Initial TPP Impressions: Market Access for Goods

I will post materials over the next few days devoted to unpacking the texts and schedules in different elements of the TPP agreement.  In an overall document with more than 1200 pages of texts, plus thousands of additional pages of schedules, plus 58 special “side letters,” a fuller explanation and understanding of different provisions will take time.  Nevertheless, I will do what I can to provide an early analysis of some striking points from goods, services, investment, and other chapters.  For specific information on how the TPP may affect your business, please contact us to start preparing an individualized analysis.

Overall, for many goods firms, the TPP should produce substantial net benefits.  Tariffs are dropping across the board.  If these rates are translated into retail price reductions, consumers stand to win--sometimes with significant savings possible on future purchases.  

Many currently high rates fall as low as 0 as soon as entry into force (EIF).  Even drops in lower tariff rates can be critical for companies if they trade in low margin or high volume goods.  Most of the tariff reduction benefits for goods from one TPP member country into another TPP member country happen quite rapidly, with the vast majority of tariffs for all members falling to 0 on entry into force.  The rules of origin are the same for all (with a few exceptions) TPP countries—once a firm has qualified a product as TPP content, it can ship anywhere across the TPP without reformulation and receive the lower TPP tariff rates or preferences from the agreement.

TPP trade in goods is not free.  There are a host of potentially complicated issues that must be sorted out.  For sensitive sectors like agriculture, textiles and certain machinery products, using the TPP will provide benefits that may take longer to phase in and are often extremely complicated to understand and use.  However, since many of these highly sensitive products are normally just excluded or carved out of trade agreements, firms may still receive significant cost savings from the agreement compared to the status quo.  Benefits of the TPP are also substantial, as might be expected, for specific markets like Vietnam where tariff rates have been much higher overall (regularly set at 10, 20, or 40%) than other markets. 

There are three key elements of the TPP for any firm trading goods between TPP members.  First, the specific rules related to trade in goods.  This is shown in Chapter 2 of the agreement.  Second, the individual tariff schedules for each of the TPP member countries, plus any other country-specific annexes (that explain, for instance, the tariff rate quotas used by some members and explained further below).  Finally, tariff cuts do not matter if the rules of origin (ROOs) employed in the deal make it difficult or nearly impossible for firms to qualify for tariff benefits.  Hence, firms also need to check the associated ROOs for their goods in Chapter 3 (and any additional annexes related to ROO issues). 

The fine print is important.  For example, buried in the 67 pages of texts for market access for goods is a provision to allow Vietnam to continue to prohibit the importation of a wide range of used items.  Malaysian firms may be able to access new markets overseas, but will have to check carefully the long list of allowable export duties, taxes and other charges that may negate any new tariff savings.  Food and beverage producers will need to be aware of rules around food and food safety (SPS) in Chapter 7 that may impact their goods.

With these caveats in mind, many of the textual provisions in the agreement are quite helpful for companies.  For instance, firms can receive, repair and return goods without having to pay new duties and companies can more freely temporarily import goods for trade shows or performances.  The rules tighten up the procedures for countries that want to impose import or export license requirements.  There are many provisions related to trade in food and agricultural products intended to provide greater certainty for farmers and producers.

The tariffs schedules are extraordinarily complicated in the TPP.  Every country has their own format for showing the tariff benefits.  For some countries, like Malaysia, the schedule shows basically four columns:  the HS or product code, the product description, the current or base rate of tariffs, and a staging category that applies to all TPP members (with some variations in TRQs).  Many other schedules break out the TPP members specifically, with columns for each individual member country.  While most of these columns are blank (same benefit applies to the whole lot), some have country-specific commitments.

Equally confusing, because the TPP negotiators cannot currently say when the TPP will come into force (fastest schedule could be late 2016 or 60 days after last of the 12 parties finish domestic ratification or potentially 2018 or beyond—see entry into force rules in Chapter 30), the schedules are written with codes.  A bewilderingly complex set of codes is explained in the country specific general notes to each member’s annex.  A notation like B4 in the American schedules means that whatever the current tariff is, it will be cut down in four equal stages to arrive at 0 duties on the first day of the 4th year of the agreement.  [I assume that, during the 60 day period between signing and entry into force, all these notations will be converted to actual dates in the document, making them easier to understand.]

For many firms, the level of tariff reductions is impressive.  Vietnam, for instance, will drop tariffs to 0 on entry into force for items currently set at 18-20% on most fish varieties; fruits from 30%; or many paints with 24% tariffs.  Mexico’s numbers look extremely impressive with many categories dropping from 20% or higher to 0 on entry into force.  [Of course, since Mexico has so many existing FTAs, not all firms currently pay MFN rates, making some of these tariff cuts less impressive in practice.]  Australia appears to have been highly ambitious, with nearly all tariffs dropping to 0 immediately and fewer complicated mechanisms for the remainder. 

And then we get to the United States and Japan.  While there are some very impressive tariff reductions included in these schedules (note that Japan’s schedules as posted are incomplete with tariffs ending at product category 65 out of 99), there are also a host of complications embedded within the schedules. 

For example, both countries take substantial advantage of tariff rate quotas (TRQs) to shield domestic producers.  Under TRQs, TPP members will have a set quantity of a good that can be sold at a lower tariff.  Everything above this rate is charged a significantly higher duty.  For both in- and out-of-quota rates, the TPP does cut down the levels and usually provides some (or all) of the TPP members with additional access to the in-quota allocation.  The complexity of this system can be shown by a quick glance at the TRQ annexes for various individual members.  Japan’s TRQ schedule is 79 pages long.  The annex for the United States is 49 pages in length.

To make matters worse, both countries also have a separate document, an annex on tariff differentials.  These are essentially the marking rules first used in NAFTA that are intended to provide an additional layer of protection to sensitive sectors.  I am way over my own word count quota for this post and cannot go into more detail here, but just note that companies will also need to examine these annexes carefully to determine how they might apply to their inventory for shipment into the U.S. and Japan.

Most of the rules of origin (ROOs in Chapter 3) are product specific.  This means that product categories have a corresponding ROO shown in the annex that must be followed to receive the tariff cut.   In many cases, the TPP requires that the good be classified into a different tariff category (usually at the 4 or 6 digit level which is less helpful for firms) than the original inputs to qualify.  In others, the agreement requires a certain percentage of content from TPP members to be included in the final product.  Note that textiles and footwear into the U.S. (in particular) have very complicated ROOs that must be followed to qualify for some very substantial reductions in tariff levels.

To sum up, the TPP is likely to provide a range of benefits for many firms.  The cost savings for some companies could be significant and firms might become highly competitive in new, untapped markets.  But the complexity of the agreement means that firms will also have to expend significant effort to comb through this massive agreement to determine which benefits apply and which might not.  Firms may have to shift sourcing and production to take full advantage of the TPP, which means that companies should start planning for TPP entry into force now.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

It’s Out! The Complete TPP Texts and Schedules Are Now Available

We will follow up with more in-depth analysis later, but wanted to quickly alert our subscribers that the TPP agreement is out and publically available!

The full text, plus all associated schedules, is available through the following website:  http://www.mfat.govt.nz/Treaties-and-International-Law/01-Treaties-for-which-NZ-is-Depositary/0-Trans-Pacific-Partnership-Text.php

New Zealand has always served as the official repository (keeper of documents) for the TPP.  New Zealand went first in publishing the documents, followed rapidly by other TPP members. 

Note that the TPP documents have to be read in two ways—1) the legal texts that describe the specific provisions and rules that all members have agreed to follow and 2) the country-specific commitments (if any) for each chapter.

If there are no specific annexes, it means the chapter applies to all (such as rules of origin). 

As anticipated, the TPP includes commitments on: goods, rules of origin, textiles, trade facilitation and customs procedures, trade remedies, SPS (food and food safety), technical barriers to trade or TBT, investment, services, financial services, temporary entry of business persons, telecommunications, e-commerce, government procurement, competition policy, state owned enterprise rules, intellectual property, labor, environment, cooperation and capacity building, competitiveness and business facilitation, development, small and medium enterprises, regulatory coherence, transparency and anti-corruption, administration (but not, sadly, a Secretariat:( ), dispute settlement, exceptions, and final matters (including addition of new members in the future). 

The documents published today are apparently still subject to potential minor changes, particularly in footnotes, to make sure the entire document is legally consistent.  It is still being translated into French and Spanish.  The English-language version, however, is the official document.  All subsequent disputes will refer to the English language copy only.

Stay tuned for updates as I read through this monster… 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Gearing Up for the TPP Text Release

The moment trade geeks have been waiting for is nearly here—after close to six years, the texts and schedules of the Trans-Pacific Partnership (TPP) are supposed to be released this week. 

The release will be accompanied by much hyperventilating by a handful of companies and NGOs that believe they have been negatively affected or who believe that the TPP agreement is insufficient in one way or another.  The TPP is a carefully crafted deal that managed the nearly impossible task of making all 12 participating countries equally satisfied (or unsatisfied) with the results.  It cannot be reopened and, I would argue, if it were, some member states risk losing substantial benefits elsewhere in an ultimately futile attempt to make everyone happy.

The best quote of the year, courtesy of New Zealand Trade Minister Tim Grosser, assessed the TPP outcomes this way: “It means both of us are swallowing dead rats on three or four issues to get this deal across the line.”  The art of compromise is critically important to reach an agreement with 12 member states in so many areas.

Firms and sectors (and consumers) that are likely to benefit from the deal will be more muted, particularly because they may actually be trying to read the agreement.  It will run to hundreds of pages of dense legal language accompanied by thousands of pages of various member country schedules.  Decoding it all and sorting out what the TPP might mean for any particular company will take some time and considerable effort. 

Because the TPP is not a standard trade agreement (certainly compared to many in Asia), determining the implications of TPP commitments for companies is tougher than might be expected.

As an example, let me use a firm I met with last week at a YPO event in Jakarta.  This company creates industrial lubricants in Vietnam.  They seem to be enthusiastic users of free trade agreements (FTAs), since tariffs on many of their products can be substantial enough to cut into profits.  But using existing agreements is not straightforward.

To qualify for benefits, firms have to show that goods were manufactured in or use materials from FTA member countries.  Without strict rules of origin (ROOs) in place, companies could import goods from somewhere else, relabel the products, and export using the FTA benefits.  This would be very problematic for competitors that are trying to legitimately use the agreement to support domestic production.

The firm currently has to carefully formulate or reformulate every product in their inventory depending on the final destination of each item.  Products shipping to Japan, for example, require one type of formulation to meet the requirements of the ASEAN-Japan FTA.  The same item going to Australia may need a slightly different set of raw materials or require the items to be sourced from different places to meet the criteria of ASEAN/Australia/New Zealand (AANZFTA). 

To add to the complications, the paperwork needed to track each product is extensive.  The firm has to ensure that it carefully meets each and every rule in different FTAs or it could be subject to substantial fines for non-compliance (and even face retroactive enforcement of past mistakes).

Under the TPP, however, this firm will have just one rule of origin to meet for each item in its inventory that it intends to ship to all 12 TPP member markets.  The exact same product can go to Japan or to Australia without a change.  Just as important for this firm, the paperwork is identical (and the firm might qualify for an additional benefit that obviates the need for special customs paperwork at all). 

If these were the only benefits for the firm, sorting through the TPP texts and associated schedules might not be challenging.  But since the TPP is deep and broad, benefits for the firm could be scattered across multiple chapters.  The company will also have better access to TPP services providers, potentially providing improved legal or accounting services or logistics or distribution services.  Its investment opportunities will expand dramatically.  Other provisions in the agreement could result in fewer tests for products, as the firm might be able to submit test results from one jurisdiction directly into another without retesting.

Figuring this out will take some time.  In addition, savvy firms will also be trying to anticipate what the TPP will do to overall trade flows in their particular sector.  They may be figuring out what the TPP might do (or not) to their competitors.  The impact could vary by market.  In short, it will be complex but for most, the benefits ought to be significant.

For nearly all the other firms that are likely to squeal loudly when the texts get released, the TPP could still represent an improvement off the status quo.

As an example, consider dairy.  There will be deep unhappiness in some export markets about the fact that dairy is not completely opened across TPP member countries.  The academic in me, of course, would like to have seen full access with no exclusions.  But the real world often demands compromises and the final agreement has to be compared with the current status quo.

Compared to now, dairy exporters still come out ahead.  Tariffs will fall over time.  Quotas are expanded.  (Neither, I might add, happen so quickly in some markets that vulnerable domestic firms will not have time to adjust to new market conditions.)  The agreement creates a benchmark for potential improvements at some future negotiation. 

Another complaining industry will be pharmaceuticals who will bang on loudly about renegotiation needed to give further protection to biologic drugs.  This is frankly crazy.  The United States fought for more than five years and nearly derailed the entire agreement with a dogged insistence on moving patent extensions to 12 years. 

Twelve years is a non-starter.  The other TPP member countries refused to budge, no matter what sort of promises and threats the Americans employed. 

Again, compare the TPP to the status quo.  Currently, five member countries do not protect biologics at all.  Four members have five years of protection.  Only two (Canada and Japan) provide eight years of protection now.  The United States law provides 12 years of protection, but the budget covers seven years only. 

This math alone suggests no compromise at 12 years would ever be possible.

Any attempt by disaffected firms to insist that the deal be renegotiated risks opening up a Pandora’s box of changes.  It will not just be one member that wants something else included/excluded. 

This is the deal. 

After we have all poured over the texts and schedules, we can have a discussion about the gains and losses that will actually accrue in implementation.  Enjoy your reading!

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Multilateral Trade at a Crossroads: 20 Years of the WTO

The World Trade Organization (WTO) is gearing up for a major ministerial meeting to take place in Nairobi, Kenya, at the end of this year.  The meeting will coincide with the 20th anniversary of the WTO. 

This ought to have been the occasion for a happy party and celebration.  It is not.  Officials are struggling to deliver even the tiniest package of positive outcomes and concrete results. 

This is a depressing outcome for an institution starting its third decade.  It matters too, particularly for the smallest, poorest and most vulnerable economies. 

Normally, for a ministerial meeting just six weeks away, members would have already agreed on the basic texts of the final declaration.  All outcomes would be mostly lined up and ready to go.  After all, the WTO is a bit like an ocean liner.  It takes time and considerable effort to get more than 160 member countries to agree on declarations and outcomes, even if the greatest will in the world exists to get these things done.

Unfortunately, political will is in terribly short supply in Geneva, as shown by the meager harvest of possible outcomes for Nairobi:

1.  Negotiations on the Doha Development Agenda (DDA) are at a complete standstill.  These global trade talks, launched in 2001, are supposed to address (at least) agricultural and services trade and help modernize the rulebook for the WTO. 

No one can say so publically, but these talks are dead.  The various partial “deals” that were on the table in the past are simply not going to be the basis for future negotiations.  Key players have moved on and will not accept a return to the past in 2016 and beyond.  Since the WTO is a consensus-based institution, the unwillingness of many to engage in an old agenda or use old frameworks for addressing issues effectively means the DDA is finished.

Where the institution goes from here is a good question.  Unfortunately, discussion of future pathways cannot begin in earnest until the existing approaches are firmly put to the side.  The topics may remain, but the mechanisms for achieving outcomes will have to change.

2.  With the main product stuck, officials are scrambling to cobble together anything positive.  Still on the table as a possible deliverable for Nairobi: a commitment to rule out export subsidies (or, put more crudely, to do anything related to agriculture).  The basic issue with reducing subsidies explicitly for the purpose of export is that almost no country provides such subsidies any longer.  It could be worthwhile to discuss export rules and restrictions, but an export subsidies commitment is going to have minimal implications for the global trade system.

3.  Promises on transparency.  There are lots of things that might usefully be done to increase transparency at the WTO, including full implementation of previous pledges to immediately provide information on new bilateral and regional trade agreements (FTAs).  However, whatever happens on transparency in areas like antidumping actions or fish subsidies or FTA notification requires willingness by members to actually be transparent and timely.  So far, the track record of members to abide by WTO transparency rules is not good—no matter what may happen in Nairobi.

4.  Measures to help Least Developed Countries (LDC)s.  Even here, members continue to disagree on what sort of promises might be usefully made to improve the prospects for LDC members in the WTO.  For example, negotiations on a services waiver have been difficult.  Granting duty-free, quota-free access remains controversial. A new dispute has erupted over extending a waiver on pharmaceutical patents for public health in LDC countries.

5.  In the absence of DDA progress, some WTO members would like to announce progress on other issues.  First up, the Trade Facilitation Agreement (TFA).  This agreement was signed with great fanfare at the last ministerial meeting in Bali in December 2013.  Unfortunately, movement towards implementation has been extremely slow. 

The 52nd country (Pakistan) stepped forward with its implementation commitments on October 27.  This sounds impressive, but do recall that the number is skewed upwards by 28 members of the EU who all accepted at once.  Two-thirds of total WTO members must agree to participate before the deal can start moving.  Getting substantial new members to sign on will be challenging with the limited time remaining before Nairobi.  Two years have already passed.

6.  Members want to announce movement on the Information Technology Agreement II (ITA2).  This is a plurilateral (meaning not all WTO members are involved in the negotiations) agreement designed to extend an existing plurilateral commitment on tariff-free coverage for technology goods.  While members did agree on a list of 201 products for inclusion on the list, they remain quite divided on the timing of tariff reductions.  Hence, the deal is really only partially finished.

7.  The Environmental Goods Agreement (EGA) has also received some positive coverage by the WTO.  This is another plurilateral agreement designed to make it easier for countries to trade in environmentally-friendly goods by lowering tariffs on specified products like wind turbines. 

Looking at the progress of these negotiations closely, however, not much of note can likely be announced at Nairobi.  Of the 665 products on the provisional list at the beginning of this month, member states disagreed about the placement of nearly 200, or almost 1/3, of the total number of items under consideration.   

8.  Another important plurilateral negotiation, Trade in Services Agreement (TiSA), is also not yet ready for unveiling in Kenya.  Negotiations are progressing, but too slowly to achieve results in a few weeks.

Even changes to the Secretariat that might be helpful in updating the institution are proving problematic.  For example, while the dispute settlement system is often described as the “crown jewel” of the WTO system, growing backlogs are tarnishing the crown.  Discussions of how to alleviate a staff shortage and adjust the system have been mostly languishing since 2013.

My own modest proposal to revamp the WTO’s website and extend outreach to new stakeholders with a better use of social media outlets was coolly received at a meeting in Singapore last week of Asian trade officials and Secretariat staff.  Such changes, it was suggested, could require buy-in from members and may also prove impossible given resource constraints. 

I would argue that an institution that cannot fix its own outdated website without encountering pushback and internal disagreement is not well-positioned to handle many of the toughest trade issues as it heads into a third decade of existence.

***Just in—Indonesia’s President Jokowi apparently told President Obama that Indonesia “will join” the Trans-Pacific Partnership (TPP).  The New York Times did not provide a timeline for this “eventual” commitment.  Bets anyone?

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Traveling with One “L” or Two? A Review of TPP Timelines

A former trade negotiator once told me that he spent over an hour of his time on Earth arguing over whether or not the word “traveling” should be spelled with one “L” (American style) or two (British style).  Such linguistic disputes are common in the final phases of trade agreements, as the legal texts get nailed down and then translated.

For the Trans-Pacific Partnership (TPP), the legal teams are holed up in Japan, confirming all the final details of the agreement.  In both legal and trade terms, language is extremely important.  There is a vast difference between a sentence that reads, “Members shall…” and “Members shall endeavor…”  The former requires the action by members while the latter merely urges action. 

Getting a dozen legal teams to comb out the final details on such a comprehensive agreement that runs to hundreds of pages is taking a long time.  Fortunately, the official language of the TPP is English.  This means that, although the final document will also be translated into Spanish and French, the legally applicable text is the English version only.  This dramatically cuts down on the time required between the completion of negotiations and possible release of final texts. 

While we all wait for the texts and associated schedules to be circulated (hopefully within another week or two), it seems a good time to review the timelines ahead for the TPP. 

In general, there are two critical sets of timelines that matter for the agreement.  The first deadlines are a whole set of complicated dates related to approval of the TPP inside the United States.  The second deadlines are those related to entry into force for the entire TPP agreement. 

To make matters more complicated, the US domestic procedures contain multiple timelines.  To try to summarize (and simplify slightly) the situation:

1.     President Obama, following Trade Promotion Authority (TPA) guidelines, has to notify Congress of his intention to sign the texts.  This triggers a 90 day procedure under which the texts must be formally released to the public for at least 60 days.  At the end of 90 days, the President is allowed to sign the agreement.

2.     The formal signature of the agreement by the President must be accompanied (within 60 days) with a list of legislative changes necessary for Congress to consider in order to bring domestic laws into compliance with TPP rules (wherever needed). 

3.     At some point, the President will need to deliver to Congress the official text of the agreement, a draft implementing bill, and a statement about how the agreement matches requirements of Congress under TPA.

4.     Once Congress receives the bill from the President, it must send the bill directly to relevant committees for expedited review.  There are specific time deadlines that apply again once the bill has been submitted.

5.     After limited floor debate, both houses of Congress must vote on the bill.  No amendments are allowed, so members must vote either yes or no.

Hence, one important issue inside Washington is figuring out when is the most auspicious moment to trigger some of the deadlines.  Most critical, of course, is the best opportunity for the final debates and reviews inside of Congress prior to final votes.

While many will feel particular urgency to get US approval for the TPP agreement, the implementation of TPP commitments across all 12 members remains some distance off.  New Zealand’s government has been releasing a series of helpful fact sheets.  One, on implementation and legal commitments, highlights the three options included in the TPP agreement for handling the entry into force deadlines.

The basic problem is that, while negotiations on the TPP agreement with the 12 members concluded on October 5, member states need to have domestic approval to move forward with implementation.  An agreement with a dozen participants may run into difficulties at the domestic level in getting approvals at the same time. 

Hence, the TPP has three possible methods for achieving entry into force.  The first and easiest method is to have all 12 countries finish domestic procedures within 2 years of signing the agreement.   Within 60 days of the last approval, the agreement automatically enters into force. 

Under option 1, entry into force could be much sooner than 2 years since it is triggered by the speed of domestic procedures alone.  Most TPP members have parliamentary systems, where the government usually has higher confidence that domestic legislators will follow government policy.  It is conceivable that many TPP members could put the matter before parliaments immediately after signature and be ready to move forward in a matter of weeks.

Except, as noted, the United States.  To add to the difficulties, as anyone following the United States knows, America is in the middle of a drawn-out electoral cycle in a bitterly contested, hyper-partisan environment.  It is not at all clear whether the TPP will get the 51% of votes needed in both houses of Congress or when this approval might be most likely.

This concern has given rise to the next option for TPP approval.  Under option 2, if all 12 parties have been unable to commit to the agreement at the domestic level inside of 2 years, the agreement can still come into force if at least 6 members are ready. 

However, this comes with a catch—because TPP officials have been worried that either the United States or Japan would not get the agreement through their legislators and bureaucracies for approval, option 2 also requires that both countries must be among the six (or more) countries ready to move ahead to implementation.   Hence, option 2 really means that, provided the United States and Japan can join up with at least 4 other good-sized members by the end of a two-year period, the agreement can proceed.

But what if either Japan or the United States are not finished with domestic procedures within 2 years?  Then Option 3 kicks in, under which the agreement can come into force within 60 days of the last one signing the agreement (along with the other major party and at least 4 more members). 

The TPP agreement, therefore, does give more weight to the Japanese and American approvals than the remainder.  This is a reflection of economic realities, where the payoffs are greatest if, and only if, the biggest markets are included.  Unless all 12 members are included at the outset, then members that collectively contribute at least 85% of the market size need to be ready to implement the TPP.  Any country that is not involved at the date of entry into force (other than the U.S. and Japan) can enter the agreement at any later time.

This complex set of entry into force conditions makes it difficult to predict with accuracy exactly how soon the TPP will take effect.  If all 12 parties moved at light speed, the soonest possible date could be fall 2016.  It is a pretty safe bet, however, that this will not happen so smoothly or so soon.  Instead, businesses might realistically be planning and pushing for TPP implementation in 2017.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***