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What the Conclusion of the Trans-Pacific Partnership Agreement Means

What the Conclusion of the Trans-Pacific Partnership Agreement Means




by Shubhendu Misra, Partner, and Tan Juan Fook, Trade Policy – FTA Lead, EY

After more than five years since the first round of negotiations in March 2010, the Trans-Pacific Partnership (TPP) negotiations have finally been concluded.

The TPP will set new and high standards for trade and investments on both Asia- Pacific and global fronts. To put matters in perspective, TPP includes 30 chapters that cover trade in goods, textiles and apparels, rules of origin, customs and trade facilitation, e-commerce, services, government procurement, investment, intellectual property, small and medium-sized enterprises and state-owned enterprises among other areas.

In relation to cross-border trade, the TPP countries aim to eliminate and reduce tariffs and non-tariff barriers on industrial goods; and to eliminate and reduce tariff and other restrictive policies on agricultural goods. Tariff elimination on most industrial goods would be effective immediately upon entry into force of the agreement, although tariffs on agricultural goods would be eliminated over longer timeframes. As the text of TPP agreement has not been released to the public, there is no further detail on the duty concession offered by TPP countries.

Potential advantage for Southeast Asia

An advantage of the TPP is the sheer size of the grouping, which provides an expansive area for regional sourcing as it allows cumulation, where raw materials and inputs sourced from TPP countries could be treated as “local” materials and help the manufacturer meet the rules of origin for the finished products.

Clearly, there are benefits for businesses who might be encouraged to establish their manufacturing footprint in this region to take full advantage of the agreement.

Textiles and apparel, for examples, have special mention in this agreement with regard to rules of origin and enforcement commitments. This is mainly due to domestic sensitivity of countries. As an illustration, for the year 2014, it was reported that US companies imported textiles and apparel worth a staggering US$121.7bn from the rest of the world. In order to ensure that tariff benefits are accorded to deserving textiles and apparel products, all the TPP countries agreed to rules of origin for selected products to require use of yarns and fabrics from TPP region. There is a short supply list mechanism that allows use of certain yarns and fabrics not widely available in the TPP countries.

The thriving apparel industry in Vietnam is well-poised to maximise the tariff benefits offered by the US and other TPP countries once the agreement enters into force. This may also require the apparel companies to relook at their current sourcing patterns. In some cases, the apparel companies may need to change their sourcing pattern by purchasing yarns and fabrics from TPP countries so that their finished products can qualify for TPP benefits.

It was also reported that the last minute agreement on the rules of origin for automotive products during the last negotiation round in Atlanta contributed to the successful conclusion of the TPP.

TPP countries seems to agree to a more liberal set of rules of origin proposed by one of the parties. It remains to be seen how “liberal” the agreed rules of origin are and this might spark a change in manufacturing and global sourcing patterns as auto companies may find it feasible set up new manufacturing plants or invest in more manufacturing activities in existing plants in this region to meet the rules of origin. This may provide a boost to the automotive sector in Malaysia, which in the past has been eclipsed by the robust auto ecosystem in Thailand and the large domestic market in Indonesia.

Rules of origin is a complex topic and many small businesses and exporters struggle to understand how their products can meet the origin criteria. The TPP will contain a specific chapter for small and medium-sized enterprises where TPP countries are committed to create userfriendly websites targeted at such users to provide easily accessible information and organise capacity building activities to support them.

The TPP will add to the mix of free trade agreements (FTAs) that already exist between partner countries. For instance, with the TPP, New Zealand and Singapore will have four FTAs in common (bilateral FTA, “Pacific 4” Partnership Agreement and the ASEAN-Australia-New Zealand FTA).

It appears that Canada will stand to gain substantially as the TPP will provide it with preferential market access into seven countries in the Asia Pacific region. Countries, such as Chile and Singapore, may appear to not gain much as they are essentially negotiating with one or two new FTA partners. However, the coverage of benefits under the TPP might be better than those available in the existing FTAs. Also, in the area of rules of origin, the expansive regional sourcing will assist manufacturers in meeting the origin criteria compared to other bilateral agreements, which limit choices for sourcing of materials.

Accordingly, businesses will need to make an informed decision on which FTA is most beneficial, since the rules of origin, tariff concessions and procedural requirements differ among the respective FTAs.

What’s next?

The next phase after the conclusion of agreement is equally crucial. Each of the TPP country will need to undertake domestic ratification procedures. In this regard, domestic politics and the upcoming US Presidential elections will be a crucial element. Separately, the approval process in Canada is compounded by the run-up to their elections scheduled for later this month.

An implementation date or entry into force date has yet to be determined by the TPP countries. Optimistically, the agreement could enter into force in year 2016 or realistically in year 2017.

The contents of the TPP agreement will be highly watched. So far, much has been said about how importers would enjoy the tariff savings in cross-border trade but less has been said about the cost of compliance faced by traders.