The Comprehensive and Progressive Agreement for Trans-Pacific Partnership: Implications for Southeast Asia 9789814818889

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Reproduced from The Comprehensive and Progressive Agreement for Trans-Pacific Partnership: Implications for Southeast Asia, edited by Cassey Lee and Pritish Bhattacharya (Singapore: ISEAS – Yusof Ishak Institute, 2021). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of ISEAS Publishing. Individual chapters are available at .

The ISEAS – Yusof Ishak Institute (formerly Institute of Southeast Asian Studies) is an autonomous organization established in 1968. It is a regional centre dedicated to the study of socio-political, security, and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. The Institute’s research programmes are grouped under Regional Economic Studies (RES), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). The Institute is also home to the ASEAN Studies Centre (ASC), the Singapore APEC Study Centre, and the Temasek History Research Centre (THRC) ISEAS Publishing, an established academic press, has issued more than 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world.

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First published in Singapore in 2021 by ISEAS Publishing 30 Heng Mui Keng Terrace Singapore 119614 E-mail: [email protected] Website: All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the ISEAS – Yusof Ishak Institute. © 2021 ISEAS – Yusof Ishak Institute, Singapore The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of the publisher or its supporters. ISEAS Library Cataloguing-in-Publication Data Name(s): Lee, Cassey, editor. | Bhattacharya, Pritish, editor. Title: The Comprehensive and Progressive Agreement for Trans-Pacific Partnership : implications for Southeast Asia / edited by Cassey Lee and Pritish Bhattacharya. Description: Singapore : ISEAS – Yusof Ishak Institute, 2021. | Includes bibliographical references and index. Identifiers: ISBN 978-981-4818-87-2 (paperback) | ISBN 978-981-4818-88-9 (PDF) Subjects: LCSH: Comprehensive and Progressive Agreement for Trans-Pacific Partnership—(2018 March 8). | Pacific Area cooperation. | Pacific Area— Commercial treaties. | Free trade—Economic aspects—Pacific Area. Classification: LCC HF2570.7 C73

Cover illustration by Pritish Bhattacharya Typeset by International Typesetters Pte Ltd Printed in Singapore by Markono Print Media Pte Ltd

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Contents

Preface

vii

Abbreviations

viii

About the Contributors

xiv

 1. Introduction

Cassey Lee and Pritish Bhattacharya

1

  2. The Economics of the CPTPP and RCEP: Asia Pacific Trade Agreements without the United States

12

  3. The TPP and CPTPP: Truths about Power Politics

30

  4. The Investment Chapter and ISDS in the CPTPP: Lessons from and for Southeast Asia

51

Peter A. Petri, Michael G. Plummer, Shujiro Urata and Fan Zhai

Malcolm Cook

Luke Nottage

  5. Intellectual Property in the CTPP and Access to Medicines: A Thai Perspective

112

  6. New Rules for State-Owned Enterprises in the CPTPP

138

Jakkrit Kuanpoth

Wan Khatina Nawawi

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vi

Contents

  7. Impact of the CPTPP on Japanese Manufacturing Affiliates in ASEAN

162

  8. Reassessing Malaysia’s Export Opportunities in the TPP and CPTPP

179

  9. Impact of the CPTPP on Vietnam

218

10. Should Thailand Join the CPTPP?

253

11. Indonesia, the TPP and CPTPP: Hold Your Breath

281

Index

308

Kazunobu Hayakawa and Kohei Shiino

Tham Siew Yean and Andrew Kam Jia Yi

Phan Duc Hieu

Archanun Kohpaiboon Kiki Verico

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PREFACE

This edited volume has taken a long time to complete. The original plan was to publish an edited volume on the potential impact of the Trans-Pacific Partnership (TPP) Agreement on Southeast Asia based on papers presented in a series of seminars held at the ISEAS – Yusof Ishak Institute in 2016. This plan was put on hold following the uncertainties created by the withdrawal of the United States from the TPP in January 2017. The subsequent signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018 convinced us to resuscitate the book project. Our contributors have had to revise their chapters to take into account, as much as possible, the major changes brought about by the new deal. We are confident that this volume will continue to be important and relevant in light of the plethora of global political and economic challenges that have emerged in recent times, such as the rise of protectionism, the US-China trade war and the Covid-19 pandemic. We hope that this volume will serve as a useful reference to anyone keen to understand the CPTPP—its nature, evolution and impact. This book project would not have materialized without our contributors. We thank them for their patience and willingness to reconfigure the chapters after the TPP was transformed into CPTPP. At ISEAS, the support of Director Choi Shing Kwok and Senior Advisor Tan Chin Tiong has been invaluable. We would also like to thank Ng Kok Kiong and Sheryl Sin Bing Peng of the Publications Unit for their help in finalizing and publishing this edited volume. Cassey Lee and Pritish Bhattacharya

vii

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Abbreviations

AANZFTA

ASEAN-Australia-New Zealand Free Trade Area

ACFTA

ASEAN-China Free Trade Area

ACP

African, Caribbean and Pacific Group of States

AFC

Asian Financial Crisis

ACIA

AEC AFTA

ASEAN Comprehensive Investment Agreement

ASEAN Economic Community ASEAN Free Trade Area

AHKFTA

ASEAN-Hong Kong, China Free Trade Area

AIAK

Agreement on Investment between ASEAN and Korea

AIAI

AICA AIFTA AJCEP AJFTA

AKFTA

APEC

Agreement on Investment between ASEAN and India

Agreement on Investment between China and ASEAN ASEAN-India Free Trade Agreement

ASEAN-Japan Comprehensive Economic Partnership

ASEAN-Japan Free Trade Agreement

ASEAN-Korea Free Trade Agreement Asia-Pacific Economic Cooperation

ARV Antiretroviral

viii

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ix

Abbreviations

ASCM ASEAN

BIMSTEC BIT

BRI

CACM CAD CGE CIC

CITES CMSA

CNEN

C/O

COMESA

CPTPP

Agreement on Subsidies and Countervailing Measures Association of Southeast Asian Nations

Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation Bilateral Investment Treaty Belt and Road Initiative

Central American Common Market Current Account Deficit

Computable General Equilibrium China Investment Corporation

Convention on International Trade in Endangered Species of Wild Fauna and Flora Constant Market Share Analysis

Consortium for New Export Nation Certificate of Origin

Common Market for Eastern and Southern Africa

Comprehensive and Progressive Agreement for Trans-Pacific Partnership

DIP

Department of Intellectual Property

EAP

East Asia and the Pacific

DSM

EAS

ECAP ECCAS

ECOWAS E&E

Dispute Settlement Mechanism East Asia Summit

EU-ASEAN Project on the Protection of Intellectual Property Rights

Economic Community of Central African States Economic Community of West African States Electrical and Electronics

EPA

Economic Partnership Agreement

ESDA

Export Share Difference Analysis

EPC ETF

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European Patent Convention Entry into Force

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x

Abbreviations

EU

European Union

FDI

Foreign Direct Investment

FCRI

FTA

FTAA

FTAAP

Agricultural Research Specialist Field and Renewable Energy Crops Research Institute Free Trade Agreement; Free Trade Area

Free Trade Area of the Americas

Free Trade Agreement of the Asia Pacific

GAPP

Generally Accepted Principles and Practices

GATT

General Agreement on Tariffs and Trade

GATS GDP GE

GFC GI

GNI

GPO GSC GSP

GTAP

GVC IC

ICN

ICSID ICT

IFSWF ILO

IMF

IMFC INPI IP

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General Agreement on Trade in Services Gross Domestic Product Global Economy

Global Financial Crisis Governance Indicator

Gross National Income

Government Pharmaceutical Organization Global Sector Competition

Generalized System of Preferences Global Trade Analysis Project Global Value Chain Integrated Circuit

International Competition Network

International Centre for Settlement of Investment Disputes

Information and Communication Technology

International Forum on Sovereign Wealth Funds International Labour Organization International Monetary Fund

International Monetary and Financial Committee

National Institute of Industrial Property

Intellectual Property

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xi

Abbreviations

IPF

Independent Pension Fund

ISDS

Investor-State Dispute Settlement

IPR

ISIS IT

ITA

ITC

IWG JAI

JETRO JICA

JMEPA JTEPA JVEPA KNB

KORUS LDC

MAB

MAHB MAS

MERCOSUR METI

Intellectual Property Rights

Institute for Strategic and International Studies Information Technology

Information Technology Agreement International Trade Commission

International Working Group on Sovereign Wealth Funds Japan Analytical Industry Co., Ltd. Japan External Trade Organization

Japan International Cooperation Agency

Japan-Malaysia Economic Partnership Agreement Japan-Thailand Economic Partnership Agreement

Japan-Vietnam Economic Partnership Agreement Khazanah Nasional Berhad

United States-Korea Free Trade Agreement Least Developed Country Malaysia Airlines Berhad

Malaysia Airports Holdings Berhad

Malaysian Airline System Berhad; Monetary Authority of Singapore

Mercado Común del Sur, or Common Market of the South Ministry of Economy, Trade and Industry

MFA

Multi-Fibre Arrangement

MITI

Ministry of International Trade and Industry

MFN MNC/E MOIT

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Most Favoured Nation

Multinational Corporation/Enterprise Ministry of Industry and Trade

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MPI

Abbreviations

Ministry of Planning and Investment

NAFTA

North American Free Trade Agreement

NCM

Non-Conforming Measure

NAPHA

NGO NSC

NT

NTB/M NTR

OECD O&G P4

PCT

PWL

R&D RCA

National Access to Antiretroviral Program for People living with HIV/AIDS Non-Government Organization National Sector Competition National Treatment

Non-Tariff Barrier/Measure Normal Trade Relations

Organisation for Economic Co-operation and Development Oil and Gas Pacific Four

Patent Cooperation Treaty

Priority Watch List

Research and Development

Revealed Comparative Advantage

RCEP

Regional Comprehensive Economic Partnership

RTA

Regional Trade Agreement

ROO SAT

SEHC SITC

SME

SOE SPS SSL

SWF

TAFTA

TCI

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Rules of Origin

Seed Association of Thailand

Samsung Electronic Ho Chi Minh City Complex

Standard International Trade Classification Small and Medium-Sized Enterprise State-Owned Enterprise

Sanitary and Phytosanitary Short Supply List

Sovereign Wealth Fund

Thailand-Australia Free Trade Agreement Trade Complementarity Index

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Abbreviations

TFEU ThaSTA TIFTA TII

Treaty on the Functioning of the European Union Thai Seed Trade Association

Thailand-India Free Trade Agreement Trade Intensity Index

TNFTA

Thailand-New Zealand Free Trade Agreement

TPP

Trans-Pacific Partnership

TTIP

Trans-Atlantic Trade and Investment Partnership

TPA

TSM

UNCITRAL UPOV 91 US

USAID USSFTA

USTR VFDI

VINATEX

VNUSBTA WCT

WIPO

WPPT WTO

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Trade Promotion Authority

Transitional Safeguard Measure

United Nations Commission on International Trade Law

International Convention for the Protection of New Varieties of Plants of 1991 United States

United States Agency for International Development US-Singapore Free Trade Agreement United States Trade Representative Vertical Foreign Direct Investment

Vietnam National Textile and Garment Group Vietnam-US Bilateral Trade Agreement WIPO Copyright Treaty

World Intellectual Property Organization

WIPO Performances and Phonograms Treaty World Trade Organization

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about the CONTRIBUTORS

Pritish Bhattacharya, Research Officer, Regional Economic Studies, ISEAS – Yusof Ishak Institute, Singapore Malcolm Cook, Visiting Senior Fellow, Regional Strategic and Political Studies, ISEAS – Yusof Ishak Institute, Singapore Kazunobu Hayakawa, Senior Research Fellow, Institute of Developing Economies, IDE-JETRO, Japan Andrew Kam, Associate Professor, Institute of Malaysian and International Studies, National University of Malaysia, Malaysia Archanun Kohpaiboon, Associate Professor, Faculty of Economics, Thammasat University, Thailand Jakkrit Kuanpoth, Research Director for Economic Laws, Thailand Development Research Institute, Thailand Cassey Lee, Senior Fellow and Coordinator, Regional Economic Studies, ISEAS – Yusof Ishak Institute, Singapore Luke Nottage, Professor of Comparative and Transnational Business Law, University of Sydney Law School, Australia Peter A. Petri, Carl J. Shapiro Professor of International Finance, Brandeis International Business School, Brandeis University, USA

xiv

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About the Contributors

xv

Phan Duc Hieu, Deputy Director, Central Institute for Economic Management, Vietnam Michael G. Plummer, Director, SIAS Europe and Eni Professor of International Economics, School of Advanced International Studies – Europe, Johns Hopkins University, Italy Kohei Shiino, Associate Professor, Faculty of International Studies, Takushoku University, Japan Tham Siew Yean, Visiting Senior Fellow, ISEAS – Yusof Ishak Institute, Singapore Shujiro Urata, Professor, Graduate School of Asia-Pacific Studies, Waseda University, Japan Kiki Verico, Deputy Director of Research, Institute for Economic and Social Research – Faculty of Economics and Business, University of Indonesia, Indonesia Wan Khatina Nawawi, Director of Economics, Malaysian Aviation Commission, Malaysia Fan Zhai, Executive Advisor and Chief Economist, Everglory Group, China

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1 INTRODUCTION Cassey Lee and Pritish Bhattacharya

1. Overview The appetite for regional economic integration has waxed and waned over time. Since the failure of the Doha Development Round of multilateral trade negotiations in 2008, countries in Southeast Asia have continued to show interest in greater regional economic integration. This has manifested in several forms and at several fronts—both intra- and inter-regionally. A key initiative that pre-dates the collapse of the Doha Round is the ASEAN Economic Community (AEC), which was formally established on 31 December 2015. It remains a key focal point for regional economic integration for ASEAN member countries. Simultaneously, ASEAN countries have also negotiated the free trade agreements (FTAs) with other countries that already have FTAs with the Association’s member countries. A smaller subset of Southeast Asian nations—namely Brunei, Malaysia, Vietnam and Singapore—and eight other countries from the Asia Pacific came together to participate in the Trans-Pacific Partnership (TPP). Even though the TPP negotiations were successfully concluded

1

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Cassey Lee and Pritish Bhattacharya

and the agreement was signed in February 2016, the United States’ withdrawal from the TPP cast significant doubts on its future. The remaining eleven countries subsequently renegotiated the agreement successfully, resulting in the signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in March 2018. To date, seven of the TPP signatory countries have ratified the CPTPP, where it has entered into force. Of the four Southeast Asian nations that have signed the CPTPP, only two countries—Singapore and Vietnam—have ratified the agreement; Brunei and Malaysia have yet to do so at the time of writing. The CPTPP, in its current form and in its earlier manifestation as the TPP, has been touted as a “twenty-first century trade agreement”—a lofty phrase that conveys the agreement’s comprehensiveness and its usefulness as a benchmark for all other subsequent trade deals. Despite this, there is clearly no consensus about the impact of the CPTPP in terms of its costs and benefits. To complicate matters, such calculus—as some have argued—extends beyond economics. The political economy of trade agreements is also not confined to domestic politics. Regional geopolitics matter, too. The ongoing trade dispute between the United States and China exemplifies this. This brings us to the goal of this edited volume. The chapters in this volume have been put together to shed some light on the impact of the CPTPP on the Southeast Asian region. These chapters are organized along four distinct themes. The first theme covers analyses of the CPTPP from broad “bird’s-eye” perspectives, including an economic standpoint (Chapter 2) as well as an international politics angle (Chapter 3). The next theme covers two areas in the CPTPP that have received significant attention, namely investor-state dispute settlement (Chapter 4) and intellectual property (Chapter 5). The third theme is devoted to the analyses of two key actors in Southeast Asian economies—state-owned enterprises (Chapter 6) and multi-national enterprises (Chapter 7). Finally, the fourth theme focuses on country-level studies on the impact of the agreement. It includes countries that are members of the CPTPP (Malaysia—Chapter 8 and Vietnam—Chapter 9) and non-member countries (Thailand—Chapter 10 and Indonesia—Chapter 11). To set the background and context for these chapters, the next section in this introductory chapter offers a brief explanation and history of

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Introduction

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the CPTPP, followed by the economic importance of the agreement. A comprehensive summary of the key elements of all the CPTPP chapters is provided in the third section. The final section then outlines the key orientation and findings of the chapters included in this volume.

2.  The Nature of the CPTPP The CPTPP is a regional trade agreement that determines market access, rules and regulations for trade and investment among its participating countries. Eleven countries signed the agreement in March 2018, but only seven countries have ratified it so far, namely Australia, Canada, Japan, Mexico, New Zealand, Singapore and Vietnam. The four nations that have yet to ratify the agreement are Brunei, Chile, Malaysia and Peru (see Box 1.1). The CPTPP has entered into force progressively for these countries according to the sequence of their ratification process: • 30 December 2018—Australia, Canada, Japan, Mexico, New Zealand and Singapore; • 1 January 2019—Vietnam. As stated in the preamble of the CPTPP, the main economic goals of the agreement are to: • Establish a comprehensive regional agreement that promotes economic integration to liberalize trade and investment, bring economic growth and social benefits, create new opportunities for workers and businesses, contribute to raising living standards, benefit consumers, reduce poverty and promote sustainable growth. • Strengthen the competitiveness of businesses in global markets and enhance the competitiveness of economies by promoting opportunities for businesses, including promoting the development and strengthening of regional supply chains. • Support the growth and development of micro, small and mediumsized enterprises by enhancing their ability to participate in and benefit from the opportunities created by the agreement. • Establish a predictable legal and commercial framework for trade and investment through mutually advantageous rules.

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Cassey Lee and Pritish Bhattacharya

Box 1.1:  A Brief History of the CPTPP The origin of the CPTPP can be traced all the way back to 2005 when Brunei, Chile, New Zealand and Singapore signed the Trans-Pacific Strategic Economic Partnership Agreement. Popularly dubbed as the Pacific Four (P4), it was a comprehensive deal that covered trade in goods, rules of origin, trade remedies, sanitary and phytosanitary measures, technical barriers to trade, trade in services, intellectual property, government procurement and competition policy. In 2008, the United States expressed interest in joining the P4 economies. The following year, guided by President Obama’s “pivot” to the Asia Pacific region, the country entered into talks with the four members. By 2010, Australia, Peru and Vietnam also joined the group to launch a new round of negotiations. Later that year, the cluster expanded to nine countries when Malaysia joined, hoping to reap benefits of lower tariff and non-tariff barriers. In 2012, Canada and Mexico announced their participation in the P4, which by then had metamorphosed into the Trans-Pacific Partnership (TPP). Finally, in 2013, Japan, in an effort to stimulate the domestic economy in the face of rapid depreciation of the Yen, became the twelfth and last country to join the pact. In February 2016, all twelve members signed the TPP. However, on 23 January 2017, Donald Trump, the newly-elected President of the United States signed a Presidential memorandum to withdraw the United States from the TPP. Immediately after America’s exit, the remaining member countries were unsure of the next steps with regard to the agreement, but eventually decided to revive it in May 2017. An agreement was reached in January 2018, and the formal Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) signing ceremony was held in March 2018. According to the provisions of the CPTPP, the agreement would enter into effect sixty days after ratification by at least 50 per cent of the signatories. Following sequential ratification by Mexico, Japan, Singapore, New Zealand, Canada and Australia by October 2018, the pact entered into force between the six nations on 30 December 2018. In November 2018, Vietnam, too, ratified the CPTPP, and the agreement entered into force for the country in January 2019.

• Facilitate regional trade by promoting efficient and transparent customs procedures that reduce costs and ensure predictability for importers and exporters. • Promote high levels of environmental protection, including through effective enforcement of environmental laws, and further

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Introduction

• • • • •

5

the aim of sustainable development, including through mutually supportive trade and environmental policies and practices. Protect and enforce labour rights, improve working conditions and living standards, strengthen cooperation and the parties’ capacity on labour issues. Promote transparency, good governance and the rule of law, and eliminate bribery and corruption in trade and investment. Contribute to the harmonious development and expansion of world trade and catalyse broader regional and international cooperation. Establish an agreement to address future trade and investment challenges and opportunities, and contribute to advancing their respective priorities over time. Expand partnership by encouraging the accession of other states or separate customs territories in order to further enhance regional economic integration and create the foundation of a Free Trade Area of the Asia Pacific.

The above are primarily the economic goals that are ultimately aimed at improving economic welfare. Apart from these, scholars have also discussed the geopolitical goals of the CPTPP. In describing the launch of the TPP negotiations, Schott (2016) noted that a key objective of the Asian participants was “the need to ensure sustained US participation in the region’s economic development and to maintain US strategic engagement to deter the type of military adventurism that caused so much devastation in East and Southeast Asia over the past century”. The TPP was also seen as a potential contributor to America’s economic recovery in the aftermath of the Global Financial Crisis in 2008 (ibid.). Thus, even though the United States subsequently withdrew from the TPP, these goals could have been important drivers in the earlier history of the CPTPP.

3.  The CPTPP Chapters The multiple economic objectives and the comprehensiveness of the CPTPP are reflected in the structure and contents of the agreement, which comprises thirty chapters. These are briefly summarized in Table 1.1. It is important to note that studies conducted by Cimino-Issacs and Schott (2016) and Lim, Elms, and Low (2012) contain some discussions

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Table 1.1 Summary of Key Elements of the CPTPP Chapters Chapter

Summary of Contents

1. Initial Provisions and General Definitions

Definitions of the general terms used in the CPTPP text.

2. N  ational Treatment and Market Access for Goods

Application of national treatment, tariff reduction/elimination and other regulations affecting trade (imports and exports).

 ules of Origin (ROO) and 3. R Origin Procedures

Definitions of ROO, costing methods, accumulation, de minimis for nonoriginating materials and origin procedures.

4. Textile and Apparel Goods

Application of rules and regulations in textile and apparel goods trade. It includes ROO, emergency actions (for adverse impact of changes in customs duty), monitoring and verification processes and enforcement institutions.

 ustoms Administration and 5. C Trade Facilitation

Obligations on customs cooperation, advanced rules and advice for importation of goods (tariffs, ROO), trade facilitation (express shipment, automation) and administration of penalties by customs.

6. Trade Remedies

Safeguard measures and processes (to protect domestic industries temporarily). Rules pertaining to antidumping and countervailing duties.

 anitary and Phytosanitary 7. S Measures

Rules, processes and institutions for sanitary and phytosanitary measures, including equivalence recognition, science and risk analysis, audits, import checks, certification and transparency.

8. Technical Barriers to Trade

Application of international standards for technical regulations, standards and conformity assessment procedures. It covers various aspects of conformity assessment—processes, governance, institutions and cooperation.

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Table 1.1  (continued)

7

Introduction

Table 1.1  (continued) Chapter

Summary of Contents

9. Investment

National treatment of investors. It includes national treatment, MFN treatment, compensation for expropriation or nationalization, financial transfers, performance requirements and investor-state dispute settlement mechanisms.

10. C  ross-Border Trade in Services

Treatment of services and service suppliers from other member countries. It covers market access and local presence requirement, governance of domestic regulations, recognition of standards and criteria for service providers.

11. Financial Services

Treatment (national and MFN) of investors and financial institutions from other member countries. It includes cross-border trade, supply of new financial services, non-conforming measures and exceptions, regulatory issues and dispute settlement.

 emporary Entry for Business 12. T Persons

Aspects related to temporary entry of business persons, such as procedures, conditions, information, cooperation and associated institutions.

13. Telecommunications

Access to and use of public telecommunications services. Areas covered include regulations, interconnection conditions, international mobile roaming services and competitive safeguards.

14. Electronic Commerce

Customs duties on electronic transmissions, non-discriminatory treatment of digital products, legal framework for e-commerce, storage and transmission of information, location of computing facilities and source code for mass-market software or products.

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Cassey Lee and Pritish Bhattacharya

Table 1.1  (continued) Chapter

Summary of Contents

15. Government Procurement

Types of public procurement covered, treatment of suppliers from other member countries (national and nondiscrimination) and governance of procurement processes.

16. Competition Policy

Procedural fairness in competition law enforcement, private right of action, consumer protection law and cooperation.

 tate-Owned Enterprises and 17. S Designated Monopolies

Scope of activities of state-owned enterprises (SOEs) and designated monopolies involved in commercial activities. It includes the use and impact of non-commercial assistance to SOEs, and governance and institution for review.

18. Intellectual Property

Commitments to ratify international agreements on intellectual property (IP). Governance of IP regime, including measures in specific areas such as agriculture chemical products, biologics and pharmaceutical products.

19. Labour

Commitments to implement laws and regulations that support ILO Declaration on labour rights, including nonderogation, institution for review and monitoring.

20. Environment

Recognition of the importance of multilateral environmental agreements and the link between trade and environmental law and policies. Other specific areas covered include ship pollution, biodiversity, invasive alien species, marine capture fisheries and conservation.

 ooperation and Capacity 21. C Building

Areas and institutions for cooperation and capacity building activities.

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Introduction

Table 1.1  (continued) Chapter

Summary of Contents

22. C  ompetitiveness and Business Facilitation

Establishment of a committee to enhance competitiveness and business facilitation. A key focus area would be supply chains.

23. Development

Recognition of the importance of broadbased growth strategies and women empowerment.

 mall and Medium-Sized 24. S Enterprises

Support to enhance gains in commercial opportunities for small and mediumsized enterprises (SMEs) arising from the agreement.

25. Regulatory Coherence

Achieving greater regulatory coherence among member countries. Processes, mechanisms and institutions to facilitate coordination, review and implement regulatory measures to reach this goal.

 ransparency and 26. T Anti-Corruption

Enhancing the transparency of laws, regulations, procedures and administrative rulings. Specifically, it focuses on establishing measures to combat corruption.

 dministrative and Institutional Establishing the Trans-Pacific 27. A Provisions Partnership Commission to review and manage the activities of other committees setup to modify the agreement. 28. Dispute Settlement

Establishing the scope of dispute settlement and setting up a panel to deal with unresolved disputes.

 xceptions and General 29. E Provisions

Security-related exceptions, temporary safeguard measures and taxation measures.

30. Final Provisions

Status of Annexes, Appendices and Footnotes. Conditions for amendments, accession, entry into force and withdrawal.

Source: Authors’ summary of the CPTPP text.

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on a few of these chapters, but before they were revised and adopted in the CPTPP. This volume, on the other hand, adopts a different strategy, as the focus lies on Southeast Asia rather than on each chapter of the CPTPP text. An overview of the chapters in this volume is presented in the next section.

4.  Structure of this Volume In Chapter 2, Peter A. Petri, Michael G. Plummer, Shujiro Urata and Fan Zhai undertake a comparative analysis of the economic impact of five trade arrangements—namely the original TPP, the CPTPP, the CPTPP16, the US-Japan FTA and the RCEP. The benefits from the CPTPP are also assessed for the case involving the inclusion of additional countries from the region. In Chapter 3, the evolution of the TPP and its subsequent replacement by the CPTPP are analysed by Malcom Cook in the context of regional geopower politics. In particular, the author focuses on the trade policy entrepreneurship of small states in the CPTPP and changes in the US political leadership with different geopolitical agendas. In Chapter 4, Luke Nottage provides an analysis of the CPTPP chapters on investment and investor-state dispute settlement. The balance of these chapters (in terms of investor versus host country bias) is examined, and implications are drawn for their future adaptation towards new innovations based on the European approach. In Chapter 5, Jakkrit Kuanpoth examines the intellectual property chapter in the CPTPP by focusing on the provisions related to pharmaceuticals. The author assesses the potential impact on access to health services in Thailand, drawing from the country’s experience with the TRIPS-Plus IP rules. In Chapter 6, Wan Khatina Nawawi discusses the chapter on state-owned enterprises in the CPTPP. In addition to elaborating on the treatment of SOEs under current international rules and FTAs, implications are drawn for SOEs of the CPTPP’s four ASEAN member states—Brunei, Malaysia, Singapore and Vietnam. In Chapter 7, Kazunobu Hayakawa and Kohei Shiino elaborate on how tariff reductions brought about by the CPTPP will affect exports from the agreement’s member and non-member countries to Japan. The chapter also highlights the distribution of Japanese firms in the region and how their operations will be affected by the CPTPP.

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Introduction

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In Chapter 8, Tham Siew Yean and Andrew Kam reassess Malaysia’s export opportunities in the TPP and CPTPP. The significance of the US withdrawal is also analysed through a comparative trade analysis involving Malaysia and Vietnam. The impact of tariff cuts on selected sectors is also discussed. In Chapter 9, Phan Duc Hieu compares the coverage of the CPTPP with other trade agreements that Vietnam has signed in the past. The overall impact of the agreement on Vietnam is analysed in terms of economic growth, trade, investment and institutions. In Chapter 10, Archanun Kohpaiboon focuses on the current state of FTA utilization in Thailand and the features of the CPTPP. Furthermore, the potential of the agreement is analysed in terms of market access for goods, intellectual property protection and services liberalization. In Chapter 11, Kiki Verico describes the pull and push factors underlying Indonesia’s interests in the CPTPP. A comparative static analysis incorporating the effects of trade diversion and trade creation is undertaken for the two scenarios of Indonesia joining and not joining the CPTPP. References Cimino-Issacs, Cathleen and Jeffrey Schott, eds. 2016. Trans-Pacific Partnership: An Assessment. Washington, D.C.: Peterson Institute for International Economics. Lim, C.L., Deborah K. Elms, and Patrick Low, eds. 2012. The Trans-Pacific Partnership: A Quest for a Twenty-First Century Trade Agreement. Cambridge: Cambridge University Press. Schott, Jeffrey. 2016. “Understanding the Trans-Pacific Partnership”. In Trans-Pacific Partnership: An Assessment, edited by Cathleen Cimino-Issacs and Jeffrey Schott. Washington, D.C.: Peterson Institute for International Economics.

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2 THE ECONOMICS OF THE CPTPP AND RCEP Asia Pacific Trade Agreements without the United States Peter A. Petri, Michael G. Plummer, Shujiro Urata and Fan Zhai

1. Introduction The withdrawal of the United States from the Trans-Pacific Partnership (TPP)1 dramatically disrupted the long-standing trade agenda of the Asia Pacific. The region’s governments have pursued trade and invest­ ment liberalization strategies for at least a quarter of a century, and many recently participated in both the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and Regional Comprehensive Eco­nomic Partnership (RCEP) negotiations.2 Since the withdrawal of the United States, not all of the remaining members have ratified the CPTPP. Should these countries still move forward with the agreement? Should they, instead, seek bilateral agreements that the United States

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still seems interested in concluding? Or should the region simply just focus on RCEP? This chapter explores the choices facing Asia Pacific governments from the economic and political economy perspectives. The economic analysis presented here confirms that US withdrawal has been costly not only for the United States, but also for its Asia Pacific partners. But, in addition, it shows that significant gains are possible from less rigorous but wide-membership trade agreements such as the RCEP, and from high-quality trade agreements such as the CPTPP without the United States. As Schott (2017) noted, “bigger is better” with respect to Asia Pacific trade agreements, but this analysis also shows that “better is bigger” in the sense that higher-quality agreements generate larger benefits. As explained below, these results are supported by simulation studies similar to those conducted earlier for the TPP including the United States (Petri and Plummer 2016; Petri, Plummer, and Zhai 2012). From a geopolitical perspective, new Asia Pacific agreements will increase the leverage of individual countries against bilateral pressures and help keep trade liberalization on the global agenda. In time, these agreements will likely attract other partners, too. For example, if an eleven-member CPTPP agreement later admitted the five Asia Pacific economies that have expressed interest in the alliance in the past3 (thus creating a TPP16), the total gains would rival those from the original agreement with the United States. Benefits could be further amplified if China, Europe, and/or the United States sought membership in the future. New agreements would also give members expanded influence over global rules. The withdrawal of the United States in some ways undermines but in others strengthens the rationale for Asia Pacific regional cooperation. Since the region’s economies have similar comparative advantages, improved access to the US market has long been a powerful incentive for concerted regional liberalization. Without the United States, regional negotiations have to manage competition among China, Southeast Asia and India with overlapping fields of comparative advantage. But the technological capabilities and global reach of Asia Pacific economies are growing rapidly, and the region has become central to global production systems. Meanwhile, the share of the United States in the exports of

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CPTPP countries has dropped from 40 to 35 per cent over the last two decades. The region has a growing stake in the world trading system and integration can enhance its global influence. These arguments suggest an active, multitrack strategy to sustain economic integration in the Asia Pacific, encompassing both widemembership and high-quality agreements. Each has its political rationale, and the RCEP and CPTPP tracks might converge over time to create a regional system with high-quality rules among more advanced members and initially lower-quality rules among less advanced ones. Steps on this path will yield both economic benefits and stronger negotiating positions for members vis-à-vis global partners such as the United States.

2.  Options for the Asia Pacific Region Historically, the United States has offered not only economic benefits but also leadership for Asia Pacific integration. It had long supported regional economic integration by building transpacific institutions such as the Pacific Economic Cooperation Council (1980), the AsiaPacific Economic Cooperation (1989) and the Enterprise for ASEAN Initiative (2002). It has also signed bilateral trade agreements with Australia, Canada, Chile, Mexico, Peru, Singapore and South Korea. More recently, President Barack Obama’s “Asian pivot” envisioned deepening these ties through the high-standard TPP agreement. Without this external driver, the region will need to build a new, internal case for cooperation. 2.1  Baseline: No New Regional Trade Agreements Without the United States, Asia Pacific groupings are dominated by mostly competitive economies. This is one reason why concerted liberalization within Asia is so difficult. The best results, so far, have been achieved in the ASEAN Economic Community (2015), based on strong political motives. China-Japan-Korea cooperation produced an investment agreement that was signed in 2012 and entered into force on 17 May 2014, and led to the start of negotiations on a trilateral free trade agreement (FTA) starting in 2013. There has not been much progress on the trilateral FTA since, but a China-South Korea Free Trade

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Agreement was negotiated and entered into force on 15 December 2015. The RCEP negotiations also began in 2013 after decades of discussions, and even that step has been attributed to pressure from the TPP (Damuri 2016). The RCEP was signed on 15 November 2020. The difficulties of Asia Pacific groupings without the United States can be analysed by comparing the new CPTPP agreement with the original, twelve-member TPP agreement that included the United States. This study therefore sets as its baseline the “no new regional trade agreements” scenario—a business-as-usual growth path to which other results are compared. To be sure, this baseline does project some growth in regional interdependence due to market forces.4 The original TPP is one of the scenarios examined, now mainly as a benchmark for assessing post-US regional agreements. 2.2  RCEP: Broad Cooperation Across Asia Greater formal integration is, nevertheless, possible as regional economies search for new engines of growth and as China turns to investments in connectivity and infrastructure, for example, through the Belt and Road Initiative (BRI).5 Such developments are also likely to fuel formal cooperation through RCEP and other regional mechanisms. RCEP is the culmination of three decades of Asia-centred integration efforts. It was launched by the ASEAN process,6 although China has played an important role in the negotiations (Petri and Plummer 2014). RCEP’s Principles envision “a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement …[to] cover trade in goods, trade in services, investment, economic and technical coopera­ tion, intellectual property, competition, dispute settlement” (ASEAN 2012). But the Principles also stress flexibility, suggesting that RCEP will include special and differential treatment for developing country members and is likely to avoid areas such as labour and environmental standards. In modelling RCEP, one can only assume relatively limited liberaliza­ tion provisions: weaker tariff reductions than in most ASEAN+1 agreements; a limited positive list approach in services; reasonably strong investment provisions albeit with carve-outs; few improvements in intellectual property rules; and varied provisions to assist small and medium-sized enterprises (SMEs).7 In the longer run, as in other

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ASEAN processes, provisions could improve, especially if the CPTPP path offers sustained competition. 2.3 CPTPP: High-quality Cooperation without the United States Immediately after the US withdrawal, several members, includ­ing Australia and New Zealand, indicated their interest in conduct­ ing a meeting in Vina del Mar, Chile in March 2017. At first, Prime Minister Shinzo Abe of Japan deflated these efforts by saying that a TPP without the United States would be “meaningless”, but as the possibility of a return of the United States to the TPP faded, in April 2017, Japan appointed a deputy foreign minister as chief negotiator for a TPP without the United States (Japan Times 2017). The remaining TPP countries undertook several meetings through­out 2017, including in Toronto and Hanoi in May, Hakone in July, and Sydney in August. The revised agreement, now called the CPTPP, was signed on 8 March 2018 in Chile. By October 2018, six countries—Mexico, Japan, Singapore, New Zealand, Canada and Australia—had ratified the CPTPP and it entered into force in these countries on 30 December 2018. Vietnam ratified the CPTPP in November 2018 and the agreement entered into force there in January 2019. A number of provisions of the original TPP have been suspended in the CPTPP, including some of the provisions on intellectual property protection. Thus, some provisions that American negotiators fought hardest to achieve fell by the wayside without US participation. The resulting agreement may generate even stronger incentives for others to join. In fact, the CPTPP is structured as a “living agreement” with an accession clause designed to attract new members. Indonesia, Korea, the Philippines, Taiwan and Thailand all indicated interest in membership as the agreement was negotiated. At one stage, China also expressed interest (Petri, Plummer, and Zhai 2014); its membership, though controversial, would generate especially large benefits for all. Europe, with several bilateral FTAs in the region and a new one underway with Japan, is another potential partner. Significant expansion is possible— perhaps even probable—with potentially large economic and strategic benefits.

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In modelling the CPTPP scenarios, the eleven-member CPTPP (original TPP members less the United States) and a sixteen-member alternative (adding the five interested economies listed above) are hypothesized. These scenarios could be viewed as different phases of a CPTPP path. The high standards of the original agreement are assumed to apply to both, partly because opening the agreement to renegotiation is considered risky by most participants. However, it is assumed that the depth of non-preferential reductions in non-tariff barriers—the general effect of the CPTPP provisions on regulating trade with all partners, or the so-called spillover effect—will be smaller than it would have been under the TPP with the United States.

3.  Policy Simulations This chapter applies the computable general equilibrium (CGE) model used by Petri and Plummer (2016) and Petri, Plummer, and Zhai (2012) to analyse certain RCEP and CPTPP scenarios.8 Box 2.1 briefly describes the model. Broadly, it belongs to the family of CGE models that have served as the workhorse of trade policy analysis for several decades. However, it also incorporates innovations based on recent advances in trade theory, including firm-level differences in productivity levels, and substantially more detailed policy parameters and data on inter­ national trade and investment barriers than are found in other similar studies.9 The overall results of the model, say, for simulations of the original TPP agreement, generally fall in the middle of the range of studies conducted by other research groups; they were larger than results reported in older versions of CGE models and smaller than results of more speculative models incorporating some theoretical approaches. Table 2.1 operationalizes assumptions about the liberalization of trade and investment barriers under the different policy scenarios discussed in the previous section. The results of the simulations for real income levels are presented in Table 2.2 and for exports in Table 2.3. These results reflect changes relative to the baseline, which assumes no new trade policy initiatives in the Asia Pacific.10 Results for the original, twelve-member TPP agreement are included for comparison, based on projections in Petri and Plummer (2016).

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Peter A. Petri, Michael G. Plummer, Shujiro Urata and Fan Zhai

Box 2.1:  The Computable General Equilibrium Model Computable General Equilibrium (CGE) analysis accounts for interactions among firms, households and governments in multiple product markets in multiple countries and regions of the world economy. Firms are assumed to maximize profits and consumers to maximize utility. After transfers among firms, households and governments, income is spent on goods, or saved and invested, both at home and abroad. The model finds an equilibrium solution by calculating prices that make supply equal demand for each product and factor of production (labour, capital and land) in every region. The effects of free trade agreements (FTAs) are simulated by introducing changes in tariffs and other parameters (see Table 2.1), finding a new equilibrium, and comparing new prices, output, trade, income and demand to baseline levels. The mathematical structure of a CGE model reflects assumptions about market competition, trade patterns, consumer preferences, production technology, market equilibrium conditions, factor supplies, taxes and many other economic relationships. These assumptions are represented by input-output tables, elasticities and other parameters—for example, how consumption demand responds to income. Data are collected from multiple sources and the model is calibrated to yield an initial solution that matches data for a benchmark year (in this model, 2015). Simulations then predict the evolution of economies over time, including policy interventions. Because CGE models represent medium- and long-term changes, they assume normal levels of employment and do not incorporate features to analyse short-term macroeconomic fluctuations. Simulations in this chapter are based on a nineteen-sector, twenty-nine-region model, based on a specification by Zhai (2008). Parameters and data sources are shown in Petri and Plummer (2016). The model is dynamic in that simulations track changes in saving rates that affect capital accumulation over time. However, the model does not include other dynamic factors proposed in the literature, such as productivity increases from the accumulation of knowledge and other endogenous growth effects, induced inflows of foreign technology and capital, and follow-up trade liberalization that may result from new trade agreements. Introducing such effects can dramatically change the results, as demonstrated by Todo (2013).

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The Economics of the CPTPP and RCEP

Table 2.1 Trade Policy Scenarios for the Asia Pacific Region TPP

CPTPP

CPTPP16

RCEP

Membership

Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam

Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam

Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, Indonesia, Korea, Philippines, Taiwan and Thailand

Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, Thailand and Vietnam

Launch date

2017

2018

2018

2018

Tariff liberalization

99 per cent eliminated (as negotiated)

Same as TPP

Same as TPP

85 per cent eliminated

KORUS adjusted Same as (Petri, TPP Plummer, and Zhai 2012)

Same as TPP

3/4 concessions of recent ASEAN+1 agreements

20 per cent

10 per cent

10 per cent

NTB liberalization Agricultural liberalization Services liberalization FDI liberalization Nonpreferential NTB reductions

10 per cent

Notes: TPP = Trans-Pacific Partnership; RCEP = Regional Comprehensive Economic Partnership; FDI = Foreign Direct Investment; KORUS = United States-Korea Free Trade Agreement; ASEAN = Association of Southeast Asian Nations; NTB = Non-Tariff Barrier Source: Authors’ assumptions.

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Country Americas  Canada  Chile  Colombia  Mexico  Peru   United States   Latin America nie Asia Brunei China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand

2030 income (2015 US$ billion) 39,569 2,717 463 684 2,169 442 25,754 7,341 50,659 31 27,839 461 5,487 2,192 4,924 2,243 675 680 485 776 812

Change (in 2015 US$ billion) TPP CPTPP CPTPP16 RCEP 208 49 72 2 37 22 29 0 4 3 5 0 0 0 0 0 22 16 33 0 11 10 11 0 131 –2 –6 1 3 0 –1 0 202 69 316 253 2 1 1 0 –18 –10 –53 101 6 1 1 2 –5 –4 –16 57 –2 –1 18 1 125 46 98 56 –8 –3 84 24 52 21 36 6 –1 0 13 1 19 13 19 2 1 0 60 –3 –7 –5 30 3

Table 2.2 Real Incomes in 2030 TPP 0.5 1.3 0.9 0.0 1.0 2.6 0.5 0.0 0.4 5.9 –0.1 1.2 –0.1 –0.1 2.5 –0.3 7.6 –0.1 3.9 0.2 –0.8

Percentage of income CPTPP CPTPP16 RCEP 0.1 0.2 0.0 0.8 1.1 0.0 0.7 1.1 0.0 0.0 0.0 0.0 0.7 1.5 0.0 2.2 2.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.6 0.5 2.6 3.7 0.9 0.0 –0.2 0.4 0.2 0.3 0.4 –0.1 –0.3 1.0 –0.1 0.8 0.0 0.9 2.0 1.1 –0.1 3.8 1.1 3.1 5.4 0.9 0.0 1.9 0.2 2.7 3.8 0.4 0.0 7.8 –0.4 –0.6 3.6 0.3

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497 283 3,272 2,854 2,590 264 40,720 4,068 23,189 10,001 3,371 90 133,801   41,011 465 27

41 –1 0 21 15 6 60 0 48 9 2 0 492   15,257 157 –10

11 0 0 15 12 3 14 0 12 2 0 0 147

21,961 486 –37

25 0 –1 22 17 5 39 –1 22 15 2 0 449

49,800 201 84

2 1 0 7 5 2 23 1 16 5 1 0 286  

1.1 0.0

8.1 –0.4 0.0 0.7 0.6 2.2 0.1 0.0 0.2 0.1 0.1 0.2 0.4

1.0 0.0

2.2 0.0 0.0 0.5 0.5 1.1 0.0 0.0 0.0 0.0 0.0 0.1 0.1

2.2 0.0

5.1 –0.1 0.0 0.8 0.7 2.0 0.1 0.0 0.1 0.1 0.1 0.0 0.3

  0.4 0.1

0.5 0.2 0.0 0.2 0.2 0.6 0.1 0.0 0.1 0.0 0.0 0.1 0.2  

Source: Authors’ computations. Changes defined as equivalent variations in income.

Notes: n  ie = not included elsewhere; TPP = Trans-Pacific Partnership; RCEP = Regional Comprehensive Economic Partnership; ASEAN = Association of Southeast Asian Nations; EMENA = Europe, Middle East and North Africa. Country details of regional aggregates may not add to total due to rounding.

Memorandum   Income (members) (members)   (non-members)  

Vietnam ASEAN nie Asia nie Oceania Australia New Zealand Rest of World (ROW) Africa (Sub-Sahara) Europe EMENA Russia ROW World

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Country Americas  Canada  Chile  Colombia  Mexico  Peru   United States   Latin America nie Asia  Brunei  China   Hong Kong  India  Indonesia  Japan  Korea  Malaysia  Philippines  Singapore  Taiwan  Thailand

2030 income (2015 US$ billion) 7,068 835 147 120 670 135 3,906 1,255 12,905 16 4,976 357 1,360 446 1,190 1,089 491 184 470 506 561

Change (in 2015 US$ billion) TPP CPTPP CPTPP16 RCEP 478 72 103 –1 58 39 56 –1 8 6 8 –1 1 0 0 0 32 23 45 –2 14 12 15 0 357 –10 –22 3 9 1 1 0 511 172 874 668 1 1 1 0 9 –9 –44 259 4 1 1 –1 1 –3 –13 132 –4 –3 49 17 276 97 225 136 –11 –6 203 62 99 42 71 17 –1 0 29 4 35 29 33 3 4 0 170 –7 –9 –7 68 24

Table 2.3 Exports in 2030 TPP 6.8 7.0 5.3 0.9 4.7 10.3 9.1 0.7 4.0 9.0 0.2 1.0 0.1 –1.0 23.2 –1.0 20.1 –0.4 7.5 0.8 –1.6

Percentage of exports CPTPP CPTPP16 RCEP 1.0 1.5 0.0 4.6 6.7 –0.1 4.3 5.7 –0.5 0.1 0.0 0.0 3.5 6.7 –0.2 9.0 10.8 –0.2 –0.3 –0.6 0.1 0.1 0.1 0.0 1.3 6.8 5.2 3.5 4.9 0.9 –0.2 –0.9 5.2 0.2 0.2 –0.3 –0.2 –1.0 9.7 –0.6 11.1 3.8 8.1 18.9 11.4 –0.6 18.7 5.7 8.6 14.4 3.4 –0.2 16.0 2.2 6.2 7.0 0.6 –0.1 33.6 –1.5 –1.3 12.0 4.3

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Memorandum   Exports (members) (members)   (non-members)  

  8,890 1,025 81

107 –3 2 38 29 9 79 5 49 20 5 0 1,106

4,984 308 –22

31 0 1 28 23 5 14 1 8 4 1 0 287

7,769 1,102 –70

84 –1 0 45 37 8 10 0 –7 14 2 0 1,032   12,745 546 131

17 4 1 17 14 3 –7 1 –9 1 1 0 677

11.5 0.3

30.1 –2.8 0.2 5.6 4.9 10.2 0.5 0.5 0.5 0.5 0.5 1.1 3.1

6.2 –0.1

8.8 –0.4 0.1 4.2 4.0 5.8 0.1 0.1 0.1 0.1 0.1 0.3 0.8

14.2 –0.2

23.5 –1.5 –0.1 6.6 6.3 9.2 0.1 0.0 –0.1 0.3 0.3 –0.2 2.9     4.3 0.6

4.9 3.9 0.1 2.5 2.4 3.1 0.0 0.1 –0.1 0.0 0.1 –0.1 1.9

Notes: n  ie = not included elsewhere; TPP = Trans-Pacific Partnership; RCEP = Regional Comprehensive Economic Partnership; ASEAN = Association of Southeast Asian Nations; EMENA = Europe, Middle East and North Africa. Country details of regional aggregates may not add to total due to rounding. Source: Authors’ computations.

357 93 810 673 589 84 15,503 883 9,706 4,021 851 43 36,149

 Vietnam   ASEAN nie   Asia nie Oceania  Australia   New Zealand Rest of World (ROW)   Africa (Sub-Sahara)  Europe  EMENA  Russia  ROW World

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The original TPP agreement generated global income benefits of US$492 billion. This included income gains of US$131 billion for the United States and substantial percentage gains for other members, especially Vietnam and Malaysia. As is evident from comparisons with other scenarios, much of these gains were based on their trade with the United States. The CPTPP, on the other hand, generates substantially lower global income benefits of US$147 billion.11 It also produces lower gains from trade for each of its members than does the TPP not only because it is much smaller without the United States, but also because many CPTPP members already have free trade agreements with each other. The differences are especially marked for Japan, Malaysia and Vietnam, with the benefits of each reduced to about one-third to one-fourth of the TPP benefits. Establishing freer trade with the United States was a major reason for their interest in the TPP; this is not addressed by the CPTPP. Meanwhile, some economies in North America and Oceania, including Australia, Canada and Mexico, do reasonably well in the CPTPP. First, their gains in US markets were limited in the TPP since they already had FTAs with the United States, and second, the CPTPP would allow them to capture some benefits in third-country markets, such as Japan, which might have gone to the United States under the TPP. But no member economy gains from replacing the TPP with CPTPP. The United States experiences the largest single net loss, moving from a US$131 billion gain (under TPP) to a US$2 billion loss (under CPTPP).12 The CPTPP16 generates the greatest benefits among the new alterna­ tives examined in this chapter, with income gains of US$449 billion globally and US$486 billion for member economies (member-economy gains are, in fact, higher than in the TPP itself). The most prominent beneficiaries, in absolute terms, are Japan, Korea and Taiwan, along with their Southeast Asian partners. The CPTPP16 gains are large because such an agreement would apply high-quality provisions to trade among the three industrialized economies that do not currently have a trade agreement with each other. Also, the agreement would go further than the others analysed in establishing new supply chains in the Asia Pacific region. Taiwan, in particular, has few agreements with other economies (only New Zealand and Singapore in the CPTPP16) and would benefit disproportionately with income gains of 7.8 per cent of GDP, the largest percentage gain for any economy. The gains

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associated with CPTPP16 suggest that the CPTPP path could provide very attractive options for new members as expansion gains steam. The RCEP agreement generates global income gains of US$286 billion. This reflects, on one hand, the economic scale of RCEP— its member economies have the largest combined GDP among all alternatives examined—and on the other, the relative weakness of RCEP provisions. As already noted, the RCEP negotiations are shaping up to be exceptionally difficult. RCEP members are more competitive than complementary in economic structure and no single economy is accepted as a natural leader. In addition, many prior trade agreements cover trade among RCEP countries—the requirement for membership in RCEP is that each economy has an agreement with ASEAN—and RCEP provisions are not likely to exceed the FTAs already in place in terms of quality. Still, RCEP could lead to improved follow-up agreements in the future, as other ASEAN agreements have done, yielding greater long-run benefits. Further analysis shows that the largest income gains reported in the scenarios are due to changes in trade and associated productivity gains, not trade diversion. Member economy exports rise by usually more than double the income gains in all regional scenarios (see Table 2.3). Non-member economies are negatively affected in the aggregate only in the TPP scenarios without the United States.13 But, in all cases, trade creation far exceeds trade diversion. China is the biggest loser in the CPTPP scenarios in terms of income losses due to both trade diversion as well as the erosion of its preferential treatment in the integrating markets. But, in all scenarios, the effects are small.

4.  Conclusion To former US Trade Representative Michael Froman, the TPP offered “a positive vision for American leadership in the global economy. This vision is vitally important, because in the absence of US guidance and leadership, the world is likely to turn to alternative policy models” (Froman 2017). Since the withdrawal of the United States from the TPP, other observers are also worried that confrontational, mercantilist approaches will replace steady, albeit far from linear, progress towards global economic integration. Such a stark forecast is not foreordained. This chapter offers a brighter perspective by exploring positive policy alternatives that appear

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to be emerging in the Asia Pacific even without American involvement. Specifically, it shows that: • Even an eleven-member CPTPP (all original members excluding the United States) could generate benefits to members, albeit with gains only about a third as large as those expected from the twelve-member TPP. The shortfall would be largest for economies that offered significant policy concessions motivated by their interest in US markets, such as Vietnam and Malaysia. • Larger regional agreements, such as a sixteen-member CPTPP and RCEP, would generate greater benefits than smaller ones. For example, adding five economies that have expressed interest in the CPTPP (Indonesia, South Korea, the Philippines, Taiwan and Thailand) to the eleven-member agreement would boost benefits three-fold, in part because the agreement’s high-quality rules would help to establish new supply chains in the Asia Pacific region. • High-quality agreements lead to substantially larger gains than less-rigorous ones. For example, the CPTPP16 agreement could produce more than double the gains of RCEP, even though the CPTPP16 economies have only half the GDP of the RCEP region. What can the Asia Pacific policymakers take from these results? The findings show that regional actions can produce benefits. Both the scale and quality of regional agreements matter. Even if no large, high-quality agreement can be concluded now, one could be built over time. The gains from the CPTPP could rise three-fold by adding five plausible partners. Similarly, the RCEP might open a path to steady, future improvements. In other words, there is a strong case for accelerating formal economic integration in the Asia Pacific on multiple tracks. For the United States, the implications are more negative. The country would forego the benefits of participating deeply in the integration of a very dynamic region. In addition, newly emerging forms of regional integration would exclude the United States as well. For example, US exporters would lose some markets relative to the baseline in most scenarios analysed in this chapter. Direct economic losses would be modest at first, but greater costs would follow as large economies, including China, India and Japan, begin to shape regional rules—on trade, investment, intellectual property, digital economy, state-owned

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enterprises, labour, inter alia—to their own advantage. These trends would validate some of Froman’s concerns. As a matter of fact, by creating stronger Asian economies and markets, regional integration may also eventually encourage the United States to revisit its engagement with the Asia Pacific. notes   1. The twelve countries that signed the TPP agreement in February 2016 include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.   2. Sixteen Asian economies are original negotiation members of the RCEP: Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand and Vietnam.   3. They are Indonesia, Korea, the Philippines, Taiwan and Thailand.   4. Remaining liberalization of barriers in FTAs that are still being implemented is included in the baseline.   5. Using a computable general equilibrium model under modest assumptions, Zhai (2017) estimates potentially large gains under the Belt and Road Initiative over the next fifteen years; annual global welfare gains would be about US$1.6 trillion by 2030, accounting for 1.3 per cent of the global GDP. More than 90 per cent of this gain is expected to be captured by countries included in the BRI. It is also expected to boost global trade by 5 per cent by 2030.   6. ASEAN stands for Association of Southeast Asian Nations. “ASEAN centrality” is enshrined in the process and members of RCEP must have a free trade area in place with ASEAN.   7. These assumptions are based on previously cited sources as well as conversations with individuals familiar with the policy process. For a compendium of ongoing reports on the RCEP negotiations, see https://aric. adb.org/fta/regional-comprehensive-economic-partnership. India is assumed to be part of RCEP—it opted out in November 2019 but was given the option to join RCEP later.   8. The underlying data and results of this model, including its prior applications, are available on the website: www.asiapacifictrade.org.   9. The properties of this model are examined in Zhai (2008). The modelling approach yields somewhat larger effects than the usual Armington formulation. 10. Description of the baseline can be found in Petri and Plummer (2016).

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11. Other simulations of a TPP5 scenario, which includes only Australia, Brunei, Japan, Singapore and New Zealand, were also undertaken. This small group of open economies has been recently mentioned in media speculations as it could quickly adopt the TPP agreement. However, the gains from an agreement among already open economies would also be small, accounting for only about a fourth of the CPTPP’s already modest benefits. 12. Kawasaki (2017) also uses a computable general equilibrium model to estimate the effects of the TPP, Japan-US FTA and RCEP alternatives. He finds larger results, in part due to two assumptions that differ substantially from those made in this study. First, Kawasaki assumes 50 per cent elimination of non-tariff barriers, while the results of this study are derived from the expected provisions of the agreements and generally reflect less liberalization. Second, he assumes that 50 per cent of liberalization measures agreed in the FTAs would be implemented on a most favoured nation (MFN) basis, that is, would apply to all partners rather than those in the agreement. This chapter, on the other hand, assumes a significantly lower 20 per cent spillover rate in the TPP analysis, and an even lower 10 per cent spillover effect from the smaller agreements analysed in the study. 13. This result derives mainly from the lower spillover assumptions used in the scenarios of this study. The spillover effect occurs due to close monitoring of the implementation of an agreement and is assumed not to occur in the same degree under the smaller regional agreements analysed in this chapter as in the TPP.

References ASEAN (Association of Southeast Asian Nations). 2012. Guiding Principles and Objectives for Negotiating the Regional Comprehensive Economic Partnership. https://asean.org/wp-content/uploads/2012/05/RCEP-Guiding-Principlespublic-copy.pdf. Damuri, Yose Rizal. 2016. “RCEP Prospects and Challenges: Political Economy of East Asian Integration”. In Trade Regionalism in the Asia-Pacific, edited by Sanchita Das Basu and Masahiro Kawai. Singapore: ISEAS – Yusof Ishak Institute. Froman, Michael. 2017. “Trade, Growth and Jobs”. Cabinet Exit Memo, 5 January 2017. https://insidetrade.com/sites/insidetrade.com/files/documents/ jan2017/USTR%20Exit%20Memo.pdf. Japan Times. 2017. “Deputy Foreign Minister Named as Japan’s Chief TPP Negotiator”, 25 April 2017. www.japantimes.co.jp/news/2017/04/25/ business/deputy-foreign-minister-named-japans-chief-tpp-negotiator/#. WQBtuIjyiUk.

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Kawasaki, Kenichi. 2017. “Emergent Uncertainty in Regional Integration— Economic Impacts of Alternative RTA Scenarios”. GRIPS Discussion Paper 16-28 (January). https://ideas.repec.org/p/ngi/dpaper/16-28.html. Petri, Peter A. and Michael G. Plummer. 2014. ASEAN Centrality and the ASEANUS Economic Relationship. Policy Series 69. Honolulu: East-West Center, March 2014. https://www.eastwestcenter.org/sites/default/files/private/ ps069.pdf. ———. 2016. “The Economic Effects of the TPP: New Estimates”. In Assessing the Trans-Pacific Partnership, Volume 1: Market Access and Sectoral Issues. PIIE Briefing 16-1, edited by Cathleen Cimino-Isaacs and Jeffrey J. Schott. (Also published as PIIE Working Paper 16-2. www.piie.com/publications/ interstitial.cfm?ResearchID=2906). Petri, Peter A., Michael G. Plummer, and Fan Zhai. 2012. The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment. Policy Analyses in International Economics 98. Washington: Peterson Institute for International Economics. ———. 2014. “The Effects of a China-US Free Trade and Investment Agreement”. In Bridging the Pacific: Toward Free Trade and Investment between China and the United States, edited by C. Fred Bergsten, Gary Clyde Hufbauer, and Sean Miner. Washington: Peterson Institute for International Economics. Schott, Jeffrey J. 2017. “US Trade Policy Options in the Pacific Basin: Bigger is Better”. PIIE Policy Brief 17-7 (February). Washington: Peterson Institute for International Economics. https://piie.com/system/files/documents/ pb17-7.pdf. Schott, Jeffrey J., Euijin Jung, and Cathleen Cimino-Isaacs. 2015. “An Assessment of the Korea-China Free Trade Agreement”. PIIE Policy Brief 15-24 (December). Washington: Peterson Institute for International Economics. https://piie.com/publications/policy-briefs/assessment-korea-china-freetrade-agreement. Todo, Yasuyuki. 2013. “Estimating the TPP’s Expected Growth Effects”. RIETI Policy Update 048. Tokyo: Research Institute of Economy, Trade and Industry. Zhai, Fan. 2008. “Armington Meets Melitz: Introducing Firm Heterogeneity in a Global CGE Model of Trade”. Journal of Economic Integration 23, no. 3: 575–604. ———. 2017. “China’s Belt and Road Initiative: A Preliminary Quantitative Assessment”. Paper presented at the National University of Singapore International Conference on Trade, Industrialization and Structural Reforms in ASEAN, Ho Chi Minh City, January 2017.

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3 The TPP AND CPTPP Truths about Power Politics Malcolm Cook

1. Introduction Preferential trade agreements are negotiated by states. By definition, they are political in nature. As they involve more than one state, by definition, they are shaped by geopolitical interests as well as economic and commercial ones. The larger the preferential trade agreement, the more geopolitical concerns are likely to matter in the intent of the deal and its ramifications. Likewise, the more powerful the states involved in the negotiations and eventual deal, the more geopolitical concerns are likely to matter in intent and ramifications. The disastrous outcomes of World War I and World War II centred in Europe when power political considerations trumped all else were the necessary conditions for the establishment of the post-war Bretton Woods System and the General Agreement on Tariffs and Trade (GATT) at the global level (Office of the Historian n.d.) and the European Union (EU) at the regional level (Silva 2009). Both were created to foster economic exchange as a liberal means to moderate and direct power political impulses away from war. The Cold War bipolar interstate

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structure determined who was in and out of these new global and European economic bodies. The Trans-Pacific Partnership (TPP) and its replacement following the US withdrawal, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), reflect this overarching truth. This chapter will go deeper and analyse how the four stages of the TPP’s evolution each highlight different, but not all mutually support­ ing, elements about this geopolitical truth and its determining effects on preferential trade agreement negotiations and how these negotia­ tions and agreements are interpreted. The first phase is prior to the United States’ decision to join the TPP negotiations. The second phase, the main focus of the chapter, is from when the United States joined the TPP negotiations to the signing of the agreement in early 2016. The third phase is the US withdrawal from the TPP under President Trump. And the fourth stage is the development of the CPTPP after the United States withdrew.

2.  Small State Strategy It is a fact that, in international diplomacy, size matters. The bigger and more powerful a country is, the greater its clout. However, this does not mean that all small countries are doomed to irrelevance and will be forever marginalised. Much depends on how a small country projects itself and interacts with other countries. This will shape other countries’ perception of its relevance and usefulness (Jayakumar 2011).

When the TPP was signed in early 2016, it had been fourteen years in the making. Negotiations among its original three negotiating parties— New Zealand, Chile and Singapore—had started in 2002. The first four negotiating parties—Brunei Darussalam joined the negotiations in 2005—signed a partial agreement in 2005. Until 2008, when the Bush administration in the United States expressed its interest in joining the TPP (then known as the Trans-Pacific Strategic Economic Partnership) negotiations over financial services and investment, the TPP was a lowkey, though complex and broad-reaching, preferential trade agreement little noted or commented upon. This lack of attention to the deal was hardly surprising as “the original member countries account for only 0.8 per cent of world gross domestic product (GDP) and 2.2 per cent of global trade” (Barfield and Levy 2009).

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This lack of attention goes much deeper than the lack of headlines or news stories about the 2005 agreement. The 2005 agreement is an anomalous case in relation to the academic literature and economic models for why states negotiate minilateral preferential trade agreements. The four members are not geographically proximate or part of a recognized economic region. Wellington is over 8,500 km away from Singapore, which itself is over 16,000 km away from Santiago. The 2005 agreement was, by definition, not a regional trade agreement. Outside of Singapore, for Brunei, none of the countries are major trading partners with each other. In 2015, Chile and Brunei were statistically insignificant trading partners for New Zealand while Singapore accounted for less than 3 per cent of total New Zealand trade (New Zealand Government 2016). Moreover, in 2005, the two most important trading relationships among the original four TPP signatories were already covered by pre-existing preferential trade agreements. Singapore and Brunei were members of the ASEAN Free Trade Area, while Singapore and New Zealand were covered by a bilateral trade agreement signed in 2000. Finally, the very small size and open economy nature of all four participants meant that there would be no significant trade or investment diversion effects from the 2005 agreement that would benefit the signatories or encourage excluded parties to join to reduce their trade or investment diversion losses. In other words, the original TPP should not exist according to the conventional, bounded and deductive wisdom on preferential trade deals. Looking at the deal in power politics terms provides an explanation for the original TPP that is not anomalous but consistent, and one that has been borne out by TPP developments since 2008. The word “Strategic” in the original name for the TPP underlines its power political origins. A power politics truth is that small states are a distinct group that perceive themselves as different from larger, more powerful states and conduct their international engagements in a similar manner to each other. Singapore, New Zealand, Chile and Brunei all self-identify as small states that are unable to individually shape their external environments and that are particularly reliant on strong, well-functioning regional and global interstate agreements, rules and norms.

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Taking up the second part of the above quotation from S. Jayakumar, small states often seek to enhance their interests and influence by working together as “policy entrepreneurs” and “policy brokers” to come up with agreements or cooperative proposals that major powers will later accept. In this vein, Singapore, New Zealand and Chile were all members of the De La Paix group in the World Trade Organization (WTO), a grouping of small and middle power states that brokered many of the key agreements during the Uruguay Round (VanGrasstek 2013). The original TPP is a good example of this form of small state behaviour. With their smallness and open economies, negotiating the Trans-Pacific Strategic Economic Partnership was comparatively quick and easy. It took only three years and five rounds to negotiate, with Brunei only joining before the final round. From the beginning the TPP initiative was “nested” within the APEC process.1 The agreement to negotiate it among the original three was reached on the sidelines of the 2002 APEC Leaders’ Meeting and it was envisaged as a way to advance APEC’s central regional economic integration goals. The TPP, reflecting its policy entrepreneur function, from its origins embraced a broader range of issues with a focus on “behind the border” issues of growing importance to trade liberalization but that are not well addressed in the multilateral Uruguay Round agreements or most existing bilateral or minilateral preferential trade agreements. Reflecting APEC’s commitment to “open regionalism” and the TPP’s policy entrepreneur function, from the beginning the TPP was open to other APEC members to join. The United States joined in early 2008, followed later that year by Australia, Peru and Vietnam, and then by Malaysia in 2010, Mexico and Canada in 2012, and Japan in 2013. The later joining by these much larger economies created the potential for the decisions reached by these four small open economies to be taken on board by trading and investment partners of much greater importance for each of the original four TPP members. Small states need to be nimble and cooperative if they want to attract the attention of larger, more powerful states and to engage them on terms not fully set by these comparative behemoths. The TPP is a good example of this small state strategy.

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3.  TPP Transformation And so we need to begin with a very fundamental proposition in understanding this agreement: either the United States of America is an Asia Pacific power, or we are not. And the ‘not’ carries with it serious consequences. And we can’t just stand up and say to the world, ‘Hey, we’re a Pacific power.’ We have to show it in our actions and in our choices. We can’t pick and choose where and when we want to be involved. We can’t talk about the rebalance to Asia one day and then sit on the sidelines the next, and expect to possibly send a credible message to partners and to potential partners around the world (John Kerry, Secretary of State) (Kerry 2016).

The Bush administration’s decision formally announced in September 2008 to bring the United States into the TPP fundamentally changed the meaning of the agreement in geopolitical terms while also greatly complicating its progress. The Bush TPP decision that the subsequent Obama administration put into practice greatly enhanced the geopolitical importance of the TPP and the importance of geopolitical concerns for the agreement in four mutually supporting ways. 3.1  Size Matters First, the US decision to join instantly transformed the TPP into a preferential trade deal primarily between the United States and the other TPP members (existing and future). This US predominance is first and foremost a matter of comparative size. The US economy, in 2015 market exchange rate terms, was twenty-five times larger than the combined GDPs of the four original TPP members. The United States by itself accounted for 65 per cent of the combined GDP of the twelve TPP signatories. Japan comes second at only 16 per cent. US trade diplomacy interests that shaped their earlier preferential deals also determined more than those of any other signatory the scope and focus of the TPP agreement signed in 2016. This form of US predominance over the TPP is most noticeable in the chapters on labour, electronic commerce, intellectual property, cross-border services, and state-owned enterprises and designated monopolies. US predominance is also reflected in the fact that the most contentious disputes in the negotiation of the agreement signed in 2016 were mostly between the United States and other individual TPP parties or coalitions of TPP parties. These include the US-Vietnam dispute over

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Table 3.1 The TPP Signatories’ 2015 GDPs (in current US$ billion) Signatory United States

GDP

Percentage of Total

18,037

64.8

Japan

4,383

15.8

Canada

1,551

5.6

Australia

1,339

4.8

Mexico

1,144

4.1

Malaysia

296

1.1

Singapore

293

1.1

Chile

241

0.9

Vietnam

194

0.7

Peru

189

0.7

New Zealand

174

0.6

13

0.05

27,854

100

Brunei Total

Source: World Bank, http://data.worldbank.org/indicator/NY.GDP.MKTP.CD.

the “yarn-forward” provisions for textile rules of origin. Vietnam even had to agree to use US-sourced cotton for cotton pants exported to the United States to benefit from the lowering of textile tariffs under the TPP (USTR n.d.). For Japan, a major point of contention was the TPP rules for automobile and automobile parts’ rules of origin. A compromise deal was struck between Japan on one side and the United States, Canada and Mexico on the other (Japan Times 2015). For Australia, backed by Chile and Peru, disagreements with the United States over patent protections for biologic drugs were a potential deal breaker (Lopert 2015). The TPP is the first trade agreement to include coverage of these cutting edge medicines. 3.2  US Leadership Second, the identification of US geopolitical interests in the TPP and their prioritization in Washington largely occurred during the two Obama administrations from 2009 to 2017. In September 2008, when

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the Bush administration, in its final months, announced the decision to join the TPP, economic reasons predominated. United States Trade Representative Susan Schwab, at the formal announcement of US participation, outlined the primary goal of TPP membership as: We need to ensure that our trade will continue to expand so that it can contribute to US economic growth in the future. Strengthening our economic ties to the Trans-Pacific region is vital to achieving this goal because of the economic significance of this region now and in the future. The Trans-Pacific region accounts for nearly 60 per cent of world GDP and almost half of all global trade. With its large and growing markets and robust economic growth, it is clear that further strengthening our ties to this region should be a priority (USTR 2008).

It was only during the Obama administrations that the US geopolitical interests in the TPP, and how they would be marshalled to support the US participation in the deal, became clear. From the beginning of the first Obama term, the administration wanted to change America’s global geopolitical approach from the prior Bush administration, which was largely defined by two costly and sapping wars in the Middle East. This shift away from the Middle East became known as the Asia “pivot” or rebalance policy, even though the focus was always the Asia Pacific, a broader concept that includes the United States as the region’s leading state. The most comprehensive early description of the desired shift was Secretary of State Hillary Clinton’s 2011 article entitled “America’s Pacific Century: The Future of Geopolitics Will Be Decided in Asia, Not Afghanistan or Iraq, and the United States Should Be Right at the Center of the Action” that posits at the outset: The Asia Pacific has become a key driver of global politics. Stretching from the Indian subcontinent to the western shores of the Americas, the region spans two oceans — the Pacific and the Indian — that are increasingly linked by shipping and strategy. It boasts almost half the world’s population. It includes many of the key engines of the global economy, as well as the largest emitters of greenhouse gases. It is home to several of our key allies and important emerging powers like China, India and Indonesia.    At a time when the region is building a more mature security and economic architecture to promote stability and prosperity, US commit­ ment there is essential. It will help build that architecture and pay continued dividends for American leadership well into this century, just as our post-World War II commitment to building a comprehensive and lasting transatlantic network of institutions and relationships has

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paid off many times over — and continues to do so. The time has come for the United States to make similar investments as a Pacific power, a strategic course set by President Barack Obama from the outset of his administration and one that is already yielding benefits (Clinton 2011).

In the article, the TPP is only discussed near the end, after long sections on US alliances and security relationships in the Asia Pacific and US engagement with ASEAN. In line with the US hosting of APEC in 2011 in Hawaii, Clinton’s article discusses the TPP as part of the US commitment to APEC and APEC’s 2010 identification of the TPP as one of the possible pathways to an eventual Free Trade Area of the Asia Pacific.2 From 2010 to early 2013, CNN listed forty-five positive mentions of the TPP in public remarks by Hillary Clinton, including her most fulsome reference in November 2012 in Adelaide, Australia: “This TPP sets the gold standard in trade agreements to open free, transparent, fair trade, the kind of environment that has the rule of law and a level playing field.” This reference is the only one among those listed by CNN that has a distinct geopolitical feel to it (Tapper 2015). As Secretary of State, Hillary Clinton never gave a speech on the TPP. The TPP did not feature in the early speeches by President Obama setting out his administration’s Asia Pacific rebalance strategy. In his November 2009 speech in Yokohama and his November 2011 speech in Canberra on the Asia Pacific rebalance policy, the TPP is not mentioned. Nor is it in his opening remarks to the 2011 APEC Leaders’ Summit in Honolulu. Greg Sheridan, the foreign editor of The Australian, noted caustically that President Obama never gave a major TPP or Asia Pacific rebalance speech in the United States (Sheridan 2016). President Obama and Secretary of State John Kerry only began to promote the TPP and its geopolitical importance strongly in their public remarks at home and abroad from early 2015 onwards. This was when the US executive branch began to push Congress to first grant the Obama administration trade promotion authority (granted in June 2015) and then to ratify the TPP once it had been signed in February 2016. This relative silence until 2015 strongly suggests that the Obama administration’s focus on the TPP’s geopolitical dimensions was primarily a tactic to pressure the traditionally trade-shy Congress to pass the largest and most complex regional trade agreement the United States had negotiated and signed.

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The verbal fusillade from the Obama administration aimed at Congress about the TPP’s geopolitical importance for the United States was impressive and did certainly contribute to the granting of trade promotion authority. In April 2016, in an unprecedented intervention into trade policy, eight of the nine surviving secretaries of defense who together had held this position for twenty-nine of the last forty years sent a letter of support for ratifying the TPP to the majority and minority leaders of the House and Senate majorities.3 Echoing Clinton’s 2011 Foreign Policy article, the letter states: The TPP presents a choice for the United States. It is a choice between leading the world toward a future that supports US values and interests, or standing back and allowing others — most likely China — to write the rules of the road for Asia in the twenty-first century. And let us be clear: trade rules written by China would not promote a trading system consistent with American interests and values.    The United States cannot and should not fall behind on the world stage. Our leadership in a troubled world is dependent on our military, diplomatic, and economic power. We cannot afford to weaken any element of our strength at this critical time. With a trade agreement of this magnitude, there will be elements that some dislike, but the overall benefits to our economy and national security cannot be overstated. We urge you to support the TPP and to help the United States maintain its leadership in the twenty-first century.4

The serving Secretary of Defence Ashton Carter joined his predecessors in strongly supporting ratification of the TPP for its perceived geopolitical benefits for the United States. In a Council on Foreign Relations presentation in April 2016, Secretary Carter paraphrased the argument of his predecessors, stating: TPP should be ratified because of its economic and strategic benefits and because we must recognize that the alternative to TPP really is — a regional economy, largest in the world, with standards that don’t serve American interests and one’s that carved up by lopsided, coercively negotiated, lower-standard deals. That’s why I’ve said that TPP is as strategically important to the rebalance as an aircraft carrier. And I strongly urge Congress to approve TPP this year (Carter 2016).

President Obama and Secretary of State John Kerry also trumpeted similar geopolitical arguments and the US-China rivalry for leadership in the Asia Pacific in their statements encouraging Congress to ratify the TPP. In a May 2016 opinion piece for The Washington Post, the

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president compares the TPP positively with its possible alternative, the ASEAN-led Regional Comprehensive Economic Partnership (RCEP) process. This process does not include the United States. China is the leading economy accounting for about half of the combined GDP of the sixteen negotiating parties. President Obama ends his opinion piece by contending: The world has changed. The rules are changing with it. The United States, not countries like China, should write them. Let’s seize this opportunity, pass the Trans-Pacific Partnership, and make sure America isn’t holding the bag, but holding the pen (Obama 2016).

Secretary of State Kerry focused more of his advocacy on reactions from other Asia Pacific states if the United States did not ratify the TPP. In an impassioned speech at the Wilson Center in Washington in September 2016, Secretary Kerry warned: And make no mistake — if we retreat from this agreement, every government in the region, every business, every labour union, every group of environmental advocates, and the commanders of every army and navy will notice. And they will notice it in a way that does not work for the United States of America. It will be a unilateral ceding of American political influence and power with grave consequences for the long term.    And I got news for you. They’re going to be asking themselves, hey, if we can’t count on the United States, where else should we turn? If the principles and rules written into the TPP don’t matter to the United States, why should we accept them? If America won’t enter into partnership with us on economic matters, why should we look to Washington for guidance on political or security matters (Kerry 2016).

3.3  Supporting US Leadership Third, the decision by the United States to join the TPP raised the geopolitical importance of the agreement for its existing members and for those that chose to join after the United States (likely predominantly because the United States had chosen to join). For Singapore, Australia, Japan and Vietnam in particular, the TPP’s geopolitical potential to strengthen the basis for continued US leadership in the Asia Pacific and as a platform to enhance their respective geopolitical relations with the United States appear decisive. In the cases of Japan and Vietnam, this heightened geopolitical importance may have been a necessary

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condition for these states to join a trade negotiation that promised to require significant, painful economic reforms (Mulgan 2016; Dien 2016). Australia and Singapore, however, had already negotiated bilateral trade deals with the United States prior to 2008, limiting the market access gains they would accrue from the US decision to join the TPP. Senior politicians from Australia and Singapore, in a very undiplomatic and direct manner, expressed the geopolitical importance of the US ratification of the TPP for them. In June 2016, Joe Hockey, the Ambassador of Australia to the United States, set out Australia’s geopolitical interests and concerns as follows: So, Ladies and Gentlemen, five months after Woodrow Wilson gave his speech to Congress about his fourteen point plan for the destiny of America and the world, just five months later, as I said, Australian soldiers and United States soldiers fought together, side-by-side for the first time on the Western Front in the battle of Hamel on the Fourth of July 1918.     We are the only nation on earth to have fought side-by-side with the United States in every major battle since 1918. Sometimes great battles are not necessarily fought by soldiers. Sometimes courage from political, community and business leaders and the leaders of organized labour must be equal to the most courageous of soldiers. Implementing and promoting core values, such as freedom of trade, made America great in the first place. Countries are only great if their values, ideals and ambitions are shared willingly by others. By ratifying the TPP, the United States will ensure that it continues to have a major leadership role in the Asia Pacific Region.    The cost of failure may well be too great to imagine (Hockey 2016).

In an October 2016 interview with Time, Singapore Prime Minister Lee Hsien Loong, when answering a question about the United States not ratifying the TPP, argued in a similar vein: Your standing goes down with many countries around the world. Your opponents as well as your friends will say, ‘You talked about the strategic rebalance, you talked about developing your relationships. You can move aircraft carriers around. But what are the aircraft carriers in support of?’ It has to be deeper economic and broad relationships. You do not do things which the Chinese do. The Chinese go around with lollipops in their pockets. They have aid, they have friendship deals, they build you a Prime Minister’s office or President’s office, or Parliament House or Foreign Ministry. For them, trade is an extension of their foreign policy. …

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   It is not just on trade, even on strategic issues. The key thing in Northeast Asia is North Korea. They are unpredictable, they are developing their nuclear capabilities and their missiles. You do not want the South Koreans to do that, you do not want the Japanese to do that. What is the restraint on them? It is your credibility as an ally and as a deterrent. I do not think failing to ratify the TPP will strengthen that at all, or help Mr. Abe, who has gone out on a limb to support this and is in the process of ratifying it right now.5

Prime Minister Shinzo Abe of Japan in a speech in New York echoed, in more diplomatic terms, this same message of urgency: And here is my request to you. Please do ratify the TPP. The Asia Pacific should be much, much, much better off with the US fully being a TPP member. We are simply waiting for you to take a leadership role. ‘Come along, America,’ should be my own message to you.6

Japan, Australia and Singapore have long been strong advocates of US leadership in the Asia Pacific and have shaped their foreign and security policies to support the United States in the region. The US alliances with Japan and Australia are the two most important and interlinked in East Asia. Singapore is the most important and reliable US security partner in Southeast Asia. Security and broader strategic relations between the United States and Vietnam deepened the most of all US relations in East Asia over the period of the two Obama administrations as Vietnam sought to reduce its vulnerability and dependence on China (Hiep 2015). 3.4  Power Transition The fourth way the geopolitical importance of the TPP has been enhanced may be the most important and the hardest to analyse. It is a matter of historical timing. As John Maynard Keynes (1936) observed, “the ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else”. The overarching concept and broader International Relations theory that has bolstered the perception of the geopolitical importance of the TPP is the power transition theory associated with Organski (1958) at the global level and Lemke (2002) at the regional level. Echoing Realist thought, power transition theory holds that the structure of the interstate (or regional) strategic order is fluid. Periods

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of systemic stability are associated with the rule of a dominant power, yet non-dominant powers will seek to replace the dominant power. Periods of instability and potential conflict arise when this state of dominance is credibly challenged by a rising power or collections of powers. The prevailing understanding of the current situation in the Asia Pacific is that the period of US dominance is coming to an end with China seeking to replace the United States as the dominant power. This particular interpretation of reality is prevalent in academia, the media, the business community and government. The Obama administration’s Asia Pacific rebalance policy was informed by power transition theory as the United States sought to address concerns of US “staying power” in East Asia in the region and at home in the US. The geopolitical reasons the Obama administration marshalled to pressure Congress to pass the TPP are all very consistent with power transition theory, particularly the focus on a battle between China and the United States and its partners to “write the rules”. Likewise, for the arguments marshalled by the Australian, Singapore and Japanese governments. The acceptance of power transition theory and its gloomy tenets underpins these comments’ sense of urgency and the view expressed above by Prime Minister Lee Hsien Loong that, if the United States does not ratify the TPP, this would be a significant geopolitical victory for China and loss for the US. Reflecting the depth of acceptance of power transition theory and its focus on US-China rivalry for dominance, much of the academic and media analysis of the Obama administration’s Asia Pacific rebalance policy and of the TPP’s progress has been seriously overdetermined and simplistic. Despite President Obama’s Asia Pacific rebalance speech in November 2011 in Canberra barely mentioning China, and when it did, noting the benefit for the United States and region of China’s rise, Paul Keating, the former prime minister of Australia, creatively re-interpreted it as a call for the containment of China: Yes, well, I think what we saw this week was the president in Australia saying that — to the American audience, really; it was a speech for the American audience, ‘We’re getting out of the Middle East. We’re renewing our interest in the Asia Pacific and we’re sticking it to China.’    Now, I think that was the context of the speech. Where we got wrapped up in the speech is of course in it was the announcement of a modest increase in troop movements through Australia. This

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would have been otherwise unexceptional had it been announced, say, after the AUSMIN meeting between Australian and US ministers in San Francisco six weeks ago, but it got wrapped up in the US kabuki show, and in a sense we’ve got brought into it, perhaps verballed to be part of what looks like the stringing out of a containment policy (Jones 2011).

Prime Minister Gillard, Keating’s Australian Labour Party colleague, not surprisingly, had a very different, more benign view. Another example of the power of power transition theory over the depiction of the US participation in the TPP is the very common mis­ representation of the RCEP. China, so far, has demurred from joining the TPP, stating that it is not ready to do so. The United States is not part of the RCEP negotiations as a pre-existing trade agreement with ASEAN was a prerequisite for an ASEAN invitation to join the RCEP negotiations that started in late 2012. Many mistakenly have depicted RCEP and TPP as rivalrous trade diplomacy efforts with the United States leading TPP and China RCEP.7 Rather, RCEP is an ASEAN initiative and RCEP negotiations are chaired by Indonesia, ASEAN’s largest member state and economy. Moreover, RCEP is the ASEAN-led alternative to the 2001 idea promoted by China for a narrower thirteen-member East Asian Free Trade Area.8 RCEP reflects much more the competing 2006 Japanese idea for a Comprehensive Economic Partnership for East Asia that consisted of the same states now negotiating RCEP (Park 2012). The origins of RCEP were a successful attempt by ASEAN to preclude a Chineseled regional trade deal, the exact opposite of how it is regularly presented.

4.  TPP Terminated “It’s a rape of our country. It’s a harsh word, but that’s what it is — rape of our country” (Donald Trump, 28 June 2016). “I oppose it now, I’ll oppose it after the election, and I’ll oppose it as president” (Hillary Clinton, 11 August 2016). “The Trans-Pacific Partnership is a disastrous trade agreement designed to protect the interests of the largest multi-national corporations at the expense of workers, consumers, the environment and the foundations of American democracy” (Senator Bernie Sanders, 29 December 2014).

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“There are a number of Republicans on that (debate) stage who support TPP, who support (the Trade Promotion Authority), I voted against TPA and I intend to vote against TPP” (Senator Ted Cruz, 19 November 2015).

On 23 January 2017, in one of his first acts as president, Donald Trump withdrew the United States from the TPP, effectively terminating the agreement that was signed on 4 February 2016.9 Over the next years, the truthfulness of the counterfactual threats issued by the Obama administration and the governments of Australia and Singapore among many others about the detrimental geopolitical consequences for US leadership in the Asia Pacific of TPP withdrawal will be tested. The US withdrawal itself does support an enduring truth of geopolitics and one that is particularly painful for diplomats and International Relations scholars. Domestic, pocket book concerns (real or imagined) invariably trump grand strategic designs and geopolitical interests, particularly in the legislature. Politics are local, not regional or global. The US withdrawal from the TPP is just the latest reversal in US trade diplomacy history. In the immediate post-war period, the Truman administration signed the Havana Charter to establish the International Trade Organization, then deemed as key to precluding World War III, only for a Republican-majority Congress to refuse to ratify the agree­ ment. The first George W. Bush administration had to renegotiate key parts of the trade deal the United States had signed with South Korea under the Clinton administration. The first Clinton administration could only get the North American Free Trade Agreement (NAFTA) through Congress with the support of the Republican minority. A majority of Democrats in both the House of Representatives and the Senate voted against the agreement and their president. As indicated by the above 2015–16 campaign comments on the TPP from the two Republican and two Democratic Party front-runners, the TPP was particularly politically toxic. President Obama failed to get the TPP through Congress despite a strong, if late, push by his administration. It is likely that regardless of who won the 2016 presidential campaign, they could not have secured enough votes in Congress to ratify the TPP. It would have at the very least required, as in the case of the US-South Korea bilateral deal, some renegotiations to satisfy Congressional concerns, a much more difficult scenario to imagine

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with the twelve-member TPP than with the bilateral US-South Korea deal particularly as some TPP members including Japan had already ratified the agreement signed. It is clear though that Donald Trump’s opposition to the TPP (as with that of Bernie Sanders) is not simply a case of placing vested sectoral interests above general economic or geopolitical ones. Rather, Trump’s opposition shows that geopolitical interests and the cost/ benefit analysis underlying them are not fixed as sug­gested by both Realist and power transition theories. Instead, they are contingent on the worldview of the leader of the particular state at the particular time. Donald Trump has, for decades, seen that the main bases of US regional and global leadership have been detrimental to US power accumulation and long-term geopolitical interests. He has posited that American allies and partners in trade agreements have taken advantage of the United States, that these alliances and preferential trade deals are zero-sum games with the US as the losing side. This despite the United States being in all cases the most powerful state. For the first time in US post-war history, the president himself is a barrier to the existing US trade diplomacy agenda. President Trump, not the US Congress, terminated the TPP and he terminated it for, not despite, perceived truths about power politics.

5.  CPTPP: The TPP Revived “Amid growing trade tensions and anti-globalisation sentiments, the CPTPP signals Singapore’s commitment to free trade and a rules-based trading system” (Lee Hsien Loong, Prime Minister of Singapore) (cited in Ng 2018). “After the US withdrawal, Japan, recognising the significance of free trade, has led the initiative in pulling together the TPP 11, … Our efforts have borne fruit if the United States judged it would be better to rejoin” (Taro Aso, Finance Minister of Japan) (cited in Straits Times 2018).

On Thursday, 8 March 2018, the eleven remaining negotiating parties signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade deal, also known as the TPP11 deal. Japan, as the largest remaining economy, took the lead in the renegotiations, despite being the last state to join the original TPP negotiations. This

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agreement was quickly negotiated after the US withdrawal, maintains the vast majority of what was agreed in the original TPP deal, but includes a much easier ratification clause that provides no one negotiating party a deal-breaking veto. As the above quotations from Prime Minister Lee Hsien Loong of Singapore and Finance Minister Taro Aso of Japan show, the quick revival of the TPP after the US withdrawal serves a number of purposes. Prime Minister Lee’s quotation reflects the small state vital interest in a rules-based global trading system (particularly in the face of unilateralist major powers) that was discussed in the first section of this chapter. Finance Minister Aso’s quotation reflects the continuing centrality of the United States to the TPP process that was the focus of the second section. The quick renegotiation of the TPP by the eleven remaining negotiating parties led by Japan is a good example of what is referred to as “hedging” in International Relations. While, as with all key terms in International Relations, there is no agreed upon definition for hedging, Evelyn Goh provides a suitable one for our purposes. Goh (2006) defines hedging, in contrast to balancing against or band­ wagoning with a major power, as: A set of strategies aimed at (or planning contingencies in) a situation in which states cannot decide upon more straightforward alternatives such as balancing, bandwagoning or neutrality. Instead, they cultivate a middle position that forestalls or avoids having to choose one side [or one straightforward policy stance] at the obvious expense of another.

Signing of the CPTPP provides greater protection of the interests of the negotiating parties and, by extension of the global trading, against the unilateral actions of the United States under the Trump administration. This is the option of collective cooperation against the potential damage wrought by American aggressive unilateralism in trade on the same side of the continuum of strategic choices as balancing against the United States. Keeping the CPTPP open for the United States to rejoin and strongly encouraging the Trump administration to do so is a positive option on the same side of the continuum of strategic choices as bandwagoning with the United States. The signing of the CPTPP deal that is still open to US participation means that the CPTPP states do not have to rely on plurilateral trade negotiations like the ASEAN-led RCEP ones that exclude the United

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States. It also means that the seven CPTPP states involved in RCEP can work individually or together to try to “TPPnize” any eventual RCEP agreement reached to reduce the dissonance between them and to boost the quality of RCEP. Hedging strategies focus on providing states flexibility and policy autonomy during periods of major power uncertainty. The CPTPP agreement, which is now ratified by enough members, is a clear example of hedging and the benefits it provides. Notes 1. For more information on the concept of institutional nesting, see Aggarwal (1998). 2. Asia-Pacific Economic Cooperation (2010). This declaration identifies three potential pathways, the ASEAN+3 process (that never prospered), the ASEAN+6 process (that became the Regional Comprehensive Economic Partnership process) and the TPP. The United States is only a member of the TPP pathway. 3. Dick Cheney, a supporter of Donald Trump’s presidential bid, was the only living secretary of defence to not sign the letter. 4. The letter can be seen at https://csis-prod.s3.amazonaws.com/s3fs-public/ event/160428_Trans_Pacific_Partnership.pdf. 5. Interview with Lee Hsien Loong, Time, 26 October 2016, http://time. com/4545407/lee-hsien-loong-singapore-globalization/. 6. Opening remarks by Prime Minister Shinzo Abe at the Dialogue with the New York-based business and financial community, 21 September 2016, http://japan.kantei.go.jp/97_abe/statement/201609/1219240_11015.html. 7. A stark example among many of this misrepresentation is Chang (2015). 8. Australia, New Zealand and India were excluded from the East Asia Free Trade Area proposal. 9. For the TPP signed in February 2016 to come into force, at least six of the twelve signatories accounting for at least 85 per cent of the combined GDP of the twelve signatories must ratify the agreement. The US withdrawal meant that this requirement could not be met.

References Aggarwal, Vinod. 1998. “Institutional Nesting: Lessons and Prospects”. In Institutional Designs for a Complex World: Bargaining, Linkages and Nesting, edited by Vinod Aggarwal. Ithaca NY: Cornell University Press.

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Asia-Pacific Economic Cooperation. 2010. “Pathways to FTAAP”. 2010 APEC Leaders’ Declaration, 14 November 2010. http://www.apec.org/MeetingPapers/Leaders-Declarations/2010/2010_aelm/pathways-to-ftaap.aspx. Barfield, Claude Barfield and Philip I. Levy. 2009. “Tales of the South Pacific: President Obama and the Transpacific Partnership”. AEI International Economic Outlook, December 2009. Carter, Ashton. 2016. “The Future of the U.S. Rebalance to Asia”. Speech given at the Council on Foreign Relations, 8 April 2016. https://www.cfr.org/ event/future-us-rebalance-asia. Chang, Gordon G. 2015. “TPP vs. RCEP: America and China Battle for Control of Pacific Trade”. The National Interest, 6 October 2015. http://nationalinterest. org/feature/tpp-vs-rcep-america-china-battle-control-pacific-trade-14021. Clinton, Hillary. 2011. “America’s Pacific Century: The Future of Geopolitics Will be Decided in Asia, Not Afghanistan or Iraq, and the United States Should be Right at the Center of the Action”. Foreign Policy 189 (November): 57. Dien Luong. 2016. “Why Vietnam Loves the Trans-Pacific Partnership”. The Diplomat, 16 March 2016. http://thediplomat.com/2016/03/why-vietnamloves-the-trans-pacific-partnership/. Goh, Evelyn. 2006. “Understanding Hedging in Asia-Pacific Security”. PacNet No. 43. Honolulu: Pacific CSIS, 31 August 2006. Hiep, Le Hong. 2015. “The TPP’s Impact on Vietnam: A Preliminary Assessment”. ISEAS Perspective, no. 2015/63, 4 November 2015. https://www.iseas.edu. sg/images/pdf/ISEAS_Perspective_2015_63.pdf. Hockey, Joe. 2016. “Australia, the US and the Trans-Pacific Partnership”. Speech given at an East-West Centre/Pacific CSIS event, Honolulu, 29 June 2016. https://usa.embassy.gov.au/sites/default/files/ambassador-eastwestcenterhi-160629.pdf. Japan Times. 2015. “Four-way Auto Deal Advances TPP Talks”, 2 October 2015. http://www.japantimes.co.jp/news/2015/10/02/business/tpp-talksextended-ministers-struggle-strike-trade-deal/#.WJwsM_KOwug. Jayakumar, Shunmugam. 2011. Diplomacy: A Singapore Experience. Singapore: Straits Times Press. Jones, Tony. 2011. “Paul Keating Welcomes the Rise of China”. ABC News, 23 November 2011. http://www.abc.net.au/lateline/content/2011/s3374642. htm. Kerry, John. 2016. “Remarks on the Trans-Pacific Partnership”. Speech given at the Wilson Center, Washington D.C., 28 September 2016. https://2009-2017. state.gov/secretary/remarks/2016/09/262551.htm. Keynes, John Maynard. 1936. The General Theory of Employment, Interest and Money. London: Palgrave.

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Lemke, Douglas. 2002. Regions of War and Peace. Cambridge: Cambridge University Press. Lopert, Ruth. 2015. “Why Biologics were such a Big Deal in the Trans Pacific Partnership”. The Conversation, 6 October 2015. https://theconversation. com/why-biologics-were-such-a-big-deal-in-the-trans-pacific-partnership48595. Mulgan, Aurelia George. 2016. “Securitizing the TPP in Japan: Policymaking Structure and Discourse”. Asia Policy 22 (July). https://www.nbr.org/ publication/securitizing-the-tpp-in-japan-policymaking-structure-anddiscourse/. New Zealand Government. 2016. New Zealand: Economic and Financial Overview 2016. Wellington: New Zealand Government. https://treasury.govt.nz/sites/ default/files/2010-04/nzefo-16.pdf. Ng Huiwen. 2018. “Singapore Ratifies Asia-Pacific Trade Deal for 500 Million People”. Straits Times, 19 July 2018. https://www.straitstimes.com/singapore/ singapore-ratifies-cptpp-trade-deal-to-become-3rd-nation-to-do-so-aftermexico-and-japan. Obama, Barack. 2016. “The TPP would let America, not China, Lead the Way on Global Trade”. The Washington Post, 2 May 2016. https://www. washingtonpost.com/opinions/president-obama-the-tpp-would-let-americanot-china-lead-the-way-on-global-trade/2016/05/02/680540e4-0fd0-11e6-93ae50921721165d_story.html?utm_term=.001df2ff0284. Office of the Historian, US State Department. N.d. “Bretton WoodsGATT, 1941-1947”. https://history.state.gov/milestones/1937-1945/brettonwoods. Organski, Abramo Fimo Kenneth. 1958. World Politics. Ann Arbour: University of Michigan Press. Park Jae-Kyung. 2012. “ASEAN Centrality: The Case of RCEP”. cogitASIA, 15 November 2012. https://www.cogitasia.com/asean-centrality-the-caseof-rcep/. Sheridan, Greg. 2016. “Death of TPP can be Laid at Barack Obama’s Feet”. The Australian, 14 November 2016. http://www.theaustralian.com.au/opinion/ columnists/greg-sheridan/death-of-tpp-can-be-laid-at-barack-obamas-feet/ news-story/116f9b8bdb4acc8ae69e3a0ad2fb1489. Silva, Karine de Souza. 2009. “Pedagogy of Peace: The Contribution of Jean Monnet to the Construction of the European Union”. Jean Monnet/Robert Schuman Paper Series 9, no. 5. Straits Times. 2018. “Japan’s Finance Minister Taro Aso says He Would Welcome US Taking Fresh Look at TPP”, 13 April 2018. https://www.straitstimes. com/asia/east-asia/japans-aso-says-he-would-welcome-us-taking-fresh-lookat-tpp.

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Tapper, Jake. 2015. “45 Times Secretary Clinton Pushed the Trade Bill She Now Opposes”. CNN, 15 June 2015. http://edition.cnn.com/2015/06/15/ politics/45-times-secretary-clinton-pushed-the-trade-bill-she-now-opposes/. United States Trade Representative (USTR), Office of the. N.d. “Textiles and Apparel”. https://ustr.gov/sites/default/files/TPP-Chapter-SummaryTextiles-and-Apparel.pdf. ———. 2008. “Schwab Statement on Launch of the U.S. Negotiations to Join the Trans-Pacific Strategic Economic Partnership Agreement”, 22 September 2008. https://ustr.gov/schwab-statement-launch-us-negotiations-join-transpacific-strategic-economic-partnership-agreement. VanGrasstek, Craig. 2013. The History and Future of the World Trade Organization. Geneva: World Trade Organization.

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4 THE INVESTMENT CHAPTER AND ISDS IN THE CPTPP Lessons from and for Southeast Asia* Luke Nottage

1. Introduction The Trans-Pacific Partnership (TPP) free trade agreement (FTA) was signed on 4 February 2016.1 Prior to and following the signing of the TPP, significant media and public attention focused on its investment chapter, especially the investor-state dispute settlement (ISDS) provisions. For example, one report asserted: “Indonesia could fall into bankruptcy if the biggest market in Southeast Asia [joins the TPP], which would allow investors to sue the government in international arbitration courts through investor-state dispute settlements” (Jakarta Post, 15 February 2016).2 Yet a considerable proportion of additional economic growth modelled from the TPP was expected to come from more foreign direct investment (FDI) generated by liberalization commitments in that FTA (Petri and Plummer 2016).

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Ratification of the TPP fell into doubt following newly-elected President Trump’s withdrawal of signature by the United States in January 2017. But on 8 March 2018, the other eleven signatories (including four Southeast Asian states) re-signed the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). It made minimal changes to the original TPP’s investment chapter and its ISDS pro­visions as well as loosening the requirements for this FTA to come into effect.3 Accordingly, there are practical and theoretical lessons to be drawn from the investment chapter and ISDS provisions in the agreement. For example, why were the Southeast Asian countries involved agreeable to ISDS? As the second section of this chapter outlines, ISDS-backed investment treaty commitments are already widespread across the Asia Pacific region (Bath and Nottage 2020). They have been offered in FTAs and earlier standalone bilateral investment treaties (BITs) signed by Southeast Asian states, the option to promote FDI especially where host states lack domestic laws and courts meeting international standards, which are current TPP signatories as well as potential new partners. Other countries in the region that showed some interest in the TPP, such as Thailand, the Philippines and Indonesia (Crockett 2016), have each been subjected to a few arbitration claims brought by foreign investors and these countries consequently reviewed their approach to investment treaties and ISDS. Yet, until the end of 2016, none of them, and indeed no Southeast Asian state, had ever had to pay out on an arbitral award where the host state’s consent to international arbitration has been given through an investment treaty. Nor has any Southeast Asian state declared that it would eschew ISDS completely in future treaties. This includes Vietnam, which has also been subject to several ISDS claims but signed the TPP in 2016 and then re-signed the CPTPP in 2018. A different stance—eschewing ISDS—was adopted in recent years by a few leftist South American states, South Africa (Trakman and Musaleyan 2016), Australia (albeit only over 2011–13, under the centre-left Gillard government’s Trade Policy Statement), 4 and New Zealand (with a centre-left government elected in October 2017 renouncing ISDS provisions in post-CPTPP treaties) (Kawharu and Nottage 2018). Meanwhile, investors from Singapore and Malaysia (the major sources of outbound investment from Southeast Asia) (Lee and

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Sermcheep, eds. 2017) have initiated several ISDS claims under investment treaties.5 This backdrop partly explains not only why those two states and the other TPP signatories from Southeast Asia (Vietnam and Brunei) were willing to agree to ISDS-backed commitments in that FTA, and then the CPTPP. It also makes it quite likely that Thailand, the Philippines and even Indonesia will not see the ISDS provisions as precluding their eventually perhaps joining the CPTPP, or a version of the TPP that might be revived if the United States changes its mind again and is able to rejoin the original signatories. Anyway, the current CPTPP signatories (even New Zealand) probably would insist that any new treaty partners from Southeast Asia should adopt ISDS provisions as a key feature of the treaty package. In addition, the third section shows that the CPTPP’s investment chapter is already quite similar to the major investment treaty commitments entered into by Southeast Asian states, especially under FTAs over the decade or so, including four “ASEAN+” FTAs concluded by the Association of Southeast Asian Nations (ASEAN) (Bath and Nottage 2015). This is unsurprising. From around 2001, after earlier experiences with ISDS claims under the trilateral North American Free Trade Agreement (NAFTA), the United States developed a new Model BIT (in 2004) that was significantly more protective of host state interests (Kantor 2004). This template influenced the investment chapters in its own FTAs with Asia Pacific counterparties (for example, with Singapore, Australia, and later South Korea) (Shin and Chung 2015), but also was adapted by the latter states and others (such as Japan) as they began negotiating FTAs (and/or sometimes still standalone BITs) with further countries, including in Southeast Asia.6 The US template also then influenced the drafting of the ASEAN+ FTAs, as well as the ASEAN Comprehensive Investment Agreement (ACIA, consolidating earlier 1987 and 1998 intra-ASEAN investment agreements) (see Cho and Kurtz 2016; Chaisse and Jusoh 2016), albeit with somewhat more variations. This significant shift in Asia Pacific treaty practice over the last decade created a platform for the TPP investment chapter, which therefore draws heavily on contemporary US treaty practice (Alschner and Skougarevskiy 2016). Section 3.1 therefore briefly sketches the scope of the main substantive protections offered to foreign investors in the original TPP, noting

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some minor changes agreed in the CPTPP, compared to other major ASEAN agreements (especially ACIA, and ASEAN+ FTAs containing investment chapters). These commitments include the host state’s promise to compensate foreigners adequately for expropriating their investments, and to provide “fair and equitable treatment” (including or related to avoiding “denial of justice” in local courts, or egregious lack of due process by government authorities). In many ways, they are much more important than the ISDS provisions, discussed then in Section 3.2. Those merely add an extra dispute resolution procedure that can be selected by the foreign investor wishing to make (at its own expense) a direct arbitration claim against the host state, instead of trying to mobilize its home state to initiate the interstate arbitration procedure that is also invariably agreed upon the treaties. As the WTO interstate dispute settlement process similarly shows (Payosova, Hufbauer, and Schott 2018), such procedures are often more politicized, so foreign investors nowadays almost never go down that route if the treaty provides the ISDS option. However, interstate arbitration provisions in BITs and FTAs may encourage investors first to approach their home state to seek resolution of the dispute with the host state, before progressing to the cost and expense of pursuing ISDS claims directly against the host state (see Gertz, Jandhyala, and Poulsen 2018). Overall, as concluded in the last section, ISDS and even the rest of the investment chapter in the TPP, or now the CPTPP, should not therefore really be seen as a “big deal”. In the short term, it is true that, had the original TPP come into force including the United States, or the latter changes its mind again and is able to persuade CPTPP signatories to let it join that agreement, US investors in Malaysia and Brunei would gain new ISDS-backed protections for existing and future FDI there. Yet, US investment in those countries would be limited at least for Brunei (the United States already has ISDS protections through bilateral treaties with Vietnam and Singapore). ISDS may become a more significant issue if other major Southeast Asian countries also ratify the CPTPP. But the region as a whole has won or settled occasional claims brought by investors from the United States, which furthermore are not necessarily more litigious than those from other nations on a per capita basis (as indicated in Appendix 4.1).7 In addition, ratifying the CPTPP offers an opportunity to displace older more pro-investor

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standalone bilateral investment treaties (and revisit such BITs more broadly, as Indonesia has been doing since 2014). Nonetheless, although the TPP, and now the CPTPP, are arguably an improvement over earlier BITs, their US-style approach to investment treaty drafting is now being challenged by the European Union (EU). The latter is now developing some interesting further innovations to recalibrate investment commitments, in even less pro-investor ways. These include a standing investment court with a review mechanism to correct substantive errors of law. The feature was developed especially for its FTA negotiations with the United States (the TransAtlantic Trade and Investment Partnership or TTIP), but was recently accepted in the EU’s bilateral FTAs with Canada and even Vietnam and now Singapore (all of which had agreed to a more traditional ISDS procedure in the TPP, and more recently in the CPTPP) (European Commission 2016; Nguyen 2018; Mohan 2018; Charlotin and Peterson 2018). In addition, the wording contained in the FTA between the EU and Canada (substantially agreed in August 2014, with modifications after a “legal review” completed on 29 February 2016) (European Commission n.d.), and now proposed for TTIP, arguably protects the regulatory autonomy of host states somewhat more strongly than the TPP’s substantive provisions (Henckels 2016; Titi 2015). This should not necessarily impede CPTPP ratification. Yet, it does raise broader questions about whether an emergent EU-style model, rather than the current US-style model (culminating in the TPP), will and should ultimately prevail in (Southeast) Asia, including in finalizing the “ASEAN+6” Regional Comprehensive Economic Partnership (RCEP) (Fukunaga 2015; Wilson 2015; Scollay 2016; Bath and Nottage 2020).

2. Investment Trends, Treaties and ISDS Claims in (Southeast) Asia 2.1  FDI and Treaty Trends The Asian region has long been a major destination for FDI. It has also emerged as a major source of outbound FDI (Bath and Nottage 2017; Nottage, Chaisse, and Thanitcul 2018). The latter tendency began with investors from Japan in the 1980s (Hamamoto and Nottage 2010), followed by investment out of South Korea from the late 1990s

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(Kim 2011), and more recently China (Bath 2015) and ASEAN economies like Singapore (Ho 2013). By 2013, not only were a quarter of the top twenty host countries for inbound FDI located in East Asia and the Pacific (EAP), but so were more than a quarter of the top twenty economies for outbound FDI worldwide. Transnational companies also considered that eight of the seventeen top prospective host countries for FDI over 2014–16 were in EAP.8 Notably, FDI into Southeast Asia rose for the third consecutive year, from US$117 billion in 2013 to US$136 billion in 2014, despite a 16 per cent decline in FDI flows worldwide in 2014. ASEAN member states collectively received the largest amount of FDI among developing countries, with inflows exceeding those into China since 1993. IntraASEAN investment (mostly from or via Singapore) jumped 26 per cent to comprise now almost one fifth of all inbound FDI, making Southeast Asian countries the second largest investor group in the region. A major driver has been the business sector’s aim to develop a stronger regional presence due to the completion of the ASEAN Economic Community by the end of 2015. Infrastructure investment remains a priority area for FDI.9 The dramatic expansion of FDI within or involving Asian economies has been paralleled by the emergence of an extensive network of investment treaties.10 Standalone BITs mostly aim to “protect” existing investments, especially against discrimination compared to local or third-country investors, expropriation without adequate compensation, or denial of justice or other violations of “fair and equitable treatment”. Such protections have also long been considered to indirectly encourage cross-border investment, especially FDI where the larger amounts and control involved for foreign investors often make their sunk investments more politically sensitive and open to host state intervention. In addition, provisions against discrimination—“national treatment” (NT) and/or “most favoured nation” (MFN) treatment—can be extended to the pre-establishment or investment admission phase, albeit typically with some agreed carve-outs for specific sectors or types of investment. Such BITs can also “liberalize” market access for foreign investors and thus directly promote greater FDI. More recently, Asia Pacific countries have tended to negotiate fewer BITs, instead including investment chapters in FTAs. The latter almost always include substantive protections, but also increasingly pre-establishment liberalization commitments. FTA investment chapters

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go beyond multilateral agreements, notably under the aegis of the World Trade Organization (WTO) in operation since 1995. These WTO agreements only offer liberalization and then NT and/or MFN protection for individually-agreed service sector investments (under the General Agreement on Trade in Services), and protection against discriminatory “local content” and other specific performance requirements targeting foreign investors (under the Trade-Related Investment Measures Agreement) (Hahn 2015). Some WTO member states sought to add broader investment protection and liberalization commitments, but these initiatives were shelved after strong objections from civil society groups around 2000. The subsequent and more narrowly circumscribed Doha Development Round does not include such investment proposals, and initiatives within the OECD to develop a multilateral agreement on investment were also suspended in 1998 (Karl 2015). Admittedly, recent research casts some doubt on whether offering treaty-based investment protections, in fact, leads to significantly more cross-border investment. For example, Poulsen’s archival research and interviews of treaty negotiators in various developing countries suggest that “motivated learning” was a significant factor. That is, they “wanted” to believe in this benefit from signing BITs, without undertaking much investigation or rationally processing contrary evidence.11 Bellak’s recent “meta-analysis” of econometric studies acknowledges that investment treaty implementation had an average impact on FDI ranging from 4 to 13 per cent (with median increases of 2–19 per cent), but argues that publication selection biases reduce aggregate effects on both flows and stocks to statistically negligible levels. 12 To assist with more accurate quantitative analysis, which can furthermore be linked up to country-specific qualitative research, Chaisse and Bellak (2015) have gone on to develop a “BITSel Index” that assesses the overall strength of investment treaties by combining their breadth or scope, liberalization effect, protections against discrimination, other constraints on regulation (compensation for expropriation, fair and equitable treatment) and access to international dispute settlement. Armstrong and Nottage (2016) used their underlying treaty database to present preliminary econometric results of some significant positive impacts on worldwide FDI flows associated with investment treaties generally as well as from (separately) ISDS protections. However, there are other rather intriguing results, and methodological challenges in such empirical work remain formidable.13

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Another study by Friedrich and Saloman (2015) provides a comprehensive overview of both BITs and FTAs or other investment treaties concluded so far by EAP economies—in East Asia, Pacific Islands, New Zealand and Australia. As of December 2014, twenty-four EAP economies had concluded 712 BITs (with 541 in force) out of around an estimated 3,000 BITs worldwide, as well as at least sixty-nine other investment agreements (such as bilateral or regional FTAs) out of around thirty.14 The proportions of treaties signed by the most active EAP states (and numbers of formal ISDS claims filed) were as follows.15 From slow beginnings in the 1970s, it became increasingly common for these investment treaties to provide the extra option of ISDS, notably international arbitration (generating an award binding on the host state if the tribunal finds a violation of substantive treaty commitments). If the treaty allows for the option of such arbitration under the 1965 Washington Convention establishing the (World Bank affiliated) International Centre for Settlement of Investment Disputes (ICSID), and both the home state of the foreign investor and the host state have ratified this further framework Convention, the arbitration will be administered through a more pro-investor and “delocalized” process. Any challenges about the scope of the consent to ICSID arbitration contained in the treaty, the arbitrators appointed or procedural problems will be heard by an annulment committee, rather than any court, and the final award simply has effect like a judgment of a court in the ICSID Convention member state where the successful investor seeks enforcement. Host states may also consent to ICSID Convention arbitration through individual investment contracts or authorizations,16 or domestic legislation applicable to foreign investors generally.17 By contrast, if the host state has not acceded to the ICSID Convention, it can only offer other types of arbitration through its treaties (or contracts, etc.); for example, ad hoc arbitration under the UNCITRAL Rules. Resultant awards will still be enforced against host states, but they may be challenged in courts at the agreed seat (or venue) of the arbitration and/or under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (widely ratified, but applicable also to arbitrations involving just private parties). Until around 2010, the numbers of ISDS claims filed against Asian host states appeared comparatively low, and even more so regarding Asian investors bringing ISDS claims against host states. Drawing on theoretical paradigms used to analyse low levels of civil lawsuits

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formally filed in Japan, Nottage and Weeramantry (2012) suggested that the most plausible explanation for comparatively few Asia-related ICSID arbitrations (for which, data is most readily available) was an array of “institutional barriers”, including costs and a paucity of experienced counsel and arbitrators in Asia, rather than some general cultural aversion to arbitration.18 Building on this hypothesis, Kim highlighted an increase in ICSID and other ISDS claims against Asian host states from 2011, as well as more claims filed by Asian investors, and anticipated more of both (Kim 2012; Ferracane 2017). Friedrich and Salomon (2015) also noted eight claims against EAP states in 2011 and five in 2012, albeit only two each (closer to the usual number before the 2011 spike) in each of 2013 and 2014. This generated a total of thirty-five claims since 1981, including thirty cases where the host state had consented to ISDS under investment treaties, mostly against developing countries in Asia (as also indicated in Table 4.1).19 They also find twenty-nine investors from EAP states, including nineteen treaty-based claims and twenty-two administered by ICSID under the framework 1965 ICSID Convention, which has been adopted by almost all Asian states and facilitates enforcement of resultant awards.20 Friedrich and Salomon (2015) do admit that initially these EAP investors:21 Mostly were involved as locally-incorporated subsidiaries of Western European and North American parent companies. However, EAP investors quickly brought investment claims without the involvement (at least on record) of any non-EAP parent entity. While investors from one of the region’s few developed countries, Australia, have been the most active in pursing their investment claims in arbitration, nearly two-thirds of the region’s investment claims were brought by EAP investors from developing countries (nineteen cases, 65.5 per cent).

Overall, Friedrich and Salomon (2015) observe that ISDS arbitrations involving EAP parties have been lagging somewhat compared to global trends. However, the growth rate in the ICSID case proportion since 2000 has been twice as significant as the overall growth rate in ICSID cases (which comprise most investment arbitrations).22 The last column in Table 4.1 highlights how the most active EAP signatories to BITs have now been subjected to at least one treaty-based ISDS claim, either under administration through ICSID or via ad hoc UNCITRAL Rules arbitration, although a few such pioneering claims were settled by the host state.

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5.8% 1.4%

8.7% 6.5% 6% 5.6% 5.3% 3.5% 3.4% 3.2% 3.2% 0.8% 0.6%

  5. Vietnam

 6. Singapore

 7. Mongolia

  8. Thailand

 9. Philippines

10. Laos

11. North Korea

12. Australia

13. Japan

… 18. Brunei

… 20. New Zealand

Source: Author’s compilation.

10.1%

10%

 4. Malaysia

2.9%

N/A

18.8%

23.2%

N/A

N/A

1.4%

17.4%

1.4%

2.9%

15.9%

10%

13.8%

 2. South Korea

17.4%

 3. Indonesia

20.4%

BIT proportion FTA proportion (out of 541) (out of 69)

 1. China

States

–

–

–

1 (filed in 2011)

–

2 (both, interrelated, filed in 2012)

4 (first filed in 2002 but settled)

1 (filed in 2005)

4 (first filed in 2004)

–

4 (first filed in 2003 but settled)

3 (2 interrelated: filed in 1994 and 1999)

7 (3 under treaties: first filed in 2004, but also under contract and settled)

2 (1 under treaty: filed in 2012)

2 (under treaty: first filed in 2011 but settled)

ISDS claims received (including number and year first filed, where consent under treaty)

Table 4.1 Investment Treaties and ISDS Claims Involving East Asia and Pacific States (until end 2014)

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Extending the analysis to South and Central Asia as well as the Pacific Islands, Chaisse and Bellack (2015) find seventy ISDS claims brought against twenty-five Asia Pacific states, including fourteen against India. They note a sharp jump in 2011 (ten claims filed, compared to around five each year over the previous decade), maintained in 2012 and 2013 (thirteen claims each), although only five again were filed in 2014. The authors also explain such growth by increased FDI and investment treaties, combined with better understanding of such instruments, and expect “a likely intensification of international investment arbitration practice in the Asia Pacific region in the coming years”.23 However, there has been lingering discontent in parts of Asia over foreign investment generally (Sornarajah 2011), and a backlash against ISDS remains possible. After all, that backlash has been evident in South America over many years, following a wave of claims against Argentina and then other high-profile cases against other states in that region (Lazo 2014; Balchin et al. 2010). The growing numbers of ISDS claims worldwide, exceeding 600 by the end of 2014 (UNCTAD 2015) and 1,000 by the end of 2019, have even given rise to some concerns among some developed countries in Europe and North America. So far, the ISDS system has survived (Trakman and Musaleyan 2016; Mohan 2016), but it remains subject to more debates and many reform options are being discussed (Kalicki and Joubin-Bret, eds. 2015; UNCTAD 2016a; UNCITRAL Secretariat 2017; Bath and Nottage 2020). 2.2  ISDS Policy and Practice in Southeast Asia As a whole, ASEAN has arguably gone through three phases in protect­ing and liberalizing investments through treaties (Cho and Kurtz 2016; Cho and Kurtz 2018). Over the 1950s–70s, the logic was mainly “Hobbesian”: viewing foreign investors (and indeed traders) more as adversaries, and with member states consequently signing few BITs. Over the 1980s–90s, the logic became more “Lockean”, driven by neo-liberalism to instead compete for and welcome FDI, resulting in a proliferation of BITs as well as the 1987 ASEAN Agreement for Promotion and Protection of Investments. The latter instrument did provide for ISDS, but was limited in scope to “investments specifically approved in writing” and with respect to national treatment obligations. Those obligations were

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instead introduced (albeit without ISDS) through the 1998 Framework Agreement on the ASEAN Investment Area, aiming to bolster the declining share of intra-ASEAN FDI, after the Asian Financial Crisis of 1997 and the rise of China as a competing manufacturing powerhouse. In this third (partly “Kantian”) era, with ASEAN committing to deeper community, there nonetheless remain several significant Hobbesian or sovereigntist tendencies. Turning to individual member states and their attitudes towards ISDS, only Singapore—now a very large capital exporter—has long been committed to pragmatically negotiating investment treaties that include broad ISDS-backed protections (Ho 2013; Mohan 2017). By contrast, after being subject to some comparatively early investment treaty arbitrations, the Philippines has been noticeably more cautious for over a decade, although it only suffered its first treaty-based award on 23 January 2017 (the first such ICSID award against any Southeast Asian state).24 In Vietnam, the Ministry of Justice also raised the possibility of limiting ISDS provisions after a few more recent claims, but the Ministry of Planning and Investment prevailed and instead an inter-agency protocol was introduced in 2014 to better anticipate and respond to investor claims (Nguyen and Vu 2014; Dang 2011; Nguyen and Nguyen 2018). Nonethe­less, Vietnam has never acceded to the framework ICSID Convention, and recently agreed to a new FTA with the EU. That adopts the latter’s international investment court mechanism, to be staffed by permanent judges pre-appointed only by the treaty partner states (rather than ad hoc arbitrators, including one typically appointed by the relevant investor) and providing for appellate review for errors of law (along the lines of WTO dispute settlement) (European Commission 2015b). Indonesia (like India more recently) is letting lapse its many existing BITs. The aim seemed to be to negotiate new ones in accordance with a model BIT, which might limit access to ISDS as well as host state liability exposure (Crockett 2015). However, Indonesia (unlike India) (Hanessian and Duggal 2015; Ranjan and Anand 2018; Hepburn and Kabra 2017; Kawharu and Nottage 2017) has not disclosed any new model, perhaps reflecting tensions within different parts of the government over foreign investment policy. Draft investment regulations issued in 2016 also seemed to envisage the future conclusion of investment treaties containing consent to ISDS (Crockett 2017). Indonesia may anyway need to be flexible as it continues to negotiate FTAs with

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significant FDI exporters, such as the EU or (bilaterally as well as via RCEP) with Australia (Ubilava and Nottage 2020). The attitude of Malaysia remains more favourable towards ISDS, even though it, too, has been subjected to a few ISDS claims.25 Malaysia is a significant outbound investor, including through governmentlinked companies, and one of those (Malaysia Telekom) as well as private investor are known to have initiated ICSID arbitrations under its large network of BITs (Jusoh, Razak, and Mazlan 2017; Wang 2015). The scope of application for such treaties has also in fact widened over time: from (a) BITs protecting only specifically “approved projects”, to (b) treaties (from 1993) protecting investments admitted in accord­ance with the host state’s laws, to (c) recent FTA investment chapters (including the TPP and CPTPP) adding reference to covered assets needing to have certain characteristics of an investment (Reed and Wong 2015). Thailand is another intriguing country study within ASEAN (Nottage and Thanitcul 2016c; Sucharitkul 2015; Yackee 2018). BITs until 1993 did not provide for ISDS at all, or only if both states were party to the 1965 ICSID Convention—signed by Thailand in 1985, but never ratified. BITs containing effective (ad hoc) ISDS provisions then were increasingly signed, but the Thai government may have considered that its liability exposure remained limited by requirements for covered investments to be “specifically approved in writing”. It had also been quite successful in Thai court challenges to purely contract-based arbitration awards with foreign investors (not based on consent provided in treaties, and/ or drawing on substantive treaty violations). However, a major adverse contract-based arbitration award in 2004 prompted a Cabinet Resolution requiring prior approval of concession and other contracts with public authorities. This was further tightened in 2009, when Thailand lost its first-ever treaty-based arbitration initiated by Walter Bau in 2005 (and then continued by its liquidator), under a revised BIT with Germany signed in 2002. Soon after the latter treaty (allowing for ISDS) had been ratified and came into force in 2004, directors appointed by majority (government and local) joint venture partners in a highway concession project outvoted the German directors to approve toll reductions that further impacted on the project’s profitability. The adverse investment arbitration award attracted enormous public attention in Thailand in mid-2011, when the liquidator obtained a German court order seizing the airplane of the then Crown Prince (now the King of Thailand) in Munich airport.

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The Thai government has vigorously resisted enforcement of this (non-ICSID Convention) award through courts in Switzerland (the agreed seat) as well as under the New York Convention in Germany and the US courts. For example, it revived objections that the original investment was not specifically approved, an argument rejected by the arbitral tribunal in its jurisdictional award in 2007. It was only in December 2016 that German courts finally confirmed that the BIT arbitration award should be enforced against security given by the Thai government to secure release of the plane in 2011. However, rather than abandoning ISDS altogether, in 2013, Thailand revised its 2002 Model BIT to incorporate less pro-investor provisions. The country has since concluded a few BITs, as well as agreeing over the last decade to several bilateral FTAs and ASEAN investment treaties retaining ISDS provisions. Part of the context is that Thailand became a net FDI exporter in 2011. Myanmar, which (like Thailand, Vietnam and Laos) has also not acceded to the framework ICSID Convention, obtained an award in 2003 where the tribunal (chaired by a Thai ex-diplomat) declined jurisdiction. The Singaporean company was found to have made its investment before Myanmar joined ASEAN and ratified its 1987 Agreement, without getting a subsequent specific approval in writing as required by the Agreement for such investments. Significantly, however, the tribunal opined that for new foreign investments made after ratification, a general approval by the Myanmar investment board could be sufficient to satisfy under a separate provision in the Agreement.26 Laos faced three related ISDS claims (one with the seat in Singapore27) associated with a casino investment originating from Macau. The Lao government was also apparently developing a Model BIT (Weeramantry and Mohan 2017). Cambodia has adopted the ICSID Convention, but (like Laos and Myanmar) has comparatively few BITs in force and has not yet faced an ICSID claim based on advance consent given under any of those treaties. However, it recently successfully defended an ICSID Convention arbitration initiated by a US investor in a power plant, based on consent Laos had given in an investment contract (Weeramantry 2017). Brunei also has very few BITs, or further investment treaties (other than through ASEAN). It is the only country in Southeast Asia with no known investment claims against it or brought by its own investors against other countries (Jetin and Chaisse 2018).

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Overall, this ongoing variance in ISDS experiences and policy developments within Southeast Asia complicates the picture somewhat. RCEP was substantially agreed in November 2019, reportedly without ISDS and India for now, but almost all partner states already had separate ISDS-backed treaties (Nottage and Jetin 2020), and for RCEP, ISDS was on the agenda in 2015.28 The inclusion of ISDS in the 1987 and 2009 intra-ASEAN agreements as well as all ASEAN+ FTAs (except with Japan, which omits an investment chapter), plus the limited adverse experience with ISDS claims across Southeast Asia, seem to be major factors behind the general acceptance of this dispute resolution option. This not only explains why four ASEAN states agreed to ISDS in the investment chapter of the TPP and then the CPTPP. It also suggests that these provisions will not prove a deal-breaker if other ASEAN member states were to join such a megaregional FTA.

3. Highlights from the TPP and CPTPP Investment Chapter Developing country members may, indeed, have been over-optimistic in acceding to BITs especially from the 1990s, hoping thereby to attract significantly more cross-border investment, without recalibrating treaty provisions in light of the emerging ISDS experiences of other countries (Poulsen 2015). But the advent of mostly US-style FTAs in the Asian region over the last decade, and their own experiences with ISDS, have allowed for a more careful assessment of investment treaty provisions. Nonetheless, it remains important to compare the investment chapter provisions of the TPP and the CPTPP against current major treaties in Southeast Asia. Section 3.1 examines its substantive provisions, while Section 3.2 focuses on the ISDS procedure. Key reference points include the ACIA and ASEAN’s FTAs or investment treaties also signed in 2009, with Australia and New Zealand (“AANZFTA”), Korea (“AIAK”) and China (“AICA”), as well as ASEAN’s investment agreement signed in 2014 with India (“AIAI”).29 The analysis reveals rather limited differences across those four instruments compared to the TPP and then the CPTPP. This reinforces the conclusion that the investment chapter, in itself, should not be seen as a “big deal” for existing and potential signatories from Southeast Asia.

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The CPTPP, signed in March 2018, basically adopted the TPP provisions, but an Annex “suspends” some provisions—especially some that were seemingly pushed by the United States against the inclinations of other TPP signatories.30 Accordingly, the analysis below still refers to articles set out in the TPP, while noting any variations introduced by the CPTPP Annex. 3.1  Substantive Provisions The TPP investment chapter follows US treaty practice in adopting an asset-based definition of “investment”. Following the somewhat tighter definition in the 2004 and 2012 US Model BITs (compared to the 1984 Model), it must have “the characteristics of an investment”, such as “commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk” (TPP Article 9.1). A similar clarification is found in ACIA, AIAK and AIAI (as indicated in Table 4.2), consistently also with recent FTAs concluded by TPP parties with third countries.31 Anyway, even without such an express clarification, some investment tribunals have ruled that the concept of “investment” can require similar characteristics (see Coppens 2011). Table 4.2 Summary Comparing Scope for Covered “Investment” Treaty:

ACIA AIAK AICA AANZFTA AIAI (CP)TPP

“Characteristics”

ü

üü

Excluding contract claims

ü

üü

ü

Excluding judgments Admitted under host state law

ü

ü

ü

ü

ü

ü

ü

ü

ü

ü

ü

Source: Author’s compilation.

By contrast, the TPP does not carry additional clarifications found for example in Korea’s recent FTAs with Australia and New Zealand restricting the scope to bring treaty claims for debts owed under commercial supply contracts,32 although this issue has arisen in ISDS claims against Malaysia and the Philippines as well as several other countries.33 Such express exclusions are found in ACIA, AIAK, AANZFTA

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and AIAI (but not AICA). Even without this exclusion, however, a tribunal recently rejected jurisdiction regarding a French company’s BIT claim against Vietnam, alleging non-payment by state-owned enterprises (SOEs) on contracts concluded during Vietnam’s economic slowdown during 1986–98 due to US trade embargoes and sanctions. The tribunal ruled that there was no investment “in” Vietnam anyway, after finding no evidence of any transfer of know-how, capital or technology to Vietnam and no local staff training activities, with the French firm’s small office in Vietnam only performing very limited administrative tasks (Hepburn 2016). Nor does the TPP expressly clarify, as in the Korea-NZ FTA, “market share, market access, expected gains, and opportunities for profit-making are not, by themselves, investments” (ibid.). However, that footnote is “for greater certainty” and is indeed arguably well accepted anyway, at least among government negotiators and experts in international investment law—although not necessarily the general public.34 The TPP also brings into the main text (and therefore highlights) a US Model BIT footnote expressly excluding “an order or judgment entered in a judicial or administrative action”. This appears to aim at preventing claims about local decisions that are allegedly “substantively” unfair, but it might still be arguable that egregious decisions evidence denial of “procedural” justice or FET, and anyway the TPP provision leaves open the possibility of treaty claims for non-enforcement of arbitral awards.35 Similar express exclusions can be found in AANZFTA and AIAI. More importantly, the TPP does not limit covered investments to those admitted in accordance with the host state’s domestic laws. This qualification was a feature of Malaysia’s BITs from 1993, for example, substituting for coverage only for “approved projects” under earlier treaties. But the former wording is also found in the Malaysia-India FTA signed in 2011 (adding reference also to investments needing “characteristics of an investment”), and the AIAI further mentions that it applies to investment that “where applicable, has been admitted” by the host state. Reed and Wong (2015) note that, whereas Thailand, Cambodia and Vietnam have qualified protection under this 2014 Agreement to investments specifically approved in writing, Malaysia did not. Nor are there similar qualifications under the TPP investment chapter, which only restricts investments to assets having characteristics as such.

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Kawharu (n.d.) adds that wordings to restrict protection to investors that did not comply with the host state’s laws when initially making the investment were proposed in a leaked draft TPP text of 2012, but were dropped by at least 2015. This outcome may be challenging for Thailand to accept, without more, if it wants to join the CPTPP. After all, Thailand has tried to limit coverage in its treaties (even within ASEAN+ FTAs) to foreign investments specifically approved in writing, or at least admitted in accordance with its laws.36 The ASEAN agreements certainly require investments to have been admitted in accordance with host state law, but one commentator notes that although this preserves significant regulatory freedom for ASEAN member states, the challenge is how they “can enable prospective investors to predictably identify and determine the exact ‘laws, regulations, and policies’ they are bound to comply with ex ante, so as to merit treaty protection in future” (Desierto 2015). Turning from coverage of investments under the TPP to its substantive commitments by host states to foreign investors, these include the main protections now familiar in Asia Pacific investment treaties: (1) Non-discrimination compared to local investors (i.e., national treatment “in like circumstances”: Article 9.4) as well as thirdcountry investors (most favoured nation treatment “in like circumstances”: Article 9.5), both after establishment or admission of the investment, as well as (more controversially) before establishment, but with some listed reservations;37 (2) Fair and equitable treatment, tied to the evolving customary international law standard (elaborated in Annex 9-A), including a specific reference to denial of justice through local adjudicatory proceedings (contrary to “the principle of due process embodied in the principal legal systems of the world”: Article 9.6); (3) Compensation for direct and indirect expropriation (Article 9.7). A difference agreed in the CPTPP, compared to the TPP, is that ISDS protection for violations of fair and equitable treatment (phrased as the minimum standard of treatment) has been suspended with respect to investments in the financial services sector.38 However, along with a few other TPP signatories, Brunei had already negotiated a partial exemption: under TPP Annex 11-E, no ISDS claims could be brought regarding situations arising for the first five years that the treaty is in force. ISDS-backed protections for fair and equitable treatment violations

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may also remain against the other ASEAN states party to the CPTPP under their respective bilateral or ASEAN+ treaties. Anyway, interstate arbitration remains as a back-up under the CPTPP. Accordingly, the CPTPP’s suspension of ISDS-backed protections for fair and equitable treatment may not be very significant in practice. The TPP’s main substantive commitments contained in the investment chapter try to build in public welfare considerations, for arbitral tribunals to assess if and when foreign investors allege violations, for example, by further elaborating what constitutes “in like circumstances”, as well as the now-familiar Annex (9-B, derived from US domestic law and then treaty practice) on what constitutes “indirect expropriation”. Interestingly, ACIA includes this US-style Annex (as does AANZFTA, unsurprising given also that it was included in the Australia-US FTA signed five years earlier), but none of the other ASEAN agreements do so (even AIAI, signed recently). ACIA and AANZFTA exclude the US-style proviso (reproduced in the TPP’s Annex 9-B) that “except in rare circumstances”, non-discriminatory regulatory actions designed and applied to achieve legitimate public welfare objectives (such as the protection of public health, safety and the environment) do not amount to indirect expropriation. However, there is anyway no known tribunal decision that has found such “rare circumstances” and therefore ruled against the host state for taking such non-discriminatory public health or similar measures. An innovation for TPP partners, including the United States itself, is a “Drafter’s Note” issued by government negotiators alongside the TPP that aims at restating at least some NAFTA case laws and guiding future inter­pretations regarding national treatment and most favoured nation commitments. It elaborates on the fourteenth footnote of the TPP’s invest­ ment chapter, which requires non-discrimination “in like circumstances” to be assessed on “the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives”. Specifically, Henckels (2016) has pointed out that according to the Note: The purpose of the obligation is “to ensure that foreign investors or their investments are not treated less favourably on the basis of their nationality”. This indicates that only intentionally discriminatory measures would breach national treatment, which means that measures with legitimate objectives that happen to place a greater burden on foreign investors will not amount to a breach.

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  The Note also clarifies that a claimant must be in a competitive

relationship with a domestic investor or investors for the purpose of comparison of treatment accorded by the measure, and provides that tribunals should take into account the measure’s objective, the applicable legal and regulatory frameworks and whether investors or investments are subject to like legal requirements when determining whether the treatment has been afforded to foreign and domestic investors or investments in like circumstances. Moreover, the Note indicates that to avoid liability, differential treatment of foreign and domestic investors or investments must be plausibly or reasonably connected to a legitimate public welfare objective and have been applied in a non-discriminatory manner.    The text of the provision and Note do not, however, address whether foreign investors or investments as a group should be compared with their domestic counterparts in terms of the benefits and burdens of the measure, or whether the more favourable treatment of a single domestic investor compared to the claimant would suffice for a finding of breach. Most tribunals to date have taken the latter approach, which is a relatively easy hurdle for a claimant to overcome.

TPP Article 9.15 adds that a host state may use measures “that it considers appropriate to ensure that investment … is undertaken in a manner sensitive to environmental, health or other regulatory objectives”, but only if “consistent with this Chapter” (i.e., non-discriminatory etc.). Some commentators suggest that this proviso negates any protections otherwise added by the provision, but others argue that it can “pick up both the substantive protections contained in the Investment Chapter and its various carve-outs and clarifications—including those concerning the State’s right to regulate”.39 In this respect, in contrast to the US Model BIT, the TPP’s Preamble further expressly acknowledges the member states’ “inherent right to regulate”. This is also found in abridged form in Australia’s FTA with China,40 but not Australia’s FTAs with Korea, Japan, Malaysia or (albeit much earlier) Thailand.41 The investment chapters by some TPP partners other than the United States, such as Australia (for example, in its FTAs with Korea and China, signed in 2014 and 2015 respectively, and earlier in AANZFTA) included a general exception, based on GATT Article XX for trade in goods, allowing host states to introduce measures necessary to protect public health etc. provided these were not applied in a discriminatory manner or as a disguised restriction on investment. This is also spelled out in other ASEAN agreements (Desierto 2015). An advantage of this approach may be the extensive jurisprudence from WTO panels

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applying the GATT exception. Disadvantages include some obvious as well as subtle differences between trade and investment law, and a potentially higher evidentiary burden on the state seeking to justify its measures (Henckels 2016; Kurtz 2016; Riffel 2018). Somewhat ironically, adding an express general exception could therefore result in more pro-investor decisions compared to the NAFTA and TPP approach, although this remains to be seen. Certainly, including such a general exception gives something simpler for governments to highlight (compared to a lengthy Drafter ’s Note) when seeking to assuage public concerns about potential “regulatory chill” from ISDS-backed treaty commitments.42 Also, the TPP limits the scope of protection available to investors in specified areas raising strong public interest concerns, such as public debt claims (Annex 9-G) and tobacco control measures. ISDS claims over the latter can be precluded in advance by member states, under the treaty’s overarching chapter on general exceptions (Article 29.5). This is clearly in response to arbitration claims brought by Philip Morris against Australia (and earlier Uruguay)—ultimately unsuccessfully (Hepburn and Nottage 2017)—although such a sectorspecific exclusion had earlier been resisted by the United States as setting a dangerous precedent for future treaty negotiations.43 The TPP investment chapter also contains the usual “denial of benefits” provision (Article 9.14) seeking to limit scope for forum-shopping (as found anyway in the Philip Morris case against Australia). This allows the host state to refuse protection if the investor has no substantial business operations in the home state, although Kawharu recommends further clarificatory wording.44 ASEAN agreements also include such denial of benefits provisions. In addition to the overarching commitment to “fair and equitable treatment”, the TPP includes a separate Chapter 28 on “Transparency and Anti-Corruption” (generally enforceable by interstate dispute settlement procedures). The transparency requirements extend not only to: • Making publically available general foreign investment-related laws and agreements (as in the ASEAN agreements,45 allowing also for enforcement through ISDS); but also • Allowing for reasonable public comments by foreign investors before those are finalized, and due process in related administrative proceedings (as found only in AANZFTA).

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Another innovative feature of the TPP is that each member state commits to “encouraging” its enterprises to “voluntarily incorporate into their internal policies those internationally recognised standards, guidelines and principles of corporate social responsibility” endorsed or supported by the relevant state (Article 9.16). This could extend, for example, to (local and foreign) retailers with respect to adopting the Accord on Fire and Building Safety in Bangladesh, which then locks firms into a separate enforcement regime underpinned by international arbitration law.46 3.2  ISDS Procedure The option of ISDS set out in Section B of TPP Chapter 9, in addition to interstate dispute settlement under Chapter 28, also tends to follow the provisions in the US Model BIT and its FTAs from around 2004, which in turn have influenced the FTAs drafted by other Asia Pacific states (Nottage and Miles 2009; Alschner and Skougarevskiy 2016). For example, the TPP includes time limits for bringing claims (Article 9.20.1). Similar provisions can be found in ASEAN’s investment agreements. The TPP also has a fairly standard “fork in the road” provision (Article 9.20.2), requiring investors invoking ISDS to waive rights to henceforth “initiate or proceed with” claims to resolve disputes instead through local courts or administrative tribunals of the host state. This helps to preclude situations as in the dispute brought by Philip Morris, which challenged Australia’s tobacco plain packaging law before the High Court of Australia under constitutional law as well as an ISDS tribunal under international treaty law.47 However, Australia did not join Chile, Peru, Mexico and Vietnam, which extend (through Annex 9-J) the protection for host states by preventing ISDS if the investor had “already filed” claims before local courts or tribunals (Kawharu n.d.). The Annex qualification reinstates the approach taken under the 1994 US Model BIT. By contrast, the 2004 US Model BIT had adopted wording that is (uncharacteristically) more pro-investor in this respect (Kantor 2004), which has carried over into US and Australian FTA treaty practice—including now TPP Article 9.20.2. The ASEAN agreements also reveal diversity on this point. ACIA, AANZFTA and even AIAI allow the foreign investor to commence local proceedings, but then abandon those to bring an ISDS claim before one

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of the international forums listed in the relevant treaty. This is also allowed under AICA “before a final judgement [sic] has been reached” in the local court proceedings (Article 14.5), except for Vietnam as well as Indonesia, the Philippines and Thailand—a court claim therefore precludes a subsequent ISDS claim. AIAK is most restrictive: once the investor files in local courts or indeed administrative tribunals, “the choice of forum shall be final” (Article 18.6). The latter approaches may seem more favourable to host states, especially if other ASEAN and South Korean investors are unaware of these features and inadvertently first attempt to resolve their disputes through local proceedings. Yet, this is arguably unfair on investors, by catching them by surprise, compared to the approach in other ASEAN treaties and the TPP. That can also help to build up capacity in local courts or administrative tribunals, and allow attempts at cheaper and more amicable dispute resolution.48 Similarly, following the 2004 Model BIT and US FTA practice, and as in Australia’s FTA with South Korea (and to a somewhat lesser extent with China), TPP Article 9.23 sets out extensive provisions for transparency in ISDS proceedings. These include public hearings (still rare even in WTO interstate dispute resolution) and admission of amicus curiae briefs from relevant third parties. The ASEAN agreements, even AANZFTA, have much less extensive requirements than the TPP regarding transparency, even though this is often highlighted in public critiques of the ISDS system.49 Article 9.22 requires arbitral tribunals to decide preliminary jurisdictional objections on a fast-track basis, and may award lawyer and other costs against the claimant after considering whether the claim was frivolous. (However, it does not have to award such costs, and nor is there a general “loser-pays” rule for costs as under the recent Canada-EU FTA: see TPP Article 9.28.3) (European Commission n.d.). Similar provisions are found in the ASEAN agreements. Unlike all ASEAN agreements (even AANZFTA), except for the recent AIAI,50 under the TPP, an interstate Commission can issue an interpretation of a provision that then binds the arbitral tribunal (Article 9.24.3). This is a provision favouring host states over investors, although joint interpretations may be difficult to achieve in practice in regional compared to bilateral treaties. In addition, there is some debate among commentators about whether such a Commission can make such a binding interpretation regarding a pending (or already-filed) dispute (Burch, Nottage, and Williams 2012; Ishikawa 2014), and the

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China-Australia FTA wording had helpfully clarified that it can. That FTA also adds an innovative provision, not found in the TPP (or any other FTA involving Australia) allowing a host state to issue a “public welfare notice” to the home state of the foreign investor, declaring that it invokes the (Article 9.11.4) general exception for public health measures etc. This triggers interstate consultations and a requirement on the host state to publically announce its view on the home state’s invocation of the exception. The ASEAN agreements only provide for interstate consultations at a later stage regarding certain claims involving taxation measures, and any joint interpretations are not necessarily binding on tribunals. Partly offsetting the omission of Australia’s innovative “public welfare notice” in the TPP, it adds the option (in the chapter on general exceptions) of a host state precluding ISDS (but not interstate dispute settlement) claims regarding tobacco control measures, as mentioned in Section 3.1 of this chapter. More generally, the investment chapter adds that the arbitral tribunal can only award limited damages if the foreign investor successfully claims that it was thwarted in attempting to make an initial investment, due to the host state violating substantive treaty commitments. The tribunal must also issue a draft award to the disputing parties for comment (Article 9.22.10), albeit not to the public or even the home state of the investor. Release of draft decisions is a feature of WTO interstate dispute resolution, and is found already in the 2004 US Model BIT as well as in Australia’s FTA investment chapters with Chile (signed in 2008) and South Korea. This useful feature is not found in any of the ASEAN agreements. However, similar to all the ASEAN agreements, the TPP does not establish an appellate review mechanism, to correct for errors of law (as opposed to errors in procedure or jurisdiction) as under the WTO regime. There is only a commitment to consider such a mechanism if and when developed for international investment disputes “under other institutional arrangements” (Article 9.22.11). This provision again derives from the 2004 US Model BIT, in turn prompted by the Bipartisan Trade Promotion Authority Act 2002.51 However, the 2004 Model provided more specifically that if a multilateral agreement created an appellate mechanism, the parties would strive to agree to extend its jurisdiction to the BIT (a provision reproduced for example in the Korea-Australia FTA Article 11.20.13); and otherwise the parties would consider adding a bilateral appellate mechanism within three

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years of the BIT coming into force (with no counterpart in Australian treaties). Yet, no appellate review mechanism has ever been added to subsequent US investment treaties, no doubt reflecting the persistent diversity of views on this possible reform to the ISDS system (Lee 2014; UNCITRAL Secretariat 2017). Luttrell and Weeramantry (2015) highlight that TPP Chapter 27 creates an interstate “TPP Commission”, with power not only to issue interpretations of the treaty but also to resolve disputes about its interpretation and application (Articles 27.2(2)(e)(f)). Lee (2014) further suggests: “some form of appellate or review body will be established if or once the TPP comes into force. However, at least for the first few years, any appellate function is likely to be formed by ad hoc committees formed by the TPP Commission …”. However, this sort of institutional arrangement goes back to the North American FTA signed in 1993 (Article 2001 on the Free Trade Commission), but has never exercised appellate review functions in the way envisaged by Luttrell and Weeramantry (2015). Instead, the US BITs and FTAs since 2004 have added specific provisions to encourage the potential development of an appellate mechanism. As introduced in Section 1 and elaborated in Section 4 of this chapter, the EU is now expressing stronger interest in appellate review, including in its TTIP negotiations with the United States, where it has even proposed establishing an international investment court (European Commission 2016; European Commission 2015a; Council of the European Union 2018). Indeed, the EU has already agreed on this sort of court (including appellate review for errors of law) in FTAs recently agreed with Canada, Vietnam and Singapore (European Commission n.d.; European Commission 2018), despite the latter two having signed the TPP and then the CPTPP, including the more traditional ISDS mechanism. Article 9.21.6 further envisaged that, before the TPP (or now CPTPP) comes into force, member states will “provide guidance” on extending the Code of Conduct for arbitrators (already contained in Chapter 28 for interstate arbitrations) to ISDS disputes, as well as “other relevant rules or guidelines on conflict of interest”. The Australian government could presumably point to the Australia-China FTA, where such a Code of Conduct has already been set out for ISDS arbitrators, and reference could also be made to further proposals now being raised in the EU and beyond.52 New Zealand may have adopted a stricter approach

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than Australia at least towards the increasingly controversial practice of “double-hatting” in ISDS arbitration (Langford and Behn 2018). When signing the CPTPP, New Zealand, along with Canada and Chile, issued a “Joint Declaration” stating that the three states intend to work together on matters relating to the evolving practice of ISDS, including as part of the ongoing review and implementation of the CPTPP. Most of their guiding principles for this project are aspirational (reaffirming the right to regulate and strong safeguards for host states, input from civil society and others, consideration of multilateral initiatives), but the three states also specifically:53 Intend to promote transparent conduct rules on the ethical responsibilities of arbitrators in ISDS procedures, including conflict of interest rules that prevent arbitrators from acting, for the duration of their appointment, as counsel or party appointed expert or witness in other proceedings, pursuant to Article 9.22.6 of the CPTPP [requiring guidance or a code of ethics for ISDS arbitrators before the treaty comes into force].

Interestingly, none of the four ASEAN signatories to the CPTPP joined in this Declaration, perhaps indicating that they are all quite comfortable with the ISDS system generally. However, one could expect at least Singapore and Vietnam to be open to including the CPTPP Code of Conduct an express prohibition of “double-hatting” in ISDS arbitration, as their recent respective investment agreements with the EU adopt the latter’s approach of prohibiting the practice (albeit in the context of the EU-style two-tier permanent investment court).54 From January 2019, when the CPTPP came into effect for most signatories, the Code of Conduct in fact prohibited “double hatting” (Ubilava and Nottage 2020).

3.2.1 Extending ISDS to Investment Authorizations or Contracts

Another interesting question, where a significant change in the CPTPP can already be seen, concerns the scope of applicability for ISDS. TPP Article 9.18.1 allows ISDS claims (under Section B of the Investment Chapter) for breaches of: (a) The substantive commitments set out in Section A of the Investment Chapter itself; (b) An “investment authorization” of its foreign investment authority; or

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(c) An “investment agreement” with central government authorities for their natural resources, specified utilities or infrastructure projects for the general public, which is concluded after the TPP comes into force, and is relied upon by the harmed foreign investor in making the covered investment and the claimed subject matter and damages directly relate to it. However, regarding (c), the TPP expressly excludes claims regarding enforcement of authorization requirements or conditions (Article 9.18 footnote 31), and “investment authorization” excludes for example “actions taken by a Party to enforce laws of general application, such as competition, environmental, health or other regulatory laws” (footnote 10). In addition, Ministerial decisions not to approve investment proposals are not subject at all to ISDS or even interstate dispute settlement (Annex 9-H) for Australia, New Zealand, Canada and Mexico (but no ASEAN state signatories).55 Regarding (b) above, the extension of the ISDS procedures (Investment Chapter Section B) to certain investment agreements was a bigger break with treaty practice for TPP signatories such as Australia (which had only allowed this under its FTA with Korea) and New Zealand (which had never agreed to this). It also contrasted with ASEAN+ investment agreements, none of which had applied their ISDS provisions to investment contracts but only to the (main) substantive treaty protections offered by host states in those agreements. A leaked draft of the TPP text during its negotiation, and analysis of past US treaty practice suggest that the United States was a major influence in obtaining the extension of ISDS to investment contracts (and authorizations, subject to the exceptions noted above) when the TPP was signed in 2016 (Kawharu n.d.). When it came to signing the CPTPP in 2018 without the United States, therefore, it is unsurprising that the remaining signatories reverted to excluding the TPP’s ISDS provisions’ applicability to investment authorizations or contracts.56 This reversal restrains some potential extra liability exposure for host states, created by allowing claims under investment contracts with specific investors that might go beyond claims under substantive treaty commitments made by the host state to all investors. But this potential extra liability exposure depends on what substantive obliga­ tions were agreed in the investment contract, and anyway only arises in the nowadays quite unusual situation where the host state has

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not otherwise agreed to arbitration under the relevant investment contract. In addition, there are several advantages in having a treaty’s ISDS provisions extend to investors’ contracts with host state instrumentalities. First, in the more usual case where the investment contract agrees anyway to arbitration, this would create a route for the host state to raise a related counterclaim or set-off against the foreign investor under the treaty as well, which is expressly provided in the TPP (Article 9.18.2). Second, the TPP’s provisions on transparency in ISDS proceedings, for example, should come into effect. These are more appropriate given the various public interests involved in ISDS claims, compared to the rules of arbitration institutions dealing mainly with commercial arbitrations that might otherwise be chosen to apply to investment contracts. Additionally, the (suspended) Annex 9-L of the TPP adds innovative provisions dealing with potential multiple claims where there is a specified “investment agreement”. If the authorities have consented therein to arbitration under the Arbitration Rules of ICSID, UNCITRAL, ICC or London Court of International Arbitration (LCIA), the investor cannot make an ISDS claim under Section B of the TPP Investment Chapter (paragraph 1). But it does not waive rights to initiate or proceed with arbitration under those agreed Rules (paragraph 2) “with respect to any measure alleged to constitute a breach” under Article 9.18. Nonetheless, if such claims “have a question of law or fact in common and raise out of the same events or circumstances” as a claim for breach of Section A substantive treaty commitments (or investment authorizations), the disputing parties can agree to consolidation of these sets of proceedings or otherwise be subjected to consolidated proceedings under Article 9.27. In other words, both contract- and treaty-based claims can be channelled more efficiently into one forum, benefitting especially host states and addressing a scenario that can arise quite often in practice.57 Curiously, however, Annex 9-L does not list for such treatment of investment agreements containing consent to arbitration of contractbased disputes under the Arbitration Rules of major regional centres, such as the Kuala Lumpur Regional Centre for Arbitration (recently renamed the Asian International Arbitration Centre) or the Singapore

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International Arbitration Centre (SIAC).58 Perhaps they were considered to have less experience in investment arbitrations than the ICC or LCIA. But it means that parallel treaty claims may still be brought by the claimant under Article 9.18.4 before a tribunal constituted by ICSID, UNCITRAL or other agreed Arbitration Rules.59 Legal advisors to investors wishing to preserve this option, perhaps to obtain greater leverage in settlement negotiations in the event of a dispute, may therefore seek to conclude investment agreements that provide for example for SIAC Arbitration Rules. Interestingly, on 1 February 2016, SIAC initiated a public consultation on SIAC Investment Arbitration Rules, which were finalized on 1 January 2017 (Singapore International Arbitration Centre 2016). Welladvised host states may instead seek to incorporate those into their investment contracts. First, these Rules build in some—but not all60— features better tailored to public interests associated with investment disputes, such as greater transparency. Secondly, if a treaty-based claim is ever initiated, it may be easier—although perhaps still difficult—to persuade an investor to agree to one set of arbitration proceedings under the SIAC Investment Arbitration Rules, rather than ICSID or UNCITRAL Rules. In addition, SIAC and the Singapore government may be hoping that SIAC Investment Arbitration Rules may eventually be added to a list similar to Annex 9-L in any amendments to the CPTPP or future FTAs such as RCEP that might adopt such features contained in the original TPP, or simply as another option for investors to choose when bringing ISDS claims in other future regional or bilateral treaties negotiated by Singapore.

3.2.2  Possible ISDS Claims by Minority Shareholders

A final little-remarked provision of the TPP investment chapter, albeit found in Australia’s other FTAs, concerns the possibility of minority shareholders bringing ISDS claims against host states. Under Article 9.19, a claimant may submit an “investment dispute” to arbitration regarding, for example, a violation of Section A substantive commitments by the host state. Under Article 9.1, an “investment” includes shares as an asset “that an investor owns or controls, directly or indirectly”. Unlike some investment treaties promoted by other states, there is no exclusion for “portfolio investment”.61 Article 9.19.1(b) further allows an investor in shares to make a representative claim “on behalf of an enterprise of the respondent that is a juridical person that the claimant owns or controls

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directly or indirectly”. However, although this may allow a claim by a minority investor, it necessitates a controlling interest in the investment vehicle in that host state, and any relief awarded (such as damages) then goes to that local vehicle (Article 9.28.5). By contrast, it seems that any minority shareholder may seek arbitration “on its own behalf” if it “has incurred loss or damage of, or arising out of, that breach” (Article 9.19.1(a)). It is accepted, even by those generally critical of claims by minority shareholders under investment treaties (Bottini 2008), that shareholders can bring a direct claim at least for direct interference with their rights, such as host state laws seizing their shares or preventing exercise of their voting rights in the local investment vehicle. More controversial is whether a minority shareholder can make a reflective loss claim for the diminution of the value of their shareholding, due especially to the host state’s violation of fair and equitable treatment as found in the Walter Bau case, for example (Nottage and Thanitcul 2016c), or expropriation relating to the local investment vehicle. Many such damages claims have been upheld, beginning in fact with the first-ever successful ISDS claim for violation of UK BIT commitments, brought by a Hong Kong minority investor into a locally incorporated shrimp farm in Sri Lanka.62 In particular, several claims were upheld by minority US investors in local companies holding concessions or other arrangements with Argentina after its economic crisis around 2000, under the 1991 BIT (Bentolila 2010). However, the wordings of these treaties are less elaborate than that found in the US Model BITs of 2004 and 2012, which in turn are derived broadly from NAFTA, and which have carried over into the TPP and other US-inspired FTA provisions. In 2004, a NAFTA tribunal rejected a jurisdictional objection by Mexico against a claim under Article 1116 by a 15 per cent minority shareholder in a local company operating sugar mills that were allegedly subject to direct expropriation as well as breaches of FET and national treatment obligations,63 despite acknowledging that in principle such claims might lead to double recovery (if the local company also was able to claim against the host state, for example under host state law).64 The tribunal upheld the admissibility of the claim for direct expropriation, but ultimately dismissed it because a local court had since rendered judgment neutralizing the effect of this. It also upheld the admissibility of the FET claim for reflexive loss, although this substantive violation was not proven.

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However, before permitting ISDS claims NAFTA Article 1121 requires the investor and the local investment vehicle to provide waivers of rights to continue other proceedings, regarding claims by an investor on its own behalf for loss arising out of treaty violations (Article 1116) as well as by an investor on behalf of its investment vehicle (Article 1117). Douglas (2009) points out that this can limit scope for reflexive loss claims by minority shareholders, as the majority shareholders may be satisfied by any relief provided by the host state to the investment vehicle, and therefore not provide the necessary waiver. Páez-Salgado (2017) goes on to argue that the US Model BITs since 2004 and TPP “retain the essence of NAFTA provisions”, thus providing “for direct claims and representative claims, [but] excluding reflective loss claims”. However, those Model BITs and the TPP (Article 9.21.2(b)(i)) require a written waiver regarding other proceedings, prior to ISDS, only from the claimant (such as a shareholder) and not from the local investment vehicle in the scenario of claims brought by the investor on its own behalf, as opposed to on behalf of the local vehicle (where double waivers are required: Article 9.21.2(b)(ii)). This reinstates more possibilities of double recovery, and also leaves open the question of whether reflexive loss claims by a minority shareholder are permitted. Tribunals will need to decide whether it “has incurred loss or damage of, or arising out of that breach” of the TPP (under Article 9.19.1(a)), bearing in mind case law and commentary under various BITs and NAFTA that mostly recognizes minority shareholder claims for reflexive loss.65 Future treaty negotiators may need to reconsider the pros and cons of allowing such treaty claims, contrary to the traditional position under customary international law and despite the possibility of double recovery, as well as the related vexed issue of whether any contractual settlement of a dispute between the investment vehicle and host state should preclude minority shareholder claims.66

3.2.3  Bilateral Exclusions of ISDS in the (CP)TPP

Lastly, it should be noted that even when the TPP was signed in 2016, Australia and New Zealand agreed bilaterally by side letters to exclude the operation of ISDS altogether as between themselves. A precedent dated back to AANZFTA in 2009, where this bilateral exclusion was partly justified on the basis that the two countries were considering adding an investment protocol to their long-standing Australia-New

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Zealand Closer Economic Relations FTA. That protocol was signed in 2011, by which time Australia’s centre-left Gillard government had anyway issued a Trade Policy Statement eschewing ISDS in all future treaties. But even the centre-right coalition government, which regained power in late 2013 and then reverted to Australia’s past practice of including ISDS in treaties based on a case-by-case assessment, was amenable to excluding ISDS bilaterally in the TPP. Similarly, with the Australia’s earlier omission of ISDS in the 2004 FTA with the United States, the main rationale is that Australia and New Zealand have a good understanding and respect for each other’s domestic legal systems as well as other very close bilateral links (Nottage 2016a; Kawharu and Nottage 2017, Part 4). The two countries certainly have particularly wide-ranging and tight relationships at many levels, reinforced by both treaty-based and non-treaty mechanisms (Nottage 2014a). When it came to signing the CPTPP in 2018, the newly-elected centre-left New Zealand government went the next step of approaching other signatories and securing side-letters agreeing to bilaterally exclude ISDS with respectively Peru, Brunei, Malaysia and Vietnam. However, these agreements with the latter three ASEAN states are largely symbolic, as they and New Zealand retain ISDS-backed investment commitments under AANZFTA. These side-letters, like the three-country Joint Declaration mentioned above and the minor revisions to the TPP achieved by all eleven CPTPP signatories, appear to be driven by recent domestic politics in New Zealand, rather than strong concerns about ISDS on the part of the Southeast Asian counterparties. It remains to be seen whether and how New Zealand might reconcile its newfound opposition to traditional ISDS, in future new treaties (Kawharu and Nottage 2018), with the commitment to this procedure expressed so far in most other treaties as well as early on in negotiations for the (ASEAN+6) RCEP FTA (Kawharu and Nottage 2017, Part 5; Kawharu and Nottage 2018, Part 2).

4 Conclusion The wording of many Asia Pacific FTA investment chapters, derived from recent US treaty practice and epitomized by the TPP and (in somewhat attenuated form) the CPTPP, can be seen as a blessing and a curse.67 On the one hand, the wording of the US Model BIT of 2004

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(largely maintained in 2012) (Kantor 2012) drew on NAFTA drafting and actual experiences with ISDS claims to incorporate provisions that were mainly more favourable to host states,68 compared to earlier US Models and BIT wording that was even more pro-investor than Western European templates.69 This shift influenced FTA negotiations by the United States with regional partners such as Australia from 2002, and made it easier to sign its two other early FTAs with Singapore and Thailand, which had respectively concluded or begun their own bilateral FTA negotiations with the United States. The result is more balanced investment treaty regimes for FTA investment chapters, compared to earlier-generation BITs for those countries and other (actual and potential) (CP)TPP signatories.70 On the other hand, the spread of the US-derived FTA template through subsequent bilateral and more recent regional treaties risks creating a new “status quo bias” (see Poulsen 2015) that prevents or limits further significant rebalancing, even if that can be shown to be optimal. Specifically, it makes it hard for Asia Pacific states to develop their treaty practice towards the new approach being pressed by the EU, in its TTIP FTA negotiations with the United States but also more broadly (European Commission 2016; Schill 2016). Compared to (CP) TPP investment chapter wording, that approach arguably provides narrower substantive protections for fair and equitable treatment (by enumerating proscribed behaviours and constraining the concept of legitimate expectations), more guidance on general exceptions, and express reference to proportionality of the adopted measures when assessing indirect expropriations.71 In terms of procedural innovations, the new EU approach involves moving away from ad hoc appointment of investment treaty arbitrators to create a standing investment court, which moreover can engage in appellate review. This move is potentially game-shifting, given the predominance so far of ISDS arbitrators from backgrounds in law firms (Pauwelyn 2015). They would generally start off (as least) with less exposure to key concepts developed in national public law and recently international law, such as proportionality and standards of review of state action. Indeed, other fields of international law that have expanded concepts of proportionality, despite little or no direct textual references, have done so in the context of standing judiciaries. If the EU successfully promotes the institution of permanent investment courts, the latter may feel similarly more confident about developing

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proportionality doctrine (and the related question of the standard of review) to adjudicate international investment disputes in a more principled way.72 The EU has already introduced this court institution into its FTAs with Vietnam and Singapore, despite the latter having agreed to more conventional ISDS in the TPP and then the CPTPP (Daly and Ahmad 2015). It is conceivable that something like a permanent investment court could emerge even by side letters among existing CPTPP signatories,73 especially if domestic political circumstances impede ratification, or if major potential future partners such as Indonesia become ever more sceptical about ISDS-based treaty protections. This development is probably even more likely in RCEP as substantially agreed in November 2019, but perhaps to be further revisited, including India and New Zealand which have recently become cautious about traditional ISDS, and bilateral FTA negotiations commenced by the EU with countries like Thailand, Australia and New Zealand.74

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Appendix 4.1 ISDS Claim Statistics Critics of the TPP, and ISDS protections more generally, have often argued that a particular concern is that the United States is not only a large source of FDI, but it is “the nation whose corporations use ISDS the most”.1 The inference is that US investors are particularly “litigious” in the field of investment treaty claims, rather like they are purported to be in civil litigation in their home courts (Hamamoto 2015; Nottage 2015c). In fact, empirical research into comparative civil dispute resolution patterns has long noted that a representative US state like Arizona—in terms of urban/rural population mix, etc.—has fewer filings per capita than several other countries (Nottage and Wollschlaeger 1996). Comparing ISDS claim patterns, while Table A and Figure A-1 confirm that claimants from the United States had indeed lodged the most claims by end 2015 (138), on a per capita basis (per 100,000 people in the home state) US investors are historically less “litigious” compared to investors from eleven other countries whose investors have filed considerable numbers of ISDS claims. Those states are all the EU (including Belgium and Luxembourg, which generally conclude IIAs collectively and whose investors have filed the most claims per capita), except for Switzerland (whose investors become the fourth most litigious) and Canada (the fifth most litigious home state). As further indicated in Table A and Figure A-2, if we group together most of these EU states their investors’ per capita ISDS claim rate is also higher than that for US investors. Admittedly, many of those other more highly-ranked states have historically attracted foreign investment for logistical and/or tax reasons (Luxembourg/ Belgium, Cyprus, Netherlands). Some may have come from and remained controlled by US investors, who could have then launched ISDS claims under those countries’ claims (to the extent not precluded from denial of benefits or other treaty provisions).2 However, other such investments would have come from outside the United States; data are hard to come by. It could also be retorted that per capita claim rates do not accurately reflect litigiousness anyway, in the sense of a propensity to sue based on a comparable corpus of underlying disputes. However, the latter is extremely difficult to determine (even for civil dispute resolution within one country, which is why researchers tend to use per capita filings). A starting point would be to ascertain outbound FDI stocks. Yet by the 1 2

See for example, Hill 2015 (quoting ANU Professor Thomas Faunce).  ee for example, the (first and only treaty-based) claim brought by Lonestar against S Korea, outlined by Shin and Chung (2015).

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end of 2015 the United States had a very large accumulated volume, even compared to the outbound stocks of major EU states combined (for example, the UK, Germany, France) (OECD Data 2018). The United States did have comparatively few IIAs, but some of those concluded by EU states may not originally have had ISDS protections (for example, the initial BIT between Germany and Thailand) (Nottage and Thanitcul 2016c), or may have been concluded with counterparties that were less economically significant (thus not generating much additional FDI) compared to those focused on US treaty negotiations. It is also possible that the nature of US outbound investments differed from that originating from the EU, Switzerland or Canada. After all, for example, ISDS cases worldwide tend to congregate more on services and primary industry sectors, compared to FDI in manufacturing (UNCTAD 2016b). Additional research along these lines would be helpful, although difficult. Table A Most ISDS Claims Filed—Totals vs Per Capita

Ranking (per capita)

State(s) of Claimant

Claims per capita by end 2015 (per 100,000 people)

Total claims by end 2015

 1

Luxembourg/Belgium

5.32

 31

 2

Cyprus

1.49

 18

 3

Netherlands

0.47

 80

 4

Switzerland

0.28

 23

 5

Canada

0.11

 39

 6

United Kingdom

0.09

 59

 7

Spain

0.07

 34

 8

EU (Netherlands, Germany, France, Spain, Luxembourg)

0.06

323

 9

Germany

0.06

 51

10

France

0.057

 38

11

Italy

0.048

 30

12

United States

0.042

138

Sources: http://investmentpolicyhub.unctad.org/ISDS and https://www.cia.gov/library/ publications/the-world-factbook/.

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Figure A-1 Total ISDS Claims Filed (by Home State of Investor) Aggregate total claims by end 2015 350 300 250 200 150 100 50 0

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Meanwhile, it is certainly more useful for policymakers and commentators concerned about exposure of host states to ISDS claims by “litigious” foreign investors from particular countries to focus on per capita rates rather than absolute numbers of claims. Further, in the Southeast Asian context, one recent study has located twenty-seven total claims (relatively few, given the large volume of FDI now in that region). Only three claims have been brought by US investors, as indicated in Figure B.3 This hardly seems grounds for being concerned about treaties such as the TPP on the basis that they include the United States.

Figure B ISDS Claims versus Southeast Asian States ISDS Claims (27) in Southeast Asia by Home State of Investor Netherlands 5 Others 6 United States 3

Singapore 2 United Kingdom 2

Belgium/Luxembourg 3 Germany 3

France 3

Source: Nottage and Thanitcul, “International Investment Arbitration in Southeast Asia”, Appendix.

3

 ottage and Thanitcul (2016a). Two were brought by US companies under investment N contracts (against Indonesia, eventually obtaining US$2.7m; and failing against Cambodia), while another claim was brought under the US treaty with Vietnam (unsuccessfully).

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Notes * This chapter is adapted and revised significantly, with permission, from Nottage (2016b). It draws also on support from an Australian Research Council Discovery Project (DP140102526) for 2014–18, jointly with Dr Shiro Armstrong and Professors Jurgen Kurtz and Leon Trakman. Thanks to Kirsten Gan for research and editorial assistance. Any errors or misconceptions remain the author’s sole responsibility.   1. See generally Bhala (2016); Chaisse, Gao, and Lo, eds. (2017). The original twelve TPP signatory states were: Brunei, Chile, New Zealand and Singapore (the original four from 2004); Australia, Malaysia, Peru, the United States and Vietnam (which had joined negotiations from 2008); plus Canada, Japan and Mexico (which joined negotiations from 2012–13). See generally the Australian Government, Department of Foreign Affairs and Trade, “TransPacific Partnership Agreement (TPP-11)”, n.d., http://dfat.gov.au/trade/ agreements/tpp/Pages/trans-pacific-partnership-agreement-tpp.aspx.   2. Hermansyah (2016). For a broader critique of ISDS from a prominent Malaysian economist, see also Jomo (2016).   3. New Zealand, Ministry of Foreign Affairs and Trade, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), n.d., https:// www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreementsconcluded-but-not-in-force/cptpp/ (accessed 30 April 2018); Kawharu and Nottage (2018).   4. See generally Nottage (2015b), manuscript at http://ssrn.com/abstract=2685941; and a more detailed analysis in Nottage (2016a).   5. See Figures 4 and 8 and Appendix in Nottage and Thanitcul (2016a). For another recent “outbound” claim by Singaporean investors, see Charlotin (2018).   6. See example, Hamamoto and Nottage (2013), p. 347. This focuses on the Japan-Cambodia BIT as the apparent de facto “model” used to negotiate recent Japanese treaties.   7. For example, the United States filed 0.045 ISDS claims per 100,000 people compared to the Netherlands, which is much more “litigious” on this measure, at 0.523 ISDS claims per 100,000 people. Calculations based on data drawn from UNCTAD (n.d.), and population estimates for the Netherlands and United States at Central Intelligence Agency (n.d.).   8. Friedrich and Salomon (2015), pp. 800, 834, referring to UNCTAD’s World Investment Report 2014. See also Ferracane (2015), p. 61.   9. ASEAN Secretariat (2015). See also generally ASEAN (2016). On the ASEAN Economic Community project underway since 2007, see also Nottage and Thanitcul (2016b), p. 1.

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10. Bath and Nottage (2011), p. 1; Bath and Nottage (2017); Bath and Nottage (2020). The Asia-Pacific Economic Cooperation (APEC) forum has tried to help systematize this development, after earlier issuing non-binding 1994 Recommendations for its member economies to promote and protect inbound investment through voluntary unilateral measures. 11. Poulsen (2015) (reviewed by Nottage in the Journal of World Investment and Trade 17, p. 1015, manuscript at http://ssrn.com/abstract=2795396). 12. Bellak (2015), p. 71. However, he remarks (at p. 76) that these “results should not be read as implying that BITs are useless, as investor protection may enhance the effects of other types of investment policies and location factors, not least incentives, on FDI”; and “BITs may contribute substantially to the sustainability of FDI, as they allow taking legal action against the host country” (usually even after treaty termination, due to sunset clauses). On the first point, see also Rogers (2015), giving country studies—and signalling ongoing joint econometric research—suggesting that investment treaty arbitration combines with national reforms to international commercial arbitration regimes to generate significant effects on cross-border investment. 13. Armstrong and Nottage (2016). A version, including an analysis confirming similar patterns for ASEAN+3 investment treaties and flows, can be found in Armstrong (2018). See also Asian Development Bank (2016), p. 163. 14. Friedrich and Salomon (2015), pp. 802–3. For a second treaty dispute notified to Thailand in 2015, see Nottage and Thanitcul (2016c). 15. Adapted from Friedrich and Salomon (2015), and (for investment agreements other than BITs) its online annex, Salomon and Friedrich (2015). Lightly shaded columns in Table 4.1 are current CPTPP partners; more heavily shaded columns are potential additional partners. 16. See for example, Nottage (2015a). The tribunal upheld ICSID jurisdiction on the basis of a mining investment authorization from Indonesia, not the provisions of its BIT with Australia. 17. This was initially proposed for Myanmar’s investment law: see Kyaw (2015). But the government subsequently backtracked, seemingly envisaging that consent to ISDS would instead be provided under its (slowly) unfolding investment treaty programme. See Bonnitcha (2017), pp. 974–1000. 18. Nottage and Weeramantry (2012), p. 19. On the spread of international commercial arbitration in Asia especially over the last decade, undermining some earlier opinions that this was inconsistent with cultural preferences for negotiated or mediated settlements, see Nottage (2014b), p. 211. 19. Friedrich and Salomon (2015), pp. 835–36 (also remarking that Amco Asia Corp v Indonesia, ICSID Case No. ARB/81/1, was not only the first against an EAP state—albeit based on consent in a contract rather than a treaty with Indonesia—but also only the tenth ICSID arbitration ever filed).

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20. Ibid., p. 837. 21. Ibid., pp. 839–40 (footnote 225 omitted: identifying in the 1980s, Amco Asia Corp v Indonesia and Mobil Oil Corp et al v New Zealand, ICSID Case No. ARB/87/2). More recently, however, Cambodia Power Company v Cambodia, ICSID Case No. ARB/09/18 also involved a US-owned subsidiary. See Weeramantry (2017), pp. 942–73. 22. Ibid., p. 840. 23. Chaisse and Bellack (2015), p. 612. Ferracane (2015) finds 103 claims against APEC economies by the end of 2014, especially against Canada and Mexico under NAFTA, as well as 203 claims initiated by investors in APEC economies, especially in the United States but also Canada. She also notes a reduction since 1998 in the disparity between APEC FDI stock and ISDS claims, as a proportion of global totals (although the APEC proportions are heavily influenced by the United States, and the proportion of APEC to global FDI is still higher than the proportion of ISDS cases compared to worldwide ISDS cases). 24. Baggerwerken Decloedt En Zoon NV v. Republic of the Philippines, ICSID Case No. ARB/11/27, Award, 23 January 2017; Bennaning (2017). See generally Sornarajah (2011) (adding that a provision in the 2009 ASEAN Comprehensive Investment Agreement required further post-dispute consent to ISDS for claims against the Philippines). A year after the adverse Fraport Annulment Committee decision in 2010, the Philippines also complained to—and sought procedural improvements through—the ICSID Administrative Council. See Markert and Titi (2013–14), p. 431; Reyes (2017), pp. 1025–61. 25. Jusoh, Razak, and Mazlan (2017), pp. 890–917; Sornarajah (2011), pp. 246 and 250, remarks that the tribunal declined jurisdiction by finding no “approved investment” as required under the relevant BIT, in Grueslin v Malaysia, ICSID Case No. ARB/99/3, but had difficulties in Malaysian Historical Salvors v Malaysia, ICSID Case No. ARB/05/10, where the sole arbitrator focused instead on economic development as a criterion for determining an actionable “investment” (going on to decline jurisdiction in 2007, only to have his award overturned by an ICSID Annulment Committee in 2009). See also Coppens (2011), p. 174. 26. See Yuang Chi Oo Trading Pte Ltd. v Government of the Union of Myanmar, ASEAN ID Case No. ARB/01/1, Award (31 March 2003) at paras 58–60, http://www.italaw.com/sites/default/files/case-documents/ita0909.pdf (accessed 17 October 2016); and generally Bonnitcha (2017). 27. The tribunal’s jurisdiction was subsequently upheld by the Court of Appeal: Sanum Investments Ltd v Government of the Lao People’s Democratic Republic  [2016]  SGCA 57. See further Hwang and Chang (2018). 28. See the Ministerial statements as well as a leaked draft Investment Chapter: Kawharu and Nottage (2017), Part 5.

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29. ASEAN Comprehensive Investment Agreement, signed 26 February 2009, in force 29 March 2012, http://investmentpolicyhub.unctad.org/IIA/treaty/3273; Agreement Establishing the ASEAN-Australia-New Zealand Free Trade Area, signed 27 February 2009, in force 1 January 2010, http://investmentpolicyhub. unctad.org/IIA/country/11/treaty/3268; ASEAN-Republic of Korea Investment Agreement, signed 2 June 2009, in force 1 September 2009, http:// investmentpolicyhub.unctad.org/IIA/country/111/treaty/3257; ASEAN-China Investment Agreement, signed 15 August 2009, in force 1 January 2010, http:// investmentpolicyhub.unctad.org/IIA/treaty/3272; Agreement on Investment under the Framework Agreement on Comprehensive Economic Cooperation between the Association of Southeast Asian Nations and the Republic of India, signed 12 November 2014, not yet in force, http://investmentpolicyhub.unctad. org/IIA/treaty/3503 (all accessed 20 October 2016). 30. Hepburn (2018) on Investment Arbitration Reporter, 21 February 2018, https:// www.iareporter.com/articles/revived-trans-pacific-partnership-tpp-treatytext-is-released-with-a-few-tweaks-to-the-previously-negotiated-investmentchapter-australia-and-new-zealand-continue-to-disapply-isds-between-them/; and New Zealand, Ministry of Foreign Affairs and Trade, “CPTPP vs TPP”, https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-tradeagreements-concluded-but-not-in-force/cptpp/tpp-and-cptpp-the-differencesexplained/ (both accessed 30 April 2018). 31. See for example, Australia’s FTAs agreed since 2014 with Korea (Article 11.28), Japan (Article 14.2(f)) and China (Article 9.1(d)). Yet, curiously, the clarification is not found in its 2012 FTA with Malaysia, which had faced an ISDS claim where investment “characteristics” were extensively canvassed. 32. The FTA with Australia (Article 11.28) states in the main text: “a claim to payment that arises solely from the commercial sale of goods and services is not an investment, unless it is a loan that has the characteristics of an investment”. Korea’s FTA with New Zealand (Article 10.2) instead has footnote 1: “forms of debt such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics” of an investment. 33. Regarding the first two, see Sornarajah (2011). For claims against other states, see Global Trading Corp et al v Ukraine, ICSID Case No. ARB/09/11, cited by Kawharu (n.d.); and for example, Nova Scotia Power Inc v Venezuela, ICSID Case No. ARB(AF)/11/1. 34. See for example, Australian Government, Department of Foreign Affairs and Trade, “Investor-State Dispute Settlement (ISDS)”, n.d., http://dfat.gov.au/ trade/topics/pages/isds.aspx (accessed 17 October 2016), remarking that: “It is not enough that an investor does not agree with a new policy or that a policy adversely affects its profits.”

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35. On denial of justice or FET claims, and more generally, see Liebscher (2009), p. 105. In response to a recent claim against Canada, see also Liddell and Waibel (2016). Arguments regarding non-enforcement of commercial arbitration awards were raised against India (by an Australian investor, White Industries) and Bangladesh, for example, with tribunals adopting various approaches: see generally Bjorklund (2016). 36. Reed and Wong (2015), pp. 20–21, notes that Thailand has expressly required specific approval in the ASEAN-Australia-New Zealand FTA (as did Vietnam), the ASEAN-China FTA and ASEAN-India Investment Agreement. Nottage and Thanitcul (2016c) observe that Thailand’s 2013 Model BIT applies to investments that have obtained specific approval but only “if required” (similar to the 2009 Comprehensive Investment Agreement), as well as admission “in accordance with the laws” of the host state. For a general argument that approval (or admission) and legality provisions should be interpreted differently rather than conflated, as by some investment tribunals, see Brown (2015). 37. Comparing generally ASEAN agreements, see Desierto (2015), pp. 1033–35. It is far beyond the scope of this chapter to compare the specific reservations made by individual TPP member states (even from Southeast Asia) compared to those they recorded in earlier ASEAN treaties as well as bilateral IIAs with TPP counterparties. 38. Compare CPTPP Annex, para 4 (at https://www.mfat.govt.nz/assets/CPTPP/ Comprehensive-and-Progressive-Agreement-for-Trans-Pacific-PartnershipCPTPP-English.pdf) with TPP chapter 11 (at http://dfat.gov.au/trade/ agreements/not-yet-in-force/tpp-11/official-documents/Documents/11financial-services.pdf) (both accessed 30 April 2018). 39. Luttrell and Weeramantry (2015), p. 15; in response to Johnson and Sachs (2015). The former also points to the award in Al-Tamimi v Oman, ICSID Case No. ARB/11/33, 3 December 2015, which took into consideration similar wording under the US-Oman FTA. See also Kawharu (n.d.). 40. Those two states uphold “rights of their governments to regulate in order to meet national policy objectives, and to preserve their flexibility to safeguard public welfare”. On Australia’s treaty practice generally, see also Mitchell, Sheargold, and Voon (2017). 41. By contrast, preambles in New Zealand’s FTAs (including with Korea and Thailand) more consistently add such wording, see Kawharu (n.d.). 42. See, for example, Jomo (2016), p. 41. For an empirical study doubting much independent impact on tobacco measures from ISDS threats, see for example, Côté (2014). 43. On some of the interest group politics behind this unique product-specific carve-out, see Lester (2016).

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44. Kawharu (n.d.) argues that some recent cases suggest that states must exercise the right to deny benefits proactively and at least before ISDS proceedings commence, which is less effective that clearly putting an onus on claimant investors to prove they have the requisite connection to the home state. 45. See generally Desierto (2015), pp. 1039–42 (but noting also some poten­tially broad exceptions to transparency requirements in the ASEAN agreements). 46. Accord on Fire and Building Safety in Bangladesh (n.d.). The arbitration clause in this Accord is awkwardly worded, but arguably not pathological and therefore unenforceable. 47. British American Tobacco Australasia Limited and Others v Commonwealth of Australia (2012) 250 CLR 1; Australian Government, Attorney-General’s Department, “Tobacco Plain Packaging–Investor-State Arbitration”, n.d., https://www.ag.gov.au/Internationalrelations/InternationalLaw/Pages/ Tobaccoplainpackaging.aspx. 48. Vietnamese law has been revised recently to encourage court-annexed mediation generally, and indeed to require either negotiations or mediation with state authorities in the event of an investment dispute. See Nguyen and Nguyen (2017). Because AIAK requires Korean investors to choose at the outset between local proceedings and ISDS, their legal advisors will almost certainly recommend the latter. Under the other ASEAN treaties, foreign investors can instead commence local proceedings and related mediation, without losing all rights to ISDS. 49. For recent multilateral initiatives, building on US-led treaty developments, see also Shirlow (2016), p. 633; Ubilava and Nottage (2020). 50. Article 20 requires the tribunal to abide by a joint decision of the states party. Article 19 adds an innovative provision specifying that if a joint decision cannot be reached within 60 days of a request from a disputant or the tribunal, any interpretation submitted by one state party nonetheless “shall be forwarded to the disputing parties and the tribunal, which shall decide the issue on its own account”. 51. 19 USC § 3801; Kantor (2004), pp. 384, 391–92. 52. On the extra possibility of also having state-nominated rosters of ISDS arbitrators to minimize conflicts of interest, not yet envisaged for the (CP) TPP, see generally Trakman (2018), pp. 615–45. 53. See Ministry of Foreign Affairs and Trade, “Joint Declaration on Investor State Dispute Settlement”, n.d. https://www.mfat.govt.nz/assets/CPTPP/ CPTPP-Joint-Declaration-ISDS-Final.pdf. This document is not listed among the CPTPP officials texts (including side instruments) online (see note 38 above) perhaps because the three states do not intend to be bound under international law by this joint statement of intent. Interestingly, the three

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states also “recognise the need to ensure that small and medium-sized enterprises (SMEs) are able to fully benefit from the protections of the investment chapter, and intend to promote rules that reduce the costs of dispute settlement for SMEs”. 54. Free Trade Agreement Between the European Union and the Socialist Republic of Vietnam, Chapter 8: Trade in Services, Investment and E-Commerce, Article 14(1); Investment Protection Agreement Between the EU and Singapore (agreed in April 2018, not yet in force), Chapter 3: Dispute Settlement, Article 3.11(1) at http://trade.ec.europa.eu/doclib/docs/2018/april/tradoc_156731. pdf (upon appointment as investment court judges, “they shall refrain from acting as counsel, party-appointed expert or party-appointed witness in any pending or new investment protection dispute under this or any other agreement or domestic law”). By contrast, there was no express prohibition of double-hatting in the Code of Conduct Annex 14-B for the (now superseded) investment chapter in Singapore’s FTA with the EU, nor in the recent amendments to its FTA with Australia (consistently with the latter’s current TPP-inspired approach to treaty negotiations, as outlined in Kawharu and Nottage (2018), Part 3). 55. The latter exclusion is consistent with the past FTA practice of (at least) Australia and New Zealand. However, Kawharu (n.d.) argues that claims may be possible for a foreign vendor of an investment for non-approval, or for administration of foreign investment legislation (such as monitoring of compliance with approval conditions). 56. CPTPP, chapter 9, Article 9.19, para. 2. 57. See for example SGS v Pakistan, ICSID Case No. ARB/01/13, SGS v Philippines, ICSID Case No. ARB/02/6, although complicated by the relevant BITs also including an umbrella clause; outlined by Wendlandt (2008), p. 523. Various tribunals have accepted jurisdiction to rule on contract-based disputes under “generic treaty dispute settlement clauses” (whereby the host state consents to arbitration of “any” disputes related to the covered investment). There is far less case law suggesting that tribunals can assume jurisdiction under such clauses (thus applying the applicable contract law, as opposed to international law pursuant to an “umbrella clause”) if the foreign investor is not also claiming violation of substantive treaty commitments. However, the latter tendency has been criticized, see Sinclair (2009), p. 92. In addition, arguing that general doctrines under international law could be developed so investment tribunals can give preclusive effect to commercial arbitration awards, see Stanivukovic (2014). 58. Since at least 2015, the KLRCA has been building up its capacity in international investment arbitration. See for example, Kuala Lumpur Regional Centre for Arbitration (2016).

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59. In addition, the TPP and Annex 9-L do not address the situation where the investor agrees with the host state under an investment contract to bring claims (even exclusively) before a local court. In principle, treaty-based claims operate at a different (international law) level, so are not precluded. For a critique, see Johnson and Sachs (2015). 60. For example, Article 30.7 allows the chairperson a casting vote to issue an award. By contrast, the UNCITRAL and ICSID Rules require a majority vote of the tribunal. See generally Nottage and Miles (2009). 61. See for example the recently revised India Model BIT (January 2016) Article 1.4, at http://finmin.nic.in/the_ministry/dept_eco_affairs/investment_ division/ModelBIT_Annex.pdf (accessed 17 October 2016). 62. AAPL v Sri Lanka, ICSID Case No. Arb 87/3. The majority award (27 June 1990) has been described as a “silent revolution”, but not with respect to allowing a claim from a minority shareholder (for destruction of the investment vehicle by government forces during a civil war). See Pauwelyn (2014). Nor is this aspect criticized by the strongly-worded dissenting award (see also http://www.italaw.com/cases/96 (accessed 17 October 2016)). 63. Gami Investments v The Government of the United Mexican States, UNCITRAL, Final Award, 15 November 2004, http://www.italaw.com/cases/474 (accessed 17 October 2016); critically examined in Douglas (2009), pp. 420–25. 64. On the policy implications, see also generally Gaukrodger (2014). 65. Schreuer (2005); Smutny (2009), p. 92; Bjorklund (2013), p. 501 (albeit without specifically addressing the possibility of reflexive loss claims by a minority shareholder under NAFTA Article 1116); Caplan and Sharpe (2013) (albeit without specifically addressing the possibility of reflexive loss claims by a minority shareholder under 2012 Model BIT Article 24(1)(a)). But for interpretations of treaties and case law to limit minority shareholder reflexive loss claims for violations of FET or indirect expropriation, see Douglas (2009), especially pp. 415–51. 66. See generally Páez-Salgado (2017); Bentolila (2010), p. 139. The practical difficulties for a foreign minority shareholder are illustrated by the recent case of Walter Bau (Sucharitkul 2015), where the German investor held only 10 per cent whereas local companies held 30 per cent and the government itself held a majority stake in the vehicle, when the investor finally filed its (ultimately successful) BIT claim for reflexive loss against Thailand in 2005. Various settlements had earlier been reached between the local investment vehicle and Thai authorities, related to prior disputes of the long-term concession agreement. See Nottage and Thanitcul (2016c). 67. I thank Professor Jaemin Lee for this observation, in private conversation comparing developments in Korea and Australia.

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68. See generally Kantor (2004); and Gantz (2016). But see Section 3.2 above, on wording that may be more permissive of minority shareholder claims for reflexive loss even compared to NAFTA. 69. Poulsen (2015) highlights elaborate performance prohibitions and preestablishment non-discrimination provisions promoting investment liberalization as well as protection, as features of US treaty practice. 70. See for example Nottage (2016a). However, the ICSID tribunal in Planet Mining v Indonesia argued that several of Australia’s early BITs intentionally contained highly constrained access to ISDS protections, see Nottage (2015a). Although a questionable conclusion, this would instead make Australia’s subsequent FTAs—all clearly providing advance consent when including ISDS protections—significantly more pro-investor. Anyway, to clarify the situation Australia arguably needs at least to terminate BITs with new FTA partners (as it was careful to do with Chile in 2008, and now some other TPP partners). On the complex interaction between bilateral and regional treaties, particularly in the Asia Pacific region, see generally Wongkaew (2015); Chaisse (2015). 71. However, the latter reference might also work in favour of investors, and the TPP is clearer in limiting national treatment and MFN violations to intentional discrimination. See Henckels (2016). 72. Henckels (2015), comparing emergent investment treaty case law with the approach of the WTO Appellate Body, Court of Justice of the European Union, and the European Court of Human Rights. 73. After all, Australia and New Zealand have already signed side letters that completely exclude ISDS bilaterally. See Robb (2016). 74. See Australian Government, Department of Foreign Affairs and Trade, “Australia-European Union Free Trade Agreement”, n.d., http://dfat.gov. au/trade/agreements/aeufta/pages/aeufta.aspx (accessed 17 October 2016); New Zealand, Ministry of Foreign Affairs and Trade, “European Union (EU)-New Zealand Free Trade Agreement”, n.d., https://www.mfat.govt. nz/en/trade/free-trade-agreements/agreements-under-negotiation/eu-fta/; European Commission (2013).

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Flexibilisation in Dispute Resolution, edited by Joachim Zekoll, Moritz Baelz, and Iwo Amelung. Leiden: Brill. ———. 2015a. “Do Many of Australia’s Bilateral Treaties Really Not Provide Full Advance Consent to Investor-State Arbitration? Analysis of Planet Mining v Indonesia and Regional Implications”. Transnational Dispute Management 1. http://www.transnational-dispute-management.com/article.asp?key=2177 (accessed 17 October 2016). ———. 2015b. “The Evolution of Foreign Investment Regulation, Treaties and Investor-State Arbitration in Australia”. New Zealand Business Law Quarterly 21, no. 4. ———. 2015c. “ISDS in the Japanese Diet”. Japanese Law and the Asia-Pacific, 2 December 2015. https://japaneselaw.sydney.edu.au/2015/12/isds_in_the_ japanese_diet.html (accessed 30 April 2020). ———. 2016a. “Investor-State Arbitration Policy and Practice in Australia”. CIGI Investor-State Arbitration Series Paper 6. ———. 2016b. “The TPP Investment Chapter and Investor-State Arbitration in Asia and Oceania: Assessing Prospects for Ratification”. Melbourne Journal of International Law 17, no. 2. Nottage, Luke and Bruno Jetin. 2020. “New Frontiers in Asia-Pacific Trade, Investment and International Business Dispute Resolution”, 25 June 2020. In New Frontiers in Asia-Pacific International Arbitration and Dispute Resolution, edited by Luke Nottage, Shahla Ali, Bruno Jetin and Nobumichi Teramura. Sydney Law School Research Paper No. 20/35. Wolters Kluwer, forthcoming. https://ssrn.com/abstract=3635795. Nottage, Luke and Christian Wollschlaeger. 1996. “What Do Courts Do?” New Zealand Law Journal 369. Nottage, Luke, Julien Chaisse, and Sakda Thanitcul. 2018. “International Investment Treaties and Arbitration Across Asia: A Bird’s Eye View”. In International Investment Treaties and Arbitration Across Asia, edited by Julien Chaisse and Luke Nottage. Leiden: Brill, pp. 3–56. Nottage, Luke and J. Romesh Weeramantry. 2012. “Investment Arbitration in Asia: Five Perspectives on Law and Practice”. Arbitration International 28, no. 1: 19–62. Nottage, Luke and Kate Miles. 2009. “‘Back to the Future’ for Investor-State Arbitrations: Revising Rules in Australia and Japan for Public Interests”. Journal of International Arbitration 26, no. 1: 25–58. Nottage, Luke and Sakda Thanitcul. 2016a. “International Investment Arbitration in Southeast Asia”. Sydney Law School Research Paper No. 16/95. ———. 2016b. “Introduction”. In ASEAN Product Liability and Consumer Product Safety Law, edited by Luke Nottage and Sakda Thanitcul. Bangkok: Winyuchon. http://ssrn.com/abstract=2703130 (accessed 17 October 2016).

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———. 2016c. “The Past, Present and Future of International Investment Arbitra­ tion in Thailand”. Sydney Law School Research Paper No. 16/31. OECD Data. 2018. “FDI Stocks”. https://data.oecd.org/fdi/fdi-stocks.htm (accessed 30 April 2018). Páez-Salgado, Daniela. 2017. “Settlements in Investor-State Arbitration: Are Minority Shareholders Precluded from Having Treaty Claims Adjudicated?” Journal of International Dispute Settlement 8, no. 1 (March): 101–24. Pauwelyn, Joost. 2014. “At the Edge of Chaos? Foreign Investment Law as a Complex Adaptive System, How It Emerged and How It Can Be Reformed”. ICSID Review 29. ———. 2015. “The Rule of Law without the Rule of Lawyers? Why Investment Arbitrators are from Mars, Trade Adjudicators are from Venus”. American Journal of International Law 109, no. 4 (October): 761–805. Payosova, Tetyana, Gary Clyde Hufbauer, and Jeffry J. Schott. 2018. “The Dispute Settlement Crisis in the World Trade Organization: Causes and Cures”. Peterson Institute for International Economics (March). https://piie. com/system/files/documents/pb18-5.pdf (accessed 30 April 2018). Petri, Peter and Michael Plummer. 2016. “The Economic Effects of the TransPacific Partnership: New Estimates”. Peterson Institute for International Economics Working Paper No. 16-2 (January). http://www.iie.com/ publications/interstitial.cfm?ResearchID=2906 (accessed 17 October 2016). Poulsen, Lauge. 2015. Bounded Rationality and Economic Diplomacy: The Politics of Investment Treaties in Developing Countries. Cambridge: Cambridge University Press. Ranjan, Prabhash and Pushkar Anand. 2018. “Investor State Dispute Settlement in the 2016 Indian Model Bilateral Investment Treaty: Does It Go Too Far?” In International Investment Treaties and Arbitration Across Asia, edited by Julien Chaisse and Luke Nottage. Leiden: Brill, pp. 579–611. Reed, Lucy and Kenneth Wong. 2015. “Evolution of the Formal Requirements for Investment Treaty Protection of ‘Investments’ in Malaysia”. KLRCA Newsletter 20. Reyes, Anselmo. 2017. “Foreign Direct Investment in the Philippines and the Pitfalls of Economic Nationalism”. Journal of World Investment and Trade 18, no. 5–6: 1025–61. Riffel, Christian. 2018. “The Chapeau: Stringent Threshold or Good Faith Requirement”. Legal Issues of Economic Integration 45: 141–76. Robb, Andrew. 2016. “Australia – New Zealand: Investor State Dispute Settlement, Trade Remedies and Transport Services”. Letter to Todd McClay, Minister of Trade, 4 February 2016. https://www.dfat.gov.au/trade/agreements/ not-yet-in-force/tpp/Pages/tpp-text-and-associated-documents (accessed 6 August 2020).

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5 Intellectual Property in the CPTPP and Access to Medicines A Thai Perspective Jakkrit Kuanpoth

1. Introduction The intellectual property (IP) chapter in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) covers almost all categories of IP rights. It introduces even higher standards of IP protection than those in the World Trade Organization (WTO) Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement (the so-called TRIPS-Plus provisions). The CPTPP binds the participating countries and obliges them to provide more extensive IP protection. The IP chapter under the CPTPP, however, will undermine countries’ substantive ability to deal with public health problems. First, the proposed rules will have negative implications on access to medicines by limiting flexibilities that the countries currently have under the WTO TRIPS Agreement; for example, by restricting the right of governments to allow the production, marketing and import of generic medicines. The treaty has also introduced a language that will undermine the ability of the participating countries to make use of compulsory licensing as

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a means to obtain differentially priced generic products and restrict the measures that can be taken to pursue the option of affordable drugs. This chapter aims to examine the CPTPP IP provisions related to pharmaceuticals and assess their possible impact on public health. In order to do so, Thailand’s experience with the TRIPS-Plus IP rules, together with the implications on access to medicines, is presented as a case study.

2.  General Background of the CPTPP In the late 1980s, a number of countries, including Taiwan, South Korea, India, Thailand and Indonesia, were placed under tremendous pressure by developed countries to improve their laws for IP protection. In particular, the United States, the world’s largest trading nation, exerted significant bilateral pressure, by withdrawing or threatening to withdraw trade privileges they offered to developing countries under the Generalized System of Preferences (GSP). The developed nations also threatened to impose trade sanctions on the countries that failed to provide adequate and effective IP protection. As a result, the developing countries decided to revise their IP laws to increase the protection level even before the adoption of the WTO TRIPS Agreement in 1994. In addition to the aggressive unilateralism and bilateralism, the industrialized countries’ IP norm-setting activities also took place on a plurilateral level. For example, when a country’s government decided to apply for WTO membership, it had to make a large number of commitments. Even today, accession to the WTO involves complex technical processes and negotiations with existing members. The interested country has to adopt domestic laws and regulations to implement WTO obligations, including improving IP protection, even before the final accession terms and commitments are presented to the WTO body for a vote. The early 2000s saw the proliferation of free trade agreements (FTAs) around the world. In recent times, the United States and the European Union have launched their negotiation campaigns for FTAs with certain countries. Notably, they have already signed, or are in the process of negotiating, bilateral and regional trade agreements with Australia, Bahrain, Chile, India, Jordan, Morocco, Panama, Singapore, Southern African countries, South Korea, Thailand, Vietnam, inter alia. Larger economies like China and Japan are also negotiating their own free

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trade agreements with important trading partners. There are several reasons for the expansion of these FTAs. First, the success of the North American Free Trade Agreement (NAFTA) and the move towards a Free Trade Area of the Americas (FTAA) motivated other countries to adopt FTAs. Second, the United States and the European Union aim to dominate rule-setting in the global trading system, and FTAs can help insure against the periodic difficulties and slow progress of multilateral trade liberalization. Since trade liberalization has been getting more difficult under the WTO framework, American and European trade negotiators have started using bilateral and regional trade fora to achieve what they could not in the multilateral WTO forum, such as enforcing an inflexible, high level IP protection in develop­ing countries. In other words, developed countries can easily manage to set benchmarks with respect to all their trade objectives that will be difficult to achieve in the WTO (Kilic 2014). One of the most significant free trade agreements was the Trans-Pacific Partnership (TPP) Agreement, which was negotiated by twelve nations, including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam, and was concluded on 5 October 2015. Following the United States’ withdrawal from the treaty on 23 January 2017, the remaining eleven signatory states proceeded to negotiate a new agreement that was subsequently concluded as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP ties together the Pacific’s largest economies and sets standards of trade measures that cover a broad range of traditional and non-traditional trade and investment issues, such as local-content requirement in government contracts, higher standards of IP protection, the role of state-owned enterprises, liberalization of telecommunications, labour and environment standards, and e-commerce. In fact, the agreement is expected to be the world’s highest standard agreement and, perhaps, will become the most important trade agreement of the twenty-first century (Backer 2014). Given that it allows membership expansion, the CPTPP will create the largest and most important trading bloc that includes several of the Pacific’s largest economies. In fact, more countries are considering joining the agreement, including China, the United Kingdom and Thailand. From the perspective of the participating countries, the regional and bilateral deals will increase the volume of international trade and

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investment (Grantz 2013). Also, the signing of non-multilateral trade agreements is a crucial economic factor for creating growth, efficiency and stability in their respective economies (Matsushita 2010). A unified and borderless economic entity will present greater business challenges and opportunities for enterprises and investors of the signatory countries. It will also give exporters and investors from those countries greater access to lucrative integrated markets. However, it has been argued that the benefits derived from the trade agreements seem unbalanced, given that such agreements are negotiated between parties with unequal bargaining power. The power asymmetry is likely to influence the negotiation outcomes and will lead to unequal distribution of benefits, resulting in unfairness and inequity in trading relations. Bilateral and regional trade deals will also bring about several negative consequences for smaller economies, particularly when they restrict those countries’ ability to use the relevant policy space to implement national development strategies. The prospective cost of the bilateral trade treaties includes various problems relating to monopoly, public health, education, food security, environment, labour rights, technology transfer, biodiversity management, inter alia (Fazzone 2012). Before beginning to develop legal agreements regarding IP protec­ tion for pharmaceuticals under the CPTPP, it is important to examine some other issues. It may be noted that commitments under the CPTPP are extended to cover several essentially non-trade issues—principally investment, competition policy and government procurement. In many countries, there is widespread public concern over the adoption of looser rules on investment. The CPTPP investment chapter offers some truly novel features on investment rules, including the right to private ownership and establishment (permitting 100 per cent foreign ownership of companies), fair and equitable treatment, no restrictions on the free flow of capital into and out of the country, no performance requirements, investor-state dispute mechanisms, inter alia. For a developing country, incorporating such investment rules into national legislation will have severe consequences. The government could, effectively, lose the right to regulate the entry of foreign investors. The state will no longer be able to give preference or protection to local firms, or even farmers. Home-grown producers will disappear or be taken over by larger foreign firms, while foreign competitors will have full rights to own land and real estate and receive government aid, subsidies and contracts, just like their local counterparts. Any attempt by the state to regulate

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investment activities, say, in the form of imposing high environmental standards, could end up with the government paying millions of dollars in compensation to foreign investors, as has happened in the NAFTA countries. Under the competition policy proposed in the CPTPP, member countries are obliged to establish domestic competition policies and laws of a certain type, which could restrict the sovereign right of each state to adopt laws preventing companies from resorting to practices that are prejudicial to the host country’s interest. Regarding government procurement, it is clear that the CPTPP has introduced a process whereby foreign bidders and contractors will be entitled to obtain a large share of the lucrative business of state projects in the host country. Many WTO members currently have no obligations to provide government contracts to foreigners as they have not joined the WTO’s plurilateral agreement on government procurement. Winning government contracts is undoubtedly lucrative given that a significant proportion of countries’ national expenditure goes to state projects. If that is the case, the liberalization of government procurement raises the question of why this domestic spending should be treated as a trade issue. As far as IP rights are concerned, the CPTPP has incorporated most of the TPP provisions on IP, but suspended a handful of them. The twenty-two suspended provisions could be revived if the United States decides to re-join the agreement in the future. This means, in effect, that the current IP chapter of the CPTPP does not include, along with provisions for copyright and related rights, several pharmaceuticalrelated clauses that the United States proposed during the TPP negotiations. The suspended provisions relating to pharmaceuticals include: patent-term extension (i.e. requirement that members extend the patent term to compensate the delays in patent granting and marketing approval); providing data exclusivity for small-molecule drugs and biologics; and protection of subject-matter relating to new uses of a known product.

3.  Intellectual Property Protection in Thailand 3.1  IP Law Thailand is party to the WTO TRIPS Agreement and the Berne Convention. It joined the Paris Convention in August 2008, and

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subsequently ratified accession to the Patent Cooperation Treaty (PCT) in September 2009. It has also recently joined the Madrid system for the inter­national registration of trademarks. Currently, there are seven legisla­ tions protecting intellectual property rights in Thailand, including: the Patent Act B.E. 2522 (1979); the Trademark Act B.E. 2534 (1991); the Copyright Act B.E. 2537 (1994); the Plant Variety Protection Act B.E. 2542 (1999); the Protection of Layout-Designs of Integrated Circuits Act B.E. 2543 (2000); the Trade Secrets Act B.E. 2545 (2002); and the Geographical Indications Protection Act B.E. 2546 (2003). Apart from laws protecting internationally recognized IP rights, Thailand has also adopted a law to protect traditional knowledge in the field of medicine. The Traditional Medicine Act B.E. 2542 (1999), which falls under the administration of the Ministry of Public Health, lays down conditions on access to herbal resources and Thai traditional formulations. The law establishes the rights of traditional healers to retain control over traditional medicinal knowledge through public registry (Kuanpoth 2002). 3.2  Research Policy and Technology Diffusion The Thai government has financed a number of research programmes in various universities, public research institutes and private companies in order to encourage the development of local technology. In spite of these efforts, the level of science and technology development remains relatively low in the country. Thailand’s research and development (R&D) expenditure is insignificant compared to other industrialized countries. In fact, research spending in Thailand in 2009 accounted for 0.12 per cent of the national Gross Domestic Product (GDP) (ONRCT 2010), which was much smaller than the equivalent figures in Japan (3.4 per cent), the United States (2.7 per cent), Germany (2.5 per cent), France (2 per cent), South Korea (1.8 per cent) and China (1.4 per cent) (ONRCT 2010; UNESCO 2010). Besides a smaller R&D budget, Thailand also has a shortage of skilled scientists and engineers to under­ take R&D activities. According to the World Bank (2007), there were merely 316 researchers in R&D (per million people) in Thailand, compared to 5,409 in Japan, 4,673 in the United States, 3,525 in Germany, 3,593 in France, 4,672 in South Korea and 1,077 in China.

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3.3  Patent Office The Department of Intellectual Property (DIP), established within the Ministry of Commerce in May 1992, is in charge of implementing IP laws in Thailand, with the exception of the Plant Variety Protection Act B.E. 2642 (1999), which is administered by the Ministry of Agriculture. The DIP is a government agency, and its duties and responsibilities include: registering patents, trademarks and licensing of IP rights; developing systems, patterns and means to protect IP; promoting effective use of IP and technology information for the purposes of education, research and development, commercialization; and studying, analysing and recommending policies on IP to the Thai government (DIP 1999). Establishing an effective patent system is also a challenge for Thailand. Like most patent offices in developing countries, the patent office administered by the DIP does not have adequate skilled personnel or sufficient institutional capacity to perform necessary patent examination. While an efficient office generally requires at least 200 examiners to guarantee proper examination in all technical fields (Sherwood, Scartezini, and Siemsen 1999), there are currently just forty-two patent examiners at the Thai Patent Office. Although the number of examiners employed by the DIP Patent Office has increased in recent years, from twenty-four in 2001 to forty-two in 2010, the number is still too small to guarantee the quality and efficiency of patent exam­ination. The situation is even worse considering the fact that only seventeen out of the total forty-two examiners are involved in examination of patent applications for inventions in the fields of chemistry, biotechnology, pharmaceuticals and engineering. The rest are involved in examining applications for designs and petty patents (Kenan Institute Asia 2011). It is to be noted that the recruitment of experienced engineers and scientists as patent authorities to examine increasingly complex applications is a serious problem for developing countries. In Thailand, for example, 11.9 per cent of the patent examiners currently employed by the DIP have a bachelor’s degree in science, and the remaining hold a master’s of science degree. The majority of them have little experience in patent examination. Of the total, 35.7 per cent have between ten and fifteen years of experience, and the rest fewer than ten years (Kenan Institute Asia 2011).

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Experienced patent examiners cannot be hired quickly in the labour market. The problem is more acute as the DIP is not a self-financing executive agency. Patent examiners at the DIP are hired at the government pay scale, which is not competitive. For example, the starting salary of a DIP patent examiner is THB12,000 (approximately US$300) per month, while an examiner with five to ten years of experience receives a maximum salary of THB50,000 (approximately US$1,666) per month (Kenan Institute Asia 2011). The DIP enjoys less flexibility than its counterparts in some other ASEAN countries, such as the Singapore and Malaysia Patent Offices, which are now autonomous organizations. The DIP is still regarded as a source of income for the Thai government, and most of its income generated from application and maintenance fees must be remitted to the Revenue Department. The surplus income cannot be used for offering incentives to high-performing examiners. Because of such limitations, the Thai Patent Office has struggled to recruit competent examiners and, as a result, is unable to deal with the rising number of applications. 3.4 Backlog of Applications and Incomplete Patent Documentation Like Thailand, many countries do not have sufficient expertise necessary to maintain a modern patent office with full capability for thorough technical examination in all fields, particularly in new areas of technology, such as biotechnology and pharmaceuticals. In recent years, patent offices around the world are facing the challenge of patent backlog due to a dramatic increase in the number of applications (London Economics 2010; The Royal Society 2003). As a result, many patents being issued for inventions do not meet the patentability criteria. In the United States, for example, very few patent claims reach the trial phase, and “about 30–35 per cent of patents brought to trial are found invalid or unenforceable” (Abbott 2005). The problem of patent backlog for developing countries like Thailand has become even more acute due to the weak institutional capacity in patent administration. It has become obvious that the DIP has struggled to cope with the increasing volume of patent applications. From 2005 to 2010, the DIP received approximately 10,000 patent applications each year, the majority of which were design-related applications. Only about 15 per cent were invention-based applications. The period of patent granting in Thailand is, on average, between three and five years,

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and this can be much longer for more complex fields. It is estimated that the time needed to obtain a patent for inventions in the areas of physics and biotechnology generally takes between five and nine years due to the lack of skilled examiners. The number of applications per examiner has also been growing in recent years. Today, each examiner is expected to process an average of 254 applications per year, at an approximate rate of one application per working day. Thailand has also attempted to improve the quality of its patents and reduce the administrative burden on the Patent Office by seeking international collaboration. The DIP has outsourced search and examination of patents to foreign patent offices, such as the Australian Patent Office, with additional fees incurred by applicants. While the outsourcing option provides relatively low-cost, high-quality examination, it has created a language problem, as Thailand’s patent law requires all applications to be drafted in Thai. In practice, the DIP, due to limited resources and facilities, gives greater weightage to the patent grants for the same invention in other countries. As a result of this practice, a claimed invention that has been granted a patent by a patent office in a foreign country—particularly a developed country that is considered more capable of thoroughly examining applications—is almost guaranteed a patent right in Thailand as well. In principle, patent database and related documentation provide a wealth of information to local scientists. In reality, however, the patent specifications provided by the applicant are generally a translation of the application filed in a foreign country by the same applicant. The DIP’s patent examiners have faced difficulties dealing with the large number of translated documents. A number of applications filed in Thailand are technically incomplete and/or poorly translated, making it difficult for the examiners to read and understand the technical descriptions. It is interesting to note that a specialized profession of patent attorneys does not exist in Thailand. The law is silent on the qualifications of the patent representative. Consequently, only legal attorneys are qualified to represent clients in the prosecution of patent applications. These patent attorneys are generally law graduates, and most of them do not have a technical degree. As a matter of fact, there is no graduate school for the professional training of patent attorneys in the country. The importance of essential details of the patented invention cannot be overstated. Inadequate and incomplete disclosure in patent

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applications makes it impossible for the public to utilize the patented information efficiently. Poorly translated applications may also lead to errors in the determination by the patent examiner and could result in an invalid patent being granted. 3.5  Specialized IP Court In Thailand, a special court for IP was set up by the Act for the Establishment of and Procedure for Intellectual Property and Interna­ tional Trade Court B.E. 2539 (1997). At the same time, the Office of the Attorney General also established a special division to deal with litigation involving IP and international trade. Thailand aimed to have a dedicated court equipped with specialized expertise to handle cases pertaining to IP and international trade matters (Ariyanuntaka 1999; Legomsky 1990). A quorum of the Intellectual Property and International Trade Court (IP&IT Court) comprises two career judges and an associate judge who is an expert in the relevant field. The Court has its own procedural rules, which can be issued by the Chief of Justice of the IP&IT Court, with the approval of the President of the Supreme Court. An appeal against any judgment of the Court is filed directly to the Supreme Court. A new procedural law was also developed, which authorizes the use of deposition and affidavit of foreign witnesses in lieu of hearing of witnesses residing overseas. A hearing of evidence by means of video-conferencing is also allowed in order to facilitate the conduct of the trial. According to the Rules for Intellectual Property and International Trade Cases B.E. 2540 (1998), various enforcement measures are available, including a preventive injunction (an injunction granted to prevent an IP infringement prior to instituting an action) and an Anton Piller order (an order granted to preserve relevant evidence concerning the alleged infringement). The changes in procedural law are expected to provide a speedy, efficient and fair trial. The establishment of a specialized IP court in Thailand was in response to the issue of lack of judicial expertise in IP, which was viewed as a major problem in handling contentious IP matters. However, the IP&IT Court still lacks sufficient judges with IP expertise. Since the IP&IT Court is a specialized court under the general administration of justice, its career judges are still under the rotation system imposed by the Judicial Commission of Thailand. These judges generally move from one court to another every two to three years in order to gain

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promotion. However, when a judge who has developed IP expertise and learnt all aspects of the IP&IT Court practice is transferred, it is often difficult to find a replacement. In any case, when problems like institutional deficiencies and limited IP resources and expertise are not addressed, establishing a specialized court is of little benefit. 3.6 IP and Technical Assistance The need for technical assistance among developing countries is obvious. Foreign agencies have long provided technical assistance on IP laws and policies to Thailand to strengthen the country’s capacity in handling IPrelated matters. The IP&IT Court and DIP have received the maxi­mum assistance in this regard (Kuanpoth 2005). Each year, the IP&IT Court receives support from: • The United Kingdom: The British Council offers several scholar­ ships to study in the UK. It also funds academic seminars and sponsors resource persons coming from foreign countries. • The United States: The US Embassy organizes meetings between American resource persons, and lawyers and judges from the IP&IT Court through teleconferences. This allows both sides to share experiences and clarify certain issues. The USAID also co-funds the Court to attend an annual symposium every December. It also sponsors judges from Vietnam to train and share experiences with the IP&IT Court. • France: The INPI Division of the French Embassy invites resource persons from France to share their experiences with Thai judges. • Australia: Australia has supported multiple IP seminars in Thailand on several occasions. • Germany: Germany offers one scholarship per year for judges to undertake research at the Max Planck Institute in Munich. The scholarship includes a two to three month stay in Germany. • Japan: Japanese agencies like JETRO, JICA and JAI provide technical assistance to the Court in several forms, including funding seminars, offering annual field trips to Japan, and sponsoring judges to train in Japan for two to three weeks. The IP&IT Court has also recently entered into a technical collaboration with Waseda University to develop a database containing court decisions.

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• The ECAP Project (EC-ASEAN Intellectual Property Rights Collaboration Programme), through which the EU provides different forms of assistance to the Court, including: organizing meetings to raise awareness; arranging field trips and seminars; and devel­oping relevant IP databases. The DIP has engaged in technical collaborations with foreign agencies at three levels—multilateral, regional and bilateral. The multilateral collaborations mostly come from the World Intellectual Property Organization (WIPO) and the World Trade Organization (WTO). The DIP has also entered into regional collaborations with APEC and ASEAN countries. It receives bilateral technical assistance from Japan, the EU, the US, Australia, Korea, China and individual members of APEC. These collaborative projects appear in the forms of academic and educational engagements on different IP-related issues, technical assistance in the drafting and amendment of laws for the development of the IP system, training in patent application processes, inter alia. To date, the majority of technical collaborations that Thailand is a part of are mostly related to IP protection and enforcement. Support provided to the DIP is mainly focused on IP enforcement with an emphasis on training police, judges, and customs officers. Some donor agencies see the benefit in assisting the DIP in developing its own IP system, as they expect that, in return, Thailand will have better enforcement. It can be seen that technical assistance is provided to Thailand mainly for raising awareness of IP protection and for increasing enforcement of IP rights. Specific programmes have focused on training judges and officers in agencies responsible for IP enforcement. Current collaborations are also concentrated in amending existing and drafting new legislations to comply with international rules. It is to be noted that devel­oping countries like Thailand have urgent needs in management or commercialization of IP, in addition to IP enforcement. They also require support for raising awareness of the social and developmental impact of IP and advanced technologies such as biotechnology and information and communication technology. This suggests that technical collaboration should be available to developing countries to promote the legal, commercial and economic exploitation of IP rights. Likewise, training assistance should be provided to assist local entrepreneurs in commercializing their innovations and creations, or finding markets for

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their innovative products. Assistance is also needed in the restructuring of national agencies, such as the reorganization of the IP office to: facilitate better management of IP; improve efficiency of the office; and review the process for patent granting and repealing—all in order to improve the country’s overall IP system. 3.7  Opposition Proceedings Examination of patent applications requires not just competent patent examiners, but also access to a vast body of scientific and technical knowledge. However, it is extremely expensive for a country to carry out accurate patent examination. The United States, for example, spends more than US$1 billion per year to conduct exhaustive search and examination of prior patent applications. But patent offices in develop­ ing countries do not have sufficient resources and qualified staff. Their staff are generally under-trained and have limited access to technological materials on prior art (Kanter 2005). It is also possible that many patents granted by patent offices of the developing countries are, in fact, invalid. Granting a bad patent can have negative consequences for the country, particularly if an invalid patent is granted to a powerful economic actor like a multinational pharmaceutical company. Thus, it is extremely important that patent challenge proceedings are available to detect an application’s weaknesses and allow competitors to oppose the grant of a patent to such applications. There are two types of opposition proceedings—pre-grant and postgrant. The former is a system in which the opposition is considered by the national patent office during the examination process, and the latter refers to the proceedings brought by the opponent of a patent holder before the patent office or the courts. The post-grant procedure comes after the decision on the examination leading to official grant of the patent, and the opposition is filed to challenge the decision. Challenging a patent before it is issued is an administrative process and is generally faster and cheaper than post-grant court proceedings. While a successful opposition in a pre-grant procedure will prevent the entire issuance of the patent or limit the scope of the opposed patent claims, the post-grant patent challenge can result in one of three outcomes: rejection of the opposition; nullifying the granted patent; or amending the patent.

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The TRIPS Agreement is silent on the issue of procedures for patent opposition. The Japanese law, the European Patent Convention (EPC), and laws of the countries brought in line with the European Convention (for example, the UK, the Netherlands, Germany, Sweden and Denmark) provide for a post-grant opposition procedure (Beier 1989; Pagenberg 1991). India’s current law is unique as it is the only patent law that provides for both pre- and post-grant opposition (Dhar and Gopakumar 2006). The patent systems of other developing countries seem to prefer a pre-grant opposition. Section 31 of the Thai Patent Act, for example, permits oppositions to be filed after the applications are published. Any person, without restriction of nationality or connections with the applicant, may initiate proceedings to oppose the grant of tion. There a patent within ninety days from the date of the publica­ are two reasons on which oppositions may be based: first, lack of patentability; and second, the applicant is not entitled to apply for a patent application. Other factors likely to affect the validity of a patent (for example, insufficient disclosure) cannot be raised as grounds for opposition under Thai law. Thailand is currently under pressure from the US and the EU to discard its pre-grant opposition proceedings. Such procedures, they maintain, are unnecessary and conducted at the wrong time. Since the only document available after the date of publication would be the specification as filed, the person who lodges an opposition might not be certain as to what exactly he is opposing (Helfgott 1985). From the public health perspective, the repeal of the present system for post-grant opposition may not benefit developing countries like Thailand that want to increase public access to medicines. It will be much more difficult for competitors to oppose patents after grant as the patents will be in force while the opposition litigation remains pending. The pre-grant patent challenge is the best way to limit the number of invalid patents. It provides some form of low cost administrative procedure for the manufacturers of generic medicines, who are in a better position to check a drug’s patentability than the patent officers, as the former operate in the same field and are aware of evidence that the medicine has already been used by someone else before the applicant. However, since the pre-grant opposition proceedings can be used by third parties to delay the grant of a patent, it is necessary that the process is run in a transparent manner. It is

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equally important that the process for oppositions is independent, fair and equitable to all parties.

4. CPTPP and IP: Impact on Access to Medicines The debate on IP protection consistently touches upon the problems that are being faced by developing countries and the impact that intellectual property implementation has in these countries (Pusceddu 2014a). In particular, the impact on local industries to use and produce new products is particularly felt in emerging economies as their growth is being slowed down because of patent protection (Dreyfuss and Frankel 2015). It is universally accepted that access to good quality essential medicines could make a vital contribution to improve public health and reduce mortality and morbidity. However, such essential medicines can save lives and improve health only if they are widely available and affordable. But many people in the developing world still do not have regular access to the medicines they need. This has had a major impact on health, since most common illnesses in developing countries can be treated or alleviated with basic essential medicines. Trade globalization and the controversial TRIPS-Plus issues under various FTAs, including the CPTPP, have made access to essen­tial medicines— especially patented medicines such as antiretroviral agents—more acute than ever (Dutfield 2008). Therefore, it is necessary for a country to understand the depth of IP protection before deciding to sign treaties with TRIPS-Plus obligations such as the CPTPP (Baker 2009; Mitchell, Voon, and Whittle 2015). The following is the summary of the CPTPP IP issues that may hinder access to essential medicines if the full text is implemented (if and/or when the United States rejoins the agreement). • Patents on new uses, new methods of use, and new process for using known products will flood national patent offices with patents on incremental inventions, and prolong the monopoly of the life of medicines that are supposed to enter public domain after their patents have expired. • Requirements on data exclusivity will create entry barriers for generic medicines, as the generic drug manufacturers are prohibited from accessing clinical and test data. These firms will have to enter a long and costly testing process before the

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marketing approval of a generic drug can be obtained. This will also restrain the effectiveness of the compulsory licence system by forcing the person to whom a compulsory licence is granted to come up with their own test data required for marketing approvals of medicines. • Patent term extensions for delays in granting patents, as required under the CPTPP, will give compensation for delays in issuing patents for pharmaceuticals. This will allow the manufacturers of medicines to control the market longer than the conventional patent rule, despite the fact that those companies are generally compensated by the de facto deterrent effect of pending patents on generic producers. The original companies can also use various marketing techniques, such as brand name advertisement and trade mark protection, to secure their monopoly position even after the expiration of the patent term. Extending patent terms will delay the potential introduction of affordable generic medicines. • The CPTPP text mandates patent linkage, whereby the national drug regulatory agency is under obligation to inform the holders of patents relating to medicines to seek registration by a generic company. The authority is also required to withhold marketing approvals of the said medicine while the patent holders exercise their patent rights through judicial or administrative procedures. The linkage of drug registration with the patent status will impose an unnecessary burden on the drug authority and unnecessarily restrain the entry of generic medicines. The practice of linking patent status to registration obviously provides stronger protection for IP rights than any other rights of the private party (Bhardwaj, Raju, and Padmavati 2013). • The previously mentioned provisions, together with other provisions contained in the CPTPP text, including a strong enforcement mechanism of IP rights and the availability of the investor-state dispute settlement that gives IP owners broad rights to bring claims for private arbitration directly against the state, will deter governments from using the flexibilities that TRIPS provides (for example, compulsory licensing). This will inhibit countries’ ability to access generic and patented medicines (Pusceddu 2014b).

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Asian countries, including Thailand, have experience in dealing with pressure tactics from pharmaceutical giants. Thailand’s experience of try­ ing to provide access to HIV/AIDS-related and other drugs to its poorer population groups highlights the difficulties a country can face when life-saving and essential medicines are protected by patents. HIV/AIDS is one of the leading causes of death in Thailand; an estimated 610,000 Thais are currently living with HIV. The widespread transmission of HIV in Thailand occurred in the late 1980s. Between 1988 and 1989, rapid transmission was apparent among injecting drug-users, with over 50 per cent HIV prevalence among users in some provinces. From 1993 to 1997, 8,325 cases were reported, with HIV infections believed to have rapidly spread among sex workers. It was found that, during the early 1990s, almost half of sex workers in Chiang Mai, a northern province in Thailand, were infected with HIV (Weniger et al. 1991). The high rate of infections among sex workers led to the rapid transmission of HIV/AIDS to their male clients, and from infected males to their wives and partners, and their children. This is particularly worrisome in a country where 20 per cent of adult males are reported to use the services of a sex worker at least once per year (UNAIDS 2008). Despite increased condom use by sex workers, this remains a prime transmission path, with female and male sex workers and injecting drug users particularly at risk. In response to the AIDS epidemic in the early 1990s, the Thai government launched large-scale preventive measures. In 1991, the Anand Punyarachun administration declared that tackling HIV/ AIDS was a government priority. The National AIDS Prevention and Control Committee (the Committee) was set up and the AIDS control programme was transferred from the Ministry of Public Health to the Office of the Prime Minister. The government also increased the 1993 budget for HIV/AIDS to US$44 million, almost a twenty-fold increase from the previous year (UNDP 2004). The top-level political commitment helped mobilize not only financial resources, but also a wide range of sectors of the government and civil society to fight the spread of HIV/AIDS. The initial policy response was limited to preventing the spread of the epidemic. Medical treatment was for the prevention of opportunistic infections only. No antiretroviral (ARV) treatment was provided to HIV patients during the early stage of the campaign. The Thai government subsequently realized that, while preventing new HIV infections was

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crucial, it also needed to treat those who had already contracted the virus. In 1992, the Ministry of Public Health shifted the HIV/AIDS policy from prevention to the subsidization of ARV treatment and the introduction of locally-produced low cost ARVs (UNDP 2004). During the initial stages of the campaign, only mono-ARV therapy (that is, AZT or zidovudine) was prescribed free of charge for a small number of selected HIV patients. However, when drug resistance increased (as the virus evolved to escape the inhibitory effects of the drug), a change of medication was needed. The Ministry was forced to switch to a combination therapy of using two or three drugs, which was more potent in suppressing the virus but also more expensive than a single therapy. In 2000, the Ministry of Public Health set up the “National Access to Antiretroviral Program for People living with HIV/AIDS” (NAPHA) project, which provided a wide range of triple drug ARV therapy. Under the project, around 400 public hospitals dispensed ARV drugs to selected HIV-infected people. The Committee based its selection of HIV patients on clinical grounds (for example, a patient with a CD4 count of less than 200). Those selected would receive free ARV drugs, which the Ministry of Public Health allocated to the hospitals based on a quota system. Each small state-funded hospital (that is, a sixty-bed hospital) received ARV drugs for twenty persons at a time. Larger hospitals received a quota of drugs for forty persons. This was, however, inadequate to cope with the increasing number of infected persons in the country. It may be noted that the Constitution of Thailand adopted in 1997 recognized, for the first time, people’s right to healthcare and social welfare. This subsequently led to the introduction of the universal healthcare system. The health insurance system or the “Thirty Baht” scheme, which currently covers approximately 95 per cent of the population, was introduced in April 2002 by the Thaksin Shinawatra government. But the universal healthcare system did not include ARV treatment, due to the country’s financial constraints and the high cost of the related medicines. As a result, only a very small percentage of Thai AIDS patients were receiving the drug therapy under the government hospital-based programme. In the early stages, most of the drugs distributed under NAPHA were branded drugs that cost more than THB380,000 (US$11,875) per person per year, far beyond the limited government budget. Due to the

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success of the Government Pharmaceutical Organization (GPO) in producing GPO-vir, a fixed-dose combination of stavudine, lamivudine and nevirapine, the Thai government could expand its treatment pro­­­ gramme, providing ARV drugs to a large number of HIV-infected people. Cur­rently there are six triple ARV therapies being used under the Ministry of Public Health’s NAPHA programme, including: GPO-vir (stavudine + lamivudine + nevirapine); d4T+3TC+EFV (stavudine + lamivudine + efavirenz); AZT+3TC+NVP (zidovudine + lamivudine + nevirapine); AZT+3TC+EFV (zidovudine +lamivudine + efavirenz); d4T+3TC+IDV/RTV (stavudine + lamivudine + indinavir/ritonavir); and AZT+3TC+IDV/RTV (zidovudine + lamivudine + indinavir/ritonavir). In the six triple drug therapies, there are seven ARVs (each a differ­ ent chemical entity). Among these, only two chemical entities (efavirenz and indinavir) are patented in Thailand. One formulation (namely GPO-vir) is under a petty patent, which is owned by the GPO. There are no patents over lamivudine, nevirapine, ritonavir, stavudine and zidovudine. The lack of patents on the majority of ARV drugs makes it possible for the GPO to produce cheaper generic medicines. For example, GPO-vir pills can be produced because stavudine, lamivudine and nevirapine are not under patents in Thailand. With the use of GPO-vir, which costs around THB1,200 (US$37) per patient per month, compared to THB18,620 (US$582) per patient per month for the imported drugs, the Thai government can run its ARV treatment programme successfully as it can obtain the generic versions of the drugs at far lower prices than what is offered by the multinational corporations (MNCs). However, the government programme faced difficulties in 2007, when the Ministry of Public Health had to switch a large percentage of patients to considerably more expensive second-line therapy because those patients became allergic to the first-line drugs, or when the HIV virus became resistant to the current drugs. Several WHO-recommended second-line drugs are currently under patent protection in Thailand. Only two of the seven second-line drugs (abacavir and ritonavir) are not patented. Three important second-line ARVs (didanosine, lopinavir and lopinavir/ritonavir) are all patented. The other two compounds (tenofovir and saquinavir) are, at the time of writing, still the subject of pending applications, to which patents can be granted in the near future. This means that five of the seven WHO-recommended secondline ARVs will be under patent protection in Thailand.

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Available data indicate that the prices of branded and patented ARVs are generally much higher than those offered by the generic drug companies. For example, the prices of two non-patented first-line ARVs currently used by the Ministry of Public Health (namely lamivudine and stavudine) are considerably lower than those offered by the originator companies. While the originator’s lamivudine 150 mg and stavudine 40 mg are priced at THB6,046 (US$189) per sixty capsules and THB5,660 (US$176) per sixty capsules respectively, the same drugs are available in the same quantities from the GPO at much lower prices—THB600 (US$19) for lamivudine and THB270 (US$8.44) for stavudine. With regard to patented drugs, the price differentiation is much greater. For example, lopinavir/ritonavir 113.3/33.3 mg, a WHO-recommended second-line ARV, is sold in Thailand by the originator company at THB17,762 (US$555) per 180 capsules, while the same drugs could be imported from an Indian generic drug company at the price of THB5,930 (US$186) (Kuanpoth 2007). Between November 2006 and January 2007, the Thai Ministry of Public Health decided to issue government-use licences against patents over three medicines: efavirenz, Merck’s anti-HIV drug; clopidogrel, an anti-clotting drug sold by Sanofi-Aventis and Bristol-Myers Squibb; and lopinavir/ritonavir (branded “Kaletra”), an ARV distributed by Abbott Laboratories. Although the past decade has seen a number of developing countries granting compulsory licences, Thailand was the first developing country to issue a license for a non-HIV medicine, which reflected that compulsory licences could be issued for patented medicines treating all types of ailments, and not just HIV/AIDS. Clopidogrel, which is sold under the brand name “Plavix”, is one of the world’s largest-selling heart disease medicines, with annual sales of US$6 billion. Around 200,000 Thai patients suffer from heart conditions and blood clotting problems, who could be treated with the drug. As for drugs required for the treatment of HIV/AIDS, the Public Health Ministry claimed that only 20 per cent of infected people (or about 20,000 individuals) were able to access the HIV treatment (UNAIDS 2008). The government pointed to high drug prices as the main factor behind its inability to provide healthcare coverage. In the 2007 fiscal year, for example, public health accounted for 9.5 per cent of the total public expenditure, equivalent to THB4,373 million (about US$112 million)

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(Ministry of Public Health and National Health Security Office 2007). With this amount, the government claimed that it could afford to provide medicines to one-fifth of all people living with HIV/AIDS in Thailand at the companies’ price. The issuance of government-use licences would allow the Ministry of Public Health to treat many more patients because it could switch to a generic version of the drugs that cost, on average, only one-seventh to one-tenth the prices of the patented and branded products, cutting the drug bill by two-thirds (Ahuja 2007). The Thai government has two options to deal with the excessive price problem. First, it can grant a compulsory government-use license allowing the GPO to manufacture generic drugs. Alternatively, it can authorize the Ministry of Public Health to import generic versions of the patented medicines from countries where the prices are lower (Abbott and Reichman 2007). It is not surprising to find political factors playing an important role in the granting of non-voluntary licences. The grant of compulsory licences by the govern­m ent attracted a variety of reactions. The owners of the affected patented brand drugs expressed concerns about the process of granting compulsory licences. They maintained that the Ministry did not give advance notice of the decision, causing the compulsory use of the patents by the Thai government to be in violation of WTO TRIPS intellectual property rules. They also claimed that the licences would reduce their profits, thereby decreasing the incentive to continue R&D. Thailand’s justification for issuing the compulsory licence is based on WTO rules that allow compulsory licensing on patents when a patent holder violates public interest by charging an excessive price for its product. The Ministry of Public Health also contended that it was engaged in extensive discussions with the rights holders for more than two years before it finally decided on government-use licensing. The use of the drugs by the state, according to the Ministry, would not affect the patented market as the medicines distributed under the non-voluntary licensing scheme would be for those unable to pay, most of whom were already covered by the universal coverage (Ministry of Public Health and National Health Security Office 2007). It is interesting to note that the move by the Thai government brought an angry response from the Office of the United States

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Trade Representative (USTR). In its 2007–8 review, the USTR exerted extraordinary pressure on Thailand by placing Thailand on the Priority Watch List (PWL) under Special 301 of the Omnibus Trade and Competitiveness Act of 1988. It also threatened to revoke the trade privileges granted to Thailand under the Generalized System of Preferences (GSP). The leverage, which was previously successfully applied by the United States on Thailand in 1992 and which caused Thailand to amend its patent law to protect pharmaceuticals, was clearly an attempt to discourage government-use licensing. Furthermore, the fear of government intervention in patent matters caused the United States to limit the application of a compulsory licensing scheme under the bilateral FTA it had been negotiating with Thailand since 2003. In the FTA negotiations, the USTR demanded that Thailand implement stricter laws concerning the licensing scheme including, inter alia, narrowing the situations in which non-voluntary licences could be issued. However, the US-Thailand FTA negotiations were suspended due to the political crisis in Thailand that led to dissolution of the Thai parliament in February 2006 (Arunmas 2008; Sell 2002). Thailand is renowned for its success in tackling HIV/AIDS; its efforts resulted in a ten-fold drop in new infections (UNAIDS 2008). It has incorporated ARV treatment into the national AIDS plan by providing free and universal access to ARV treatment for people living with HIV/AIDS. This achievement stems from the fact that Thailand has been able to build its local manufacturing capacity to produce a fixed-dose generic combination drug like GPO-vir. Thailand was also successful in using flexibilities available under the WTO TRIPS Agree­ment and the Doha Declaration on the TRIPS Agreement and Public Health to negotiate lower prices for patented drugs. The country’s success in improving the availability of essential HIV/AIDS medicines is related to many factors. First, it was able to determine the patent status of the needed products, both in Thailand as well as the countries from which it wanted to import the generic drugs. This understanding allowed Thailand to apply the appropriate mechanism to make the patented drugs available at appropriate prices. More importantly, Thailand was prepared to resist and finally overcome political pressure from multinational pharmaceutical companies and its major trading partners. UNAIDS has praised Thailand’s commitment in providing ARVs for people living with HIV/AIDS. Its 2008 report says:

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… there is a compelling argument for providing antiretroviral treatment for all households as a public good. Thailand has shown this can be done within the ambit of a national social insurance system, where more than 80 per cent of people in need of antiretroviral therapy could be provided treatment (UNAIDS 2008).

Several success factors have contributed to improve access to medicines in Thailand, including the country’s relatively good healthcare and reliable supply systems, and the Public Health Ministry’s policy that enhances rational selection and use of drugs. Finally, a combination of domestic capacities and the use of appropriate strategies, such as the use of the compulsory licensing, among other factors, have increased the Thai government’s bargaining power in negotiations with brand name companies over price discounts.

5. Conclusion The Asia Pacific nations have attempted to harmonize IP regulations under the CPTPP in order to further liberalize trade. Thailand, however, continues to struggle to improve its capabilities to implement IP laws even though it has successfully developed a very strong and efficient public health system. The debate on IP protection consistently touches upon the problems that are being faced by developing countries and the impact that intellectual property implementation has on these countries. In particular, the impact on the ability of local industries to use and produce new products is particularly felt in emerging economies as their growth is being slowed down because of patent protection. It is universally accepted that access to good quality essential medicines could make a vital contribution to improve public health and reduce mortality and morbidity. However, these essential medicines can save lives and improve health only if they are widely available and affordable. But many people in the developing world still do not have regular access to the medicines they need. Trade globalization and the controversial TRIPS-Plus issues under various FTAs, including the CPTPP, have made the issue of access to medicines, especially patented medicines such as antiretroviral agents, more acute than ever. It will be interesting to see whether the TRIPS-Plus IP rules will dramatically impact future access to affordable drugs and the healthcare system in countries that decide to join the CPTPP.

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Gantz, David A. 2013. Liberalizing International Trade after Doha: Multilateral, Plurilateral, Regional and Unilateral Initiatives. New York: Cambridge University Press. Guzman, Andrew, Joost H.B. Pauwelyn, and Robert W. Hillman. 2016. International Trade Law. 3rd ed. Alphen aan den Rijn, Netherlands: Wolter Kluwers. Helfgott, S. 1985. “The Declining Use of Patent Oppositions”. IIC 16: 178–79. Kanter, James. 2005. “A New Battlefield: Ownership of Ideas”. International Herald Tribune, 3 October 2005. Kenan Institute Asia. 2011. Comparative Assessment Study of Patent and Trademark Offices in Southeast Asia. Bangkok: Kenan Institute Asia. Kilic, Burcu. 2014. “Defending the Spirit of the DOHA Declaration in Free Trade Agreements: The Trans-Pacific Partnership and Access to Affordable Medicines”. Loyola University of Chicago Int’l Law Review 12, no. 1. Kuanpoth, Jakkrit. 2002. “Thailand”. In Intellectual Property Law in Asia, edited by Christopher Heath. The Hague, Netherlands: Kluwer Law International. ———. 2005. “Intellectual Property-Related Technical Assistance, Collaboration, and Capacity Building: The Thailand Experience”. Paper presented at ICTSD Dialogue on Technical Collaboration for IP Policy in Developing Countries, International Centre on Trade and Sustainable Development, Geneva. ———. 2007. “Patents and Access to Antiretroviral Medicines in Vietnam after World Trade Organization Accession”. Journal of World Intellectual Property 10, no. 3/4: 201–24. Legomsky, Stephen H. 1990. Specialised Justice: Courts, Administrative Tribunals, and a Cross-National Theory of Specialization. Oxford: Oxford University Press. London Economics. 2010. “Economic Study on Patent Backlogs and a System of Mutual Recognition”. Final report submitted to the Intellectual Property Office, London. http://www.ipo.gov.uk/p-backlog-report.pdf. Matsushita, Mitsuo. 2010. “Proliferation of Free Trade Agreements and Development Perspectives”. Law and Development Institute Inaugural Conference, Sydney, Australia. http://www.lawanddevelopment.net/img/ matsushita.pdf. Ministry of Public Health and National Health Security Office. 2007. “Facts and Evidences on the 10 Burning Issues Related to the Government Use of Patents on Three Patented Essential Drugs in Thailand”. Document to Support Strengthening of Social Wisdom on The Issue of Drug Patent, Bangkok. http://www.moph.go.th/hot/Second_white_paper_on_the_Thai_ CL_%5BEN%5D.pdf. Mitchell, Andrew D., Tania Voon, and Devon L. Whittle. 2015. “Public Health and the Trans-Pacific Partnership Agreement”. Asian Journal of Int’l Law 5, no. 2: 279–309. Office of the National Research Council of Thailand (ONRCT). 2010. Annual Report. Bangkok: ONRCT.

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Pagenberg, J. 1991. “Different Level of Inventive Step for German and European Patents? The Present Practice of Nullity Proceedings in Germany”. IIC 22: 763. Pusceddu, Piergiuseppe. 2014a. “Access to Medicines in Developing Countries and Free Trade Agreements: The Case of the US-DR-CAFTA with Focus on Costa Rica”. Journal of Intellectual Property Rights 19, no. 2: 104–12. ———. 2014b. “Access to Medicines and TRIPS Compliance in India and Brazil”. European Intellectual Property Review 36, no. 12: 790–801. Sell, Susan K. 2002. “TRIPS and the Access to Medicines Campaign”. Wisconsin International Law Journal 20: 481–522. Sherwood, Robert M., Vanda Scartezini and Peter D. Siemsen. 1999. “Promotion of Inventiveness in Developing Countries Through a More Advanced Patent Administration”. IDEA: The Journal of Law and Technology 39, no. 4: 473–506. The Royal Society. 2003. Keeping Science Open: The Effects of Intellectual Property Policy on the Conduct of Science. London: The Royal Society. UNAIDS. 2008. Redefining AIDS in Asia: Crafting an Effective Response. New Delhi: Oxford University Press. http://www.hivpolicy.org/Library/HPP001470.pdf. United Nations Development Programme (UNDP). 2004. Thailand’s Response to HIV/AIDS: Progress and Challenges. Bangkok: UNDP. UNESCO Institute for Statistics. 2010. www.uis.unesco.org. Weniger, B.G., K. Limpakarnjanarat, K. Ungchusak, S. Thanprasertsuk, K. Choopanya, S. Vanichseni, T. Uneklabh, P. Thongcharoen, and C. Wasi. 1991. “The Epidemiology of HIV Infection and AIDS in Thailand”. AIDS, Supp 2: S71–S85. World Bank. 2007. “Data: Researchers in R&D”. http://data.worldbank.org/ indicator/SP.POP.SCIE.RD.P6.

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6 New Rules for State-Owned Enterprises in THE CPTPP Wan Khatina Nawawi

1. Introduction On 4 February 2016, twelve signatory Parties—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam signed the Trans-Pacific Partnership (TPP) Agreement. However, on 23 January 2017, President Trump signed a presidential memorandum to direct the United States Trade Representative (USTR) to withdraw the United States as a signatory to the TPP. Despite the initial uncertainties created by the US withdrawal, the eleven remaining countries signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in March 2018. While the TPP has since been given a new name, the agreement text has remained largely the same. It can therefore be argued that the current CPTPP text was mainly based on the US free trade agreement (FTA) model as the United States was previously the major demandeur for most of the thirty constituent chapters. It was during the TPP negotiations that the United States had introduced a new standalone chapter, Chapter 17, to regulate state-owned enterprises (SOEs) and

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designated monopolies of the signatory Parties. The eleven CPTPP members had agreed to not renegotiate the text of TPP Chapter 17; instead, the current CPTPP Chapter 17 has minor amendments in terms of some of the Parties’ date of enforcement for their commitments as laid out in the chapter annexes. Currently, Chapter 17 contains the most comprehensive trade-based regulations on SOEs. This has two key implications. First, it may set the standard for future SOE rules in trade agreements, including FTAs. Second, countries that are keen to be signatory Parties to the CPTPP in the future will see their SOEs being regulated by Chapter 17. This study is organized as follows. The next section discusses the international rules on SOEs and aims to answer three questions: Why are there international rules on SOEs? What are the current international rules on SOEs? And how are SOE rules incorporated into FTAs? The third section then discusses the genesis of CPTPP Chapter 17 on SOEs and designated monopolies. The discussion tries to answer two questions: How is CPTPP Chapter 17 linked to Chapter 16 on competition policy, and to other chapters in the agreement? And how is CPTPP Chapter 17 similar to other SOE rules in the US FTA model? The subsequent section focuses on the details of CPTPP Chapter 17 and attempts to answer another two questions: What are the chapter’s key elements and substantive provisions? And what are its implications on the SOEs of the four ASEAN member states—Brunei, Malaysia, Singapore and Vietnam? The final section concludes.

2. International SOE Rules—Why? What? How? CPTPP Chapter 17 was not a new attempt at regulating SOEs on an international level. This is evidenced by the various SOE rules developed, established and implemented by multilateral and international organizations such as the World Trade Organization (WTO), Organisation for Economic Co-operation and Development (OECD), International Monetary Fund (IMF), International Competition Network (ICN), among others. This section discusses the why, what and how of the development and implementation of international SOE rules. 2.1  Why are there International SOE Rules? International SOE rules are developed, established and implemented to address several concerns regarding SOEs. This subsection highlights

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five primary issues that could arise from the establishment, operations and activities of SOEs: 1. Distortion of competition process in the market due to ownership status of companies; 2. Exclusion or exemption from domestic laws; 3. Unfair preferential treatment including bail-outs; 4. Lack of transparency, accountability and disclosure on activities; and 5. Political motivations in cross-border SOE activities in strategic sectors.

2.1.1  Distortion of Market Competition

SOEs are widely believed to have implicit special connection or relationship with governments in view of their ownership status i.e., being state-owned or state-linked. For example, Vietnamese SOEs are seen to have advantage over their non-SOE counterparts in the market—both private and foreign companies—in terms of better access to information when bidding for public procurement projects, credit facilities and ability to grant land-use rights certificates (Le 2015). Hence, being state-owned or state-linked could result in an uneven playing field in markets, which have both SOEs and non-SOEs (including foreign companies), with the former distorting the competition process.

2.1.2  Exclusion or Exemption from Domestic Laws

The special connection and status may also see SOEs being either excluded or exempted from the application of domestic laws and regulations, like competition laws or other sector-specific regulations. For instance, in the United States, the state action doctrine allows for sovereign activities of the state, including SOEs, to be exempted from antitrust laws when they engage in anti-competitive conduct that is consistent with a “clearly articulated” policy and has been “actively supervised” by the state (Zywicki 2003).

2.1.3  Unfair Preferential Treatment

Financially-troubled SOEs are more likely to receive bail-outs from governments than non-SOEs in similar troubled situations. This can be illustrated by a Malaysian example: the government, through its sovereign wealth fund (SWF), Khazanah Nasional Berhad (KNB),

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introduced and implemented a recovery plan in 2014 to turnaround the country’s beleaguered flagship and state-owned carrier, Malaysian Airline System Berhad (MAS). The “twelve-point MAS recovery plan” included funding of up to RM6 billion disbursed on a phased basis for the airline, which was renamed Malaysia Airlines Berhad (MAB) post-restructuring (KNB 2014).

2.1.4 Lack of Transparency, Accountability and Disclosure on Activities

There are also concerns over the lack of transparency, accountability and disclosure in some jurisdictions on the operations and activities of SOEs. Indeed, these were concerns that the US government had about Singapore SOEs and government-linked companies (GLCs) during the negotiations for the US-Singapore FTA (USSFTA) signed in 2003. The Singapore government owns companies in a diverse range of industries via its two investment holding vehicles, the GIC Private Limited (GIC) and Temasek Holdings Private Limited (Temasek). Both GIC and Temasek have “exempt private company” status under the Singapore Companies Act, which means that they do not have to make their financial statements public; they may lend money to their directors and companies; and their directors are similarly exempted from disclosure requirements (Shome 2009).

2.1.5 Political Motivations in Cross-Border SOE Activities in Strategic Sectors

Many SOEs operate and invest outside their home countries. Indeed, this is not a recent trend as evidenced by the cross-border activities in the seventeenth century of the English East India Company and the Dutch East India Company—examples of two well-known chartered trading companies with monopoly status for international trade activities. More recent examples include the export marketing boards such as the Canada Wheat Board and the New Zealand Meat Board that market agricultural products overseas; state-owned oil and gas companies such as Petroliam Nasional Berhad (PETRONAS Malaysia) and Petróleos Mexicanos (PEMEX) that undertake overseas exploration, production, and refining activities; and SWFs such as the Brunei Investment Agency and Temasek that invest in a diverse range of industries and companies overseas. The key concern is that these operational and investment

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activities may not be based purely on commercial considerations and may, instead, be politically motivated to eventually take control of the host countries’ strategic assets. 2.2  What are the Current International Rules on SOEs? In view of the concerns and issues highlighted above, there have been attempts to discipline SOEs by international and multilateral organizations, notably, the WTO, OECD, IMF and ICN. These are briefly discussed below.

2.2.1 WTO

Various SOE-related rules can be found in the WTO agreements, most notably, the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and the Agreement on Subsidies and Countervailing Measures (ASCM). These include GATT Article XVII on State Trading Enterprises; GATS Article VIII dealing with Monopolies and Exclusive Service Suppliers; and GATS Article IX dealing with Business Practices; and Articles 1, 3 and 25 of the ASCM. These SOE-related provisions aim to ensure that SOEs adhere to the non-discriminatory principle of international trade, undertake commercial considerations and remain transparent in their activities. Since all the CPTPP Parties are also WTO member states, they must adhere to these SOE-related provisions. The WTO also provides additional SOE rules for newly acceded WTO members, as highlighted by the Chinese and Vietnamese experiences when they joined the Organization.

2.2.2 OECD

The OECD has worked together with the IMF and World Bank to develop guidelines and best practices on corporate governance for SOEs. It has also established a Working Party on State Ownership and Privatization Practices under the auspices of the Corporate Governance Committee to work on SOE-related issues and monitor the implementation of the OECD Guidelines on Corporate Governance for State-Owned Enterprises, which was updated in 2015. The guidelines focus on the promotion of equitable treatment, transparency of information and activities, sound governance, and integrity and competency of boards.

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2.2.3 IMF

The IMF has been especially concerned about the activities of the SWFs, notably on the lack of transparency regarding their objectives and activities. It established an International Working Group on Sovereign Wealth Funds (IWG), which was coordinated by the International Monetary and Financial Committee (IMFC). In 2009, a more permanent structure, the International Forum on Sovereign Wealth Funds (IFSWF), replaced the IWG. In 2008, the IMFC adopted the Generally Accepted Principles and Practices (GAPP) for SWFs, better known as the “Santiago Principles”. The twenty-four principles cover three main areas: legal; institutional; and investment and risk management frameworks. The Santiago Principles are endorsed by the IFSWF members on a voluntary and non-binding basis.

2.2.4 ICN

The ICN, an international network of competition authorities, has undertaken SOE-related work, including special projects on SOEs and competition, published reports, and recommended practices on unilateral conduct laws and SOEs. The ICN members recognize the challenges of regulating SOEs, which tend to have significant market power and are accorded designated monopoly status by governments to operate in strategic industries in their economies.

2.2.5  Limitations of the Multilateral SOE Rules

Unfortunately, there are several gaps in the multilateral SOE rules, as explained below: 1. Narrow Scope and Coverage: The SOE rules in the WTO GATT are only applicable to state trading enterprises (STEs), which include export marketing boards, fiscal monopolies, canalizing agencies and foreign trade enterprises.1 Meanwhile, the Santiago Principles are only applicable (on a voluntary basis) to the SWFs that are IFSWF members. In contrast, the OECD and ICN guidelines seem to cover all SOEs. Such a narrow scope could be due to the specific mandate accorded to these organizations by their members. 2. Outdated: The SOE rules in the various WTO agreements do not seem to be keeping pace with the changing structures and objectives of SOEs. For example, the WTO GATS Article

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VIII was drafted at the time when infrastructure, utilities, and telecommunications services were provided by mainly government-owned monopolies or exclusive service suppliers. Privatization, rapid changes in technology, and introduction of competition have since limited the relevance of Article VIII in current market conditions. 3. Weak Enforcement: The OECD and the ICN guidelines and the IFSWF Santiago Principles are non-binding and voluntary for their respective members. Indeed, they highlight best practices for SOE governance. In this regard, the international SOE rules are based on the soft law approach—only the SOE rules in the WTO agreements are hard law in nature. While they are legally binding for the WTO member states, the rules mostly focus on improving transparency of SOEs’ structures, functions and behaviours. WTO member states must notify the relevant details of covered SOEs in their jurisdictions. Unfortunately, the notification requirement has not been widely adhered to by the members as they usually take advantage of the exclusions provided in the agreements.2 Members were also uncertain over the definition of STEs and the scope and coverage for the relevant articles (GAO 1995). 2.3  How are SOE Rules Incorporated into FTAs? Since there are problems in implementing the international SOE rules developed and established by the WTO, OECD and IMF, some developed countries have decided to work on their own SOE rules. These rules are incorporated into their FTAs, especially those with Parties that are developing countries, or with significant shares of SOEs in their economies. The United States has been leading the developed economies—which include the European Union (EU), Australia and Japan—in designing and enforcing SOE rules in FTAs. The SOE rules in FTAs can be incorporated into various chapters of the agreement. In the case of US FTAs, such rules have been incorporated into chapters on investment, cross-border trade in services, government procurement, competition, market access for goods, agriculture, financial services and telecommunications. In some of the chapters, the SOE rules may be “shallow” or not comprehensive as they were included for clarification purposes to provide certainty for Parties when interpreting

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their FTA commitments. It is also important to see whether SOEs would be subject to any dispute settlement mechanism (DSM) provisions if their behaviour is inconsistent with the FTA commitments. While a chapter may exclude SOE rules, such rules may be incorporated into other chapters in the FTA, and these chapters, including the constitutent SOE rules, may be subject to the DSM provisions. The SOE rules in FTAs may incorporate the disciplinary elements found in the WTO GATT Article XVII and the WTO GATS Article IX, which include: 1. Adherence to the non-discriminatory principle for commercial activities, that is, purchase or sale of goods or services; 2. Acting solely in accordance to commercial considerations in their purchase or sale of goods or services; and 3. Not engaging in anti-competitive conduct, such as abusing their dominant positions. There is also usually the incorporation of additional element of prohibition in acting inconsistently with the Parties’ obligations should their SOEs undertake regulatory, administrative or other delegated governmental authority functions. This SOE rule recognizes the fact that SOEs could have multiple roles and responsibilities, which may not be consistent with each other. An example of this is PETRONAS and its various functions. Under the Petroleum Development Act 1974 [Act 144], the Malaysian state-owned oil and gas company is the exclusive owner of petroleum rights onshore or offshore of Malaysia, as well as the regulator for the upstream activities in Malaysia. The US, the EU and Australia have been generally explicit in not preventing their FTA partners from maintaining or establishing SOEs or designated monopolies, thus respecting the sovereign rights of the other Parties. However, the United States had departed from such position in its bilateral FTA with Singapore—Article 12.3.2(f) in Chapter 12 on Anticompetitive Business Conduct, Designated Monopolies and Government Enterprises required that Singapore reduce and eventually substantially eliminate its ownership in GLCs. The US, Australia and the EU have different priorities for SOE rules in their respective FTAs: 1. Transparency: The SOE rules in US FTAs focused on the transparency of existence and conduct of SOEs of their FTA partners. Again, Article 12.3.2(g) in the US-Singapore FTA provided details

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on the types of information that the Singapore government should make available on its GLCs. This article aimed to address the issue of some of the GLCs (Temasek and GIC) being exempt private companies. Additionally, the transparency articles in the US FTAs’ Competition Chapters also require notification on practices that may hinder trade or investment between Parties. 2. Competitive Neutrality: The SOE rules in some Australia-based FTAs address the competitive neutrality principle, which aims to ensure a level playing field for all market players, regardless of their ownership. Governments must not provide any advantages to their SOEs, as these could create distortions in the market. The competitive neutrality principle in Australia-based FTAs is similar to that which was included in its national competition policy in 1993. The SOE rules on competitive neutrality were explicitly incorporated into Australia’s bilateral FTAs with Singapore, the United States and Korea; and implicitly incorporated in its FTAs with Chile and Japan. A specific exam­ ple of the former is Article 4 on Competitive Neutrality in Chapter 12: Competition Policy of the Australia-Singapore FTA.3 3. State Aid and Subsidies: The SOE rules in the EU FTAs transplanted the state aid rules in Articles 107 to 109 of the Treaty on the Functioning of the European Union (TFEU), which are aimed at disciplining subsidies or state aid that could distort competition in the EU market. Similarly, in the EU FTAs, the SOE rules on state aid aim to ensure that state aid does not distort or threaten to distort competition (thus affecting trade between Parties), and to ensure and promote transparency when the other Parties provide state aid or subsidies to entities, including SOEs, in their jurisdictions. The EU FTA partners are committed to annually report to the EU the total amount, distribution and details of their state aid. Examples are paragraphs 1(iii) and 3 in Article 34 of Chapter 2: Competition and Other Economic Matters in the Euro-Mediterranean Agreement between the EU and Egypt.4

3.  Genesis of CPTPP Chapter 17 This section focuses on how CPTPP Chapter 17 came into being. It is important to note that, while the United States is currently not a

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signatory Party to the CPTPP, its significant role in the development of the specific chapter on SOEs and designated monopolies must be acknowledged. And so, this section begins with the discussion on the US negotiators’ mandate for the TPP. 3.1 US Stakeholders Sought Comprehensive SOE Rules in the TPP When USTR Susan Schwab notified the US Congress in 2008 of the President’s intention to initiate negotiations with the other TPP negotiating Parties, she outlined many specific negotiating objectives, including objectives to negotiate for SOE-related commitments: [t]o seek to discipline state trading enterprises, state-owned enterprises and designated monopolies, as appropriate, to enhance transparency and eliminate market distortions.5

The expanded objectives of the US TPP negotiating mandate had since been recast as the overall US ambition for the agreement to be a highquality “twenty-first century FTA” with deep levels of commitment. The inclusion of extensive SOE rules in the TPP was important to the United States because: 1. The TPP could be the new template for future FTAs, not just for US FTAs. 2. The TPP could include new members in the future—note that China and Russia are also APEC members and have a significant number of SOEs operating in their domestic economies. Should they ever decide to become TPP Parties, then their SOEs would be bound by the disciplines incorporated into the agreement. 3. Most of the existing TPP Parties also have a significant number of SOEs operating in their domestic economies. While the United States has already implemented FTAs with several of the TPP Parties including Australia, Canada, Chile, Mexico, Peru and Singapore, it could use the TPP as a forum to regulate the SOEs established and maintained by Brunei, Malaysia, New Zealand and Vietnam—countries that the United States has yet to have FTAs with (Rushford 2012). Additionally, the proposal for comprehensive SOE rules in the TPP reflected the concerns voiced by the US industry players, which lobbied

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the government through their associations, notably the Coalition of Services Industries and the US Chamber of Commerce. Their lobbying document emphasized how the TPP SOE rules could be used to regulate the Chinese SOEs, especially in the future (Coalition of Services Industries and US Chamber of Commerce 2011). Later in 2015, the updated fast-track trade promotion authority as incorporated into the Trade Promotion Authority (TPA) for the TransPacific Partnership (TPP) and Defending Public Safety Employees’ Retirement Act (TPA 2015),6 committed the US TPP negotiators to: 1. Eliminate state trading enterprises (STEs established for trade in agriculture) whenever possible; 2. Develop, strengthen and clarify rules to address unfair or tradedistorting activities of STEs, and to subject these rules to the DSM provisions; 3. Eliminate or prevent trade distortions and unfair competition favouring SOEs and state-controlled enterprises when undertaking their commercial activities; 4. Ensure that SOEs and state-controlled enterprises base their activities solely on commercial considerations; and 5. Ensure commitments that promote transparency. On the surface, the TPA 2015 demanded similar SOE rules to those incorporated into the previous US FTAs. However, it also highlighted deeper commitments, especially in terms of eliminating STEs whenever possible and ensuring the incorporation of transparency provisions to monitor SOEs and state-controlled enterprises. The former, if incorporated into the TPP, would roll back the flexibility provided for in the WTO GATT Article XVII, which currently allows for the establishment of STEs. Additionally, the United States observed that governments not only own but may also control enterprises, thus expanding the definition of state enterprises. 3.2  TPP Chapter 16 and Chapter 17 In the early rounds of the TPP negotiations, SOE rules were discussed and negotiated mainly in the Working Group on Competition to be incorporated into the TPP Competition Chapter (TPP Chapter 16). These rules were in addition to the piecemeal SOE rules that were incorporated into other chapters, including the chapters on: national treatment and

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market access for goods; investment; cross-border trade in services; financial services; telecommunications; and government procurement. So far, the TPP negotiations on SOE rules did not deviate significantly from previous US FTAs’ negotiations. The only major difference was the decision to divide TPP Chapter 16 into two sections—Section A contained “standard” generic competition rules, and Section B contained specific competition rules for SOEs and designated monopolies. In the past, only the competition chapter in the US-Singapore FTA had come close to TPP Chapter 16 in terms of both the breadth and depth of commitments on SOE rules. It was only in the ninth round of the TPP negotiations—held in Peru in October 2011—that the United States proposed for Section B of TPP Chapter 16 to be expanded to become a standalone chapter, TPP Chapter 17. This was based on the concerns voiced by American businesses via their industry associations (in July 2011) on the effects of foreign SOEs on US trade and investment activities. This also highlighted the priority placed by the United States on ensuring that the signatory Parties would regulate their SOEs according to the USapproved standard. Indeed, this was reflected in the preamble of the TPP, which included the following text: Affirm that state-owned enterprises can play a legitimate role in the diverse economies of the Parties, while recognising that the provision of unfair advantages to state-owned enterprises undermines fair and open trade and investment, and resolve to establish rules for state-owned enterprises that promote a level playing field with privately owned businesses, transparency and sound business practices.7

The introduction of TPP Chapter 17 posed a conundrum for some of the TPP negotiating Parties, notably Malaysia and Vietnam. While Malaysia was comfortable with the traditional SOE-related provisions, this new chapter posed a challenge as substantive SOE rules were considered part of the redlines in its TPP negotiations, alongside the substantive rules on intellectual property rights (IPR), labour, environment and government procurement. The Malaysian government was especially concerned that TPP Chapter 17 would restrict its SOEs to support the government’s development and nation-building policies, which may not necessarily give priority to commercial considerations. As for Vietnam, the government was concerned that TPP Chapter 17 may contain stricter SOE rules than those in the WTO agreements.

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The country may then have to give up the flexibilities accorded by the WTO to transition economies such as Vietnam in implementing their economic policies, thus constraining the activities of its SOEs. Vietnam was also concerned that it may have to amend its existing domestic SOE-related law, Law on Enterprises of 2005, as part of its commitments in TPP Chapter 17—in turn, affecting the timeline for its SOE reform programme.8 3.3  Transplanting TPP Chapter 17 into CPTPP Chapter 17 There have been many significant developments since the conclusion of negotiations for the TPP in 2015. All the twelve TPP negotiating member states signed the agreement on 4 February 2016. However, a year later, the United States withdrew from the TPP. On 18 March 2018, the remaining TPP signatory Parties affirmed their commitments in a new agreement, the CPTPP. While there have been some changes to the signatory Parties’ commitments in the CPTPP (from the TPP), the SOE rules in the agreement were not significantly affected. The main text of TPP Chapter 17 was unchanged to become CPTPP Chapter 17. Similarly, the SOE rules in the various chapters in the TPP were retained in their corresponding chapters in the CPTPP. The only difference was the clarity on the starting dates of enforcement of commitments for Malaysia and Brunei, which are now the dates of entry into force instead of dates of signing the CPTPP for the two Parties.

4.  CPTPP Chapter 17 The previous section discussed the genesis of CPTPP Chapter 17. This section looks at its details before looking at the implications of the chapter on the SOEs of the four ASEAN member states—Brunei, Malaysia, Singapore and Vietnam—that are currently signatory Parties to the agreement. 4.1  Key Elements of CPTPP Chapter 17 The SOE rules in CPTPP Chapter 17 can be categorized according to various key elements and substantive provisions, which are discussed below.

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4.1.1  Definition of SOEs

The definitions of “independent pension fund” (IPF), “sovereign wealth fund” (SWF), and “state-owned enterprise” (SOE) reflected the acknowledgment of the signatory Parties that SOEs can exist in different forms according to different mandates, objectives, and functions. The chapter broadly defines SOE as: An enterprise that is principally engaged in commercial activities in which a Party:

(a) Directly owns more than 50 per cent of the share capital; (b) Controls, through ownership interests, the exercise of more than 50 per cent of the voting rights; or (c) Holds the power to appoint a majority of members of the board of directors or any other equivalent management body.

This compares to the shorter and less detailed definition found in the North American Free Trade Agreement (NAFTA)9 and the US-Australia FTA,10 for example. Rather, the definition of an SOE in CPTPP Chapter 17 was more consistent with that in the US-Singapore FTA11 as there was recognition of effective influence via government ownership and control in such an entity. The purpose of this rather expansive or broad definition was to address the diverse range and level of government or state ownership in such bodies. For example, the Malaysian government still retains golden shares, which have disproportionate (voting) rights to the number of shares held, in certain GLCs that it considers to be strategic, in terms of assets and/or activities. For instance, the Malaysian government has a golden share in the airport operator Malaysia Airports Holdings Berhad (MAHB), which operates thirty-nine of the forty-two airports in the country.

4.1.2  Restrictions on SOEs

While CPTPP Chapter 17 clearly states that none of its SOE rules prevent the signatory Parties from establishing or maintaining SOEs or designating monopolies, the SOE rules in the chapter restrict these entities from undertaking discriminatory treatment when engaging in commercial activities (as detailed in Article 17.4: Non-discriminatory Treatment and Commercial Considerations) and undertaking noncommercial assistance which would cause adverse effects (as detailed in Article 17.6: Non-commercial Assistance). These restrictions aim to

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provide a level playing field for market players regardless of their ownership. Additionally, these restrictions are effect-based in that they only apply when there are adverse effects on the suppliers in other territories, and these suppliers are discriminated against. The fact that there could be discriminatory policies in place may not constitute noncompliance. The injury test for non-commercial assistance is based on the WTO ASCM, which would be relevant to goods-producing SOEs as opposed to services-producing SOEs.

4.1.3  Non-Application of CPTPP Chapter 17

CPTPP Chapter 17 may not apply to some SOEs, either at the scopelevel or at the non-conforming measure (NCM)-level. The scope-level exclusion was incorporated into the main text of the chapter, while the NCM-level exclusion was incorporated into the country annexes. Unless stated otherwise, the scope-level provides a blanket exclusion for the SOEs concerned. An SOE or government activity may thus be excluded from having to undertake all the commitments in the chapter. For example, the chapter does not apply to the procurement decisions of certain SOEs. Meanwhile, the NCM-level provides for a narrower exclusion allowing SOEs to maintain existing NCMs. However, other provisions in the chapter, for example on transparency, would still apply to the SOEs concerned. CPTPP Chapter 17 excludes both SWFs and IPFs at the scopelevel. In the case of SWFs, however, it is not enough for them merely to declare themselves as SWFs to be excluded from the scope of the chapter. Rather, SWFs must be: Member(s) of the International Forum of Sovereign Wealth Funds or endorses the Generally Accepted Principles and Practices (“Santiago Principles”) issued by the International Working Group of Sovereign Wealth Funds, October 2008, or such other principles and practices as may be agreed to by the Parties.12

CPTPP Chapter 17 provides different treatment to SOEs owned by SWFs and IPFs. For the former, even if the SWFs are excluded at the scopelevel, the chapter is silent on their SOEs, thus hinting that the SOE rules in the chapter will apply to the SWFs-owned SOEs. On the other hand, the chapter excludes the SOEs owned and controlled by IPFs at the scope-level. However, parts of Article 17.6 on non-commercial assistance13 are still applicable for the IPFs-owned SOEs when the Party

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(government) provides direct or indirect non-commercial assistance to and through these entities. It should be noted that CPTPP Chapter 17 also provides exceptions for SOEs of certain revenue size at the sub-central or sub-national level.14

4.1.4 Transparency

As with other US-based FTAs, the SOE rules in CPTPP Chapter 17 promote transparency as detailed in Article 17.10: Transparency. These include signatory Parties making publicly available on official websites lists of their SOEs, which are to be updated regularly. Signatory Parties must also provide, when requested, information on their SOEs whose activities may affect trade or investment between Parties. Information that could be requested include financial and ownership details, and non-financial information such as benefits or exemptions received. Additionally, signatory Parties must provide, when requested, information on any non-commercial assistance received by their SOEs. Indeed, the level of transparency committed to by the CPTPP signatory Parties is the most comprehensive in any FTAs negotiated, signed, ratified and implemented thus far.

4.1.5  Application of the CPTPP Dispute Settlement Chapter

Once the agreement comes into force, signatory Parties must comply with their obligations under CPTPP Chapter 17, as failure to do so would result in the application of the CPTPP’s Dispute Settlement Chapter (CPTPP Chapter 28). As such, the level of commitment towards CPTPP Chapter 17 could be argued to be higher than in a traditional competition chapter. In fact, CPTPP Chapter 28 does not apply to CPTPP Chapter 16, which is similar treatment for the other competition chapters in other US FTAs. 4.2 Implications for SOEs in Brunei, Malaysia, Singapore and Vietnam As observed earlier, four of the eleven signatory Parties to the CPTPP are ASEAN member states: Brunei, Malaysia, Singapore and Vietnam. Of these, three are developing countries. As such, their SOEs are accorded varying degrees of flexibility in the application and enforcement of the SOE rules in CPTPP Chapter 17. These are discussed below.

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4.2.1  Flexibility in the Application of CPTPP Chapter 17

All the CPTPP ASEAN members have established and maintained SOEs, which have a diverse range of objectives/mandates, functions and powers. The Vietnamese SOEs are comparatively traditional SOEs, established to provide and supply goods and services in the domestic market to local consumers. The Malaysian and Singapore SOEs are more modern and updated in their mandates and functions, with many of them undertaking cross-border operation and investment activities. Indeed, the CIMB Group and DBS Bank are two of the largest banks in the region, with branches established and operating in several other ASEAN member states. Additionally, all the CPTPP ASEAN members have established and maintain SWFs: Brunei Investment Agency (Brunei), KNB (Malaysia), GIC and Temasek (Singapore), and State Capital Investment Corporation (Vietnam). All the CPTPP ASEAN members also have IPFs. These entities—SOEs, SWFs and IPFs—will enjoy flexibility in the application of the SOE rules in CPTPP Chapter 17. KNB, GIC and Temasek met the conditions contained in the SWF definition as they are members of the IFSWF, and had voluntarily endorsed the Santiago Principles. However, the SOE rules of CPTPP Chapter 17 will still apply to the SWFs of Brunei and Vietnam as they are not members of the IFSWF and so have yet to endorse the Santiago Principles. The IPFs of these CPTPP ASEAN members may also be excluded from the scope of the chapter but they must meet the condition of being “free from investment direction from the government of the Party”— footnote 3 of CPTPP Chapter 17 provided clarification of this concept. Since Singapore is a developed country, its SOEs do not enjoy the flexibility accorded at the NCM-level, unlike those of Brunei, Malaysia and Vietnam. Both Malaysia and Vietnam have also sought NCM-level exemptions for the development of their financial institutions. In the case of Malaysia, the exemption was for non-discriminatory treatment and commercial considerations, while for Vietnam, it was for nondiscriminatory treatment and commercial considerations, as well as for non-commercial assistance. Additionally, sub-central level SOEs, or in the case of Malaysia, its state-level SOEs, are currently excluded from the application of CPTPP Chapter 17. However, they could be subject to further negotiations within five years after the CPTPP enters into force, as detailed in Annex 17-C of the chapter.

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4.2.2 Longer Transition Period for Brunei, Malaysia and Vietnam to Undertake Commitments

The signatory Parties are in different stages of economic development, which means that some may take longer than others to enforce the commitments made in the agreement. And so, flexibilities were accorded to some Parties including Brunei, Malaysia and Vietnam in undertaking their commitments towards CPTPP Chapter 17. For example, footnote 10 in the chapter affirmed that Malaysia shall not be subject to the DSM provisions under CPTPP Chapter 28 for SOEs owned or controlled by KNB for two years after the agreement came into force, in view of the ongoing development of the SOE reform legislation. Brunei, Malaysia and Vietnam were given transition periods ranging from six months to five years to comply with the transparency rules under Article 17.10 (compared to the strict timeline of six months for other signatory Parties). Meanwhile, Vietnam does not have to be part of the SOE and Designated Monopolies Committee, which has the function on reviewing the commitments and SOE rules in CPTPP Chapter 17, including on non-conforming activities (NCAs). The Committee will start to meet a year after the agreement came into force. Finally, the SOE rules on non-discriminatory and commercial considerations (Article 17.4), non-commercial assistance (Article 17.6), transparency (Article 17.10), and Committee on State-Owned Enterprises and Designated Monopolies (Article 17.12) will not apply for five years from the date of the entry into force of the agreement to SOEs in Brunei, Malaysia and Vietnam if the annual revenue derived from their commercial activities are less than SDR500 million in any one of the three previous consecutive fiscal years. It must also be noted that the threshold level for revenue for the other signatory Parties are lower at SDR200 million.

4.2.3  Long NCM Lists for Brunei, Malaysia and Vietnam

As mentioned earlier, signatory Parties had maintained the ability for some of their SOEs to continue to undertake activities which would be inconsistent with their commitments in the chapter. However, they must list the details in the country annexes (NCM list) to the chapter. Parties may later shorten their NCM lists when they are ready. Brunei, Malaysia and Vietnam have independent comprehensive NCM lists, with Vietnam maintaining the longest list among all the eleven

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signatory Parties. Brunei had listed NCMs for its oil and gas, as well as investment and asset management sectors. Malaysia had listed NCMs for certain activities in oil and gas, agriculture, and investment and asset management; and certain policies including the Bumiputera policy, the small and medium enterprises (SME) policy, and the economic development policy for Sabah and Sarawak (two Malaysian states on Borneo Island). Vietnam had listed NCMs for certain activities in oil and gas, electricity, mining (coal), defence, aviation, shipping and shipbuilding, agriculture and SMEs. 4.3  Other Observations There are a few other general points that are worth highlighting, as discussed below.

4.3.1  Converting Soft Law into Hard Law

CPTPP Chapter 17 had upgraded a voluntary principle to become a legally binding commitment for the SWFs of the signatory Parties, thus converting the soft law approach in the international regulation of SWFs into hard law approach. This is interesting as the China Investment Corporation (CIC), a Chinese SWF, may not have to endorse the Santiago Principles if it chooses not to (as it is only on a voluntary basis), but KNB, GIC and Temasek would now be legally bound to endorse the Santiago Principles to ensure exclusion from the chapter scope as their governments were CPTPP signatory Parties. If Brunei and Vietnam want their SWFs to be similarly excluded from the application of the chapter, then their SWFs will have to become members of the IFSWF and endorse the Santiago Principles.

4.3.2  Additional Layer of Regulatory Mechanism for SOEs

The SOE rules in CPTPP Chapter 17 will add another layer to the already comprehensive set of domestic and international SOE-related regulatory mechanisms and instruments to regulate SOEs of the signatory Parties, including Malaysia. Currently, whenever required, Malaysian SOEs report to their shareholders (including the government); the various national regulators including the Securities Commission, Bursa Malaysia, Bank Negara Malaysia, Malaysia Competition Commission, among others; as well as to multilateral organizations such as the WTO and the IFSWF for SWFs. If CPTPP Chapter 17 is enforced as

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it is, then they would also have to report to the Committee on StateOwned Enterprises and Designated Monopolies, comprising govern­ ment representatives of each Party. Interestingly, the SOE rules in CPTPP Chapter 17 do not apply to the non-SOEs that receive any direct or indirect non-commercial assistance from the signatory Parties.

4.3.3  Transaction Costs of Enforcing Commitments

If CPTPP Chapter 17 is enforced, then signatory Parties must ensure that their SOEs undertake activities that are consistent with the provisions in the chapter, as any inconsistency could result in the DSM provisions under CPTPP Chapter 28 being triggered and applied. It is also expected for the CPTPP ASEAN members to have to amend their relevant domestic legislations to comply with their commitments in the chapter. This could be costly, both in terms of time and money spent, for both the signatory Parties and the SOEs.

4.3.4  SOEs May Choose to be Small and Unprofitable to Escape being Regulated

Signatory Parties and SOEs may find the SOE rules in CPTPP Chapter 17 to be too onerous and expensive to be enforced. Should this happen, they may decide to remain small and unprofitable so that they could enjoy the exceptions allowed in the chapter—note that Article 17.13 provides exceptions for SOEs of certain revenue size at the sub-central or sub-national level. At worst, this chapter may have the unintended consequence of discouraging SOEs to grow, and become efficient and profitable.

4.3.5  CPTPP Chapter 17 as Base for SOE Rules in Future FTAs

Future Parties to FTAs with the CPTPP signatory Parties may now consider CPTPP Chapter 17 as the base or foundation for negotiating any SOE rules in future FTAs with these Parties. Note that the CPTPP ASEAN members are currently negotiating the Regional Comprehensive Economic Partnership (RCEP) with other ASEAN member states, Australia, China, India, Japan, New Zealand and South Korea. In the case of the RCEP, Australia, Japan and New Zealand were also signatory Parties to the CPTPP. In a maximum case scenario, they could demand for similar SOE rules to be incorporated into the RCEP. If this happened, it would further lock in the commitments made in CPTPP Chapter 17.

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5. Conclusion CPTPP Chapter 17 differs from the previous SOE rules incorporated in other FTAs generally, and the US FTAs specifically, given the depth and breadth of its scope. The chapter undertook a broad approach in regulating SOEs in cross-border trade, services and investment activities. There were competition rules in that SOEs must adhere to the non-discriminatory principle for their commercial activities (for example, on subsidies or non-commercial assistance), act solely in accordance to commercial considerations in their purchase or sale of goods or services, and not engage in anticompetitive conduct, including abuse of dominant and monopoly position. These were similar to the EU- and Australia-based FTAs, as well as previous US FTAs. However, the chapter went beyond the traditional competition rules to also address general governance issues for SOEs, such as transparency of their existence and behaviour. Addi­tionally, to ensure discipline, CPTPP Chapter 28 would apply to address inconsistency or failure to meet commitments in the chapter. The many exclusions and flexibilities incorporated into the main text and annexes of the chapter hinted at the difficulties in negotiating and agreeing to the final commitments in this chapter, as signatory Parties attempted to maintain the balance between setting meaningful rules for SOEs and being practical in operationalizing the commitments according to their own levels of economic development. However, the agreement must come into force (in its current form) first before we see whether the Parties have been successful in doing so. In conclusion, negotiating the CPTPP generally, and CPTPP Chapter 17 specifically, has provided significant lessons for developing countries like Brunei, Malaysia and Vietnam that are already Parties to the agreement, and other ASEAN member states such as Indonesia, the Philippines and Thailand, which have expressed interests to be part of the agreement. Once the agreement enters into force, CPTPP Chapter 17 will change the existing regulatory and governance landscape for the CPTPP ASEAN members’ SOEs, and influence future SOE-related commitments made by these countries in their FTAs with like-minded trading partners.

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Notes   1. It was observed that there is currently no clear definition of SOEs, but the WTO Working Party on State Trading Enterprises had attempted to provide an illustrative list on SOEs. See WTO (2018).   2. Indeed, the Chairman of the Working Party on State Trading Enterprises had expressed his concerns over the poor compliance by members to notify their state trading activities. For instance, only twelve members had provided updated notifications in 2003, while only forty-eight members had provided new and full notifications in 2001. See WTO (2003).   3. 1. The Parties shall take reasonable measures to ensure that governments at

  4.

all levels do not provide any competitive advantage to any governmentowned businesses in their business activities simply because they are government owned. 2. This Article applies to the business activities of government-owned businesses and not to their non-business, non-commercial activities (Australia-Singapore Free Trade Agreement 2003). 1. The following are incompatible with the proper functioning of the Agreement, insofar as they may affect trade between the Community and Egypt: … (iii) any public aid which distorts, or threatens to distort, competition by favoring certain undertakings or the production of certain goods. 2. Each Party shall ensure transparency in the area of public aid, inter alia by reporting annually to the other Party on the total amount and the distribution of the aid given and by providing, upon request, information on aid schemes. Upon request by one Party, the other Party shall provide information on particular individual cases of public aid (Euro-Mediterranean Agreement Establishing an Association between the European Communities and their Member States, of the one part, and the Arab Republic of Egypt, of the other part, 2004).

  5. For the notification letter dated 22 September 2008, see Schwab (2008).   6. See US (2015). This bill was passed on 22 May 2015, signed by the President on 29 June 2015, and enacted as the [Trade Promotion Authority (TPA) for the Trans-Pacific Partnership (TPP) and] Defending Public Safety Employees’ Retirement Act.   7. See Preamble of the Trans-Pacific Partnership Agreement (2016).   8. WTO (2003).   9. … an enterprise owned, or controlled through ownership interests, by a Party (In Definitions, Chapter 15: Competition Policy, Monopolies and State Enterprises, North American Free Trade Agreement 1992). 10. … an enterprise owned, or controlled through ownership interests, by any level of government of a Party (In Definitions, Chapter 14: Competitionrelated Matters, United States-Australia Free Trade Agreement 2004). 11. … effective influence exists where the government and its government enterprises, alone or in combination: (a) Own more that 50 per cent of the voting rights of an entity; or

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Wan Khatina Nawawi (b) Have the ability to exercise substantial influence over the composition of the board of directors or any other managing body of an entity, to determine the outcome of decisions on the strategic, financial, or operating policies or plans of an entity, or otherwise to exercise substantial influence over the management or operation of an entity. Where the government and its government enterprises, alone or in combination, own 50 per cent or less, but more than 20 per cent, of the voting securities of the entity and own the largest block of voting rights of such entity, there is a rebuttable presumption that effective influence exists. Annex 12A provides an illustration of how the analysis of effective influence should proceed; 6. Government enterprise means: (a) For the United States, an enterprise owned, or controlled through ownership interests, by that Party; and (b) For Singapore, an enterprise in which that Party has effective influence (In Definitions, Chapter 12: Anticompetitive Business Conduct, Designated Monopolies, and Government Enterprises, United States-Singapore Free Trade Agreement 2003).

12. See Article 17.1: Definitions in Chapter 17: State-Owned Enterprises and Designated Monopolies in the Comprehensive and Progressive Trans-Pacific Partnership Agreement (2018). 13. Specifically, paragraphs 17.6.1 and 17.6.3 of Article 17.6: Non-commercial Assistance in the Comprehensive and Progressive Trans-Pacific Partnership Agreement (2018). 14. Paragraph 17.13.5 of Article 17.13: Exceptions in the Comprehensive and Progressive Trans-Pacific Partnership Agreement (2018).

References Coalition of Services Industries and US Chamber of Commerce. 2011. “‘21st Century’ Trade Issues: The Challenges to Services Trade and Investment from State-owned/Assisted Enterprises, Restrictions on Data Flows, and Forced Localization”. 2011 Global Services Summit: Engaging the Dynamic Asian Economies, Washington D.C., 20 July 2011. General Accounting Office (GAO). 1995. “State Trading Enterprises: Compliance with the General Agreement on Tariffs and Trade”. GAO/GGD-95-208. Report to Congressional Requesters, US GAO, 30 August 1995. Healey, Deborah. 2014. “Competitive Neutrality and its Application in Selected Developing Countries”. UNCTAD Research Partnership Platform Publication Series. Khazanah Nasional Berhad (KNB). 2014. “Khazanah Announces 12-point MAS Recovery Plan”. Media Statement.

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Le, Thi Anh Nguyet. 2015. “State-owned Enterprise Reforms in the TPP Negotiation: Is it a Win-Win for Vietnam?” RIETI Discussion Paper Series 15-E-092. Research Institute of Economy, Trade and Industry (RIETI). Rushford, Greg. 2012. “Trustbusters: Why the Obama Administration is Target­ ing Malaysia and Vietnam in the Trans-Pacific Trade Talks”. Foreign Policy, 13 April 2012. http://www.foreignpolicy.com/articles/2012/04/13/ trustbusters. Schwab, Susan C. 2008. Notification letter to the US House of Representatives Speaker Nancy Pelosi and US Senate President Pro Tempore Robert C. Byrd. 22 September 2008. http://www.ustr.gov/archive/assets/World_Regions/ Southeast_Asia_Pacific/Trans-Pacific_Partnership_Agreement/Other_ Documents_(Letters,_etc)/asset_upload_file775_15142.pdf. Shome, Anthony. 2009. “Singapore’s State-Guided Entrepreneurship: A Model for Transitional Economies?” New Zealand Journal of Asian Studies 11, no. 1 (June): 318–36. US. 2015. H.R. 1890: Bipartisan Congressional Trade Priorities and Accountability Act of 2015, as of 1 May 2015. https://www. /bills/114/hr1890. World Trade Organization (WTO). 2003. Report of the Working Party on State Trading Enterprises. G/STR/W/41. WTO. ———. 2018. “Technical Information on State Trading Enterprises”. http://www. wto.org/english/tratop_e/statra_e/statra_info_e.htm. Zywicki, Todd J. 2003. “Report of the State Action Task Force”. Office of Policy Planning, Federal Trade Commission (FTC). International Agreements Australia-Singapore Free Trade Agreement. 2003. Comprehensive and Progressive Trans-Pacific Partnership Agreement. 2018. Euro-Mediterranean Agreement Establishing an Association between the European Communities and their Member States, of the one part, and the Arab Republic of Egypt, of the other part. 2004. North American Free Trade Agreement. 1992. Trans-Pacific Partnership Agreement. 2016. United States-Australia Free Trade Agreement. 2004. United States-Singapore Free Trade Agreement. 2003.

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7 Impact of THE CPTPP on Japanese Manufacturing Affiliates in ASEAN Kazunobu Hayakawa and Kohei Shiino*

1. Introduction The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was signed on 8 March 2018 by eleven countries— Japan, Brunei, Malaysia, Singapore, Vietnam, Australia, Canada, Chile, Mexico, New Zealand and Peru. The agreement is bound to affect business activities of Japanese manufacturing affiliates operating not only in CPTPP member countries but also in non-member economies. While the former effect will certainly be positive, the latter could be negative. According to ASEAN Stats, Japan ranks very high in terms of value of foreign direct investment (FDI) flow into ASEAN countries; therefore, any change in the trend will have a significant impact on the grouping. This chapter investigates how Japanese manufacturing affiliates in ASEAN are expected to change their business activities following

162

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the implementation of the CPTPP. The liberalization levels suggested in the CPTPP are very high; all member countries are expected to eliminate tariffs for almost all products. With the exception of Japan, tariff elimination rates are expected to reach 99 or 100 per cent in all countries, both in terms of the number of tariff lines as well as trade value. In the case of Japan, this figure stands at 95 per cent—the highest among all its recently-concluded regional trade agreements (RTAs). In order to further investigate the impact of the trade agreement, it is important to discuss the general effects of tariff reduction on business activities in CPTPP member countries. This chapter begins with a discussion of the effects on their exports to other CPTPP members, followed by the impact on Japanese manufacturing affiliates in ASEAN. The rest of the chapter is organized as follows. The next section provides an overview of the distribution of Japanese manufacturing affiliates across ASEAN economies. The third section focuses on the general effects of tariff reduction on exports from ASEAN CPTPP member countries. The subsequent section examines the effects of tariff reduction on Japanese manufacturing affiliates in ASEAN, while the fifth section concludes the chapter.

2. Distribution of Japanese Manufacturing Affiliates in ASEAN Member Countries Information on the distribution of Japanese manufacturing affiliates across ASEAN member countries can be obtained from the “Basic Survey of Overseas Business Activities” collected by the Ministry of Economy, Trade and Industry (METI), Japan. The survey covers: first, foreign affiliates in which a Japanese corporation has invested capital of 10 per cent or more; second, foreign affiliates in which a subsidiary, funded more than 50 per cent by a Japanese corporation, has invested capital of more than 50 per cent; and third, foreign affiliates in which a Japanese corporation and a subsidiary, funded more than 50 per cent by a Japanese corporation, have invested capital of more than 50 per cent. The survey for the 2014 fiscal year is used in this chapter. The number and share of affiliates are reported in Table 7.1. The primary location is Asia, which accounts for 77 per cent of all Japanese affiliates in the world. China, in particular, has attracted the largest number of Japanese manufacturing affiliates (38 per cent). However,

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Table 7.1 Distribution of Japanese Manufacturing Affiliates in FY2014 Number

Share (%)

1,125

11

331

3

Asia

8,167

77

 China

4,025

38

 Taiwan

392

4

  South Korea

325

3

3,145

30

  Philippines

267

3

  Malaysia

396

4

  Thailand

1,183

11

  Indonesia

607

6

  Singapore

201

2

  Vietnam

455

4

 India

235

2

Europe

804

8

Oceania

99

0.9

Africa

47

0.4

Total

10,573

North America Middle/Latin America

 ASEAN

Source: “Basic Survey of Overseas Business Activities” (Japan: Ministry of Economy, Trade and Industry).

due to the recent wage hikes in the country, the number of investors has been growing in ASEAN economies.1 In fact, ASEAN countries now attract about 30 per cent of the Japanese manufacturing affiliates. About half of these affiliates in ASEAN are located in Thailand and Indonesia. Table 7.2 takes a closer look at the industry composition of Japanese manufacturing affiliates in Asia. Roughly, industries related to transport equipment, and information and communication electronics equipment

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145 315 123 311 443

General-purpose machinery

Production machinery

Business oriented machinery

Electrical machinery

Information and communication electronics equipment

392

33

53

67

20

14

28

27

15

10

5

21

1

74

3

8

13

325

24

40

33

19

13

35

22

19

7

7

15

3

68

3

5

12

TWN KOR

3,145

441

692

332

150

80

188

84

212

113

115

60

14

324

62

140

138

ASEAN

267

38

57

55

16

13

14

7

18

10

6

2

20

2

3

6

396

56

46

93

11

13

13

12

22

26

10

13

2

44

14

6

15

PHL MYS

1,183

146

317

75

70

23

97

29

78

43

47

17

3

110

18

55

55

THA

Source: “Basic Survey of Overseas Business Activities” (Japan: Ministry of Economy, Trade and Industry).

Note: The cells of the top two industries (excluding miscellaneous industries) in terms of number are shaded.

4,025

239

Metal products

Total

139

Non-ferrous metals

599

108

Iron and steel

607

109

Ceramic, stone and clay products

Miscellaneous manufacturing industries

12

Petroleum and coal

Transportation equipment

67 338

Chemicals

295

Textiles

Lumber, wood, paper and pulp

175

Food

CHN

Table 7.2 Japanese Manufacturing Affiliates in Asia in FY2014, by Industry

607

94

172

37

15

11

29

17

37

14

29

10

4

68

11

36

23

IDN

201

23

7

31

10

6

16

10

17

6

5

5

4

45

2

14

455

83

84

37

28

14

19

9

38

13

17

13

1

35

16

25

23

SGP VNM

235

16

105

6

15

6

14

12

5

5

11

4

1

27

3

5

IND

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are the main manufacturing industries in the region. In Thailand, Indonesia and Singapore, the chemical industry also has a relatively high share, while a significant number of Japanese affiliates in Vietnam deal with metal products. One noticeable trend is that, there are, in general, very few Japanese affiliates in the food and textiles industries.

3. Impact of Tariff Reduction on Exports by ASEAN CPTPP Members This section discusses the general effects of tariff reduction on exports by two of ASEAN’s CPTPP member countries, Malaysia and Vietnam. 3.1  Exports to Japan under the CPTPP Will Malaysia and Vietnam increase their exports to Japan under the CPTPP? In general, exporters are more likely to utilize RTA schemes when the preference margin is larger. Such preference has been observed in many countries (see, for example, Bureau, Chakir, and Gallezot 2007; Cadot et al. 2006; Francois, Hoekman, and Manchin 2006; Manchin 2006; Hakobyan 2015; Hayakawa 2014; Hayakawa, Kim, and Lee 2014; Hayakawa and Laksanapanyakul 2017).2 Since the most favoured nation (MFN) rates are already very low or zero in a large number of products (in fact, zero in approximately 40 per cent of the tariff lines), there is little incentive for the countries to boost exports to Japan under the CPTPP. Furthermore, based on past trends, it is expected that the availability of other RTAs will further reduce the incentive to utilize the CPTPP scheme while exporting to Japan. For example, Malaysia and Vietnam already have economic partnership agreements (EPAs) with Japan. These include the ASEAN-Japan Comprehensive Economic Partnership (AJCEP), the Japan-Vietnam EPA (JVEPA) and the Japan-Malaysia EPA (JMEPA), which entered into force in 2008, 2009 and 2006, respectively.3 Unless the CPTPP offers better terms and conditions, such as lower tariff rates or less restrictive rules of origin (ROOs), or if firms prefer a self-certification system (discussed below), both countries will continue to utilize the existing RTAs when exporting to Japan. Table 7.3 reports Japanese imports under each RTA scheme in 2015.4 The table includes only those products that are eligible under both the bilateral EPAs as well as the AJCEP with the same preferential rates

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Table 7.3 Japan’s Imports under each EPA in FY2015 (Million Japanese Yen) Vietnam Number of Products Imports under AJCEP Imports under Bilateral EPA

1,034 390,151 91,880 (JVEPA)

Malaysia 610 44,186 153,406 (JMEPA)

Notes: Products are restricted only to those in which the AJCEP rate is the same as the bilateral EPA rate, and both AJCEP rate and bilateral EPA rate are lower than the MFN rate. Sources: Ministry of Finance, and Tariff Analysis Online.

between the two schemes, i.e., zero. It can be observed that imports under AJCEP are much larger in the case of Vietnam and under JMEPA for Malaysia. One critical source of this difference between the two countries is the order in which the EPAs entered into force. The AJCEP came into force before the bilateral EPA in the case of Vietnam but not Malaysia. Based on this observation, exporters are expected to keep utilizing the familiar EPA instead of the CPTPP. 3.2  Exports to Other ASEAN CPTPP Members Like in the case of Japan, exports from ASEAN to other ASEAN CPTPP members will not increase under the new agreement (unless the CPTPP offers better terms). For intra-ASEAN trade, six plurilateral RTA schemes are already in place: the ASEAN FTA; the ASEAN-Australia-New Zealand FTA; the ASEAN-China FTA; the AJCEP; the ASEAN-Korea FTA; and the ASEAN-India FTA. Consequently, firms will most likely utilize the more familiar preference schemes. One exception is the case where inputs from other ASEAN countries play a significant role in cumulation when non-ASEAN CPTPP members (i.e., countries with which Malaysia and Vietnam do not have any RTAs) are final export destinations (except for Australia and New Zealand). This scenario is discussed later in the chapter. 3.3  Exports to Non-ASEAN CPTPP Members In contrast to the above cases, an increase in the exports of ASEAN CPTPP member countries to other non-ASEAN CPTPP member countries such as Canada, Mexico and Peru is expected. This is because the CPTPP is the first RTA with those countries for Malaysia and Vietnam.

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Additionally, the withdrawal of the United States will also result in loss of potential economic gains for Malaysia and Vietnam. The United States provides Generalized Scheme of Preferences (GSP) to some developing countries, but Malaysia and Vietnam are not among its beneficiaries. Therefore, for both economies, the CPTPP could have become the first preference scheme for exports to the United States. To further assess the impact of America’s departure, it is useful to focus on the industries that would have increased their exports to the United States under the original TPP. To do so, it would be helpful to consider the potential competitors’ market access in each industry. Specifically, this chapter examines those industries in which the least developing country (LDC) beneficiaries enjoy preferential access. Had the United States remained in the CPTPP, tariffs in the country would have been removed for all products, and exports would have increased for products in which the GSP/LDC rates are not available and for which the MFN rates are high. Thus, when exporting such products, CPTPP member countries would have enjoyed better market access, even though the member countries with RTAs involving the United States could also have had similar levels of market access to the country. Table 7.4 reports the number and share of products that are not eligible for GSP/LDC, along with the simple average of MFN rates for such products in each industry for the year 2014. It can be seen that food products, textiles and footwear meet the above conditions. In these industries, the GSP/LDC rates are not applicable, and the MFN rates are relatively high—suggesting that exports from these industries to the United States would have dramatically increased if the US had not withdrawn from the TPP. Vietnam, in particular, would have been a major beneficiary—its exports from the textiles and footwear industries currently account for 40 per cent of total exports to the United States. This is in contrast with other Vietnamese industries such as plastics and rubber, and precision metals, which have relatively low shares of exports to the United States. For other industries, the absolute effect of the CPTPP—with or without the United States—will be trivial. For example, on taking a closer look at exports from Vietnam to the United States, the major food products are shrimps and prawns (HS1605211020,  HS1605211030), but their export value in 2015 was only US$250 million.5 Furthermore, the MFN rates for these goods are already zero. Likewise, Malaysia’s

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590 318 50 499 185 1,128 164 113 153 275 1,534 169 176 50 612 890 171 348 192 7,617

0.89 0.57 0.71 0.65 0.91 0.66 0.44 0.51 0.64 1 0.96 0.87 0.59 0.48 0.62 0.66 0.68 0.68 0.60 0.71

Share 4.55 5.18 3.02 14.05 0.17 0.98 1.02 4.88 0.61 0 8.89 11.94 5.05 0.12 0.41 0.44 1.87 0.59 1.47 3.81

MFN (%) 340 170 18 296 152 934 136 83 143 275 1,527 169 117 48 564 818 131 286 174 6,381

Number 0.51 0.30 0.26 0.38 0.75 0.54 0.36 0.38 0.60 1 0.96 0.87 0.39 0.46 0.57 0.61 0.52 0.56 0.54 0.60

Share 0.85 3.47 0 16.00 0 0.01 0.29 5.55 0.37 0 8.90 11.94 1.13 0 0.03 0 0 0.21 0.98 3.20

MFN (%)

Non-LDC Products

Note: Only products with ad-valorem rates are included in the computation of average MFN rates. Source: Tariff Analysis Online.

Live animals Vegetable products Animal/vegetable fats and oils Food products Mineral products Chemical products Plastics and rubber Leather products Wood products Paper products Textiles Footwear Plastic or glass products Precision metals Base metal Machinery Transport equipment Precision machinery Others Total

Number

Non-GSP Products

Table 7.4 GSP/LDC Ineligible Products and their Average MFN Rates

663 562 70 772 204 1,715 375 220 240 275 1,598 195 298 105 988 1,350 252 512 322 10,716

Number

All

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major food export to the United States is cocoa butter (HS180400), valued at only US$100 million in 2015. Again, the associated MFN rates are zero. For other food products, the volume of exports from Vietnam and Malaysia to the United States remains insignificant. 3.4  Other Key Elements There are some other elements, too, that affect exports under the CPTPP. First, as mentioned earlier, cumulation may play a key role in increasing intra-CPTPP member trade.6 In particular, relatively strict ROOs are set for the textiles and footwear industries in the agreement. In the case of garments, for example, the yarn-forward ROO requires the materials to be obtained from CPTPP member countries (except for materials in the short supply list). Likewise, the spinning, weaving/ knitting and cutting/sewing processes must also be conducted in CPTPP member countries. Given this scenario, one possible production pattern is that Vietnam imports yarn from Japan/Malaysia, produces garments, and then exports them to other CPTPP members. In this case, exports from Malaysia to Vietnam (and other CPTPP countries) are expected to increase. Indeed, Japanese affiliates in ASEAN CPTPP member countries have high expectations from the role of cumulation. Table 7.5 reports the top three expectations from TPP negotiations as reported in the “2015 JETRO Survey on Business Conditions of Japanese Companies in Asia and Oceania” conducted by the Japan External Trade Organization (JETRO). For the survey, questionnaires were sent to 5,545 Japanese affiliates in all ASEAN countries except Brunei. The response rate was 49.9 per cent. As shown in the table, Japanese affiliates in three CPTPP countries (Malaysia, Vietnam and Singapore) list ROO, including cumulation rules, as one of the most expected outcomes of the TPP. The second by element is the Information Technology Agreement (ITA) and its expansion. Originally, the ITA was concluded by twentynine countries in December 1996 in order to completely eliminate tariffs for all WTO members on information technology (IT) products covered by the agreement (157 products). Today, its membership has grown to eighty-two countries. Furthermore, the expanded version of the ITA was concluded by fifty-three members. This version aims to eliminate tariffs in additional 201 products.

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Table 7.5 Expectations from TPP Negotiations Malaysia

Singapore

Vietnam

Facilitation of trade and customs authorities

124

107

313

ROOs (Including Cumulation)

 58

 49

131

Market Access for Goods

 41

 61

164

All responses

300

228

557

Valid responses

206

189

476

Source: 2015 JETRO Survey on Business Conditions of Japanese Companies in Asia and Oceania.

As the United States is a major importer of IT products, it is worth examining whether its withdrawal from the TPP will reduce the benefits gained by the remaining members. In the case of the US, tariffs on 239 tariff-line products are scheduled to be eliminated by the ITA expansion. Of these, tariff elimination was completed for 147 products by 1 July 2016 (Group I). Focusing on products with ad-valorem MFN rates, it can be seen that the average and maximum MFN rates in this group are 2.9 per cent and 7.2 per cent, respectively (see Table 7.6). Furthermore, the tariff rates in the remaining ninety-two products were gradually reduced to zero by 1 July 2019 (Group II). In this group, the average and maximum rates are 3.0 per cent and 8.5 per cent, respectively. This suggests that there still remains sufficient preference margin in these IT products in the United States. The main export products from most ASEAN countries to the United States are IT goods. It is important to note that the tariff rates for such products will be eliminated under the ITA expansion earlier than under CPTPP. Furthermore, unlike in the case of RTA schemes (including the CPTPP), under the ITA, exporters can enjoy tariff reduction without proving the origin of their products, i.e., without incurring any additional costs. Therefore, exporters of IT products from Malaysia to the United States will benefit more from the ITA than from CPTPP. Also, since CPTPP non-members can also enjoy such tariff elimination on IT products (if they are WTO members), exports from CPTPP members will not increase much. In other words, the withdrawal of the

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Table 7.6 Statistics for Base Rates (Percentage) Group

N

Average

Minimum

Maximum

I

140

2.9

0.8

7.2

II

 91

3.0

1

8.5

Note: Only products with ad-valorem rates are included in this computation. Source: WTO (http://docsonline.wto.org/imrd/directdoc.asp?DDFDocuments/q/WT/LET/18201.pdf).

United States from the original TPP is not likely to adversely affect Malaysia’s exports of IT goods to the country. The third key element is the self-certification system. Earlier in the chapter, it was argued that the availability of existing RTAs discourages firms from utilizing the CPTPP scheme. However, one unique feature of the CPTPP for ASEAN countries is the adoption of a self-certification system. In ASEAN, a third-party certification system has been in place for a long time. Although these countries may have adapted to this system, firms that prefer self-certification may switch to the CPTPP when trading with other ASEAN CPTPP member countries and Japan. Japanese affiliates, particularly the large ones, are expected to prefer self-certification. In the case of Japan, the Australia-Japan EPA adopts such a system. Likewise, the use of a self-certification system by approved exporters is allowed in the Japan-Switzerland EPA, the Japan-Mexico EPA and the Japan-Peru EPA. The official website of Japan’s Ministry of Economy, Trade and Industry mentions that large firms in Japan have been using this system for some time now.7 For such affiliates, the FTA utilization costs are much lower than before, allowing them to increase their exports, regardless of the type of industry.8

4.  Impact on Japanese Manufacturing Affiliates 4.1 Effects of the CPTPP on Japanese Affiliates in ASEAN CPTPP Member Countries The previous section highlighted some of the positive effects of the CPTPP in specific industries in the form of dramatic increase in exports. However, the withdrawal of the United States nullified some of these

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effects for other countries. Prior to the US withdrawal, some firms in Japan had already started to change their business operations. For instance, Japanese trading firm Itochu had concluded an agreement for a strategic business alliance with Vietnam’s state-owned textile firm Vietnam National Textile and Garment Group (VINATEX) and acquired its shares.9 It was also reported that Japanese textile maker Kuraray was planning to expand its manufacturing capacity in Vietnam.10 With the departure of the United States, it is not certain whether more Japanese companies will begin increasing their exports in the aforementioned industries.11 However, despite such uncertainties, Japanese affiliates in other industries in ASEAN CPTPP member countries are not expected to change their business activities much because the extent of market access is not significantly different between the CPTPP and non-CPTPP economies. As explained before, in the case of GSP-eligible products, both CPTPP members and GSP beneficiaries enjoy similar advantages in exporting to the United States. Market access in IT products is not much different either, given the ITA expansion. Thus, the effects of the CPTPP—with or without the United States—on Japanese affiliates in these industries will be minimal. 4.2.  Impact of Tariff Reduction on Non-CPTPP Member Countries As the United States is no longer part of the CPTPP, the effects of the agreement via tariff reduction on ASEAN countries that are not its members will be noticeably less. FDI from Japan to these specific countries may not decrease in certain industries related to textiles, footwear, and materials/intermediate products. Under the CPTPP, investment diversion from ASEAN non-CPTPP member countries to ASEAN CPTPP member countries could occur, but to a lesser extent than under the original TPP agreement. This includes industries in which Japanese multinationals would prefer a self-certification system. Furthermore, in the case of high value-added product industries, investment diversion to Japan may still take place. At the time of writing, there are no specific examples to illustrate the changes undertaken by Japanese affiliates in ASEAN non-CPTPP member countries. As a result, the conclusions are drawn from the results of the survey on business expansion plans for Japanese overseas affiliates in 2015—the “FY2015 Survey on the International Operations of Japanese Firms—JETRO Overseas Business Survey” conducted by JETRO.12 The

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Table 7.7 Percentage Change in the Number of Japanese Overseas Affiliates Planning Business Expansion FY2015 FY2014 Asia

FY2015 FY2014 Non-Asia

 China

–2.8

–0.4

  United States

+2.4

+5.9

  Hong Kong

–1.9

+0.7

  Western Europe

+2.5

+2.4

 Korea

+0.6

–1.3

 Mexico

+0.8

+2.5

 Taiwan

+0.6

+1.0

  Central-Eastern Europe

+0.9

+2.8

 Cambodia

+0.7

–0.1

 Brazil

–1.8

–1.1

 Indonesia

–2.6

–0.6

 Australia

+1.8

–0.5

 Malaysia

+0.7

–0.6

  Russia & CIS

–2.1

–0.3

 Myanmar

+1.4

–0.8

 Philippines

+0.5

–0.1

 Singapore

–3.2

+1.0

 Thailand

–2.3

–3.0

 Vietnam

+3.7

–0.9

 India

+4.0

–3.1

Source: FY2015 Survey on the International Operations of Japanese Firms—JETRO Overseas Business Survey.

results are reported in Table 7.7, which shows the percentage change in the number of affiliates that plan to expand their businesses. While Vietnam and Malaysia record a positive change, negative changes are significant for Indonesia and Thailand. Although these changes cannot necessarily be attributed only to CPTPP membership, it can be inferred that the number of Japanese affiliates that plan to expand their businesses are growing slower in CPTPP non-members.

5. Conclusion This chapter discussed how tariff reductions through the CPTPP could affect Japanese manufacturing affiliates in ASEAN countries. The main findings can be summarized as follows. First, in the textiles and footwear industries, the withdrawal of the United States from the CPTPP will create uncertainties for Japanese affiliates in Malaysia and Vietnam

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about increasing their investments and expanding their production capacity. In these industries, had the United States remained in the TPP, member countries would have enjoyed better market access to the United States than GSP beneficiaries. Additionally, it cannot be said with certainty whether the Japanese affiliates in these industries will shrink their businesses in the ASEAN nations that are not part of the CPTPP. Second, under the CPTPP, the business activities of Japanese affiliates in certain industries will not be affected much because the extent of market access is not significantly different between CPTPP members and non-members. Finally, the Japanese government’s efforts to support the inter­ nationalization of local firms should also be noted. In April 2016, the administration established a “Consortium for New Export Nation” (CNEN), with JETRO serving as its secretariat. This consortium aims to support mid-ranking companies and small and medium-sized enterprises (SMEs) to develop their markets and expand their businesses through exports or investments in CPTPP member countries. It is supported by a large number of government organizations, commerce and industry associations, financial institutions, and local government bodies. By the end of June 2016, approximately 800 firms had approached the CNEN. Based on each firm’s request, the consortium provides various kinds of support services, including: offering advice on factory location selection or local management; introducing local suppliers; assisting with applications for investment licensing or obtaining import qualification; inter alia. The CNEN will certainly have a positive impact on investments by Japanese affiliates in CPTPP member countries. Notes * We would like to thank Ikumo Isono, Satoru Kumagai, Cassey Lee, Francis E. Hutchinson, Sanchita Basu Das, Siwage Dharma Negara and seminar participants at the ISEAS – Yusof Ishak Institute for their invaluable comments. The views expressed in this chapter are those of the authors. JETRO and IDE-JETRO do not guarantee the accuracy of the data included and accept no responsibility for any consequences arising from its use. All remaining errors are ours.   1. Also, using a logit or multinomial logit model of Japanese firms’ FDI choices, Hayakawa and Matsuura (2015) show that the tariff reduction in Asian countries has lowered the productivity cut-off for vertical FDI (VFDI). Specifically, since Asian countries have experienced a relatively

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rapid decrease in tariff rates, the increase in VFDI through tariff reduction has led to the recent surge of Japanese FDI in Asia.   2. Bureau, Chakir, and Gallezot (2007) examine the utilization of the Generalized System of Preferences (GSP) granted by the European Union and the United States to developing countries in the agriculture goods sector, while Cadot et al. (2006) focus on the trade of the European Union and the United States with their preferential trading partners. Francois, Hoekman, and Manchin (2006) and Manchin (2006) examine the preferential trade relations of the European Union and non-least-developed African, Caribbean, and Pacific (ACP) countries under the Cotonou Agreement, while Hakobyan (2015) examines the US GSP utilization by 143 GSP-eligible countries. Keck and Lendle (2012) analyse utilization of both unilateral and bilateral preferences by not only the European Union and the United States but also Australia and Canada. Hayakawa (2014) examines Japan’s imports from Thailand, where not only a bilateral EPA (i.e., Japan-Thailand EPA) but also a plurilateral EPA (i.e., AJCEP) is available. RTA utilization in exports from ASEAN countries to Korea is investigated by Hayakawa, Kim, and Lee (2014). Hayakawa and Laksanapanyakul (2017) examine the impact of sharing ROOs with other ASEAN+1 FTAs on ASEAN-Korea FTA/ASEAN-China FTA utilization in Thai exports in 2011. These studies have consistently found that FTA utilization is higher in the products with the larger tariff margin and the less restrictive ROOs.   3. One important reason for the coexistence of both bilateral and multilateral EPAs with some ASEAN countries is that Japanese multinationals have developed international production/distribution networks in ASEAN since the 1990s (see, for example, Baldwin 2006). Japanese affiliates in ASEAN are actively engaged in trading intermediate goods across the region. Therefore, cumulation within the Association has enabled Japanese affiliates to easily comply with ROOs. As a result, the reduction of tariff rates based on AJCEP is more significant for products in which the international production networks are more developed. On the other hand, bilateral EPAs are designed to reduce tariff rates for products in which two countries have special interest. These also include deeper economic rules, such as those on intellectual property or labour standards.   4. See Hayakawa, Urata, and Yoshimi (2017).   5. The figures in this section are drawn from the World Trade Atlas.   6. For example, Hayakawa (2014) empirically investigates the effect of diagonal cumulation on FTA utilization by exploring Thai exports to Japan under two kinds of FTA schemes. While one scheme adopts bilateral cumulation, the other scheme uses diagonal cumulation. His estimates show around 4 per cent trade creation effect of diagonal cumulation.

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  7. Examples include Ishizaki Press Industrial Co. Ltd., Itochu Corporation, Kansai Wire Netting Co. Ltd., Kyocera Corporation, Shimano Inc., DKSH Japan, Toyota Motor Corporation, Nakanishi Corporation, Fuji Heavy Industries Ltd., Honda Motor Co. Ltd. and Mazda Motor Corporation.   8. For example, by estimating gravity equations for trade among 155 countries between 1981 and 2001, Estevadeordal and Suominen (2008) find that trade creation effects of RTAs are significantly larger in countries with self-certification system than in countries with other systems.   9. http://www.itochu.co.jp/en/business/textile/project/08/. 10. http://www.nikkei.com/article/DGXLZO96134280V10C16A1TI1000/. 11. It is also noteworthy that such a change of business in ASEAN countries by multinational enterprises (MNEs) is not limited to Japanese MNEs, i.e., MNEs owned by CPTPP member countries. In particular, firms in Asian CPTPP non-member countries have also started to reorganize their production networks. Examples include firms in South Korea (e.g., Hyosung), Hong Kong (e.g., Huafu) and China (e.g., Texhong Textile Group). These textiles firms have recently invested in Vietnam. 12. For this survey, questionnaires were sent to 9,893 firms in Japan. Valid responses were obtained from 3,005 firms (30.4 per cent).

References Baldwin, Richard E. 2006. “Managing the Noodle Bowl: The Fragility of East Asian Regionalism”. CEPR Discussion Papers No. 5561. Bureau, Jean-Christophe, Raja Chakir, and Jacques Gallezot. 2007. “The Utilisation of Trade Preferences for Developing Countries in the Agri-food Sector”. Journal of Agricultural Economics 58, no. 2: 175–98. Cadot, Olivier, Celine Carrere, Jaime de Melo, and Alberto Portugal-Perez. 2005. “Market Access and Welfare under Free Trade Agreements: Textiles under NAFTA”. World Bank Economic Review 19, no. 3: 379–405. Cadot, Olivier, Celine Carrere, Jaime de Melo, and Bolormaa Tumurchudur. 2006. “Product-specific Rules of Origin in EU and US Preferential Trading Arrangements: An Assessment”. World Trade Review 5, no. 2: 199–224. Estevadeordal, Antoni and Kati Suominen. 2008. “What are the Trade Effects of Rules of Origin?” In Gatekeepers of Global Commerce: Rules of Origin and International Economic Integration, edited by Antoni and Kati. Washington D.C.: Inter-American Development Bank, pp. 161–219. Francois, Joseph, Bernard Hoekman, and Miriam Manchin. 2006. “Preference Erosion and Multilateral Trade Liberalization”. World Bank Economic Review 20, no. 2: 197–216.

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Hakobyan, Shushanik 2015. “Accounting for Underutilization of Trade Prefer­ence Programs: The U.S. Generalized System of Preferences”. Canadian Journal of Economics 48, no. 2: 408–36. Hayakawa, Kazunobu. 2014. “Impact of Diagonal Cumulation Rule on FTA Utilization: Evidence from Bilateral and Multilateral FTAs between Japan and Thailand”. Journal of the Japanese and International Economies 32: 1–16. Hayakawa, Kazunobu, Hansung Kim, and Hyun-Hoon Lee. 2014. “Determinants on Utilization of the Korea-ASEAN Free Trade Agreement: Margin Effect, Scale Effect, and ROO Effect”. World Trade Review 13, no. 3: 499–515. Hayakawa, Kazunobu and Nuttawut Laksanapanyakul. 2017. “Impacts of Common Rules of Origin on FTA Utilization”. International Economics and Economic Policy 14, no. 1: 75–90. Hayakawa, Kazunobu, Shujiro Urata, and Taiyo Yoshimi. 2017. “Choosing between Multiple Preferential Tariff Schemes: Evidence from Japan’s Imports”. Discussion Paper No. 17002. Research Institute of Economy, Trade and Industry (RIETI). Hayakawa, Kazunobu and Toshiyuki Matsuura. 2015. “Trade Liberalization in Asia and FDI Strategies in Heterogeneous Firms: Evidence from Japanese Firm-level Data”. Oxford Economic Papers 67, no. 2: 494–513. Keck, Alexander and Andreas Lendle. 2012. “New Evidence on Preference Utilization”. World Trade Organization, Staff Working Paper ERSD-2012-12. Manchin, Miriam. 2006. “Preference Utilisation and Tariff Reduction in EU Imports from ACP Countries”. The World Economy 29, no. 9: 1243–66.

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8 Reassessing Malaysia’s Export Opportunities in the TPP AND CPTPP Tham Siew Yean and Andrew Kam Jia Yi

1. Introduction Malaysia’s dependence on trade can be attributed to its geographical location and the relatively small size of its domestic economy compared to most of its regional neighbours. The use of foreign direct investment (FDI) as a tool for industrial development has further strengthened this dependence, as a majority of such investments in Malaysia and the region have been used to forge regional production networks for enhancing their cost and efficiency of production. This gave rise to a flow of “back and forth” trade, especially in intermediate goods, leading to a progressive increase in the share of merchandise trade in GDP to a peak of 193 per cent in 2000, before falling steadily to 131 per cent in 2014 (ADB 2015). Accessing markets for exports is therefore a critical component of Malaysia’s trade policy. For example, although the country’s original motivation for joining the Association of Southeast Asian Nations

179

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(ASEAN) may have been geopolitical in nature, the economic rationales grew stronger over time, particularly in the wake of the 1973–75 recession in the United Kingdom and the United States. ASEAN’s subsequent Free Trade Area, or the ASEAN Free Trade Area (AFTA), promulgated in 1992 was Malaysia’s first venture into regional Free Trade Agreements (FTAs). The country is also a member of the ASEAN Economic Community (AEC) that evolved from the AFTA. The AEC was subsequently launched in 2015. At the same time, Malaysia became a founding member of the World Trade Organization (WTO) in 1995. However, the protracted negotiations under the Doha Round of the WTO for further multilateral liberalization led to a flurry of bilateral and regional initiatives in Southeast Asia, including Malaysia, as alternative trade liberalization commitments to the WTO. To date, Malaysia has signed and ratified seven bilateral agreements, and is a party to the ASEAN+ agreements with China, Japan, Korea, India, and Australia and New Zealand. It is also in the process of negotiating another four FTAs. Malaysia joined the Trans-Pacific Partnership (TPP) in the third round of negotiations in October 2010, and signed the agreement in February 2016 with the other eleven founding members. Following the withdrawal of the United States, it signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in March 2018. However, at the time of writing, Malaysia has not ratified the CPTPP. The objective of this chapter is to reassess Malaysia’s export opportunities in the CPTPP, as increasing merchandise exports is important at this juncture to the nation’s development because service exports are still weak. At the same time, the continuing fiscal deficit since the Asian Financial Crisis (AFC) and narrowing trade surplus in recent years have raised fears of the possible emergence of a twin deficit. The chapter is divided as follows. A literature review synthesizes the existing studies in the next section, followed by a brief overview of Malaysia’s trade with CPTPP countries. The significance of the US withdrawal from the TPP is highlighted through trade analysis in the fourth section, while the impact of tariff cuts on selected sectors is examined in the fifth section. The shift from TPP to CPTPP and Malaysia’s position in the ratification process is summarized in

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the subsequent section. The last section summarizes the key findings and offers some policy suggestions for moving forward.

2. Literature Review Since the CPTPP has thirty chapters, there is an extensive literature that examines the agreement from various perspectives, such as governance, comparisons of commitments in the CPTPP with those in other FTAs, and specific issues like access to medicine, dispute settlement, labour etc. In line with the objective of this study, the literature review in this section will only cover market access issues. The Malaysian government commissioned two studies on the TPP; one from the Institute for Strategic and International Studies (ISIS 2015), and another from Pricewaterhouse Coopers (PwC 2015). The former used combined discussions with key stakeholders, perception, factual and impact analysis based on the final text of the agreement to examine the impact of the TPP on Malaysia’s security, and its social and economic environments. The economic analysis indicates a positive effect overall due to improved market access to four “new” FTA markets (or markets with no prior FTAs with Malaysia, namely the United States, Canada, Mexico and Peru). In the sectoral analysis, exporters of goods such as electrical and electronic, chemical, palm oil, rubber, wood and textile products, as well as automotive parts and components are expected to become more competitive than their counterparts in the non-TPP countries—which is not surprising since tariffs and non-tariff measures will be eliminated progressively in TPP partner countries. The second study combined a dynamic multi-regional Computable General Equilibrium (CGE) model with in-depth sectoral analysis of five pre-agreed sectors with the Ministry of International Trade and Industry (MITI), namely construction, electrical and electronics (E&E), oil and gas (O&G), palm oil and textiles. The CGE model was built on the latest Global Trade Analysis Project (GTAP) 9 Database released in May 2015, with 2004, 2007 and 2011 as the reference years and 140 regions for all fifty-seven GTAP commodities. The CGE analysis shows that Malaysia will stand to gain cumulatively US$211 billion from US$107 billion over 2018–27 due to elimination of all tariffs and a 25–50 per cent reduction of non-tariff measures (NTMs). Approximately 90 per cent of the gains are driven by

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the reduction in NTMs. The sectoral analysis, based on secondary trade and industry data analysis and stakeholder consultation, indicates overall positive gains for textiles, E&E, automotive, plastics and wood sectors. Several other CGE models have also measured the impact of the TPP on member and non-member countries. Of these, some earlier studies—especially those before 2016—are not based on the actual text but rather a hypothetical TPP agreement (see, for example, Petri, Plummer, and Zhai 2012). Petri and Plummer (2016) subsequently updated their 2012 study using the TPP tariff schedule and non-tariff barriers (NTBs) adjusted for the difference between the Korea-US FTA template that was used in the 2012 study and the published TPP text. They found large gains for Japan, Malaysia and Vietnam. The World Bank (2016)’s CGE model, using the same methodology as Petri and Plummer (2016), also indicates that, by 2030, the TPP could potentially raise members’ GDP by 0.4 per cent to 10 per cent. Malaysia and Vietnam are the largest gainers (10 per cent and 8 per cent, respectively, by 2030) due to the removal of import tariffs and NTMs at home and in their large export markets. The textile and garment sector is singled out as a sector that will gain in terms of increased output and exports due to the prevalence of relatively high tariffs and NTMs and the comparative advantage of TPP member countries like Vietnam in this sector. The Penang Institute conducted two studies; one examining the impact of the TPP on Penang, and another assessing the competitiveness of Malaysian firms measured against their peers using a sample of firms from TPP countries as well as non-TPP countries. Using several financial indicators as measures of competitiveness, the latter study (Lim 2016) found that Malaysia has only a handful of firms that are internationally competitive and are, in general, disadvantaged by size compared to their international counterparts. This has implications on the export capabilities of Malaysian firms and their ability to take advantage of the benefits from tariff and non-tariff liberalization in the TPP agreement, after ratification. Based on the literature review, sectoral studies have already been conducted mainly using CGE analysis, secondary data and in consultation with stakeholders. This chapter uses constructed trade indicators for comparisons with Malaysia’s key competitors in the

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CPTPP to reassess the country’s export opportunities in its two crucial manufacturing exports—information and communication (ICT), and textile and apparel (given that the latter is identified as a major beneficiary sector from the CPTPP). A comparative analysis based on a common set of indicators is important as the CPTPP is not a bilateral agreement and enhanced market access is available for all its eleven members.

3. Overview of Malaysia’s Trade with TPP and CPTPP Countries Table 8.1 shows that imports from and exports to TPP countries amount to 57 per cent of Malaysia’s total trade in 2000, but this has declined gradually to around 40 per cent in 2017, mainly due to the fall in the share of the United States and the converse rise of China’s share (Tham and Kam 2016). Note that there is a trade surplus throughout this period. In the absence of the US participation in the TPP, the share declined by more than 10 per cent, to 31 per cent, with an even smaller trade surplus of US$18.3 billion. The relative importance of each TPP/CPTPP member country in Malaysia’s exports is shown in Table 8.2. In terms of total trade, Singapore, Japan and the United States contribute up to almost 80 per cent and 83 per cent, respectively, of Malaysia’s total exports and total manufacturing exports to the TPP countries. In the case of ICT exports, the share of these three countries goes up to 87 per cent, while the share for Malaysia’s textiles exports for these three countries is 81 per cent. Excluding Singapore, the United States is the largest destination for Malaysia’s ICT exports and also the single largest destination (57 per cent) for its textiles exports to the TPP members. The trade analysis in the following section of this chapter focuses on the US market alone since it is the only country within the top three TPP trade partner countries without an FTA with Malaysia. There are, however, four other TPP countries without an FTA with the United States, namely Japan, New Zealand, Brunei and Vietnam. This study, therefore, also includes Vietnam in the trade analysis on exports to the United States, as both Malaysia and Vietnam are developing TPP member countries with significant manufacturing development, but without an FTA with the United States.

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Table 8.1 Malaysia’s Trade with TPP and CPTPP Countries,* 2000–17 Exports to TPP countries (US$ billion)

Share of Share of TPP Exports Total TPP Imports Trade Imports to Total Balance (X-M) to Total Exports Imports (US$ billion) (US$ billion)

TPP (with the US) 2000

56.0

0.57

45.6

0.56

10.4

2001

48.8

0.55

38.1

0.52

10.7

2002

50.5

0.54

39.4

0.50

11.2

2003

53.4

0.51

39.3

0.48

14.1

2004

63.1

0.50

47.3

0.45

15.8

2005

71.6

0.51

49.1

0.43

22.6

2006

78.6

0.49

54.4

0.41

24.2

2007

81.0

0.46

57.9

0.40

23.1

2008

89.0

0.45

61.4

0.39

27.6

2009

65.7

0.42

49.3

0.40

16.4

2010

81.4

0.41

64.8

0.39

16.6

2011

90.2

0.40

73.3

0.39

16.9

2012

95.4

0.42

74.3

0.38

21.2

2013

93.4

0.41

73.7

0.36

19.7

2014

97.8

0.42

72.5

0.35

25.3

2015

81.8

0.41

60.7

0.34

21.2

2016

78.5

0.41

55.0

0.33

23.5

2017

87.6

0.40

64.8

0.33

22.9

0.31

48.7

0.25

18.3

CPTPP (without the US) 2017**

67.1

Note: * Aggregate of eleven countries—Australia, Brunei, Canada, Chile, Japan, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. ** The United States withdrew from the TPP on 23 January 2017. Source: Tham and Kam (2016).

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Table 8.2 Distribution of Malaysia’s Total and Specific Exports to TPP Countries, 2017 (Percentage) Total Australia

Manufacturing

8.55

ICT

5.45

3.67

Textiles 5.55

Brunei

0.61

0.52

0.05

0.35

Canada

0.93

1.13

0.55

3.38

Chile

0.19

0.22

0.07

0.94

Japan

19.74

15.56

12.34

19.03

Mexico

2.54

3.26

4.86

1.18

New Zealand

1.19

0.75

0.40

0.99

Peru

0.13

0.16

0.13

0.49

Singapore

35.35

36.55

43.98

5.38

United States

23.48

30.88

30.52

57.07

7.29

5.52

3.43

5.65

100.00

100.00

100.00

100.00

Vietnam Total

Source: Calculated by authors from UN Comtrade data.

4. Significance of US Withdrawal from the TPP: A Comparative Trade Analysis of Malaysia and Vietnam The significance of the US withdrawal from the TPP can be analysed by examining the overall export competitiveness of Malaysia and Vietnam in the US market using the differences in export shares of both countries in the United States—based on a constructed indicator called the Export Share Difference Analysis (ESDA). The indicator is described as follows: ESDA =

(

Xj,i,n,t

∑z Xz,i,n,t

–

Xk,i,n,t

∑z Xz,i,n,t

)

* 100

Xj,i,n,t = Export of country (j) in good (i) to country (n) in year (t) Xk,i,n,t = Export of country (k) in good (i) to country (n) in year (t) ∑z Xz,i,n,t = Total (z) country exports of good (i) to country (n) in year (t)

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Xj,i,n,t

∑z Xz,i,n,t Xk,i,n,t

∑z Xz,i,n,t

= E  xport share of country (j) in total z countries (or world) exports to country (n) in sector (i) in year (t) = E  xport share of country (k) in total z countries (or world) exports to country (n) in sector (i) in year (t)

If ESDA > 0, export share of country (j) in country (n) > export share of country (k) in country (n) Basically, in this study, j = Malaysia and k = Vietnam and n = USA. In year t, ESDA = –

Malaysia exports of i to USA in year t World exports of i to USA in year t

Vietnam exports of i to USA in year t World exports of i to USA in year t

* 100

• ESDA > 0 means Malaysia’s export share in the United States is more/higher than Vietnam’s share in the US market • ESDA < 0 means Vietnam’s export share in the United States is more/higher than Malaysia’s share in the US market • Declining ESDA means Vietnam is gaining more share in the US market compared to Malaysia • Increasing ESDA means Malaysia is gaining more share in the US market compared to Vietnam Figure 8.1 shows that Malaysia’s export share in the United States is higher than Vietnam’s in: beverages and tobacco; crude materials, inedibles, except fuels; animal and vegetable oils, fats and waxes; chemicals and related products, n.e.s; machinery and transport equipment; commodities and transactions not classified elsewhere in the SITC and ICT. Of all these goods, the difference in market share is the largest1 in animal and vegetable oils because it is a major export for Malaysia and not for Vietnam. Since 2000, Malaysia has a larger share of this product relative to Vietnam owing to the large US import of palm oil from Malaysia. With the exception of a small drop in 2008, Malaysia leads this product category in terms of export

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Source: Calculated by authors from UN Comtrade data.

Figure 8.1 ESDA between Malaysia and Vietnam in the United States (as Total World Exports to the US)

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shares in the United States. The decline after 2010 is because of the drop in Malaysia’s share in the United States while Vietnam’s rise is too small and its share negligible. Malaysia’s core manufacturing exports to the United States (machinery and transport equipment, and ICT) are all losing their respective market shares to Vietnam. In fact, Malaysian manufacturing exports, in aggregate, have been losing their market share in the United States relative to Vietnam since 2000. In 2013, Malaysia also lost its export share to Vietnam in industries such as textiles, manufactured goods classified chiefly by material, and miscellaneous manufactured articles. In short, Malaysia has either lost or is losing its US market share to Vietnam in almost all products since the 2008 Global Financial Crisis (GFC), with textiles witnessing the biggest loss. The ICT products are disaggregated in Figure 8.2 (see product codes in Appendix 8.1). Although Malaysia’s ESDA in ICT remains positive since 2000, it is also losing its market share to Vietnam. Electronic components remain the most important ICT export product for Malaysia in the US market. After the 2008 GFC, while other ICT products have lost their share of exports to Vietnam, electronic components have actually registered an increase in their share in the United States compared to Vietnam. Malaysia has experienced the biggest decline in its US market share to Vietnam in computer and peripheral products. Disaggregating the textile products, Figure 8.3 shows that Malaysia used to have a higher US market share than Vietnam from 2000 to 2002. However, by 2005, Malaysia lost its US market share in all subsectors of textiles to Vietnam, with the full abolition of the quota system under the Multi-Fibre Arrangement (MFA) in that year (Esho 2015). The sharpest decline is in clothing and accessories. Malaysia did regain some market share over Vietnam in textile fibres from 2008 to 2010, but this is still less than Vietnam’s share in the US market. Bearing the above analysis in mind, it is important for Malaysia to ratify the CPTPP, for the above trend will be further exacerbated if Vietnam ratifies the agreement while Malaysia does not—since the former will have increased market access to the United States because of a first-mover advantage.

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Source: Calculated by authors from UN Comtrade data.

Figure 8.2 ESDA in ICT Export Share between Malaysia and Vietnam in the United States (as Total World Exports to the US)

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Source: Calculated by authors from UN Comtrade data.

Figure 8.3 ESDA in Textile Export Share between Malaysia and Vietnam in the United States (as Total World Exports to the US)

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4.1  Intensive and Extensive Margins Malaysia’s loss in market share in exports to the United States may be attributed to changes in product variety or per unit value of product exported. To further analyse these two conjectures, this chapter invokes two important concepts in export expansion—the extensive and intensive margins. Extensive margin refers to the increase in diversity or variety of exports. Intensive margin points to the average value per product exported. WITS (2013) defined both margins in a series of scenarios. Intensive margin represents either an increase, decrease or extinction of products in established markets, while extensive margin indicates either new products in new or existing markets, or existing products in new markets. Since this study focuses on the US market alone, extensive margin is defined as product diversification in established markets. Given that there is only one destination country, extensive margin is the simple count of the number of products exported from country of origin (o) to destination market (d), Nod. Intensive margin is the export value of origin country to destination, Exod per product traded, that is, Exod /Nod. Figure 8.4 shows the extensive and intensive margins of Malaysian and Vietnamese manufacturing exports to the United States from 2000 to 2014. Malaysia has a higher number of manufactured exports to the United States compared to Vietnam. However, as the figure suggests, the variety of Malaysia’s export products to the United States has stagnated over the years.2 Vietnam, on the other hand, has increased its variety of exports, rapidly narrowing its product variety gap with Malaysia. The trend in intensive margin shows that, although Malaysia has more variety of exports to the United States, the value per export good has been declining compared to Vietnam. The decline started in 2005, and one possible explanation is that higher value products are being exported to China, especially in the ICT sector (Tham and Kam 2015). On the other hand, Vietnam’s intensive margin of exports surpassed Malaysia’s in 2011, implying that the country is capturing more value for its exports compared to Malaysia since that year. The focus can now be shifted to the main competing manufacturing industries—textiles and clothing and ICT. Before 2002, Figure 8.5 shows that Malaysia exported a larger variety of textiles and clothing to the United States compared to Vietnam. However, after the US’ extension of normal trade relations (NTR) status to Vietnam in 2001, the number

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Figure 8.4 Extensive and Intensive Margin Manufacturing Exports to the United States Extensive: Overall Manufacturing

US$ million

Intensive: Total Manufacturing

Source: Calculated by authors from UN Comtrade data.

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5   193 5   5   5  

Figure 8.5 Figure 5: Extensive Extensive vs Intensive Intensive Margins for Textiles, Textiles, clothing and accessories (SITC) (SITC) Extensive and Intensive Margins for Textiles, Clothing and Accessories (SITC) Figure 5: vs Margins for clothing and accessories Figure 5: Extensive vs Intensive Margins for Textiles, clothing and accessories (SITC) Figure 5: Extensive vs Intensive Margins for Textiles, clothing and accessories (SITC) Extensive:   verall   ex Pin (1 + timn)(5) Pin (1 + timn) > Pim > Pij(6) (Pin (1 + timn) – Pin) Qin (7) t = tariff rate; i = product; m = CPTPP member importer; j = CPTPP member exporter; n = non-CPTPP member exporter; P = Price of product; Qin = quantity of product of non-CPTPP member

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Static Trade Creation: tink ≥ tinj(8) Pin > Pij > Pik(9) Pin > Pij (1 + tinj) > Pik (1 + tink)(10) Pin > Pij (1 + tink) > Pij(11) Q P – Pij / (12) ij

(1 + tinj)

ij

t = tariff rate; i = product; n = non-CPTPP member importer; j = CPTPP member exporter; k = non-CPTPP member exporter; P = Price of product; Qij = quantity of product of CPTPP member exporter These calculations show that some products experience a two-way impact on exports (trade diversion) and imports (trade creation), while others face only a one-way impact, either on exports or imports (see Table 11.11). This implies that, for Indonesia, the cost of not joining the CPTPP (trade diversion away from Indonesian exports) is higher than the cost of joining it (trade creation from Indonesian imports). Moreover, the cost of becoming a member of the agreement is much more manageable than that of staying away, since the latter is beyond Indonesia’s control and depends on other countries’ market conditions. However, once Indonesia decides to join the CPTPP, the government has to take immediate steps to mitigate the potential detrimental impact of the agreement on affected local businesses and workers. Likewise, if the country decides not to join, the state must step in to take care of export-oriented firms.

7. Conclusion With regard to the CPTPP, Indonesia has a few major concerns. One such concern has to do with sustaining ASEAN’s economic integration journey. Economic convergence in terms of minimizing the per capita GNI disparity among ASEAN member states is a necessary condition for transforming the group into a common market. There is a possibility, however, that the CPTPP will actually increase the economic gap between ASEAN members that join the agreement and those that choose to stay away. The former cluster is expected to witness a steady rise in per capita income levels, eventually disturbing the formation of the homogeneous ASEAN Economic Community (AEC).

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Table 11.11 Indonesia’s Top Twenty Products Affected by TPP Trade Diversion and Trade Creation, 2014 Trade Diversion

Trade Creation

Dairy produce, birds’ eggs, natural honey, edible products of animal origin; Cocoa and cocoa preparations; Preparations of vegetables, fruits, nuts or other parts of plants; Ores, slag and ash; Mineral fuels, mineral oils and products of their distillation; Miscellaneous chemical products; Wood and articles of wood; Wood charcoal; Pulp of wood or of other fibrous cellulosic material, recovered (waste and scrap) paper; Paper and paperboard, articles of paper pulp, of paper or of paperboard; Articles of apparel and clothing accessories, knitted or crocheted; Articles of apparel and clothing accessories, not knitted or crocheted; Footwear, gaiters and the like, parts of such articles; Natural or cultured pearls, precious or semi-precious stones, precious metals; Iron and steel; Tin and articles thereof; Machinery, mechanical appliances, nuclear reactors, boilers; parts thereof; Electrical machinery and equipment and parts thereof, sound recorders and reproducers, television; Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical; Clocks and watches and parts thereof; Toys, games and sports requisites, parts and accessories thereof.

Basic metals; Fabricated metal products; Machinery and equipment, nec; Electrical and optical equipment; Computer, electronic and optical equipment; Electrical machinery and apparatus, nec; Transport equipment; Motor vehicles, trailers and semi-trailers; Other transport equipment; Manufacturing nec, recycling; Pulp, paper, paper products, printing and publishing; Chemicals and non-metallic mineral products; Coke, refined petroleum products and nuclear fuel; Chemicals and chemical products; Rubber and plastics products; Agriculture, hunting, forestry and fishing; Mining and quarrying; Food products, beverages and tobacco; Textiles, textile products, leather and footwear; Wood, paper, paper products, printing and publishing

Source: Author’s compilation based on UN Comtrade two-digit HS classification data.

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In recent years, the mega regionalism phenomenon has picked up pace. Countries that join such global agreements stand to gain substantially from both large untapped markets as well as new and established production and distribution channels. In the case of the CPTPP, there are several provisions that are especially useful for small and medium-sized enterprises (SMEs), particularly in terms of greater market access and economic networks in member countries. This would, in turn, help them transform not just from informal to formal operations, but, in some instances, even major global players. In addition to complying with the need to carry out economic and institutional reforms, Indonesia has two major considerations about joining the CPTPP. The first is the loss of ASEAN centrality that accompanies the agreement. So far, this centrality has emerged from ASEAN+ frameworks, such as ASEAN+1, ASEAN+3 and ASEAN+6. However, as more pacts rise in other regions, this trend may change. The second, and more important, consideration for Indonesia is its loss of first-mover advantage as a latecomer into the CPTPP. Not being a founding member of the deal means that the country would not be able to exercise substantial negotiation power on certain strategic issues on trade liberalization, such as security exceptions, temporary safeguards, tax conventions, inter alia. It is important to note that the CPTPP is an advanced economic agreement that includes major reforms on improving transparency, eliminating corruption, making government procurement non-discriminatory, preparing and preserving intellectual property rights, developing investor-state dispute settlement mechanisms, and managing state-owned enterprises. Its broad scope, however, raises concerns regarding some of Indonesia’s national regulations on: technological transfer of knowledge (under Law no. 1/1967); downstream mining processing (under Law no. 4/2009); and the maximum limit on foreign company share in joint venture businesses (under Law no. 25/2007). Additionally, Indonesia would have to commit to transparency in trade policy (in the form of databased evidence for non-tariff barrier policies) and non-discriminatory principles in hiring local people in foreign companies (in the form of affirmative action policies). Since the US’ withdrawal from the CPTPP, Indonesia has suspended preparing its submission to become a part of the agreement. The United States is the world’s largest economy, accounting for about 24 per cent

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of the global GDP. Correspondingly, its contribution to the original TPP stood at around 60 per cent. Indonesia intended to join the TPP to strengthen its bilateral lies with America, given that, so far, both countries have negotiated only via APEC and the East Asia Summit (EAS). The loss of the US market, therefore, explains Indonesia’s little to no enthusiasm in joining the CPTPP. Note * The author would like to thank Yeremia Natanael for helping with the revised chapter data and references. 1. This is a multilateral free trade agreement (FTA) towards freer and closer trade and investment flows in the Asia Pacific region with a new and high standard set for regional commerce, which was previously known as the Trans-Pacific Partnership (TPP). The agreement aims to reduce market barriers and strengthen trade by providing more liberalized trade and investment access among its participating countries. The CPTPP involves eleven countries in the Asia Pacific, namely Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. All the original TPP participating countries, excluding the United States, reached a deal in January 2018 to conclude the CPTPP, and signed the agreement on 8 March 2018 in Chile. Most of the original TPP text remains unchanged, and two-thirds of the CPTPP’s thirty chapters are similar to those included in the TPP. Moreover, the eleven countries involved in the revised agreement represent a market of approximately 500 million people and around US$13.5 trillion of gross domestic product (GDP), or 13.4 per cent of the world GDP.

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Ministry of Trade and Industry, Singapore. 2018. “Comprehensive and Progressive Agreement for Trans-Pacific Partnership Signed”, 9 March 2018. https:// www.mti.gov.sg/-/media/MTI/improving-trade/multilateral-and-regionalforums/CPTPP/media-release---cptpp-signed.pdf. Motta, Massimo and George Norman. 1996. “Does Economic Integration Cause Foreign Direct Investment?”. International Economic Review 37, no. 4 (November): 757–83. Pelkmans, Jacques. 1980. “Economic Theories of Integration Revisited”. Journal of Common Market Studies XVIII, no. 4: 333–54. Poon, Jessie P.H., Edmund R. Thompson, and Philip F. Kelly. 2000. “Myth of the Triad? The Geography of Trade and Investment Blocs”. Transactions of the Institute of British Geographers, New Series 25, no. 4: 427–44. Rob, Rafael and Nikolaos Vettas. 2003. “Foreign Direct Investment and Exports with Growing Demand”. The Review of Economic Studies 70, no. 3 (July): 629–48. Sethi, Deepak, S.E. Guisinger, Steven E. Phelan, and D.M. Berg. 2003. “Trends in Foreign Direct Investment Flows: A Theoretical and Empirical Analysis”. Journal of International Business Studies 34, no. 4 (July): 315–26. Stiglitz, Joseph. 2007. Making Globalization Work. New York: WW Norton & Co. Straits Times. “6 Things to Know about the Trans-Pacific Trade Pact CPTPP”, https://www.straitstimes.com/world/6-things-to-know-about-the-transpacific-trade-pact-cptpp. Takacs, Wendy E. and L. Alan Winters. 1991. “Labour Adjustment Costs and British Footwear Protection”. Oxford Economic Papers 43, no. 3: 479–501. The Economist. 2018. “What on Earth is the CPTPP?”, 12 March 2018. https:// www.economist.com/the-economist-explains/2018/03/12/what-on-earth-isthe-cptpp. The Japan Times. 2018. “TPP Countries to Start Accession Talks for New Members in 2019”, 19 July 2018. https://www.japantimes.co.jp/news/2018/07/19/ business/tpp-countries-start-accession-talks-new-members-2019/#. XxaqZC2w39A. Timmer, Marcel P., Abdul Azeez Erumban, Bart Los, Robert Stehrer, and Gaaitzen J. de Vries. 2012. “Slicking Up Global Value Chains”. 32nd General Conference of the International Association for Research in Income and Wealth, Boston, USA, 5–11 August 2012, SESSION 8A. Torrey, Zachary. 2018. “TPP 2.0: The Deal Without the US”. The Diplomat, 3 February 2018. https://thediplomat.com/2018/02/tpp-2-0-the-deal-withoutthe-us/. Verico, Kiki. 2013. “ASEAN Economic Integration: Challenges and Strategies”. GoLive Indonesia of Adelaide University, 2 May 2013. https://goliveindonesia. com/2013/05/02/asean-economic-integration-challenges-and-strategies/ (accessed 31 October 2016).

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307

———. 2015. “Menimbang Kemitraan Trans Pasifik”. Daily News of Koran Tempo, 10 November 2015, p. 25. Walz, Uwe. 1997. “Innovation, Foreign Direct Investment and Growth”. Economica 64, no. 253. Data Sources http://comtrade.un.org/data/ http://data.worldbank.org/data-catalog/world-development-indicators https://stats.oecd.org/Index.aspx?DataSetCode=GVC_INDIKATORS http://stat.wto.org/StatisticalProgram/WSDBStatProgramSeries.aspx? Language=E http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_ ChosenLang=en https://www.adb.org/publications/series/key-indicators-for-asia-and-the-pacific https://www.bps.go.id/Subjek/view/id/23 https://www.wto.org/english/res_e/statis_e/miwi_e/negaraprofiles_e.htm Financial Report of Public Listing Companies in Indonesia 2015 Input-Output Table of Indonesia 2010 Upper-Middle Manufacturing Survey in Indonesia 2011

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index Note: Page numbers followed by “n” refer to endnotes.

A Act for the Establishment of and Procedure for Intellectual Property and International Trade Court B.E. 2539 (1997), 121 Agreement on Subsidies and Countervailing Measures (ASCM), 142 Agricultural Research Specialist Field and Renewable Energy Crops Research Institute (FCRI), 274 2002 APEC Leaders’ Meeting, 33 2011 APEC Leaders’ Summit, 37 ASEAN Agreement for Promotion and Protection of Investments, 61 ASEAN+1 agreements, 15 ASEAN Comprehensive Investment Agreement, 53 ASEAN CPTPP members exports to, 167 tariff reduction on exports by, 166–72 ASEAN Economic Community (AEC), 1, 14, 56, 180, 275, 301 ASEAN economies, 1 ASEAN Free Trade Area (AFTA), 32, 180, 220

ASEAN-India Free Trade Agreement (AIFTA), 260, 278n5 ASEAN-Japan Comprehensive Economic Partnership (AJCEP), 166–67 ASEAN-led Regional Comprehensive Economic Partnership, 39 ASEAN+ frameworks, 282, 287, 289, 303 ASEAN+ FTAs, 53, 221 “ASEAN+6” Regional Comprehensive Economic Partnership, 55 Asian Financial Crisis (AFC), 62, 180, 255, 284 Asia Pacific, 1, 36, 282 economic integration in, 14 options for, 14–17 TPP withdrawal, consequences of, 44 trade policy initiatives in, 17 US dominance in, 42 without American involvement, 26 Asia-Pacific Economic Cooperation (APEC), 14, 47n2, 90n10, 283 Asia Pacific economies, 13 Asia Pacific investment treaties, 68

308

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Index

Asia Pacific rebalance policy, 37 Asia Pacific region, 52 trade policy scenarios for, 19–23 Asia Pacific trade agreements, 13 Association of Southeast Asian Nations (ASEAN), 15–16, 27n6, 283 agreements, 25, 72–74 Japanese manufacturing affiliates in, 163–66 Vietnam, 220 Australia-based FTAs, 146 Australia-China FTA, 75 Australia-New Zealand Closer Economic Relations FTA, 81–82 Australia-New Zealand Free Trade Area (AANZFTA), 81 ACIA and, 69 and AIAI, 67, 72 ASEAN agreements, 73 ISDS-backed investment commitments, 82 Australian Patent Office, 120 Australia, tariff rates in, 272 Australia-US FTA, 69 B Belt and Road Initiative (BRI), 15 Brunei, 31 SOEs in, 153–56 US investors in, 54 Brunei Investment Agency, 141 Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure of 1977, 273 C China in CPTPP, 25 goods import to Vietnam, 233 integrated circuit (IC) firms in, 209

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309

China-Australia FTA, 74 China Investment Corporation (CIC), 156 China-Japan-Korea cooperation, 14 China-South Korea Free Trade Agreement, 14–15 Clinton, Hillary, 36–38 Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) Article 1 on initial provisions and general definitions, 263 Article 2 on national treatment and market access for goods, 263 Article 3 on rules of origin and origin procedures, 263 Article 4 on textile and apparel goods, 146, 263 Article 5 on customs administration, 264, 266 Article 6 on trade remedies, 264 Article 7 on sanitary and phytosanitary (SPS) measures, 264 Article 8 on technical barriers to trade, 264 Article 9 on investment, 264, 266 Article 10 on cross-border trade in services, 264, 266 Article 11 on financial services, 264, 266 Article 13 on telecommunications, 264, 266 Article 15 on government procurement, 264–65, 267 Article 16 on competition policy, 264–65 Article 17 on state-owned enterprises, 264–65, 268 Article 18 on intellectual property (IP), 264–65, 267 Article 19 on labour, 264-65

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310

Article 20 on environment, 94n50, 264–65, 267 Article 21 on cooperation and capacity building, 265 Article 22 on competitiveness and business facilitation, 265 Article 23 on development, 265 Article 24 on small and mediumsized enterprises (SMEs), 265 Article 25 on regulatory coherence, 265 Article 26 on transparency and anti-corruption, 265, 267 Article 27 on administrative and institutional provisions, 263 Article 28 on dispute settlement, 264 Article 29 on exceptions and general provisions, 263 Article 30 on final provisions, 263 Chapter 16, 24–26 Chapter 17, 146 elements of, 150–53 TPP Chapter 16 and Chapter 17, 148–50 TPP Chapter 17 into CPTPP Chapter 17, transplantation of, 150 US stakeholders, 147–48 Cross-Border Trade in Services Chapter, 225 E-commerce Chapter, 224 economic features of, 261–63 elements of, 6–9 Environment Chapter, 226 Financial Services Chapter, 225 general background of, 113–16 geopolitical goals of, 5 global income benefits, 24 high-quality cooperation without the United States, 16–17 history of, 4

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Index

implementation of, 162–63 Investment Chapter, 224–25 Labour Chapter, 226 nature of, 3–5 objectives and the comprehensiveness of, 5 provisions, 263–68 scope and coverage of, 221–26 Comprehensive Economic Partnership for East Asia, 43 computable general equilibrium (CGE) model, 17, 18, 181 Consortium for New Export Nation (CNEN), 175, 213 Constant Market Share Analysis (CMSA), 296 Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), 210 Copyright Act B.E. 2537 (1994), 117 current account deficit (CAD), 284 D Department of Intellectual Property (DIP), Thailand, 118 Department of Trade Negotiation, Thailand, 277 designated monopolies, 8, 139, 145, 226 DIP Patent Office, Thailand, 118 dispute settlement mechanism (DSM), 145 Doha Declaration on the TRIPS Agreement, 133 Doha Development Round, 1, 57 E East Asia Summit (EAS), 304 EC-ASEAN Intellectual Property Rights Collaboration Programme, 123

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311

Index

econometric regression of double log model, 289 economic partnership agreements (EPAs), 166 Enterprise for ASEAN Initiative, 14 European Patent Convention (EPC), 125 European Union (EU), 30, 54 bilateral FTAs, 55 United States and, 113, 114 Export Share Difference Analysis (ESDA), 185 extensive margin method, 191–204, 214n2 F Federation of Safe Agriculture, Thailand, 274 foreign direct investment (FDI), 51, 220 into ASEAN countries, 162 dramatic expansion of, 56 industrial development, tool for, 179 sustainability of, 90n12 and treaty trends, 55–61 in Vietnam, 240, 242, 245 Framework Agreement on the ASEAN Investment Area, 62 Free Trade Agreement of the Asia Pacific (FTAAP), 283, 286 ASEAN Economic Community negotiations, 287 free trade agreements (FTAs), 1, 219 with Asia Pacific counterparties, 53 with Australia (Article 11.28), 92n32 export destinations, 237 ISDS-backed commitments in, 53 proliferation of, 113 in Thailand, 255–61 TPP/CPTPP economies, 254

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Trans-Pacific Partnership (TPP), 51 with United States, 24 US Model BIT, 72 with Vietnam and Singapore, 84 Free Trade Area of the Americas (FTAA), 114 G GATT Article XX, 70 GDP growth, impact on, 226–29 General Agreement on Tariffs and Trade (GATT), 30, 142 and World Trade Organization (WTO), 255 General Agreement on Trade in Services (GATS), 142 Generalized System of Preferences (GSP), 113, 133, 168, 176n2 Generally Accepted Principles and Practices (GAPP), 143, 152 Geographical Indications Protection Act B.E. 2546 (2003), 117 GIC Private Limited (GIC), 141 Global Financial Crisis (GFC), 5, 188 Global Trade Analysis Project (GTAP) 9 Database, 181 global value chains (GVCs), 282, 298–300 governance indicators (GI), 245 ranking of, 246 of Vietnam, 247–48 government-linked companies (GLCs), 141, 145–46 Government Pharmaceutical Organization (GPO), 130 H Human Capital Index, ASEAN, 210 I ICT products (HS Codes), 213 IFSWF Santiago Principles, 144

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312

independent pension fund (IPF), 151, 152 Indonesia annual growth rate, 284 competitors, 295–98 CPTPP on, 298–300 economic growth, 284 economic indicators, 285–86 export destinations, 289–95 Gini coefficient, 284, 285 Japan, exports rankings in, 294–95 lucrative agreement for, 287 mega regionalism, 286–89 RCA and CMSA (“Great” Products) of, 296–97 TPP economies, exports rank in, 291 TPP trade diversion and creation, 302 US, exports rankings in, 293 Indonesia’s national regulations Law no. 1/1967 on technological transfer of knowledge, 303 Law no. 4/2009 on downstream mining processing, 303 Law no. 25/2007 on the maximum limit on foreign company share in joint venture businesses, 303 information and communication technology (ICT), 183 tariff liberalization in Malaysia, 208–10 Vietnam in, 197 Information Technology Agreement (ITA), 170 institutional reforms, 243–49 intellectual property (IP), 112 CPTPP and, 126–34 law, 116–17 Intellectual Property and International Trade Court (IP&IT Court), 121, 122

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Index

intellectual property protection, 16, 273–75 applications and incomplete patent documentation, 119–21 and IP, 126–34 law, 116–17 opposition proceedings, 124–26 patent office, 118–19 research policy and technology diffusion, 117 specialized IP court, 121–22 and technical assistance, 122–24 intensive margin, 191–204 International Centre for Settlement of Investment Disputes (ICSID), 58, 59 International Competition Network (ICN), 143 International Convention for the Protection of New Varieties of Plants, 273 International Forum of Sovereign Wealth Funds (IFSWF), 143, 152 International Labour Organization (ILO) Declaration, 226 International Monetary and Financial Committee (IMFC), 143 International Monetary Fund (IMF), 143 International Registration of Marks, 273 International Relations theory, 41 international SOE rules, 139–46 international treaty law, 72 International Working Group of Sovereign Wealth Funds, 143, 152 intra-ASEAN investment, 56 investment, impact on, 240–43 investment liberalization, trade and, 263–65 investor-state dispute settlement (ISDS), 51, 225

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Index

claim statistics, 85–88 “double-hatting” in, 76 inclusion of, 65 to investment authorizations/ contracts, 76–79 investment treaties and, 52, 59, 60 mechanisms, 268 policy and practice in Southeast Asia, 61–65 procedure, 72–82 provisions, 54 ISDS-based treaty, 84 J Japan Indonesia exports rankings in, 294–95 tariff rates in, 272 Japanese firms, 249 Japanese future business in Asia, 250 Japanese law, 125 Japanese manufacturing affiliates, impact on, 164, 172–74 Japan External Trade Organization (JETRO), 170, 175 Business Conditions of Japanese Companies in Asia and Oceania, 249 Japan-Malaysia EPA (JMEPA), 166 Japan-Vietnam EPA (JVEPA), 166 JETRO Overseas Business Survey, 173 JETRO Survey on Business Conditions of Japanese Companies in Asia and Oceania, 170 K Korea-Australia FTA Article 11.20.13, 74 Kuala Lumpur Regional Centre for Arbitration, 78

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313

L Least developing country (LDC), 168 M Madrid Protocol concerning International Registration of Marks, 273 Malaysia firms in, 212 integrated circuit (IC) firms in, 209 SOEs in, 153–56 tariff liberalization on selected sectors, 204–10 TPP and CPTPP countries, trade with, 183–85 trade policy, 179 US investors in, 54 and Vietnam, trade analysis of, 185–204 Malaysia Airlines Berhad (MAB), 141 Malaysia Airports Holdings Berhad (MAHB), 151 Malaysia-India FTA, 67 Malaysian Airline System Berhad (MAS), 141 market access for goods, Thailand, 269–73 2015 market exchange rate terms, 34 mega regionalism, 286–89 Ministry of Agriculture, Thailand, 274 Ministry of Economy, Trade and Industry (METI), Japan, 163 Ministry of Industry and Trade (MOIT), Vietnam, 236 Ministry of International Trade and Industry (MITI), Malaysia, 181 Ministry of Justice, Vietnam, 62 Ministry of Planning and Investment (MPI), Vietnam, 62, 229 statistics, 243 minority shareholders, ISDS claims by, 79–81

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314

most favoured nation (MFN) treatment, 225 Multi-Fibre Arrangement (MFA), 188 multilateral SOE rules, limitations of, 143–44 multinational enterprises (MNEs), 177n11 N National Access to Antiretroviral Program for People living with HIV/AIDS (NAPHA), 129 National AIDS Prevention and Control Committee, 128 National Research Council of Thailand, 277 non-ASEAN CPTPP members, exports to, 167–70 non-conforming measures (NCMs), 275 level, 152 lists, 155–56 non-government organizations (NGOs), 254 non-multilateral trade agreements, 114–15 non-tariff barriers (NTBs), 182 non-tariff measures (NTMs), 181–82 North American Free Trade Agreement (NAFTA), 44, 53, 114, 151, 270 Article 1116, 80, 81 Article 1117, 81 Article 1121, 81 Article 2001 on the Free Trade Commission, 75 drafting and experiences with ISDS, 83 O Obama, Barack, 14, 34–39 Asia Pacific rebalance policy, 42

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Index

counterfactual threats, 44 Office of the United States Trade Representative (USTR), 132–33 Omnibus Trade and Competitiveness Act of 1988, 133 Organisation for Economic Cooperation and Development (OECD), 142, 298 P Pacific Economic Cooperation Council, 14 Patent Act B.E. 2522 (1979), 117 Patent Cooperation Treaty (PCT), 117 Petroleum Development Act 1974, 145 Petroliam Nasional Berhad (PETRONAS Malaysia), 141, 145 Plant Varieties Protection Act, 274 Plant Variety Protection Act B.E. 2542 (1999), 117 Plant Variety Protection Act B.E. 2642 (1999), 118 policy implications and recommendations, 249–51, 276–78 simulations, 17–25 power transition theory, 41–43 preferential trade agreements, 30 Priority Watch List (PWL), 133 product codes, based on UNCTAD classifications, 213 Protection of Layout-Designs of Integrated Circuits Act B.E. 2543 (2000), 117 R Regional Comprehensive Economic Partnership (RCEP), 15, 283 ASEAN initiative and, 43 ASEAN members, 157

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Index

broad cooperation across Asia, 15–16 CPTPP and, 12–14, 17, 47, 261, 287 economic scale of, 25 regional trade agreements (RTAs), 3, 163, 166 regulatory mechanism, for SOEs, 156–57 Revealed Comparative Advantage (RCA), 296 Rules for Intellectual Property and International Trade Cases B.E. 2540 (1998), 121 rules of origin (ROO), 260 S Santiago Principles, 143, 156 Seed Association of Thailand (SAT), 274 self-certification system, 172 Semiconductor Industry Association of the US, 208 services liberalization, 275–76 SIAC Investment Arbitration Rules, 79 signatory Parties, 153, 155 and SOEs, 157 Singapore CPTPP, 2 SOEs in, 141, 153–56 Singapore Companies Act, 141 Singapore International Arbitration Centre (SIAC), 78–79 Singapore Treaty on the Law of Trademarks, 273 small and medium-sized enterprises (SMEs), 15, 156, 175, 303 Southeast Asia ISDS claims vs., 88 ISDS policy and practice in, 61–65 regional economic integration, 1 TPP signatories from, 53

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315

sovereign wealth fund (SWF), 151, 152, 154 state-owned enterprises (SOEs), 67, 138–39 cross-border SOE activities, in strategic sectors, 141–42 competition rules in, 158 CPTPP article on, 268 definition of, 151 domestic laws, exclusion/ exemption from, 140 in FTA, 144 future FTAs, rules in, 157 international rules on, 142–44 market competition, distortion of, 140 non-commercial assistance to, 226 and non-SOEs, 140 reforms in, 218–19 regulatory mechanism for, 156–57 restrictions on, 151–52 rules for, 158 signatory Parties and, 157 transparency, accountability and disclosure on activities, lack of, 141 in US FTA model, 139 unfair preferential treatment, 140–41 Vietnam’s FDI, joint ventures with, 208 state trading enterprises (STEs), 143 strategic sectors, cross-border SOE activities in, 141–42 T Temasek Holdings Private Limited (Temasek), 141 textiles and apparel, tariff liberalization in Malaysia, 204–7 Thai court, 63 Thailand, 63

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316

CPTPP vs. TPP, 254 FTAs in, 255 intellectual property protection in applications and incomplete patent documentation, 119–21 and IP, 126–34 law, 116–17 opposition proceedings, 124–26 patent office, 118–19 research policy and technology diffusion, 117 specialized IP court, 121–22 and technical assistance, 122–24 research and development (R&D), 117 Thailand-Chile FTA, 260 Thailand-India Free Trade Agreement (TIFTA), 278n5 Thailand-Peru FTA, 260 Thai law, 125 Thai Ministry of Public Health, 117, 129–32 Thai Patent Act Section 31, 125 Thai Patent Office, 118–19 Thai Seed Trade Association (ThaSTA), 274 Thaksin Shinawatra, 129 Thai Rak Thai party, 255 “Thirty Baht” scheme, 129 trade globalization, 126, 134 impact on, 229–40 and investment liberalization, 263–65, 282 Trade Complementarity Index (TCI), 240 Vietnam, 241 Trade Intensity Index (TII), 236, 239 Trademark Act B.E. 2534 (1991), 117 trade policy, Malaysia, 179 Trade Promotion Authority (TPA), 148

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Index

Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, 112, 125 Trade Secrets Act B.E. 2545 (2002), 117 Traditional Medicine Act B.E. 2542 (1999), 117 Trans-Pacific Partnership (TPP), 1–2, 4, 221 Article 9.14, 71 Article 9.15, 70 Article 9.20.1, 72 Article 9.20.2, 72 Article 9.23, 73 Chapter 16 and Chapter 17, 148–50 Chapter 17 into CPTPP Chapter 17, transplantation of, 150 comprehensive SOE rules in, 147–48 and CPTPP countries, trade with Malaysia, 183–85 and CPTPP investment chapter, 65–82 economic indicators of, 289 economies, Indonesian exports rank in, 291 on exports, 238 free trade agreement (FTA), 51 geopolitical importance for United States, 38, 41 global income benefits, 24 income effect of, 227 investment impact of, 244 Malaysia, 180 member’s GDP to Indonesia’s GDP, elasticity of, 290 membership goal of, 36 negotiations, expectations for, 171 ratification of, 52 signatories’ 2015 GDPs, 35 termination, 43–46 trade diversion and creation, Indonesia, 302 transformation, 34–43

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Index

twelve signatory Parties, 138 United States, 12, 13, 16, 17, 25, 211, 253 US geopolitical interests in, 35, 36 US participation in, 43 US withdrawal from, 31, 185–204, 229 Trans-Pacific Strategic Economic Partnership. See Trans-Pacific Partnership (TPP) Treaty on the Functioning of the European Union (TFEU), 146 TRIPS-Plus IP rules, 113 Trump, Donald, 4, 44, 45, 52, 138, 253 U UNCITRAL Rules, 58, 59 United States, 144 and Australian FTA treaty, 72 economic growth, 36 economy, 34 and European Union (EU), 113, 114 exit from TPP, 211 extensive vs. intensive margin, manufacturing exports to, 192 free trade agreement (FTA) model, 138 FTA negotiations with, 55 geopolitical interests, in TPP, 35 government, 141 guidance and leadership, 25 Indonesia exports rankings in, 293 investors, in Malaysia and Brunei, 54 Malaysia and Vietnam, ESDA between, 187, 189, 190 new Model BIT, 53, 67, 70, 72, 74, 82 predominance, 34 trade diplomacy history, 44 trade diplomacy interests, 34 treaty practice, 82

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317

Vietnam’s exports to CPTPP members and, 234 Vietnam’s imports from CPTPP members and, 235 withdrawal, 13 zero-tariff relationship, 208 United States Trade Representative (USTR), 138 UPOV 91, 273–75, 277 US leadership, 35–41 Asia Pacific of TPP withdrawal, 44 US market, 13 in TPP, 24 US participation, 5 CPTPP deal, signing of, 46 formal announcement of, 36 in TPP, 43 US-Singapore FTA (USSFTA), 141 Chapter 12: Anticompetitive Business Conduct, Designated Monopolies and Government Enterprises, 145 US-South Korea bilateral deal, 44–45 US-Thailand FTA negotiations, 133 V value chains, 298–300 vertical FDI (VFDI), 175n1 Vietnam China goods import to, 233 economic and political reforms, 218 economic growth in, 226, 228 electronic industry, 210 FDI in, 240, 242, 245 GI components of, 247–48 IC firms in, 209 in ICT, 197 international economic integration, 219, 220–26 and Malaysia, trade analysis of, 185–204 Ministry of Justice, 62

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318

RCA and CMSA (“Great” Products) of, 296–97 SOEs in, 153–56 Trade Complementarity Index, 241 trade, impact on, 229–40 Trade Intensity Index (TII), 236, 239 Vietnam National Textile and Garment Group (VINATEX), 173 Vietnam-US Bilateral Trade Agreement (VN-US BTA), 220 W World Bank, 117, 228 Governance Indicators (GI), 245 World Intellectual Property Organization (WIPO), 123, 273 World Trade Organization (WTO), 33, 123, 142, 180, 275

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Index

framework, 114 GATT and, 255 Information Technology Agreement, 208 membership, 282 and OECD, 298 plurilateral agreement, 116 rules, 132 standards, 220 TRIPS Agreement, 112 Working Party on State Trading Enterprises, 159n1 WTO GATS Article IX, 145 WTO GATT Article XVII, 145, 148 WTO TRIPS Agreement, 113, 116, 133 Z zero-tariff relationship, 208

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