APEC Currents December 2015
Companies are increasingly structuring or restructuring their value chains to take advantage of new opportunities. In a value chain world, firms have been using advancements in technology and transportation to fundamentally restructure their existing operations. Companies can increasingly locate exactly the right “slice” of an operation in exactly the right geographic location. Even the smallest firms in remote locations can plug into chains and deliver goods or services to other companies or directly to consumers.
New trade agreements, and particularly the Trans-Pacific Partnership (TPP), should make it even easier for companies to create or contribute to value chains across the member countries.
The TPP brings together 12 countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. The agreement is complex and broad with 30 chapters and includes many changes at the domestic levels for member countries.
Under the agreement, companies can gain substantial benefits from being located in TPP member countries and selling goods and services into other TPP member markets.
The most obvious change in a post-TPP world will be the reduction of tariffs. On the date of entry into force of the agreement, 90% of all goods tariffs in all 12 members will drop overnight to zero. The remaining tariffs will also drop, over time, with many eventually becoming duty free.
The tariff reductions mean that firms may no longer have to contend with tariff peaks—specific items or sectors where tariffs can easily reach 30, 50, or 150%. In many of these markets, companies hoping to export products have not been competitive. With the reduction in tariffs, new TPP markets should now be attractive to many firms.
Dropping duties to zero also improves the prospects for firms to add value to products at home. In the past, tariff escalation meant that low tariffs might apply to raw and unprocessed materials like raw coffee beans. But once processed, like roasted coffee beans, firms might face higher tariffs. Worse still, ground coffee might draw higher tariffs yet and a bottled coffee drink could have had tariff rates so high as to be completely impossible for firms to compete with locally produced bottled beverages.
After the TPP is implemented, however, all tariffs may drop to zero, including reductions in processed goods. This is especially critical for food manufacturers who can take advantage of duty free access for raw, roasted, and ground beans as well as bottled coffee. Firms can shift into higher-value sectors now and are not limited to exporting only unprocessed goods and raw materials to remain competitive.
The rules of origin (ROOs) in the TPP are the same for all products across all 12 member countries. This means that once a product qualifies for preferences in one country, it automatically is eligible for preferences such as reduced or zero duties in all members.
The TPP also allows cumulation across TPP member markets. This lets firms add up (or cumulate) the materials and inputs for any given good from across all 12 TPP markets. For example, a firm that produces packaged soups can add up vegetables, broth and noodles added from TPP markets like Australia or Malaysia to “count” towards meeting the overall rule of origin for soup exported to Canada, Japan or the United States.
Cumulation across a dozen participants means that the TPP is likely to be more helpful for companies than bilateral free trade agreements agreements where firms can only include the contents sourced from the two partners. Bilateral deals also only work for selling the finished goods back to the partner.
Each product or tariff line has a specific rule of origin attached. Firms will need to research their product categories to determine how best to meet TPP origin criteria. (Soup 21.04 requires a change in tariff heading, so nearly all soups should easily qualify as “TPP originating.”)
The changes in tariffs are to be accompanied with new procedures in customs. For instance, TPP members are going to make a host of changes designed to speed up and reduce costs at the borders.
Many firms will be eligible for self-certification of origin, eliminating the need for time-consuming trips to chambers of commerce or other bodies to obtain a certificate of origin (CO). Customs officers will grant firms advance rulings that will clarify the specific rules of origin to be applied to particular products and ensure that these classifications will not shift for a year. As noted earlier, once a product qualifies for benefits, it qualifies under the origin criteria for entry into all 12 member markets.
The agreement also includes specific rules for express shipments and other expedited delivery processes. Customs officials are to allow pre-arrival processing and guaranteed release within specific time periods.
Supply chain and logistics companies themselves may also benefit directly from TPP changes. This is because the agreement also opens up services sectors for easier access to TPP firms.
Other key services may include back office processing of all types, legal services, HR, accounting, transportation, warehousing, or construction. The method of opening service sectors is also important, as member governments promised to allow TPP member participation in services sectors automatically, unless an individual government has specifically exempted a service from market opening. The actual numbers of reservations lodged by member governments are relatively modest.
TPP firms also have significantly improved investment opportunities in member countries, including market opening and better protection of investments.
The TPP also contains the first agreement on e-commerce. For smaller firms, this chapter may be particularly important as small companies can more easily plug into supply chains using e-commerce.
Note that firms need not automatically be registered, headquartered or file taxes in a TPP member country in order to count as a TPP firm—what matters is largely where, in geographic space, production takes place. The final products must also be sold into TPP markets. It is not possible to use the agreement and qualify for benefits into non-member markets.
As an example, a company cannot create soup in Singapore using largely TPP content and sell this with zero tariffs into the EU. The EU is not a participant in the TPP and none of the provisions of the agreement apply for items destined for European markets. Soup destined for the Japanese or Australian markets, however, is eligible for TPP benefits since Japan and Australia are partner countries.
TPP negotiations are complete, but domestic procedures must be completed before the deal will be implemented. In general, officials created three means to bring the agreement on line. First, if all 12 members finish domestic procedures within 2 years, the deal takes effect 60 days after the last member agrees to implementation. If, however, all 12 have not agreed within 2 years of final signing, then the TPP can automatically take effect in 26 months if at least 6 members representing 85% market share (in practice, the United States, Japan and four other members) have completed their domestic procedures. Finally, if the internal approvals process drags on longer than two years, the TPP can come into effect 60 days after the 6th member (at least) finishes domestic procedures for implementation.
The agreement provides potentially significant benefits for qualifying firms and products. Companies may find that existing supply chains should be altered or adjusted to allow specific products to qualify for TPP benefits into TPP member markets. Some changes in sourcing of inputs and raw materials may be necessary to reach the necessary level of content for the agreement to be applicable.
This complex trade deal, however, will also require an investment by companies that intend to use the agreement into understanding specific provisions. Firms must determine which benefits may or may not apply. But the payoff from successful use of the TPP could be substantial.
The release of the TPP texts also allows other APEC economies to study the agreement carefully and consider how similar rules and procedures might be implemented in different settings. For example, some of the provisions currently found in the TPP might be usefully picked up in the ongoing Regional Comprehensive Economic Partnership (RCEP) negotiations. APEC members may also want to think about how rules that help foster value chains could be incorporated into a potential Free Trade Area of the Asia Pacific (FTAAP).
Finally, since the benefits of the TPP could be substantial for many companies, excluded parties may need to examine their own domestic rules and regulations with a keen eye towards improving competitiveness conditions on the ground. Firms are mobile and will move to take advantage of opportunities for growth and expansion wherever they find them. Countries that have an uncertain or risky policy environment or expensive, time consuming or complicated procedures in place may not be well positioned to compete going forward.
***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***