With 12 nations that make up nearly 40 per cent of the global gross domestic product (GDP) and about one-third of all world trade as its core, the Trans-Pacific Partnership (TPP) Agreement is set to become the largest free trade agreement (FTA) in the world. It is impossible to say with absolute certainty what the ultimate impact of the TPP will be but chances are good that, once ratified and implemented, this single but complex agreement will create new patterns of trade and herald a new era of economic openness.

Background

With the passage of TPP, trade professionals are faced with the challenge of evaluating the benefits and compliance requirements of TPP. The agreement as it stands today accounts for about one-third of all world trade, spanning 12 markets at nearly 40 per cent of the global GDP.

The final version of the TPP that was completed on October 6, 2015, is the end result of a complex evolution that started with negotiations among four original economies – Singapore, New Zealand, Chile and Brunei that wanted to improve trade within the Asia Pacific Economic Cooperation (APEC) umbrella. Those negotiations attracted the attention of the US, which joined in September 2008 and took the process to a whole new level. A rush for expansion followed that led to the inclusion of Australia, Peru, Vietnam and, later, Malaysia, Canada, Mexico and Japan to form the group of 12 countries that are now part of the largest trade agreement in the world.

“One of the more interesting and innovative parts of the TPP was its stakeholder process,” said Dr Deborah Elms, Executive Director of the Asian Trade Centre and an expert on the TPP. Through rounds six to 18 of the negotiations, stakeholders ranging from businesses to trade associations and non-governmental organisations were welcomed to contribute to the negotiations. This is unusual. The Regional Comprehensive Economic Partnership (RCEP), for example, is virtually a government-to-government negotiation.

Just as significantly, the commitments apply to all members – although the time frames for implementation vary for some members. Tariffs will drop to zero on 90 per cent of goods traded among members when the agreement goes live and more reductions will be phased in. Eventually, 98 per cent of goods will incur zero tariffs, although in some goods that could take as long as 25 years. With the negotiations completed, the next step forward is for members to ratify the TPP deal within two years.

In the results of a joint survey conducted with corporate trade specialists in 11 countries spanning Asia, Latin America and the US released on November 6, 2015, Thomson Reuters and KPMG International found that 70 per cent of companies are not fully utilising FTAs. This means they are likely paying more than necessary in tariffs and duties which is counter-intuitive. By leveraging existing agreements and paving the way now for the implementation of the TPP, companies could optimise their operations, lower costs and tap into new markets.

Unique considerations

The companies most likely to benefit from the TPP are those that start preparing now. The TPP is particularly important at a time of much greater regional integration of supply chains. Companies increasingly source products and raw materials from a greater number of locations and also distribute products in more numerous markets. The TPP opens up new markets, provides for more expansive rules of origin and also deals with new areas of business, such as e-commerce. It also harmonises IP rules, providing greater certainty for businesses investing in the TPP region, and goes beyond most existing FTAs in terms of access and rules of origin, allowing for regional cumulation of origin so that products can be sourced from any TPP country. New rules on cross-border investment are also stronger than most existing agreements, covering basic rights, expropriation rules and legal recourse.

There are concerns over how rules of origin are applied under the agreement. The rules allow for cumulation but are not always uniform across products, said Dr Elms. Among other benefits, the TPP allows for self-certification of origin, which should streamline processes for business – with the caveat that the paperwork should always be in order.

“Every single FTA has its own rules; the use of FTAs is a necessity. Manufacturers and distributors that do not leverage trade agreements are likely to be sidelined by companies looking for lower costs and greater market access,” said Ms Angelia Chew, Partner for Indirect Tax and Asia Pacific Trade and Customs Leader at KPMG in Singapore.

The TPP, when it takes effect, will only increase the use of FTAs by multinational corporations in Singapore. TPP participants account for about 30 per cent of Singapore’s trade and a similar percentage of foreign direct investment (FDI) into Singapore, as well as 20 per cent of Singapore’s outgoing FDI.

Reality check and preparation

Trade deals are complex documents driven by political necessity as much as by economic or business realities. As a result, they are often difficult to navigate and not always practical. One approach to maximise the benefits of TPP and existing FTAs is to automate analysis and compliance in real time. Trying to get all the information necessary to optimise supply chains and stay compliant can be extremely complex. Data gathering can take months and be out of date once it is completed. Technology solutions, such as ONESOURCE, can do this on a real time basis for individual products while tracking individual shipments and suppliers, all the while offering up options to optimise supply chains.

The simple reality is that the TPP may not always be more beneficial for specific companies than existing agreements. For example, the existing North American Free Trade Agreement (NAFTA) is more comprehensive than the TPP while the Singapore-US agreement covers virtually all tariff lines, more than the TPP.

If a company is producing something in Singapore and trying to get it into the US, there could be a number of products that it could ship duty free under that agreement that the company could not under TPP.

Conclusion

The TPP has yet to be ratified and implemented. According to Dr Elms, the linchpin in this process is the US Ratification, which will all but guarantee approval from Japan and other members. The agreement only comes into effect if the US, Japan and at least four other countries ratify it within two years.

“There are not as many losers as you might think, domestically, in TPP countries but I do think there are implications from the TPP and especially implications on non-members,” said Dr Elms. “If you are not a member and it depends on which country and which sector and on what you do – but for some non-members in some sectors there will be implications from the TPP going into force.”

When it goes into force, it will give rise to a lot of opportunities by opening the door for companies to benefit from preferential duties in more markets. Market access is also much greater throughout the TPP area for service companies, with the agreement minimising discrimination for specific areas of trade.

About the Author

Nicholas Stipp is the Director of Asia Operations for the Global Trade Business of Thomson Reuters. In this role, he leads a team of international customs and trade specialists across Asia. This team is actively localising a suite of products under the ONESOURCE Global Trade brand. Originally from Vancouver, he has been based in Singapore since August 2015.