Q&A: Trans Pacific Partnership
The Jakarta Post
The recent buzz surrounding the Trans-Pacific Partnership ( TPP ) has now overshadowed that of the ASEAN Economic Community ( AEC ), which only came into effect last year. What is the TPP? Does Indonesia need to join another trading bloc? If it does join the TPP, what will happen to the AEC?
What is TPP?
TPP is a trade agreement among 12 Pacific Rim countries. The idea of the TPP can be traced back to the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP or P4) signed by Brunei, Chile, New Zealand and Singapore in 2005. The P4 expanded to include Australia, Canada, Japan, Malaysia, Mexico, Peru, the US and Vietnam. The TPP includes the world’s first- and third-largest economy, the US and Japan, respectively. Together, the 12 countries represent 37 percent of the global gross domestic product (GDP) of US$27.8 trillion.
The agreement, which was signed on Feb. 4, 2016, in Auckland, New Zealand, must be ratified by all members before it comes into force.
Why Indonesia should join TPP?
President Joko "Jokowi" Widodo said that joining free trade agreements such as the TPP would increase Indonesia’s competitiveness by obliging it to improve the standard and quality of its products. According to Jokowi, facing increased competition would increase businesses’’ efficiency, which in turn would help the country's economy become more flexible in facing the current economic downturn. Speaking to US President Barack Obama, Jokowi stated that Indonesia would join the TPP “because we will get left behind if we don’t take a chance.”
According to Bank Central Asia (BCA) chief economist David Sumual, the TPP could be a way to boost the advanced industry sector. The agreement might attract advanced technology-based investors from TPP member countries to invest in Indonesia and develop advanced industries here. Using China as a comparison, David stated that “our exports will be mainly commodities, cheap low-value-added products with a lack of technology but lots of environmental issues.”
Will Indonesia join the TPP?
President Jokowi announced his intention for Indonesia to join the TPP when speaking to US President Barack Obama.
The official decision will depend on the committee on the TPP, created in February 2016. The committee is tasked with reviewing the advantages and disadvantages of joining the US-led trade pact. The team, which consists of two divisions, namely government officials from relevant ministries, and public figures ranging from experts to chairpersons of business associations, will examine all terms in the trade agreement. The team would recommend flexibility for Indonesia in the TPP, an official has previously said, considering that Indonesia was very likely to join the trade agreement.
What is wrong with the TPP?
Some provisions in TPP could threaten state-owned enterprises (SOEs). Achmad Hafisz Tohir, the chairman of House Commission VI, which oversees SOEs, said the TPP would force the government to change the status and mission of SOEs. The TPP contains an article requiring the privatization of SOEs, which contravenes Article 33 of the Constitution obliging production entities that are vital and affect people’s lives to be managed by the state. Achmat argued that, “It would not be possible for SOEs to complete the task if they are privatized.” The TPP also limits government assistance to SOEs. Some domestic regulations will have to change. The trade minister has said that “at least 12 laws and bills need to be revised if we join the TPP.”
Investor-state dispute settlement (ISDS) is another controversial point of the TPP. ISDS gives corporations the right to sue a host country where they operate. Corporations can challenge regulations that are not beneficial for business, including loss of expected profit, regardless of the objective of the rules for the general public. The most striking example is Philip Morris v. Uruguay, in which Philip Morris sued Uruguay for the anti-smoking campaign in the country, resulting in “expected profit loss”. The most notable ISDS institution is the World Bank’s International Centre for Settlement of Investment Disputes (ICSID).
The problem with ISDS in the context of the TPP is other clauses in the agreement itself. For instance, Third World Network researcher Lutfiyah Hanim pointed out that Article 9.9 of the agreement allowed foreign firms to challenge policies used by governments to support local job creation and business growth. Indonesia for Global Justice (IGJ) manager of research and monitoring Rachmi Hertanti argued that the term ‘investment’ under the TPP had a very broad definition, leading to “serious legal consequences as it could be used to challenge the government.” Indef researcher Bhima Yudhistira Adhinegara summarized that ISDS meant “a loss of sovereignty over trade law for TPP members.”
The majority of cases submitted to the ICSID are related to oil and gas, mining, power and energy, and transportation, which are dominated by SOEs in Indonesia.
Local businesses are also vulnerable under the TPP, according to Institute for Development of Economics and Finance (INDEF) senior researcher Iman Sugema. The partnership will increase competition, and Indonesia could end up as a ‘victim-partner’ without preparation. Economist Ine Minara S. Ruky also stated that Indonesia “will probably just be another market for TPP members.”
Concern has also come from the textile industry, despite the view that it has the most to gain from the TPP. The Indonesian Textile Association's (API) advisory board chairman voiced warning regarding the TPP’s yarn-forward clause, which cuts tariffs only for garments that use materials from TPP member countries. Indonesia imports a total $8.6 billion in textiles in the form of fiber, yarn, fabric, garments, tapestry and other textile products according to the Trade Ministry, mostly from China.
The precise economic benefit and loss from the TPP is also uncertain. A calculation using the World Integrated Trade Solutions (WITS) simulation model showed that Indonesia would still have a goods trade surplus of $1.6 billion with TPP countries without joining the TPP. However if Indonesia joins the TPP, that goods trade surplus would turn into a $19 million trade deficit with TPP countries.
Wait, I thought we have the ASEAN Economic Community?
AEC does not limit its members’ ability to join other trading blocs. Vietnam, Brunei and Singapore are all signatories of the TPP.
However, the TPP will significantly impact, if not outright disrupt AEC as a single market and production base. ASEAN could be split if its members prioritize their economic interests at the expense of region-wide collective economic interests.
Trade and investment diversion caused by the TPP is significant because the US, Japan and Australia (all TPP members ) are among the top 10 trading partners of ASEAN and the top 10 sources of foreign direct investment (FDI) inflow to ASEAN. Together they account for $33.3 million, 24.5 percent of the total FDI in ASEAN in 2014. It is predicted that trade and investment will potentially be diverted from non-TPP ASEAN members (i.e. ASEAN members that are not part of the TPP) to countries that are members of both the TPP and ASEAN. The diversion is due to the benefits that the TPP offers to its members, such as lower trade barriers and better protection for foreign investors.
Cambodian Prime Minister Hun Sen called for a review of the TPP, considering that the agreement ‘included half of ASEAN as partners, leaving half of ASEAN outside.' His statement echoed what Philippine Finance Secretary Cesar Purisima has said earlier: 'If there’s a lag between the joining of the others in a high-quality agreement such as TPP, there can be resentment, particularly since we continue to integrate.'
To make things more complicated, all ASEAN members are currently in negotiations with six trading partners regarding the Regional Comprehensive Economic Partnership (RCEP). The countries involved in the RCEP contain 3.4 billion people or 48% of the world’s population, and a collective GDP of $21.7 trillion, equaling 29 percent of global GDP. Compared to the massive RCEP, the TPP involves much fewer people (808.7 million or 11 percent of the world population) but with a larger GDP of $ 27.8 trillion or 37 percent of global GDP.
Who else is against TPP?
Doctors Without Borders ( Medecins Sans Frontieres/MSF ) is opposed to the TPP. Along with 50 other groups, MSF sent a letter to US Congress expressing concern about the TPP. Their argued that the agreement’s strict patent protection would increase the price of medicine and healthcare. In the letter, the group stated that “The stakes for public health are too high."
Nobel Prize winning economist Joseph Stiglitz has also voiced concerns that the TPP would result in further inequality. Stiglitz said the regulations harmonization in the TPP would only create a ‘race to the bottom.' Furthermore, the TPP would only enrich corporations, and “will not necessarily help those in the middle, let alone those at the bottom.”
UN human rights expert Alfred de Zayas argued that the TPP would only strengthen investors' bargaining power and transnational corporations' monopoly over public expenses, while reducing labor standards, food security and health and environmental protection. Previously de Zayas has called for the abolition of the ISDS.
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