Vietnam and Malaysia predicted to be winners of TPP agreement

The Trans-Pacific Partnership involves 12pacific rim countries but some look set to benefit more than others from the agreement, with Vietnam and Malaysia singled out as two likely winners. The Trans-Pacific Partnership (TPP) is a trade agreement concerning a variety of matters of economic policy, which was reached on 5 October 2015 after 7 years of negotiations. 

Each of the 12 countries that signed up to the landmark Trans-Pacific Partnership (TPP) agreement expects to benefit greatly from a deal that will open up a vast new market of 800 million people for their products and spans a large portion of the globe. However, none has higher expectations than Vietnam, which experts say has emerged as the big winner of the TPP agreement, with Malaysia as the runner-up, in the struggle to boost exports and attract FDI. 

The agreement’s 30 chapters cover various trade and trade-related issues, including reducing tariff and non-tariff barriers in sectors as diverse as agriculture, industrial goods, pharmaceuticals, service industries, financial services and telecommunications. 

The agreement also deals with investment, intellectual property, labour, the environment, good governance and methods for dispute settlement. Novel features of the agreement include addressing the roles of state-sponsored enterprises and e-commerce, and its commitment to assisting small and medium-sized enterprises so that they benefit from the new trade openings. It will also work towards facilitating the development of production and supply chains and seamless trade.

FDI boost

That so many countries – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam – at such different levels of development were able to reach agreement on so many complex and domestically sensitive issues is remarkable. 

The TPP, though primarily about trade, is also expected to generate a significant increase in FDI. Indeed, its chapter on investment specifically emphasises that each country’s markets and services sector will be fully open to foreign investors – unless the country has put a specific sector on a 'negative list' that is not open to foreign investment.

“The big winners on trade are likely to be the big winners on investment, especially over a 10-year period,” says Dr Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, DC.

In percentage terms, Mr Hufbauer expects Vietnam to be a big winner in both categories because it is coming from far behind the rest of the field. In addition, its tariffs on many imports – among the highest in the TPP trade area – will be lowered or eliminated. To get the maximum benefit from the TPP, Mr Hufbauer says Vietnam will need better technology and financial services, both of which will require FDI. “If Vietnam carries through on the reforms in the TPP, it will get a ton of investment,” he says.

Vietnam’s burgeoning textile and apparel sector, which currently exports about $17.5bn-worth of goods a year, is expected to benefit most under the TPP. Its other major exports are telephones, consumer electronics, footwear and seafood.

The Nafta effect

Mr Hufbauer expects that under the TPP, Vietnam could enjoy the benefits of “the Nafta effect”, which enabled Mexico to increase the FDI it received from $3bn to $4bn a year to $15bn to $20bn annually after Mexico, the US and Canada signed the North American Free Trade Agreement. To get the full benefit of the TPP, however, both Vietnam and Malaysia will need to improve their infrastructure and tackle corruption, he says.

Dr Deborah Elms, executive director of the Asian Trade Centre in Singapore, is also bullish on Vietnam. “The consequences of the TPP for the [Vietnamese] economy are huge. A lot of the reforms they have to make are hard and challenging. By using TPP as the mechanism to get reforms done, we are more likely to see them,” she says. 

Inward FDI has already begun, she adds, with large-scale investors from China, South Korea and Indonesia already moving to Vietnam to take advantage of the TPP. Ms Elms points out that the trade benefits of the TPP are based on where the product is made, not on the country in which the corporate headquarters are located. Therefore companies with operations in other countries are likely to move those operations to locations within the TPP to benefit from zero or lowered tariff barriers on their products. 

Malaysia too has high hopes for the TPP. It sees a competitive advantage for its key exports of electrical and electronics goods, as well as chemical, palm oil, rubber, wood, textiles and automotive products. In a statement, the Malaysian government reported that a number of foreign companies in non-TPP countries were exploring Malaysia as a base for their operations to take advantage of the agreement.

Sector winners

The TPP also opens up vast new opportunities for the services sector in member countries – an arena in which the US is extremely competitive, says Ms Elms. The agreement states that member countries’ markets must be fully open to services, except those on the 'negative list'. 'Services' include professional services such as legal and accounting, as well as retail and restaurants, travel and tourism, and telecommunications. At the same time, Ms Elms expects openings to be created for domestic companies to become competitive.

Another industry she expects to benefit from the TPP is the food and agricultural sector, where markets are traditionally very protected and closed to foreign products. Tariffs will be eliminated or reduced over time, food will not have to be repeatedly tested as it crosses borders, and special rules will expedite the processing of perishable goods through customs. Ms Elms expects these advantages to attract FDI, especially in food processing. 

“If a company can figure out how to take advantage of this agreement, the upside is great. But it takes a fair amount of effort to figure out what is in it and how to harness it,” she says.

It will also take a fair amount of effort for each of the 12 governments that signed the deal to get their parliaments to go along with it. In each country there are powerful groups that see their own special interests as being damaged, whether in the agricultural, biopharmaceutical or automotive sectors. Labour groups also worry that production will be outsourced to workers in low-wage countries. US presidential candidate Hillary Clinton has announced her opposition to TPP, even though it was negotiated by a fellow member of the Democratic Party.

Expect a fierce fight on all fronts before the dust settles.

Click here for original piece.

Tripartite FTA COMESA-EAC-SADC Launched

The Tripartite FTA has been launched and encompasses 26 Member/Partner States from the Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC) and the Southern African Development Community (SADC), with a combined population of 625 million people and a Gross Domestic Product (GDP) of USD 1.2 trillion, will account for half of the membership of the African Union and 58% of the continent’s GDP.

The Tripartite FTA popularly known as the Grand Free Trade Area, is the largest economic bloc on the continent and the launching pad for the establishment of the Continental Free Trade Area (CFTA) according to the Abuja Treaty by 2017. This might be accomplished possibly by the Tripartite FTA negotiating with ECOWAS. 

The Tripartite FTA offers significant opportunities for business and investment within the Tripartite and will act as a magnet for attracting foreign direct investment into the Tripartite region. The business community, in particular, will benefit from an improved and harmonized trade regime which reduces the cost of doing business as a result of elimination of overlapping trade regimes due to multiple memberships. 

The launching of the Tripartite Free Trade Area is the first phase of implementing a developmental regional integration strategy that places high priority on infrastructure development, industrialization and free movement of business persons. Integration under the Tripartite is a developmental process with infrastructure development, industrial development and market integration as three critical, interdependent pillars. The second phase of negotiations, should address liberalization in services, movement of people, investment, as well as competition policy and intellectual property rights, and is yet to be undertaken.

For full copies of documents check here

EAC/EABC Monitoring of NTBs

The EAC in collaboration with EABC has developed the Non Tariff Barriers (NTBs) mechanism as envisaged in Article 13 of the EAC Customs Union Protocol. The mechanism provided for the establishment of the National Monitoring Committees in the Partner States and the Regional Forum on NTBs to assist in identifying, monitoring and the elimination of NTBs.  The mechanism is also replicated at a Tripartite level in the COMESA-EAC SADC NTB Monitoring Database. 

Currently the EAC has undertaken a study on the development of a legally binding enforcement mechanism based on international best practice for elimination of NTBs in the region.  The study is expected to analyse the effectiveness of the EAC mechanism on identifying, monitoring and elimination of NTBs as per the EAC Time Bound Programme.  The study is also expected to categorize NTBs into categories to be subjected to legally binding enforcement mechanisms based on proposed criteria and propose NTBs to be arbitrated by the East African Court of Justice.  Hence a key outcome of the study will be proposals to strengthen the EAC Mechanism through introduction of legal enforcement clauses in the current system.

In addition, EAC is coordinating preparation of an EAC position on the elimination Non-Tariff Barriers under the on-going negotiations for the Tripartite Free Trade Area to ensure that the issue of elimination NTBs in the FTA is well articulated.  In this respect the monitoring of services barriers should be included, which will expand on the approach which currently lends itself mainly to trade facilitation issues.

Lamy Warns on WTO DDA Negotiations

At a meeting in Kenya last week, Mr Pascal Lamy said the risk of failure of the talks — commonly referred to as Doha Development Agenda (DDA) after the Qatari city that first hosted them — is higher today than it was a few years ago. 'Should the talks fail, this could lock exports from poor countries out of major world markets'. See full report here.

New EU-Wide Investment Policy

As a region, the EU is the most significant global investment player. It is the world's leading host of Foreign Direct Investment (FDI) as well as the world's biggest source of FDI outside the EU. By 2008 outward stocks of the EU FDI amounted to € 3.3 trillion while EU inward stocks accounted for € 2.4 trillion. 


According to a recent press statement, the EC has now formulated a comprehensive investment policy which will seek to integrate investment liberalisation and investment protection.  Under the Lisbon Treaty, investment is one of the areas covered by the EU common commercial policy which is developed and managed at the European level giving the EU a strengthened negotiating leverage. However, there are 1200 Bilateral Investment Treaties (BITs) concluded by individual EU Member States and other countries. In addition, the European Commission (EC) as a legal entity is also negotiating investment agreements, for instance with African countries, as part of the Economic Partnership Agreements (EPAs). 

To address this anomaly, the  EC has released a comprehensive investment package which consists of: 

(1) a policy paper titled "Towards a comprehensive European international investment policy" and 

(2) a draft regulation which sets up transitional arrangements offering guarantees to existing or pending BITs concluded between EU and Non-EU countries prior to the enforcement of the Lisbon Treaty. Here, the Commission has provided legal security for European and foreign investors, without hampering the EU's ability to negotiate new investment treaties at EU level.  

The EU Member States together account for almost half of the investment agreements currently in force around the world. However, not all Member States have concluded such agreements, and not all agreements provide for the same high or equivalent level of standards. According to the EC, this leads to an uneven playing field for EU companies investing abroad, depending on whether they are covered as a "national" (granted national treatment) under a certain Member State BIT or not. 

Another feature of the agreements of individual EU Member States is that they relate to the treatment of investors “post-entry” or “post-establishment” only. This implies that Member States’ BITs provide no specific binding commitments regarding the conditions of entry, neither from third countries regarding outward investment by companies originating in EU Member States, nor vice versa. Here the EC might want to be guaranteed non discriminatory pre-establishment MFN Status.  Gradually, the European Union has begun the process of filling the gap of "entry" or "admission" through both multilateral and bilateral agreements at EU level, covering investment market access and investment liberalization, ensuring the non-discriminatory treatment of investors upon entry to a third country market.

The EC recognizes that a one-size-fits-all model for investment agreements with 3rd countries would be neither feasible nor desirable. Therefore the EC will have to take into account each specific negotiating context. However since actual trade and investment flows are in and of themselves important determinants for defining priorities, the EC indicates that they should go where its investors would like to go, through the liberalisation of investment flows. The policy paper identifies some candidates for a full investment agreement including India, Canada, Mercosur and where possible China and Russia, but also states that should a comprehensive, across-the-board, investment agreement with a country, or a set of countries, prove impossible or inadvisable, sectoral agreements may be an option whose desirability, feasibility and possible impact would have to be further assessed.

On the specifics of the approach, the EC would look beyond FDI and protect all the operations that accompany investment and make it possible in practice e.g. payments, the protection of intangible assets such as Intellectual Property Rights, etc. Enforcement is also addressed and identified as a key issue in the new policy. Currently, the EC has included in all of its recent FTAs, an effective and expedient state-to-state dispute settlement system. In addition, investor-state dispute settlement will be featured since it is a key part of the inheritance that the Union receives from its Member State BITs.  

However there is a uniqueness of investor-state dispute settlement in international economic law which impacts the EC's mandate in this area. For example, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention), is open to signature and ratification by Member States of the World Bank or those party to the Statute of the International Court of Justice. The European Commission does not qualify under either.  This new investment policy paper however proposes that the EC could seek accession to the ICSID, but notes that this would require modification of its convention.


A key outcome of this policy is that the EC may request renegotiation of existing BITs by individual member States. "The Commission will review the existing MS BITs. If it finds clauses that are incompatible with EU law (e.g. transfer clauses that would hamper the implementation of EU financial restrictions against a certain third country), it would ask the Member State to renegotiate such clause. If this proves impossible, the authorisation may be withdrawn as a matter of last resort.  Likewise, authorisations can be withdrawn if the EU negotiates an investment treaty at European level, and recourse to Member State BITs with the same third country is not necessary anymore."

While FDI will be within the full competence of the EC, the expectation is that by following available best practices, they would ensure that no EU investor would be worse off than they would be under Member States' BITs. Member States will however have scope to pursue and implement investment promotion policies that complement and fit well alongside the common international investment policy. In addition, BITs maintained by Member States may require amendments in order to bring them in compliance with EU law. The same framework is intended to be available also for Member States that would like to negotiate and conclude new investment treaties with countries, which are not targeted for EU-wide investment agreements, e.g. for foreign policy purposes.  

Overall, this is an interesting development in the wake of the EPA services and investment negotiations and should be studied carefully in light of the scope of the EC's investment text which covers all economic sectors including services i.e.: A) Agriculture, hunting and forestry; B) Fishing; C) Mining and quarrying; D) Manufacturing; and E) Production, transmission and distribution on own account of electricity, gas, steam and hot water. It is therefore useful to note that sectoral agreements rather than comprehensive investment agreements could be considered a viable option where feasible. 


One should also note that on "policy space" the EC's approach will be to ensure that the EU common investment policy fits in with the way the EU and its Member States regulate economic activity within the Union and across its borders. ...."EU investment policy has to be consistent with the other policies of the Union and its Member States, including policies on the protection of the environment, health and safety at work, consumer protection, cultural diversity, development policy and competition policy." African States negotiating investment chapters in the EPA could opt to also ensure compatibility of proposed EPA investment provisions with their own development policies.

EPA Rules of Origin and Value Added Methodology

My article on Tralac website republished here. (original dated March 2007)

In a March 2005 communication, the European Commission (EC) proposed a radical change to its origin rules and suggested that the reform would simplify processes and make the rules more development friendly. The EC envisages sweeping away the present multiplicity of rules of origin and replacing them with a single rule, based on value addition in the beneficiary country. Under this methodology, a product resulting from the working or processing of imported non-originating materials would be considered as originating if the value added in the country (or in a region where cumulation is permitted) amounted at least to a certain threshold (a minimum "local of regional value content") expressed as a percentage of the net production cost of the final product. 

Value addition is one of the three major criteria to determine last substantial transformation for non-originating inputs in the ACP-EU Cotonou Partnership Agreement. The other two criteria are the Change in Tariff Heading (CTH) test which requires that the tariff-heading of the final product should be different from the tariff-headings of its inputs at the four HS digit code and the Specific Process (SP) test, which requires a product to undergo certain stipulated processes before originating status can be conferred. 

As agreed by ACP Ministers in Port Moresby, Papua New Guinea in June 2006, the negotiating mechanism for the rules of origin in the EPA negotiations will be at the level of the ACP-EU. In this regard, while the harmonisation of the methodology for determining substantial transformation in the EU rules of origin regime is understandable, given that the EU has about forty preferential arrangements with third countries or groups of third countries in total, a proposed move to a single value addition methodology in the ACP-EU EPA negotiations would undermine the ACP negotiating position given its less frequent usage as a sole criteria and comparatively infant stages of regional integration in the ACP.

With regard to the usage of the value added methodology, the recent study by ODI Creating Development Friendly Rules of Origin in the EU found that the value added test has been aplied as the originating test for only about one tenth of the products that poor countries such as ACP countries actually export to the EU. Furthermore the study indicates that the value added test is the second most frequently applied sole substantial transformation criterion after specific processes, with a utilisation of 23.5% across all EU agreements. Taking this into account, a move to this single approach within the ACP could erode the benefits accruing in the EPA negotiations, unless the methodology can accommodate the CTH rules and SP and production methods already triggering trade within the Cotonou Agreement.

Given that the future ACP-EU rules of origin are expected to be an outcome of the EPA negotiations, a single value added approach by the EC would still need to accommodate ACP interests as part of the outcome of the negotiations. The ACP-EU negotiations would therefore need to take into account sound regional economic analysis that meets the objectives of the EPAs, which is development. Any benchmarks under consideration would need to enhance and stimulate trade for this methodology to be feasible across the sectors of interest to the ACP.

In addition, the ACP countries may also consider the following in their negotiations:

The value addition criteria, where it is utilized would rather be costs based rather than the ex-works price. The ex works price currently applied in the Cotonou Agreement may compromise the value of the EPA preferences particularly for landlocked and LDC countries.

Methodology for the valuation of non-originating materials will need to consider that some ACP States to date, still do not have the capacity to implement and apply the WTO or WCO customs valuation agreements.

The methodology should provide reduced local value added thresholds for LDCs and small, vulnerable, island and landlocked States given their unique challenges.

Value added thresholds where they are agreed upon should be as low as necessary to accommodate the diverse objectives of the different EPA regions and sectors of interest given that high or low wages and rents can conceal the true value added levels.

Thresholds will need to be achievable by firms and enterprises across the board and be based on EPA regional economic analysis and specific sectors of interest given that percentages for minimum value addition thresholds can vary significantly between products and sectors. This may arise due to the prevailing labour costs, capital and technology, cost of inputs and the import dependence of the region in terms of intermediates.

Reciprocity in rules of origin will need to be considered given that thresholds will need to accommodate the variance between developed, developing and least developed countries. This may need to be sector specific, such as clothing, textiles and fisheries, given that the ODI study on rules of origin has indicated that value added is not always lowest in low-income countries with some EU countries meeting lower value added thresholds than ACP States in certain sectors in light of technological advances for instance.

ACP defensive rules of origin will need to complement the objectives of ACP sensitive sectors vis a vis the EU and hence the value added methodology may need to consider EU sectoral processes and production advantages as well.

Detailed regional analysis will need to supplement the ACP-EU level negotiations both on the substance and objectives of EPAs. The negotiations should therefore take into account the highly unequal levels of the Parties with regard to regional integration. The concerns around overlapping membership in regional trade agreements and thereby overlapping rules of origin are relevant, if EPAs are to promote regional integration and enhance competitiveness.

The task ahead is indeed momentous. Rules of origin have frequently been identified as the root cause of underutilization of the long standing ACP-EU preference regime. Fortunately, the ACP States now have a historic opportunity to improve upon these rules in order to expand trade and development in their economies. However given the complexity of this issue, divergence in the negotiating strength of the two Parties and ACP regional variances, one wonders if ACP countries will be adequately prepared this year to negotiate reciprocal rules of origin using the value added methodology as the cornerstone of the negotiations.

Genesis of the EC's MFN Clause in the EPAs

There has been much discontent regarding the Most Favoured Nation (MFN) Clause found in the Africa-EU Economic Partnership Agreements (EPAs), and the effect the clause would have on south-south trade and the standing of the Enabling Clause.

The genesis of the MFN clause can be understood in the context of OECD's recent 2010 publication: Shifting Wealth, which finds that between 1990 and 2008, world trade expanded almost four-fold, but South-South trade multiplied more than ten times. Hence developing countries now account for around 37% of global trade, with South-South flows making up about half of that total. This trade could be one of the main engines of growth over the coming decade, especially if the right policies are pursued.

It would seem that the EU would like a slice of this rapidly expanding south south pie.  In fact as shown above, the contribution to world GDP and PPP growth by developing countries has risen sharply since the nineties and has outpaced the contribution of advanced economies, and has doubled it.  Hence, the MFN clause could be intended to accelerate the EC’s ability to benefit from south south market-opening especially with fast growing economic giants that the EU has not concluded an FTA with.  These include the BRIC countries (Brazil, Russia, India and China).  

As an example, Africa's south-south trade with non African countries, has increased from a low of 8% of Africa's total trade to almost 30% and this increase is largely trade with Asia. Trade between Africa and China was estimated at US$6.5billion in 1999 but in 2008 was valued at US$107 billion, making China, Africa's second largest single country trading partner following the United States (see previous posts on Asia China Trade). Meanwhile, in the last 30 years, Africa's trade with the EU has continued to decline, from a high of 55% in the mid eighties to about 35% share of total Africa trade in 2008.

In light of the above, it is necessary for African countries to take caution with regard to forward-looking concessions between Africa and fast growing economies and concessions between Africa and shrinking economies.  In addition, it should be noted that the EU is undertaking numerous FTA negotiations with developing and BRIC economies. Therefore, the future standing of the MFN clause in the EPAs should also be considered in light of the EU's rapidly expanding list of future FTAs. 

Other legal and systemic concerns regarding the EPAs can be found here. 

The Life Cycle of Trade in Services Negotiations

Despite the experience gained from more than two decades of services negotiations at the multilateral, plurilateral, and bilateral levels, trade in services continues to rank among the most complex subject matters in modern trade diplomacy. Such complexity arises from a number of factors, including:

1. the intangible nature of service-sector activity, and the corresponding difficulty of measuring and assessing a sector’s contribution to production and exchange and the economic consequences of alternative policy choices;

2. the considerable diversity of activities encompassed in a sector;

3. the challenge of factor mobility (capital and labor) involved in services transactions; and

4. the ubiquity (and diversity) of market failures affecting services transactions and related regulatory intensity.

For instance some African countries may be considering services market opening with the EC, as a part of the EPA Services and Investment negotiations. In this regard, the World Bank has developed a useful manual on trade in services negotiations, which addresses the 5 stages of the services negotiations life cycle. The stages include:

1. mapping a strategy for services in national development plans;
2. preparing for services negotiations (i.e., developing an informed negotiating strategy or identifying the capacity needs required to do so; setting up the proper channels of communication with key stakeholders; and conducting a trade-related regulatory audit);
3. conducting services negotiations (i.e., acquiring a voice in debates on outstanding rule-making  challenges in services trade by pursuing offensive interests; devising strategies to deal with defensive concerns; analysis of negotiating requests of trading partners; formulating own requests and offers; and participating in collective requests and offers);
4. implementing negotiated outcomes (i.e., addressing regulatory capacities and weaknesses; and identifying implementation bottlenecks); and
5. supplying newly-opened markets with competitive and international standard-compliant services (i.e., addressing supply-side constraints on the ability to take full advantage of the outcome of trade negotiations, including aid-for-trade in services).

The manual provides guidance on each of these platforms and can be accessed here.  


Meanwhile. the EPA-EC negotiations remain contentious and inclusive interim goods agreements in several regions have not even been completed (e.g. West Africa, East Africa, SADC EPA and Pacific regions).  On services and investment, it is not clear if African countries will get sufficient time and resources to negotiate with the the largest services economy in the world, the EU.  


Nonetheless, African countries should proceed with caution and with a clear strategy.  They should also bear in mind that Europe as a single market is the world‘s largest exporter of manufactured goods and services; the biggest export market for more than one hundred countries and has over 20 FTA and other trade negotiations under way (counted by country), which include services agreements.