Arent Fox recently published several articles on the impact the Trans-Pacific Partnership could have on the auto industry. To read the articles, please see "Related Posts" below.

Dateline: Chatham, ON, October 23, 2015

October 23, 2015

Free trade agreements have a generic template that negotiators follow. After the various “feel good” provisions outlining the lofty objectives of said agreement, the text quickly turns to the nuts and bolts of the negotiations – the agreed upon tariff reductions and lowering of import barriers between members of the agreement. Most everything else that follows is how the agreement will prevent circumvention and abuse of the accord. Once negotiators agree on a final text, they must then return to their capitals to face their often skeptical parliamentarians.

The Devil is in the Details – Ratification and Implementation

This process is called ratification. In the United States it means negotiators first having to address the individual concerns of over five hundred Members of Congress and taking the “hot seat” at numerous Congressional committee hearings. If all goes well the agreement (without amendment) will go before the House and Senate floors for an up or down vote. It is during these very public moments when the agreement can meet its most vocal critics.

But once this hurdle is past, the Executive Branch and its various federal agencies must begin the drafting of US rules and policies to actually implement the terms they agreed upon. In many cases, this work has already begun. For NAFTA, the uniform regulations, which contained the bulk of the details of the agreement, were issued and became effective less than 30 days after the signing of the NAFTA.

For North American manufacturers on the TPP watch, the rules will be as necessary to follow as the publication of the Agreement. A number of US federal agencies will have their share of the TPP rulemaking effort, but one of the first to watch is that of the US Customs and Border Protection, or CBP.

Assumption of Risk and Liabilities – Importers of Record

In the US, the customs laws hold the actual US ‘importer of record’ as liable for an import’s transaction reporting accuracy. For many Canadian exporters, this is very important given the high percentage of those having the dual role as the Canadian exporter and the US “importer of record.” 

Accounting for an import’s value and origin are key to that responsibility, and CBP takes their role in ensuring full compliance of the rules very seriously. The agency does so with an arsenal of inspectors at the actual border as well as an army of trade enforcement personnel poring over import documentation in the days and even months after the shipment arrives in the US. Too many companies have learned the hard way when they think their US bound shipment has been “cleared” by Customs if the truck has left the border and arrived at its US destination. In fact, CBP can (and does!) audit companies years after that truck has rolled down the highway.

Assignment of Liability – What to Look for in TPP Rulemaking

In CBP’s rulemaking, the agency will specify the requirements for a valid TPP import transaction into the United States. Readers will recall that for the NAFTA, the Certificate of Origin is the qualifying statement and it holds the foreign producer and exporter liable for its authenticity and reliability. Under those terms, CBP has the authority to audit NAFTA certificates issued by Canadian producers and exporters and vice versa for CBSA and US producers and exporters. 

However, if a NAFTA certificate is found by CBP to be invalid, it is the importer that relied on the certificate – and not the producer or exporter that issued it – who is responsible for the back duties and fees owed on all import transactions covered by that certificate. Because one NAFTA certificate issued by a producer or exporter can cover one year’s worth of import transactions, those amounts can add up.

Under the TPP, those roles remain unclear and could shift but they will be important to understand for the entire supply chain including producers of the steel, aluminum, plastics, glass, and petroleum inputs made into a US bound automotive part. CBP’s need for cost information from that supply chain is made easier if related parties are involved but can be very perilous when US importers must ask foreign suppliers who can be far removed from the final assembly operation.

Border Fees – Financial Liabilities not Limited to Duties Alone

While the duty rates and origin content rules of the TPP have received their share of media ink, there remains another dimension to the TPP that the US Congress will have to address. Specifically, what mechanisms can be put in place to offset the duty revenue shortfall created by the TPP? Historically, Congress has introduced new or higher “border fees” to make up for lost duty revenues.

This list of fees resembles an alphabet soup of various import “services” – from homeland security to import automation costs. One particular fee – the Merchandise Processing Fee, or MPF – is applied as an ad valorem to every import transaction, with the exception of NAFTA-qualifying goods. For industry sectors operating under thin profit margins, this exemption has been good news for many companies’ bottom line.

In addition, given the volume and integrated nature of the NAFTA cross-border supply chain where trucks cross the border almost every two seconds, the MPF exemption is real money. Currently the MPF rate is 0.3464% of the value of a commercial shipment, capped at $485.00, and they have steadily been increasing. While this rate may not appear as onerous to many readers, it is very important for the Canadian manufacturing and exporting sector which typically ships hundreds of high value loads into the US each and every day. The numbers quickly add up. How the TPP provisions address border fees and how Congress will balance the need for more dollars in federal coffers will be important to look for. 

In the End, It is All about the Nuts and Bolts

North American manufacturers have seen challenging times in recent years. Those which have survived are in healthier positions. There is much in the TPP’s automotive rules for us to remain vigilant and alerts such as these are designed to help position a company’s strategic goals within the new TPP world.

Other alerts will soon follow, including explanations of the TPP “snap back” provisions and how origin rules under the TPP (especially for inputs for the evolving “smart car” industry) will be necessary to understand, and quickly. With rising input costs, stricter regulatory requirements, and shifting consumer markets, executives will want to assess and possibly rebalance their corporate operations. With any trade agreement, it’s the nuts and bolts that begin that assembly of options.