One of President Obama’s primary reasons for supporting the Trans-Pacific Partnership (TPP), the massive free trade deal currently being negotiated by twelve countries, is his concern that, “If we don’t write the rules, China will write the rules in that region.”
His emphasis on rules stresses the highly regulatory nature of the TPP, which has less to do with reducing tariffs or other barriers to trade than it does with promoting “regulatory coherence” among member nations. Of the accord’s 29 chapters, only 5 pertain directly to classical trade issues. The others pertain to topics such as environmental and labor standards, financial services, government procurement, and – among the most significant and controversial – intellectual property (IP).
The U.S. is especially concerned about protecting American companies’ intellectual property. According to a report by the U.S. Chamber of Commerce, IP-intensive companies are responsible for nearly half of the country’s private sector output and thus contribute significantly to boosting American exports.
However, not all countries respect or enforce this intellectual property – chief among them, China. Its treatment of American company Qualcomm illustrates why the United States is so interested in seeing the TPP go into effect.
Not only will China’s largest trading partners have to abide by the agreed upon rules and protect American companies’ intellectual property, but so too might China itself – given the country’s recent expression of interest in joining the deal.
In February 2015, China imposed a $975 million fine on Qualcomm, the San Diego-based semiconductor company, for anti-competitive practices. China claimed that Qualcomm charged unfairly high royalties to Chinese smartphone manufacturers, which use Qualcomm’s chips in their products. Following the settlement, Qualcomm agreed to lower its licensing fee from 100 percent of the wholesale price of phones sold in China to 65 percent.
Critics contend that the lawsuit rested on shaky legal grounds, given the flexibility of China’s anti-monopoly law and the normalcy of Qualcomm’s licensing agreements. Analysts also believe that China was motivated by a nationalist, protectionist desire to financially defend its growing tech industry, which includes smartphone producer Xiaomi, state-owned chip maker Tsinghua Unigroup, and multinational firms such as Lenovo and Huawei.
Supporters of the TPP note that the absence of a robust free trade deal with China made it unlikely that Qualcomm, which derived 63 percent of its profits from patents in 2014, would challenge the lawsuit and fine. An op-ed in the Washington Post argued:
Under current trade law, Qualcomm has little recourse to appeal its treatment by the Chinese government. Under a trade agreement with China like the TPP, however, Qualcomm and other U.S. companies would have access to an investor-state dispute settlement mechanism. […T]his mechanism would protect U.S. firms against predatory regulatory interventions by member governments. Anti-competitive asymmetries in the world trade system disproportionately harm U.S. firms at present. Enactment of the TPP would establish protections against these asymmetries for U.S. companies.
This investor-state dispute settlement (ISDS) mechanism is an integral component of the TPP. It is the legal method by which a foreign company can challenge a domestic law that is discriminatory or that unjustly cuts into a company’s profits. For example, under an ISDS-enforced treaty, tobacco company Philip Morris has challenged plain-packaging rules for cigarettes in Australia via a Hong Kong-based subsidiary.
Complaints are heard and resolved by three-member tribunals, often under the auspices of the World Trade Organization (WTO). Many tribunal members are private-sector attorneys paid by the hour to participate in the proceedings.
While experts question whether Qualcomm would have been able to successfully use this mechanism to challenge China’s anti-trust decision, there is reason to believe that it could be used against TPP member nations to protect American firms’ intellectual property.
One possible precedent is the ongoing dispute between the American pharmaceutical company Eli Lilly and Canada. After Canada adopted a strict “promise utility doctrine,” it invalidated the patents of two drugs produced by Eli Lilly: Zyprexa, an antipsychotic pill, and Strattera, which treats ADHD.
Through NAFTA’s ISDS mechanism, Eli Lilly is arguing that its drugs are verifiably useful and that its patents ought to be protected under NAFTA’s intellectual property bylaws. The company is seeking $500 million in damages for lost profits.
While the ISDS tool in the TPP could be used to benefit American firms and protect their intellectual property, foreign entities can use it to challenge U.S. laws as well.
For example, a WTO tribunal ruled in 2012 that “dolphin safe” tuna labeling rules effectively discriminated against Mexican fishermen, who use purse seine nets that can inadvertently ensnare dolphins in the eastern Pacific Ocean. The tribunal found that the regulation exceeded international standards and worked “to the detriment of Mexican tuna products.”
Mexico is not the only country that has opposed U.S. seafood regulations. Vietnam and Malaysia are critical of the American catfish inspection program. They say its standards are excessive and that the program is being used to protect American catfish farmers from having to compete against cheaper imports. If the TPP is approved, they could fight to have the program repealed or changed.
The ISDS mechanism has become an increasingly popular tool for companies. According to Sen. Elizabeth Warren (D-Mass.), there were fewer than 100 ISDS claims worldwide between 1959 and 2002, while in 2012 alone there were 58 cases.
On June 18, the House passed fast-track legislation that would bar Congress from amending the TPP and put the deal to a simple up-or-down vote. The House was able to pass the bill after it separated it from another measure that would provide training assistance to workers who lose their jobs because of increased trade.
The bill now moves to the Senate, where some Democrats, led by Sen. Warren, are skeptical of the TPP and fast-track authority. Warren has said it would be “irresponsible for Democrats to sign off on a six-year fast-track deal.”