Restructuring Supply Chains to Better Match the CPTPP Trade Agreement – LogiSYM March 2018

While there are now hundreds of free trade agreements that have tied countries together, especially in Asia, for more than two decades none have been as powerful for firms as the upcoming Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).

What makes this deal—signed by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam on March 8, 2018—so important are the deep, interlocking sets of commitments.  The CPTPP matches the ways companies actually do business and provides a clear, comprehensive set of rules to reduce the risk and uncertainty of trading between member countries.

At a time of potentially increasing turbulence in global trade, CPTPP members have agreed to rapidly implement 30 chapters including commitments in goods, services, investment, customs and trade facilitation, standards, government procurement, intellectual property rights, and competition policy.

The agreement will come into effect as soon as the end of the year.  The final result will be a much more dynamic, integrated and competitive region with benefits that are largely limited to CPTPP member firms trading across CPTPP markets.

Companies that understand the agreement and plan their internal strategies around using the deal will have competitive advantages in the marketplace over those firms that do not.

As an example, swimwear for men, women and children (HS6211) typically faces high tariffs in CPTPP member countries today.  Vietnam drops from 20% tariffs to 0 on day one.  Australia levies a 10% tariff on all categories.  These will be dropped on day one of the agreement to 5% where it will remain for three years before being eliminated entirely.  In Japan, the same items are 9.1% today but become duty free on entry into force (EIF) or the first day of the agreement.  Canada charges 18% tariffs, which step down in four equal cuts to become duty free after four years.

While CPTPP firms may not automatically pass these tariff savings along to consumers, clearly these companies have a competitive advantage relative to swimsuits that cannot use CPTPP and are not eligible to receive similar duty-free tariff treatment under any other trade agreements.

The fastest way to assess a trade agreement for quality is to look at the extent and depth of tariff cuts.  Tariffs act like taxes applied on goods crossing borders.  Higher levels of tariffs can limit trade and one key goal of free trade agreements is to cut down tariff levels.  Better quality trade agreements have steeper tariff cuts overall in shorter time periods.

The CPTPP is a truly high-quality agreement in this regard, especially compared to most alternatives.  Many of the tariffs fall all the way to 0 or become duty free on EIF.  For those tariffs that do not fall to 0 on the first day, the majority of tariffs fall to become duty free in relatively short time periods.  Often, this is within 5-7 years and most are gone within 10 years.

Unlike the market access schedules, which are different for each TPP member country, the rules of origin (ROO) commitments are the same for all.  There is one ROO schedule.  Every tariff line has a matching ROO in the TPP under product-specific rules of origin (PSRs).

Once a product has met the ROO for the TPP, it can be shipped without change into every other TPP member country.  TPP benefits apply only for goods being shipped into TPP countries.

Of particular importance to companies, the TPP does allow cumulation across members—this is one of the biggest benefits of using a regional arrangement instead of a bilateral trade deal.  Firms can add up or “cumulate” the originating content from across all 11 members.

The ROOs for textiles, however, are complicated.  The basic rule is something called “yarn forward” which means that everything from the basic yarn through the cloth or textile to the finished product must be from a TPP member country (unless otherwise specified).  The category for swimsuits in Chapter 62.11 reads:

A change to a good of heading 62.10 through 62.11 from any other chapter, except from heading 51.06 through 51.13, 52.04 through 52.12, or 54.01 through 54.02, subheading 5403.33 through 5403.39 or 5403.42 through 5407.94, or heading 54.08, 55.08 through 55.16, 58.01 through 58.02, or 60.01 through 60.06, provided the good is cut or knit to shape, or both, and sewn or otherwise assembled in the territory of one or more of the Parties.

Note that swimsuits are often made of specialist fabrics.  If qualifying, swimwear fabrics are subject to something called the temporary “short supply” that allows the use of non-CPTPP fabric for five years.

To look at another example, coffee pots (HS 8516.71) also attract surprisingly high tariffs for such a common item.  In Vietnam, these have a base rate of 25% for non-CPTPP imports.  But qualifying CPTPP firms will see a reduction to 18.7% immediately and further reductions in even cuts afterward to become duty free by year 4.  Peru’s 9% tariff is cut evenly across a 6 year period.  Canada’s 9% tariff is eliminated immediately on EIF.   Malaysia, similarly, drops a 20% tariff to 0 on the first day.  Australia, Japan and Mexico have no duty.

The ROO that accompanies coffee pots allows firms two ways to qualify for these lower tariff benefits:

A change to a good of subheading 8516.72 from any other heading; or

No change in tariff classification required for a good of subheading 8516.72, provided there is a regional value content of not less than:

(a) 30 per cent under the build-up method; or

(b) 40 per cent under the build-down method; or

(c) 50 per cent under the focused value method taking into account only the non- originating materials of heading 85.16.

Once a good meets the ROO for the CPTPP, it can be shipped without any further changes into all CPTPP member countries.

For companies involved in goods, the rules for tariff reductions and ROOs are not the only things that matter.  The processes and procedures for getting goods in and out of CPTPP member countries are also important.  Fortunately, rules for customs and trade facilitation are likely to prove extremely helpful for companies.

These benefits help even electronics firms that currently pay no duties on items as a result of the Information Technology Agreement (ITA) which dropped tariffs to zero on things like mobile phones, computers and many other devices.  The CPTPP does (or will) include duty-free treatment on all components, including raw materials.

It also helps by eliminating the need for certificates of origin (COs) for shipment.  Under the CPTPP, qualifying firms can use self-certification to track origin internal without the need for additional paperwork from CO authorizing agents.  Firms will need to keep their own records for five years.  The CPTPP provides for advance rulings on tariff classification and ROO qualification that remains stable for three calendar years.

The customs chapter also includes targets for customs clearance, including six-hour windows for express deliveries, new commitments on perishable items and promises to move to online systems of clearance with improved risk assessment systems.

The agreement also opens up services and investment for every single sector and subsector, including key parts of the logistics and supply chain like warehousing, back office processing, even retail.  Prior agreements typically carved out these elements, leaving firms unable to compete effectively or deliver necessary services attached to goods manufacturing, sales and servicing.

Firms looking to shift investment and move supply chains to take advantage of CPTPP benefits should also consider the new rules on standards and intellectual property (IP) rights.  The agreement provides some additional protections for food (sanitary and phytosanitary or SPS) and technical barriers to trade (TBT).  Protection and enforcement of IP is significantly enhanced in the CPTPP.

The full text and all market access commitments for all members is now available for review.  New Zealand serves as the depositary country for CPTPP commitments and holds the official copy of the agreement on their website.

Firms should start planning now to use the CPTPP.  It provides substantial benefits for firms that should not be ignored.  The agreement will come into effect 60 days after the 6^th country finishes domestic approvals.  This is likely to be later this year or early 2019.

Tariff cuts are the easiest elements of the agreement to see and to measure.  But the complicated and interlocking nature of the CPTPP means that firms should not just focus attention on this aspect of the agreement.  The CPTPP also provides firms with lower risk and greater certainty as well as improved opportunities for doing business across CPTPP member markets. The interlocking nature of commitments means that firms—large and small—receive benefits scattered in chapters all across the deal.