Trans-Pacific Partnership Negotiations - Services

Jane Kelsey, Faculty of Law, University of Auckland

A very aggressive approach will be taken to the services/investment negotiations for the TPP. The goal is less about opening markets than a desire to create an integrated set of precedents on structure, rules, regulatory disciplines, systemic sectoral coverage, financial services, capital movements and investor rights and protection within a single text that can be advanced as a benchmark in the GATS, other FTAs and APEC.

Importance of Services Exports to TPP parties
Statistics on trade in services are notoriously misleading, because the figures that governments collect do not correlate with the definition used in trade in services agreements (TISAs), especially the inclusion of FDI and labour mobility. With that caveat in mind, official US figures for cross-border services report a trade surplus with TPP parties of over $8 billion. The US exports $1.6b to NZ and imports $1.5b, presumably mainly from tourism as the US is NZ’s 3^rd largest source of tourists and tourism expenditure. Sales of services by majority-owned US affiliates in TPP countries in 2006 were $53.8 billion, making promotion and protection of foreign investment with associated free capital movements more important than cross border services. Affiliate sales to NZ were $2.9 billion.

Australia and New Zealand rely on education exports and tourism as crucial foreign exchange earners. Although there is no evidence that trade in services agreements enhance these earnings, the importance of education and tourism alongside more niche services[1] provide the rationale for demanding strong services chapters in FTAs.

Singapore and Chile both consider themselves services hubs for their regions.

Current TIS commitments of TPP parties
All TPP parties except Brunei have high levels of binding commitments on trade in services, for slightly different reasons. The major players (Chile, Singapore, NZ, Australia and US) have highly liberalized domestic regimes and are aggressive demandeurs in the WTO and FTAs. While their current levels of liberalization are not bound under the GATS 1994 or in every FTA[2], the P4 and AUSFTA come much closer. Peru has extensive bindings through the US Peru FTA that came into force in February 2009 and Vietnam through its WTO accession in January 2007.

Services industry lobbies
The US services lobby is very effectively organized through the Coalition of Services Industries. Their counterparts in Australia and NZ (operating through the Wellington Chamber of Commerce) work closely with their governments. The CSI submission to the US hearing on the TPP set some clear objectives and identified supporting precedents. CSI members want comprehensive market access for cross-border trade and direct investment, investor protections, and regulatory transparency (including prior consultation before new regulation). Because direct and portfolio investment generates much more income for the US than cross border supply, a priority is to eliminate all investment barriers, including equity caps and limits on juridical form, across all main services areas. The definition of “investment” should include portfolio investment, and new protections should apply to pre-existing investments, as in earlier US BITS. Provisions in the P4 and FTAs with other TPP parties on services (and intellectual property) should be renegotiated to reflect the higher standards of the most recent US FTAs. A TPP should also include anti-corruption provisions similar to U.S.-Peru FTA.

Sectoral priorities
The sectoral priorities of the CSI and the US Chamber of Commerce are advertising, audiovisual and media, computer and related services, construction, education, distribution, energy, express delivery, environmental, financial, medical, print media and publishing, retail, basic and value-added telecommunications and wholesaling, legal services, accounting, media. The NZ US Business Council, established in 2001 to push for a US FTA, is focused on primary production, manufacturing, finance, travel, new technology and services sectors.

Further insights into the sectors that TPP parties will target are found in the plurilateral requests they endorsed in the GATS 2000 process in 2006:

US: Computer, Construction, (private) Education, Energy, Engineering, Environment, Express Delivery, Finance, Logistics, Postal, Telecom

Australia: Computer, Construction, (private) Education, Energy, Engineering, Environment, Finance, Logistics, Legal, Maritime, Telecom

NZ: Computer, Construction, (private) Education, Engineering, Maritime, Logistics, Postal, Legal

Singapore: Computer, Construction, Energy, Logistics, Telecom

Peru: Computer, Logistics

Chile: Computer, Engineering, Logistics

There is substantial common ground, suggesting they may aim to develop the equivalent of model schedules or clusters suited to a negative list and will insert novel chapters that discipline the regulatory options of government in these sectors.

Likely structure of a TPP for Services

The P4 is quite outdated and less ambitious than US FTAs. It seems likely to be completely revised using more recent texts. Chapters relevant to services will include:

• Investment
• Cross border trade in services
• Financial services
• Telecommunications
• Temporary Movement of Business Personnel
• Government procurement
• Competition-related, monopolies, state enterprises
• E-commerce
• Transparency

A Gold Star TPP on Services

A minimum checklist for an exemplary GATS+ agreement is likely to include:

• negative lists of non-conforming measures and excluded sectors or measures;[3]
• separate chapters on cross-border services and investment, allowing services and non-services investment to be relocated to a separate chapter or cross referenced;
• prohibiting any requirement for a commercial presence to deliver a service;
• prohibiting restrictions on the legal form of a commercial presence;[4]
• a ratchet provision to lock in new investment liberalization;[5]
• an explicit affirmation of technological neutrality that extends existing commitments automatically to new ways of delivering services;
• a telecommunications chapter that guarantees infrastructural access with minimal contributions, extending the GATS Agreement on Basic Telecoms;[6]
• a financial services chapter that extends the light handed regulation of the Understanding on Financial Services, including the right to supply new financial products[7];
• transparency requirements that include prior consultation on new regulations;[8]
• disciplines on government procurement of services, explicitly including PFIs;
• investor state disputes;[9]
• unrestricted entry and exit of current and capital payments, with full repatriation of profits and proceeds of sale, even in a balance of payments emergency;[10]
• the right to use existing FTAs where they are more liberalized.

Major Issues for NZ

Financial services: The P4 does not currently include financial services and investment, but required negotiations within two years. The US joined those negotiations in February 2008. After three rounds they morphed into comprehensive FTA negotiations.

Although there is no public information on these negotiations, the US financial services lobby has voiced its demands for the TPP. The US financial and telecom/data industries, notably AIG, Citibank, Amex and Merill Lynch, were the instigators of the GATS and still dominate the US services lobby. The US Chamber of Commerce wants the TPP to set the highest standards of market opening, including rights to own 100% of any investment, full national treatment, and elimination of non-prudential regulatory barriers. Enhanced transparency would require regular dialogue on regulatory issues and continued reform and alignment of financial services regulations with ‘global best practices’ as these develop over time.[11] US firms should be encouraged to develop new and innovative products ‘to meet the needs of consumers’ in each of the eight participating economies, which host governments would not be allowed to prohibit. The financial services chapter of the U.S.-Korea FTA was promoted as a ‘gold standard’ for regulatory transparency and data transfer and departure point for further gains. The investor-initiated dispute settlement proceedings should apply to financial-services disputes.[12]

Foreign financial services are hugely significant for NZ, given our minimal regulation. The United States Bureau of Economic Analysis (BEA) put NZ-US bilateral trade in financial services in 2004 at US$60 million. A large portion of the funding of New Zealand registered banks is sourced directly from the US via commercial paper and medium term note funding or indirectly through US dollars. Non-bank financial institutions rely heavily on US funding. In 2007 only two of the 17 registered banks in New Zealand are branches of US banks, with Australian banks much more dominant. As NZ’s foreign investment laws do not restrict the sale of the major commercial banks to new owners, they could transfer to the US, Singapore or other countries. Subsidiaries of US insurers, such as AIG, have been major players in the NZ market.

The collapse of local investment vehicles is a matter of concern irrespective of the financial crisis. The light handed regulatory regime in the GATS and existing FTAs extend to a wide range of financial services, including traders in speculative financial products such as hedge funds and securitized assets, and auxiliary services suppliers such as credit rating agencies. They also restrict governments’ rights to regulate new financial products. Further liberalisation of the cross-border supply of financial services would raise additional risks, as Iceland has shown. The scope of prudential measures has not yet been addressed, but many steps taken are likely to exceed those permitted in the financial services chapters. Recent US FTAs also remove flexibility to suspend obligations in balance of payments emergencies.

Foreign Investment: NZ’s GATS 1994 schedule bound the threshold for vetting foreign direct investment at $10 million. The NZ Singapore CEP locked in the higher $50 million threshold with a ratchet provision that extends this to any new liberalization. The criteria for vetting are also bound in the negative list in the P4. This is why the Labour government was unable to legislate against foreign control of Auckland Airport and the pretence that their intervention was to protect sensitive rural land. The results of the current review of FDI would become binding in for perpetuity.

Audio-visual: USTR annual reports consistently target the voluntary domestic content quotas in broadcasting. They may also attack the special paragraph for ‘creative arts of national value’ that has been included in the general exceptions article of NZ’s FTAs since the Singapore NZ CEP.[13]

Treaty of Waitangi: It is not clear how the US or Peru would view the special article that allows the government to take measures it sees fit to meet its Treaty obligations, especially given the current indigenous uprising in Peru against legislation to implement the investment obligations in the US Peru FTA.

[1] NZ sees niche markets in postal consultancy, aircraft and other engineering, legal profession, digital movie production, construction and logistics.

[2] eg. the NZ Thailand FTA does not include services, and the NZ China FTA and aspects of AANZFTA replicate the GATS 1994 schedule

[3] NZ maintained positive lists in the Singapore, China and ASEAN agreements, but a negative list in the P4 and CER services protocol.

[4] Not requiring subsidiaries or joint ventures or restricting branches or franchises

[5] As exists in the NZ Singapore FTA

[6] Non-discriminatory access to unbundled elements of basic telecoms networks and to services and communications platforms used in providing value-added services.

[7] Guaranteed rights to establish new financial services already offered in another country, such as shonky derivatives trades and securitized sub-prime mortgages.

[8] USCOC wants pre-consultation and regulatory transparency including for procurement and a ‘least trade restrictive’ approach to regulation.

[9] These exist in all US FTAs except US-Australia and US-Bahrain (where investment issues were covered by a pre-existing BIT)

[10] This has been common to US FTAs since US Chile where the BOP exception applies only to goods.

[11] The U.S.-Japan Regulatory Reform and Competition Policy Initiative was cited as a model.

[12] As in the U.S.-Rwanda Bilateral Investment Treaty

[13] The wording is similar, but not identical, to that used by Australia.