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Management Side
TPP: Partnership or Protectionism
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Auckland, New Zealand was the location on February 4, 2016, for the historic signing of the Trans Pacific Partnership agreement (TPP). The twelve signatories to this agreement (alphabetically) were Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam.

The stated goal of the TPP is to "promote economic growth; support creation and retention of jobs; enhance innovation, productivity and competitiveness; raise living standards; reduce poverty in our countries; and promote transparency, good governance, and enhanced labor and environmental protections." The Agreement contains measures to lower trade barriers such as tariffs, and establish mechanisms for resolving trade disputes. It also deals with intellectual property, legal, institutional and environmental issues.

Perhaps of more significance than the TPP signatories (especially as it relates to the forest products industry) are those countries that are not signers. China, the notable exception, is unlikely to join because there are no real net benefits to them, according to various analysts. South Korea may join but there is no imperative for them to rush into membership, because of an existing free trade agreement with the USA and some of the other TPP members.

Other countries have expressed firm intentions to become members of the TPP (including Bangladesh, India, Indonesia, Taiwan and Thailand) but current protectionist trade policies would preclude some from joining.

World Bank estimates suggest minimal benefits for Australia from the TPP and less for the USA, which begs the question as to why both countries were so determined to implement the TPP. For Australia it is clearly about protecting non-manufactured exports, particularly agricultural products. The TPP promises to eliminate more than 98% of tariffs including those on A$4.3 billion of agricultural exports. For the USA the conspiracy theorists are out in force! One respected business journalist argues that it is more about protection than trade - "driven by the USA, what measures devoted to trade overwhelmingly were focused on exactly the opposite; extending monopoly powers of American corporations and maintaining tariffs and quotas for US farmers ... But it is the inclusion of the dreaded Investor State Dispute Settlement (ISDS) clauses that is of most concern." I will come back to this aspect.

For the forest, pulp and paper industry, net benefits from the TPP are difficult to identify. Two recent announcements about Australia-USA business relations underscore that the more things change the more they stay the same. For both examples it seems unlikely that the TPP would have affected the outcome.

In January, Colorpak, one of Australasia's largest producers of folding cartons (estimated market share 23% or 29%, depending on the source of the estimate and 26% in New Zealand), announced that it had agreed through a court approved "scheme of arrangement" to be acquired by Graphic Packaging International (GPI), the largest manufacturer of cartonboard in the USA. The then-family-owned Colorpak was floated and listed on the Australian Stock Exchange in 2004, and subsequently has expanded through acquisition of other similar businesses, including CHH Cartons in 2011, which reshaped the cartonboard packaging sector in Australia. Colorpak also manufactures paper cups, labels and flexibles. It has invested significantly over the years and its assets are considered to be modern and productive.

The transaction makes sense for Colorpak and GPI. Colorpak may be large, but folding cartons is a tough business and investors were pleased to achieve, effectively, a more than 30% premium on their shares which had languished over the years at not much above their listing price. The half-year report to December 2015 reveals a 5.9% decline of revenue over the same half in 2014 and a decline in after-tax profit.

For GPI it is a progression of its global diversification strategy. More than 80% of its turnover is still generated from North America. But GPI has been on a steady journey of acquisitions in Europe, where it now has eleven folding carton plants, with a combined capacity that exceeds the entire Australasian demand for these products.

This acquisition, expected to be completed in late April, was not a foreign invader swooping down on an unsuspecting target; GPI has operated in Australia for nearly 25 years. It provides multi-packs to beverage businesses and has worked with Colorpak for more than a decade. The scheme book reveals that GPI represents 15% of Colorpak's revenue and 22% of board purchases annually. The management team (including CEO Alex Commins, whose family are majority shareholders with 32% of the stock) will stay on after the acquisition, suggesting that this is a comfortable business deal for all involved. There seem to be no competition and consumer issues and the Foreign Investment Review Board is unlikely to have concerns.

The TPP agreement has not and would not have had any impact on international business transactions such as this.

In February the US International Trade Commission (ITC) unanimously affirmed petitions from four manufacturers (PCA, Domtar, Finch and Glatfelter) and the United Steelworkers that cut-size uncoated paper imports from Australia (also China, Indonesia, Brazil and Portugal) were causing material injury. The preliminary determinations were the subject of our column last September. The ITC commented "in the Australia antidumping duty investigation, mandatory respondent Paper Australia Pty. Ltd. (trading as Australian Paper) notified (Department of) Commerce that it would not participate in this investigation. As a result, Commerce assigned ... a final dumping margin of 222.46 percent, based on adverse facts available".

This is clearly a punitive determination unrelated to the actual differential between prices charged in the USA on these products against the prices received in Australia. The Enforcement and Compliance Agency of the ITC said as much in their detailed statement. For other countries and specific exporters the impost ranges between 2.05% and 149%. In addition subsidy rate duties of between 7.23% and 176.75% have been applied on paper originating from China and Indonesia.

It seems that whatever the spirit and written intention of the TPP, many industries will look to the mechanism of material damage petitions to maintain the status quo. In Australia such petitions usually take so long to investigate that their relevance has passed. It is not a matter of departmental inefficiency but of Governmental philosophy, which seems at odds with the USA approach. This is at least partly because of Australia's commitment to WTO free trade principles, perhaps more for practical than ethical reasons. Paper and other forest product exports are miniscule compared with minerals and energy exports but also other agricultural exports. The Federal Government simply cannot put these at risk, especially with mineral prices at rock-bottom and energy products under huge pressure on two fronts: coal because of its climate change implications and liquefied natural gas because of the current low oil prices.

In Australia two initial tests are required to establish dumping: proof that the 'dumper' is selling below 'normal' selling price in its own market; and demonstrated injury to the affected industry sector. Injury can often be proved-- but too late to prevent significant injury. However Australian regulatory processes make it a lot harder than in the USA, Canada or Europe to gather the evidence that dumping has occurred.

Unions and others in Australia see the TPP as a deal that will have damaging consequences for Australia despite special exemptions negotiated to deal with contentious issues. These included provisions to limit global pharmaceutical companies extending their patents to prevent or delay manufacture of cheaper generic medicines and curb subsidy programs that keep drugs more affordable in Australia. There are also negotiated limits to tough intellectual property provisions requiring settlement of investor-state dispute by outside tribunals. Punitive penalties for "trivial" downloading of copyrighted material (mainly movies) could otherwise have been invoked.

Although the TPP includes mechanisms for Australia to regulate for public policy in health and environmental matters against ISDS, tobacco giant Phillip Morris is using ISDS provisions in an Australian-Hong Kong treaty to sue the Australian Government over its plain-packaging laws for tobacco products. The strategy is not necessarily to win, but to delay or block similar pending legislation all over Europe.

Where there is a will there is a way!



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