FLG Strategic Market & Government Advice

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1 The NASCO Weekly Report Vol. 1 No May 2015 Jorge Molina jfmolinal@gmail.com Trade Promotion Authority (TPA) On Tuesday 12 May, Senate Democrats blocked consideration of the TPA by a vote. The vote was not against the TPA bill, but against bringing the bill to the floor for consideration. Last week, Democrats demanded the Senate should consider the Highway Trust Fund and the Patriot Act prior to the TPA, which have deadlines of 31 May and 1 June respectively. On Tuesday, the key disagreement was whether to bundle the TPA with three other trade bills: the Trade Facilitation and Trade Enforcement Act, that includes currency manipulation guidelines, the Trade Adjustment Assistance program (TAA) and the African Growth and Opportunities Act (AGOA). Democrats wanted to consider all four bills together to assurance proper consideration. The TAA is a long time priority among Democrats, while including currency manipulation guidelines in international trade agreements has become a major issue championed by leading Democrats, like Sens. Charles Schumer (D NY), the No.3 Democrat, and Sherrod Brown (D OH). Democrats argue that considering all four bills together would ensure that any trade deal would meet a high standard. The Obama administration and the Republicans argue including currency manipulation guidelines in the TPP would kill the agreement, while most TPP parties particularly Japan and Malaysia have said including such issue at this stage of the negotiations would prevent the conclusion of the negotiations, which will enter its fifth year (see below). The auto and steel industries have been pushing hard the inclusion of currency manipulation guidelines in the TPA and the TPP to prevent other countries, like Japan, to manipulate its exchange rate to promote exports against US made products. Late last week, both sides seemed to have compromised to include the TAA which offers assistance to workers who lose their jobs because of international trade activities with the TPA bill but over the weekend Democrats seemed to have changed their mind. Republicans needed 60 votes to defeat the filibuster. After the vote, President Obama called for a meeting all ten pro trade Democratic senators to the White House to plot a strategy, including Senate Finance Ranking member Sen. Ron Wyden (D OR), who co authored the TPA bill with the Sen. Orrin Hatch (R UT), chairman of the Committee. Sen. Tom Carper (D Del.) was the only Democrat to vote in favor of debating and voting on the TPA. The negative vote reflects the growing tension between Congress and President Obama, who is known for not getting himself involved in lobbying lawmakers. President Obama has said over the past three weeks Democrats have been spreading disinformation about the TPP, singling out influential Sen. Elizabeth Warren (D Mass.). Sen. John Cornyn (R TX), the majority whip, said the vote was a failure of the president s influence, and he urged Obama to do more to convince wavering Senate Democrats. Republicans planned to move on the TPA this week and have the House vote next week in order to have the fast track authorization on President s Obama desk the last week of May, after the Memorial Day recess. The scenario considers a proposed meeting of the TPP trade ministers starting on Tuesday 26 May in the Philippines, where the agreement is expected to be finished (see below). Under this scenario, the TPP would be considered by the US Congress in the second half of this year. 1

2 The TPA bill has a very large number of industry supporters, so it was expected right away that consideration of the bill would not take very long. According to Democratic staffers, Sens. Harry Reid (D NV), the Democratic leader, and Charles Schumer proposed a compromise to Republican leaders: i) first, hold a separate vote on the customs and enforcement bill that includes currency manipulation guidelines, which could be vetoed by the President and ii) include the TAA and AGOA with the TPA bill. Majority Leader Sen. Mitch McConnell (R KY) and Sen. Hatch said Tuesday afternoon that Republicans were willing to attach the TAA to the TPA bill but there is no compromise that could link all four bills together. Sen. McConnell was the only Republican to vote against the TPA, a tactical move giving him the ability to quickly hold another vote later if circumstances change. Shortly after noon on Wednesday 13 May, the Democratic leadership accepted the deal proposed by the Republicans. The Senate will vote first on the Trade Facilitation and Trade Enforcement Act and then on the TPA / TAA. The agreement gives Democrats a symbolic chance to show support for a get tough approach to countries that keep the value of their currency intentionally low to promote their exports and to raise the cost of American goods. Debate is scheduled to start in the Senate floor at 9:45 EDT. Each will be subject to a 60 vote threshold, and there is no guarantee that they will be added to the final TPP legislation. Should they pass as standalone measures, the House of Representatives can do away with them when it considers the TPP bill. Under the proposed TPA, the US Congress will have 90 days to approve or reject a trade pact without amendments. Trans Pacific Partnership (TPP) 1) Koji Tsuruoka, Japan's chief negotiator, said on Tuesday 12 May, shortly after the US Senate rejected to consider the TPA bill, that there is no need to change the ministerial meeting scheduled to start on Tuesday 26 May in the Philippines after the conclusion of the annual APEC meeting. On the other hand, Mr. Tsuruoka said it is unclear whether ministers could make a political decision to close the negotiations. The meeting is scheduled to end on Thursday 28 May. Mr. Tsuruoka said that no effort will be spared in pursuing progress during the meeting of chief negotiators which will start this Friday 15 May in Guam and that is expected to run at least until Monday 25 May. If necessary, chief negotiators will continue the meeting under instructions from their ministers. On the other hand, New Zealand Trade Minister Tim Groser said the result will delay reaching a final agreement. Neither Canada nor Mexico made an official statement on this issue. 2) On Friday 8 May President Obama delivered a frontal attack to TPP critics within his own party as he accused fellow Democrats of deliberately distorting the potential impact of the agreement. President Obama said that liberals who are fighting the TPP were just wrong and, in terms of some of their claims, making this stuff up, which upset the Democratic leadership in Congress. President Obama spoke before more than 2,000 workers at the Nike plant in Oregon. Oregon is the home state of Sen. Ron Wyden, the ranking member of the Senate Finance Committee and one of the two authors of the TPA bill, who has been under heavy attacks by anti trade organizations over the past three months. Nike says it will manufacture more products in the US if the deal is adopted. President Obama hoped to capitalize on an announcement by Nike that the company and its partners would create up to 10,000 2

3 new jobs in the US if the TPP was approved. Nike employs about 26,000 people in America, but its contract factories overseas employ about one million people, roughly a third of them in Vietnam. 3) Canada remains heavy under pressure to dismantle protections for its dairy and poultry industries. New Zealand, Chile and other countries have joined the US to try to get the government of PM Stephen Harper to abandon its supply management system. If Canada decides not to make any concessions it could be excluded from the final agreement and it could take approximately five years for the country to join in a second round. On Thursday 7 May, US Secretary of Agriculture Tom Vilsack said Canada might run out of time, which reflects months of behind the scenes pressure. Canada's powerful dairy lobby opposes major tariff changes and altering it could cost the Conservatives votes in the October elections, which at the moment polls suggest are too tight to call. Canadian Farm Minister Gerry Ritz said on Friday 8 May that Canada would "certainly be there right till the bitter end" but he did not answer questions about concessions on supply management, which was introduced 40 years ago to protect farmers from fluctuating prices. All three major political parties in Canada support the supply management system of protection for the dairy and poultry sectors. Canadian officials say they are waiting to see whether the US Congress passes the TPA. Minister Ritz said Secretary Vilsack was "proving that he is worth his weight in gold when it comes to deflecting away from the fact" that the administration has not yet assured the passage of fast track legislation. 4) On Wednesday 13 May, a group of 14 Senators wrote a long and detailed letter to USTR Michael Froman and Labor Secretary Thomas Perez calling for strong labor standards in the TPP that also be implemented and enforced in TPP all countries. They warned that waiting to implement such standards until after the TPP enters into force could diminish enforcement of labor protection in TPP countries. The letter is signed by Sens. Sherrod Brown (D OH), Ben Cardin (D MD), Charles E. Schumer (D NY), Debbie Stabenow (D MI), Bob Casey (D PA), Al Franken (D MN), Ed Markey (D MA), Tammy Baldwin (D WI), Gary Peters (D MI), Tom Udall (D NM), Richard Blumenthal (D CT), Brian Schatz (D HI), Jeff Merkley (D OR), and Elizabeth Warren (D MA). If we don t improve labor standards in TPP countries in a meaningful way, we fail to give American workers the ability to compete, said Sen. Brown. In the letter, the Senators expressed their concerns over workers rights in Vietnam, Malaysia, Brunei, and Mexico. The letter outlined their concerns over lack of protections related to organizing, collective bargaining, and the prevention of forced and child labor and asks for updates on the results of the consultations of the US government with these governments. Mexico is accused of having laws that are inconsistent with International Labor Organization (ILO) standards and with the TPP labor chapter, of corruption and impunity that affect the institutions intended to afford workers the right to organize and collectively bargain. Transatlantic Trade & Investment Partnership (TTIP) 1) EU Trade Commissioner Cecilia Malmström presented new ideas on the investor state dispute settlement mechanism (ISDS) to the International Trade Committee of the European Parliament on Wednesday 6 May. The members of the European Parliament (MEPs) welcomed the fact that she tried to 3

4 meet their concerns but some remain hostile to the TTIP since they believe it is not in the best interest of the 28 members of the EU. Opinions were divided on whether it would suffice to improve the current rules, whereby international investment disputes are decided by international arbitration tribunals, or whether they should be settled under the two parties own and different legal systems. The European People's Party, the largest in Parliament, was particularly supportive. MEPs also broadly welcomed Commissioner Malmström s proposal to create a permanent international investment tribunal as a long term solution. Commissioner Malmström added the changes to the ISDS would recognize that EU governments have the right to regulate, "putting that in black and white." But the Greens and the European Free Alliance said the Commissioner had not shown why the ISDS is necessary. "The proposal is a step in the right direction but it still does not go far enough to restore public confidence on the issue, said S&D MEP Bernd Lange, chair of the International Trade Committee and is also the author of the parliamentary report on TTIP. The following day, Thursday 7 May, EU trade ministers debated the new proposal. France and Germany, which have been particularly critical of ISDS, backed the reforms that were endorsed also by Italy and other countries. The US has said it will not consider an agreement without ISDS, while this issue has not been discussed for the past 18 months. The European Commission must now come forward with a legal proposal to win the formal backing of EU governments and the European Parliament, which is still divided over ISDS. 2) In a speech in Ireland, EU Agriculture Commissioner Phil Hogan said the TTIP will not compromise on EU food quality or traceability standards. Opponents to the TTIP argue the agreement will lower food standards endangering European consumers because US standards are not as strict as those in the EU. Commissioner Hogan said that a "balanced deal will see huge benefits for EU agriculture and society as a whole." In recent years, the EU has been very successful in obtaining increased protection for hundreds of its famous geographical indications. USTR Michael Froman said last month he was disappointed that the EU moved to allow each one of its member to decide to accept or not genetically modified organism even after they have been designated as safe by European authorities. 3) Pascal Lamy, the former head of the World Trade Organization, said on Thursday 7 May that improving consumer protection is at the heart of the TTIP negotiations. Mr. Lamy insisted that 80% of the TTIP negotiations deal with harmonization of consumer protection standards, while only 20% focus on issues as tariffs and market access. He said before an audience in Miami that political leaders failure to explain that to the public had created a vacuum that allowed anti TTIP movements to grow. Mr. Lamy cited as an example the automobile: "It`s to harmonize car crash tests so that European cars don`t have small bumpers and American cars big bumpers, but that everyone has medium sized bumpers because that yields significant economies of scale, which isn`t very complicated." Mr. Lamy agreed that several issues appear to be more difficult to resolve because of cultural differences between the US and Europe, such as genetically modified organisms in food and other products, and the protection of private data. No date has been set for the next round, which will be held in Brussels. 4

5 World Trade Organization (WTO) India is concerned over pace of deciding agenda for next WTO ministerial meet, scheduled to take place December in Nairobi, to resolve pending issues of Doha round. At the meeting, India wants to bring back issues including agriculture (export subsidies, cotton and fishery subsidies), intellectual property rights, market access and services but according to sources involved in this issue WTO members are unable to finalize the agenda because of differences on the priority order of the issues. India was responsible for blocking the Trade Facilitation Agreement last year. The WTO agreed last December to have an agenda by July. The Doha Round of negotiations launched in 2001 has remained stalled since July 2008 due to differences between the rich and the developing nations mainly over the subsidies given to farmers. Mexico EU FTA On Monday 11 May, the EU and Mexico announced in Brussels they will launch negotiations towards a new free trade agreement later this year, as Europe seeks to tie its economy closer to North America following the CETA with Canada and the negotiation of the TTIP with the US. Mexico negotiated an FTA with the EU in 2000 and hopes to move ahead of Brazil, whose talks towards a similar agreement have stalled. "We are ready to commit to a highly ambitious deal," EU Trade Commissioner Cecilia Malmström told a forum in Brussels alongside Mexican Economy Minister Ildefonso Guajardo. "I will ask for a mandate to launch negotiations this fall," she said. EU officials are expected to discuss the timing of talks in more detail at an EU Latin American summit in Brussels on June 12, where Mexican President Enrique Pena Nieto is expected. Our agreement has removed mostly tariff barriers and now our businesses face other types of barriers that we need to tackle, said Commissioner Malmström after talks with Minister Guajardo, who said that it was important for Mexico to keep up with the EU. Trucks The influential Mexican National Chamber of Freight Auto transports (Canacar) that represents freight companies around the country agreed last week with the Secretariat of Communications and Transportation (SCT) to have a series of meetings with representatives of the US Department of Transportation (DOT) to discuss what they consider unfair treatment to Mexico domiciled vehicles in the US Mexico border. Canacar considers that current conditions are far from what it was negotiated in 1993 in the North American Free Trade Agreement (Nafta) and create much more obstacles to Mexican freight than what is required from Canadian freight in the US Canada border. Canacar met last week with representatives from SCT, the Secretariat of Economics (SE) and the Office of President Peña Nieto to analyze the conditions of the program that allows Mexican domiciled freight vehicles to enter into US territory. Canacar is concerned among other things that there is not a single position on this issue among the different Mexican agencies involved. For SCT the issue is closed after President Obama declared permanent the pilot program that ended in October SE, who is responsible for international trade negotiations, and the Office of the President have not issued a position According to media reports, Canacar is also waiting for the creation of a panel against the US under Nafta looking for compensation because of damages to the Mexican freight industry from not allowing Mexico 5

6 domiciled vehicles to enter US territory over the past ten years. A previous panel sided with Mexico and allowed SE to apply restrictions on several US made products. Consultations ended on 8 April. Energy 1) On Wednesday 13 May, Sen. Lisa Murkowski (R AK), the chair of the Senate Energy and Natural Resources Committee, introduced with 12 other sponsors the Energy Supply Distribution Act (S1312), which would lift the 40 year ban on US oil exports, that Sen. Murkowski and other Republicans have long had in their agenda. The bill would exclude oil stored in the Strategic Petroleum Reserve, but it would authorize the creation of a program requested by the US Energy Information Administration (EIA) to share data with Canada and Mexico on cross border energy flows. Mexico is still awaiting the US decision on a program to swap 100,000 barrels / day of heavy for light crude. The other sponsors that include six committee chairs are Sens. Heidi Heitkamp (D ND), John Hoeven (R ND), John Barrasso (R WY), John McCain (R Ariz.), Robert Corker (R TN), Lamar Alexander (R TN), James Risch (R ID), Jeff Flake (R Ariz.), Shelley Moore Capito (R WV), Jim Inhofe (R OK), Marco Rubio (R FL), and James Lankford (R OK). The Senate Energy and Natural Resources Committee said it will hold three hearings over the next few weeks to discuss US energy policies, as Sen. Murkowski and other committee members, including Democrats, assemble a comprehensive energy bill. 2) On Tuesday 12 May, Energy Secretary Pedro Joaquín Coldwell announced the start of the bidding process of the third stage of Round One that includes 26 mature fields that Mexican authorities expect to bring US$620 million in new investment over the next five years. The fields are located in the states of Chiapas, Nuevo León, Tabasco, Tamaulipas and Veracruz, where it is expected to have 600 new direct jobs and 6,000 indirect new jobs. Pemex has already exploded all these fields but Secretary Coldwell said there are still an estimated 109 million barrels of crude. It is expected the first projects where Pemex will work with private companies will be awarded in September, three shallow water projects of mature fields in the Gulf of Mexico. 3) The Obama administration, citing "rigorous safety standards" and a long review process, granted on Monday 11 May conditional approval to Shell to begin oil drilling in the Arctic waters off the coast of Alaska. The Interior Department issued a statement saying that Shell could begin drilling in the Chukchi Sea once several environmental conditions are met, including a sign off from agencies assessing the impact on endangered species. State agencies must also approve the plan. The move has upset environmental activists who are concerned the drilling will have detrimental effects. Shell, if it obtains the remaining permits, would be the only company drilling in the federal waters in the Arctic. The Interior Department estimates there to be more than 20 billion barrels of oil and 90 trillion cubic feet of natural gas beneath the Arctic waters near Alaska. The Last One Is it really possible to reach an open skies agreement between Mexico and the US? Any opinions, positions or projections expressed in this report are that of FLG Strategic Market & Government Advice and do not represent those of NASCO. is a Mexico City based consultant firm specialized in political risk analysis, government affairs, public policies, political and economic intelligence, econometric modelling and forecasting. 6

FLG Strategic Market & Government Advice

FLG Strategic Market & Government Advice The NASCO Weekly Report Vol. 1 No. 22 3 June 2015 Jorge Molina jfmolinal@gmail.com Twitter @jfmolinal This week Trade Promotion Authority (TPA) p.1 Trans Pacific Partnership (TPP) p.2 Transatlantic Trade