In this two-part commentary Supply Chain Matters shares some initial impressions of the Trans-Pacific Partnership (TPP) which has reached the stage of preliminary agreement pending the ratification by member nations. The government of New Zealand took the liberty to post the summary of this agreement on its web site, and it provides a high level view of the various components that will make-up this significant trade agreement.

In early October, ministers of the 12 TPP countries announced conclusion of their negotiations regarding trade among what is estimated to represent 40 percent of current global GDP, which is rather significant, especially from a global supply chain context. The countries to be included in TPP are: Australia, Brunei, Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam.

The Summary points to five defining features that make-up this agreement, which include:

  • Comprehensive market access which is expected to result in the elimination or reduction of tariff barriers across substantially all trade of goods and services.
  • A regional perspective among value-chains, where goods sourced and flowing among TPP nations can be considered a part of the same value-chain, for tariff purposes.
  • Commitments to aide small and medium businesses to take advantage of broader market access opportunities among TPP nations.
  • A platform for regional economic integration which was designed to potentially include additional economies across the Asia-Pacific region.
  • Aspects for promoting innovation, productivity and competitiveness including further development of the digital economy along with the role of state-owned enterprises in the global economy.

The TPP includes 30 chapters covering trade-related issues. We and others certainly have not had the opportunity to review all chapters in-detail, but upon our review of the summary, we cite what we believe are important chapters for our readership audience:

Chapter 2- Trade in Goods

Eliminates and reduces tariffs and non-tariff barriers on industrial goods and means to reduce or eliminate tariffs and other restrictive policies on agricultural goods. According to the summary, most tariff elimination in industrial goods will be implemented immediately upon ratification, although some specific tariffs will be eliminated over longer time periods as agreed to by TPP parties.  More than likely, the latter are the controversial tariff areas among specific individual trade nations that remain contentious.

Regarding agricultural products, the agreement calls for promotion of policy reforms that include eliminating agricultural export subsidies among nations along with fostering greater food security across the TPP region.

Chapter 3- Textiles and Apparel

This area calls for elimination of tariffs on textiles and apparel immediately, although those tariffs involving some sensitive products will be eliminated over longer timeframes. The former are obviously very significant for textile and apparel related industry supply chains and their associated sourcing strategies. The chapter further includes specific rules of origin requiring the use of yarns and fabrics from the TPP region, which promotes a regional supply chain. Since China, a significant multi-tiered player in the industry is not a current member of TPP that implies the development of a more independent apparel supply chain.

Chapter 4- Rules of Origin

The summary indicates that the 12 nations have agreed to a single set of rules of origin that define whether a particular good is “originating” and therefore eligible to receive TPP preferential tariff benefits. Obviously, this is a rather important, if not the most important section related to the entire agreement, one that defines the TPP value-chain economic benefit. To specifically quote a sentence in this chapter:

The TPP provides for “accumulation,” so that in general, inputs from one TPP party are treated the same as the materials from any other TPP party, if used to produce a product in any TPP Party. The TPP parties also have set rules that ensure businesses can easily operate across the TPP region, by creating a common TPP-wide system of showing and verifying that goods made in the TPP meet the rules of origin.

To dwell a bit more on this particular section, keep in mind that Canada, Mexico and the United States already trade under tenets of the NAFTA agreement, which defines rules of origin and tariff arrangements. Once more, as noted in a prior Supply Chain Matters commentary, country of origin and labeling legislative actions among Canada, Mexico and the U.S. were headed toward WTO arbitration.

To gain more perspective, we reached out again to trade compliance services provider Livingston International for a perspective on all of the current global trade developments in motion. We spoke again with Candace Sider, Vice President of Regulatory Affairs, Canada. While Livingston is still completing its detailed analysis of the various sections of TPP, Sider did point out that trade agreements are often contentious, especially in areas related to rules of origin. The impacts on the COOL disagreements are yet to be determined but TPP certainly adds more perspective. Concerning NAFTA, and specifically automotive supply chains, that agreement specifically calls for 60 percent origin in NAFTA countries. With Japan a member of TPP, there were reports of tense negotiations related to the effects on Japan based automaker’s global sourcing and tariff strategies which remain to be sorted out in the final details and respective ratification.

In our part two commentary, we will touch upon other important sections of TPP, along with their implications.

Bob Ferrari