exception to expropriation (e.g., the TPP’s partial exception for lowest common denominator taxes that the investor’s home government agrees do not constitute expropriation). South Korea has proposed mere guidelines regarding when taxation is not expropriation, whereas ASEAN has proposed to exclude taxation from the whole investment chapter and India has proposed a partial exception.

There is no exception in the leaked RCEP chapter to take into account an investor’s wrongdoing. Thus, even if an investor breaks the law (e.g., by polluting a river with its mining waste) in the RCEP country it is investing in, and the host government punishes it by cancelling the mining permit, the investor can still sue under ISDS (see below) for the lost profits it would have made for the remaining years of the permit. This happened to Ecuador when US oil company Occidental broke Ecuador’s law and Ecuador consequently cancelled Occidental’s mining permit, as it was permitted to do by its law and the contract. Occidental sued Ecuador under rules similar to those proposed in the RCEP and won $1 billion.

ISDS

There are proposals to make the RCEP investment chapter enforceable via investor-state dispute settlement. This would allow investors from other RCEP countries to sue an RCEP government at an international tribunal for unlimited monetary compensation and interest (which can be compounded every month at commercial interest rates from the date of the disputed government action).

Countries have had to pay up to more than $1 billion in ISDS disputes. Even when the governments win, they have still had to pay their own lawyers’ fees (which amounted to $58 million in one case) 70% of the time. But when the investors win, they have only had to pay their own legal fees 40% of the time. Some governments find the legal fees alone so unaffordable that they are willing to settle the dispute by dropping their proposed law, as Uruguay was going to do for its tobacco control measures until Bloomberg funded its defence.

(Generally the TPP’s slight safeguards in its investment chapter have also been proposed in the RCEP, but some have not. These may have been the late additions to the TPP, but the TPP negotiations were finished on 6 October 2015,6 and the leaked RCEP text was as of 16 October 2015, so all the TPP safeguards were known and could have been added to the RCEP investment chapter by the date of this leaked RCEP text.)

Intellectual property chapter

The RCEP has a number of proposed rules that would provide broader, longer and stronger intellectual property protection than the WTO rules require. Some of these are outlined below.

Like with the TPP, there is a proposal in the RCEP that RCEP countries must join the UPOV 1991 plant variety protection treaty that increases the rights of seed companies at the expense of farmers’ rights. UPOV 1991 requires farmers to pay royalties to use commercial seed for 20 or 25 years and prohibits farmers from swapping with each other commercial seed that they have saved from a harvest. A human rights impact assessment of UPOV 1991 which included the Philippines, an RCEP country, found that:

If the Philippines joined UPOV 1991 and therefore had to prohibit seed exchange and seed banks for protected plant varieties, its farmers would have to pay over four times more for seeds. One of the reasons for using farm-saved seed or seed exchanged with neighbours is that it does not require cash in hand at the time of sowing, which is often not available. Some Filipino farmers noted that if UPOV 1991 was implemented in the country, they would have no money left for school fees and no more food.

Like in the TPP, there is a proposal in the RCEP for longer patent terms (longer than the WTO’s 20 years) for two types of delays: in approving the patent (for any invention including climate change technology, medicines and agricultural inputs) and in assessing medicines as safe, effective and of good quality. One of these patent term extensions is triggered by a shorter delay than in the TPP. The patented versions of medicines to treat HIV/AIDS cost $15,000 per patient per year at the monopoly price but once the patent expired, generic versions could compete and the price fell to $67 per patient per year. Thus, agreeing to the patent term extensions proposed in the RCEP would keep medicines at the high prices for longer.

Furthermore, even if there is no patent, there is a proposal in the RCEP to have a monopoly on medicines for more than five years. This is longer than the TPP’s five-year equivalent monopoly on medicines.

E-commerce chapter

Only the RCEP e-commerce chapter’s terms of reference have been leaked. However, they include all the TPP e-commerce chapter provisions. This includes provisions on cross-border data flows with what are likely to be insufficient privacy exceptions. If it is the same as the TPP, it would mean that RCEP citizens’ personal data (e.g., health, financial and tax records) can be sent to any country in the world (which has insufficient privacy exceptions), where it can then be sold to advertisers or accessed by the US government (as revealed by whistleblower Edward Snowden).

Other chapters

Like many other FTAs, the RCEP is likely to have an exceptions chapter which copies the health and environment exceptions from the WTO. However, these exceptions have proven very difficult to use at the WTO, with governments failing to satisfy the multiple criteria to use the exceptions 43 out of 44 times. Furthermore, the exceptions may not apply to all RCEP chapters. There is a privacy exception in the WTO rules, but it has a self-cancelling sentence that has led to doubts over its effectiveness.

As with most other FTAs, most RCEP chapters are likely to be enforced by RCEP governments suing each other at an international tribunal. The winning government would be able to impose tariffs on the losing government until the latter changes its law to comply with the RCEP.

Conclusion

Even if the TPP does not come into force due to Trump’s election, the TPP rules may be resurrected in other trade agreements such as the RCEP.

 [1]


Footnotes:

[1Endnotes

1 The TPP countries are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Those in bold are also in the RCEP.

2 The Guiding Principles for the negotiations have been released: https://mfat.govt.nz/assets/_securedfiles/FTAs-in-negotiations/RCEP/Guiding-Principles-and-Objectives-for-Negotiating-the-Regional-Comprehensive-Economic-Partnership.pdf.

3 http://keionline.org/node/2472

4 http://keionline.org/node/2474

5 http://bilaterals.org/?-mega-regional-ftas-

6 http://dfat.gov.au/trade/agreements/tpp/Pages/trans-pacific-partnership-agreement-tpp.aspx