In this international trade brief, we discuss the implementation of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and why this international trade arrangement presents yet another immense opportunity and challenge for Canadian businesses.
On December 30, 2018, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was implemented as between Canada, Australia, Mexico, New Zealand, Japan and Singapore.
As described in our earlier international trade brief on the agreement, the CPTPP evolved from the Trans-Pacific Partnership (TPP), which was a comprehensive regional trade agreement negotiated between 12 countries bordering the Pacific Ocean including the United States (U.S.). However, on the heels of being inaugurated into his Office in January 2017, U.S. President Donald Trump issued an executive order unilaterally pulling the U.S. out of the deal. As the TPP required ratification by at least six states that together accounted for more than 85% of the GDP of all signatories, the TPP could not proceed without the U.S.
The remaining 11 countries, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, revived the deal, and renamed it as the CPTPP. The CPTPP incorporates, by reference, significant portions of the TPP agreement, with the exception of some provisions relating to intellectual property and investor-state dispute settlement (specifically concerning “investment agreements” and “investment authorizations”), which were previously important issues for U.S. participation in the TPP. Once fully implemented, the CPTPP will create a trading bloc made up of almost half a billion consumers and representing 13.5% of the global GDP.
Some of the key provisions of the CPTPP for Canadian businesses are described below.
A key aim of the CPTPP, like any free trade agreement, is to reduce and ultimately eliminate tariffs, and to improve market access opportunities abroad for domestic producers. Not surprisingly, the agreement sets out detailed tariff liberalization obligations with the aim of eliminating duties on 99% of the tariff lines as between the member countries.
For Canadian businesses, the elimination of tariffs imposed by Japan, Malaysia and Vietnam will be significant as these countries have to date maintained high tariff rates and because Canada does not have existing trade agreements with these countries.
A significant change for the automotive sector is the reduction in the required level of regional value content for auto parts and light-duty vehicles, to benefit from the CPTPP tariff reduction. The CPTPP provides for minimum regional value content of 45% for finished vehicles and between 35% and 45% for auto parts. Canada and Japan have also agreed, in a side letter to the CPTPP, that Japan will allow vehicles manufactured in Canada under Japan’s Preferential Handling Procedure to benefit from streamlined noise and emissions testing procedure, as well as access to accelerated dispute settlement procedures.
Trade in services
The CPTPP adopts a “negative list” approach, preferred by Canada, to the liberalization of services. Under the CPTPP, all service sectors should benefit from non-discriminatory treatment and market access, except for those expressly excluded (i.e., set out in the “negative list”). The CPTPP also includes a chapter focused on financial services trade – one of the largest service sectors in Canada. This chapter provides for enhanced market access commitments for Canadian financial services firms from CPTPP parties. It also provides protection for financial investors and a special dispute resolution framework tailored to the financial services sector. However, like other trade agreements, the CPTPP preserves the broad discretion of financial regulators to take measures to promote financial stability and maintain the integrity of their financial systems.
The CPTPP prohibits expropriation without prompt and adequate compensation and requires investors from each of the parties to be treated in a “fair and equitable manner.” Additionally, investors are to be accorded both “national treatment” and “most-favoured nation treatment,” meaning that foreign investors cannot be treated in a less advantageous manner than domestic investors or investors of any other country. While certain provisions related to disputes arising out of “investment agreements” and “investment authorizations” will remain suspended, the CPTPP will provide access to international investor-state mechanisms for dispute settlement, enabling foreign investors to enforce their rights against the host state of the investment in an independent international arbitration proceeding.
With the implementation of the CPTPP, investors from the CPTPP nations will also avoid having their investments in Canada reviewed under the Investment Canada Act unless the investment has an enterprise value of $1.5 billion or greater, a significant increase from the current threshold. State-owned enterprises will, however, not be eligible for the higher threshold.
Subject to certain exclusions and exceptions, the CPTPP will expand the ability of businesses to compete in the national and sub-national public procurement markets.
With the implementation of the CPTPP, Canada becomes the only G7 nation with free trade access to North America (under NAFTA and in the future the CUSMA), Europe (under CETA) and the Asia-Pacific region (under the CPTPP).
This will present immense opportunities as well as challenges for Canadian businesses. Canadian businesses should review their strategies and determine how this new international agreement can be used to expand supply sources and markets, and how to address any potential increased competition from global players who will seek to use the CPTPP, and Canada’s other trade agreements, to enter the Canadian market.
By Riyaz Dattu and Gajan Sathananthan, Osler