Executive Briefings

TPP: A New Era of Trade, or the Monster Spawn of Nafta?

Can we predict the impact of the Trans-Pacific Partnership (TPP) by examining the track record of the North American Free Trade Agreement (Nafta)? Well, maybe.

TPP: A New Era of Trade, or the Monster Spawn of Nafta?

Certainly Nafta contains many elements that are similar to TPP, albeit on a smaller scale. The 1994 free trade agreement between the U.S., Canada and Mexico would be dwarfed by the 12-nation treaty that is now up for consideration by Congress. But backers are selling the new pact as an extension of the benefits that Nafta brought to its participants. The Office of the U.S. Trade Representative argues that TPP “allows us to bring Nafta into the 21st Century for the benefit of working families in America.” Opponents, meanwhile, worry that the U.S. will hemorrhage even more manufacturing jobs – a loss that they lay at the door of Nafta – due to an agreement of far greater sweep.

Since Nafta’s passage more than 21 years ago, U.S. trade with Canada and Mexico has more than tripled in value, according to Maria Celis, partner in the law firm of Neville Peterson LLP and moderator of a panel of trade experts at the Cargo Logistics America conference in San Diego, Calif. late last year. But trade between the U.S. and other partners, most notably China, soared as well over that time. So how much of the increase can be chalked up to Nafta?

Darrel Pearson, partner and co-head of international trade with the Canada-based firm of Bennett Jones LLP, believes the link is evident. What’s more, he said, Nafta transformed the very nature of Canadian business. It led to the integration of industry supply chains, delivering benefits to the automotive, electronics, machinery, agriculture and aerospace sectors.

Because of Nafta, Canadian manufacturers became engaged in more “value-added” production, drawing on a far greater amount of cross-border content. And a similar scenario played in the U.S. Today, said Pearson, 40 percent of U.S. imports from Mexico and 25 percent of those from Canada are made with parts from the U.S. By contrast, U.S. imports from China consist of just 4 percent domestic content.

Nafta’s most visible result was the elimination of duties among the three countries. But Pearson said the pact has benefited Canada in an even more profound way. It prompted Canadian producers “to take advantage of the psychology of free trade – to consider markets outside of Canada.” It also caused them to look at additional free-trade agreements, such as the one ratified in 1997 with Chile.

With the removal or reduction of duties came the need for producers to observe strict and complex rules on North American content. John M. Peterson, partner with Neville Peterson LLP, said the same requirement will be borne by signatories to TPP. “You don’t want to pay the wrong duty or fail to take advantage of Nafta or TPP,” he said. “You would throw a lot of work out the window.”

The challenge is ongoing. Peterson voiced concern that Nafta-qualified manufacturers are losing the expertise they were moved to acquire when the agreement first took effect. At the time, he said, companies undertook intensive training, including drills and boot camps. Now, with Nafta moving into a second generation, some of that knowledge is disappearing, with the retirement or transfer of the original experts.

“The current generation of people who administer Nafta haven’t been so trained,” Peterson said. “They assume certain things to be true when they’re not.” Expect TPP to present the same challenge for manufacturers, only magnified.

Mexico has benefited greatly from Nafta as well, said Rafael Prieto, managing partner with Bryan Consulting Cd. Over the last 20 years, he said, the country has moved from being a “non-relevant” exporter to the U.S. to the number-three position. In the process, it has developed a “marvelous” automotive industry and taken on more complex work in garment and aerospace production. “Long gone are the days in which low wages were driving production to Mexico,” he said.

So is TPP really nothing more than “Nafta on steroids”? That characterization can cut both ways. It can mean even greater benefits for trading partners, or a further devastating loss of domestic production capacity. Signatories to TPP, after all, account for nearly 40 percent of global GDP. Positive or negative, the economic impact promises to be huge.

The two treaties differ in more than just size. TPP, said Peterson, “is not a one-size-fits-all agreement.” There are numerous exceptions for individual countries, covering such issues as the hiring of minorities and the promotion of female-owned businesses. Depending on the country, certain industry sectors continue to enjoy a measure of protection from foreign producers.

Perhaps the biggest question mark attached to TPP is the provision on investor-state dispute settlement (ISDS), which would allow private companies to sue governments for loss of profits or property due to domestic policies. Critics worry that the clause would undermine U.S. efforts to promote worker safety and environmentally responsible production methods. It could also empower multinationals to avert local health regulations.

Similar language already exists in Nafta and other pacts, but Peterson doesn’t believe the U.S. has had a “really bad experience” from corporate lawsuits. “I don’t think it would get any resonance,” he said, “but some other countries have different experiences.”

ISDS has been “a huge factor” in Canada, said Pearson. “The government has settled many disputes, and lost many cases.” In any event, the provision has tended to be overlooked in the TPP debate, which has mostly focused on the issue of domestic job protection. But it could bubble up as a major factor in the final decision of U.S. legislators.

Congress, having bestowed on President Obama fast-track trade negotiating authority, can only vote up or down on TPP, with no ability to offer amendments. So the agreement, which took years to develop among its fractious participants, will have to stand or fall in its entirety.

Given the rhetoric of a presidential election year, the outcome is far from certain. Obama is pushing hard for passage, but key Democrats oppose TPP, and while many Republicans tend to favor it, they’re not eager to hand the President a major political victory in the waning months of his administration.

Nevertheless, importers and exporters need to prepare. They must carefully assess how TPP stands to affect their activities, whether it promises to open up new markets, how it works in tandem with Nafta, and what impact it will have on domestic production. “All I can say,” said Peterson, “is that it’s a lot of homework – and it’s homework that has to be done.”

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Certainly Nafta contains many elements that are similar to TPP, albeit on a smaller scale. The 1994 free trade agreement between the U.S., Canada and Mexico would be dwarfed by the 12-nation treaty that is now up for consideration by Congress. But backers are selling the new pact as an extension of the benefits that Nafta brought to its participants. The Office of the U.S. Trade Representative argues that TPP “allows us to bring Nafta into the 21st Century for the benefit of working families in America.” Opponents, meanwhile, worry that the U.S. will hemorrhage even more manufacturing jobs – a loss that they lay at the door of Nafta – due to an agreement of far greater sweep.

Since Nafta’s passage more than 21 years ago, U.S. trade with Canada and Mexico has more than tripled in value, according to Maria Celis, partner in the law firm of Neville Peterson LLP and moderator of a panel of trade experts at the Cargo Logistics America conference in San Diego, Calif. late last year. But trade between the U.S. and other partners, most notably China, soared as well over that time. So how much of the increase can be chalked up to Nafta?

Darrel Pearson, partner and co-head of international trade with the Canada-based firm of Bennett Jones LLP, believes the link is evident. What’s more, he said, Nafta transformed the very nature of Canadian business. It led to the integration of industry supply chains, delivering benefits to the automotive, electronics, machinery, agriculture and aerospace sectors.

Because of Nafta, Canadian manufacturers became engaged in more “value-added” production, drawing on a far greater amount of cross-border content. And a similar scenario played in the U.S. Today, said Pearson, 40 percent of U.S. imports from Mexico and 25 percent of those from Canada are made with parts from the U.S. By contrast, U.S. imports from China consist of just 4 percent domestic content.

Nafta’s most visible result was the elimination of duties among the three countries. But Pearson said the pact has benefited Canada in an even more profound way. It prompted Canadian producers “to take advantage of the psychology of free trade – to consider markets outside of Canada.” It also caused them to look at additional free-trade agreements, such as the one ratified in 1997 with Chile.

With the removal or reduction of duties came the need for producers to observe strict and complex rules on North American content. John M. Peterson, partner with Neville Peterson LLP, said the same requirement will be borne by signatories to TPP. “You don’t want to pay the wrong duty or fail to take advantage of Nafta or TPP,” he said. “You would throw a lot of work out the window.”

The challenge is ongoing. Peterson voiced concern that Nafta-qualified manufacturers are losing the expertise they were moved to acquire when the agreement first took effect. At the time, he said, companies undertook intensive training, including drills and boot camps. Now, with Nafta moving into a second generation, some of that knowledge is disappearing, with the retirement or transfer of the original experts.

“The current generation of people who administer Nafta haven’t been so trained,” Peterson said. “They assume certain things to be true when they’re not.” Expect TPP to present the same challenge for manufacturers, only magnified.

Mexico has benefited greatly from Nafta as well, said Rafael Prieto, managing partner with Bryan Consulting Cd. Over the last 20 years, he said, the country has moved from being a “non-relevant” exporter to the U.S. to the number-three position. In the process, it has developed a “marvelous” automotive industry and taken on more complex work in garment and aerospace production. “Long gone are the days in which low wages were driving production to Mexico,” he said.

So is TPP really nothing more than “Nafta on steroids”? That characterization can cut both ways. It can mean even greater benefits for trading partners, or a further devastating loss of domestic production capacity. Signatories to TPP, after all, account for nearly 40 percent of global GDP. Positive or negative, the economic impact promises to be huge.

The two treaties differ in more than just size. TPP, said Peterson, “is not a one-size-fits-all agreement.” There are numerous exceptions for individual countries, covering such issues as the hiring of minorities and the promotion of female-owned businesses. Depending on the country, certain industry sectors continue to enjoy a measure of protection from foreign producers.

Perhaps the biggest question mark attached to TPP is the provision on investor-state dispute settlement (ISDS), which would allow private companies to sue governments for loss of profits or property due to domestic policies. Critics worry that the clause would undermine U.S. efforts to promote worker safety and environmentally responsible production methods. It could also empower multinationals to avert local health regulations.

Similar language already exists in Nafta and other pacts, but Peterson doesn’t believe the U.S. has had a “really bad experience” from corporate lawsuits. “I don’t think it would get any resonance,” he said, “but some other countries have different experiences.”

ISDS has been “a huge factor” in Canada, said Pearson. “The government has settled many disputes, and lost many cases.” In any event, the provision has tended to be overlooked in the TPP debate, which has mostly focused on the issue of domestic job protection. But it could bubble up as a major factor in the final decision of U.S. legislators.

Congress, having bestowed on President Obama fast-track trade negotiating authority, can only vote up or down on TPP, with no ability to offer amendments. So the agreement, which took years to develop among its fractious participants, will have to stand or fall in its entirety.

Given the rhetoric of a presidential election year, the outcome is far from certain. Obama is pushing hard for passage, but key Democrats oppose TPP, and while many Republicans tend to favor it, they’re not eager to hand the President a major political victory in the waning months of his administration.

Nevertheless, importers and exporters need to prepare. They must carefully assess how TPP stands to affect their activities, whether it promises to open up new markets, how it works in tandem with Nafta, and what impact it will have on domestic production. “All I can say,” said Peterson, “is that it’s a lot of homework – and it’s homework that has to be done.”

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TPP: A New Era of Trade, or the Monster Spawn of Nafta?