On November 5, 2015, the United States Government released a draft of the Trans-Pacific Partnership agreement (TPP) to the public. While implementation of the Agreement by the 12 member states is likely at least two years away, textile industry retailers and producers should consider the TPP’s impact now, as it has the potential to significantly reduce import costs for those in a position to structure their supply chains accordingly. The TPP’s substantial tariff reductions, with materials previously subject to 17 percent and 18 percent duties eventually becoming duty-free, provide opportunities for textile retailers and producers that can be leveraged to their advantage.
Background to the TPP
The TPP is the largest trade agreement negotiated in the past 20 years. The agreement will substantially reduce barriers to trade amongst its member states, being: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Together, the member states contain more than 800 million consumers and make up more than 40 percent of the global economic output.
The agreement is Canada’s first free trade agreement that contains a chapter specifically dedicated to textiles and apparel. According to Global Affairs Canada, the TPP’s textile and apparel rules of origin will provide Canadian producers more flexibility in sourcing options, opening up Canada’s access to trade with the other member states.
Timelines for implementation of the TPP
The TPP still needs to be finalized, signed, implemented and ratified domestically by each of the member states. This will undoubtedly take some time, but each member state is expected to complete its domestic implementation and ratification processes within two years of signing the TPP. However, the agreement may come into effect before it has been finalized by each of the member states, as only six of the original 12 signatories, representing 85 percent of the total GDP of the TPP economies, are required to ratify the agreement before it can take effect.
In Canada, Prime Minister Trudeau had promised a full and open debate on ratification of the TPP in Parliament. Following the Trade Minister’s review of the draft agreement and the Federal Government’s public consultation process, Canada signed the TPP on February 4, 2016.
Key provisions on textiles and apparel
For Canadian textile retailers and producers, the TPP reduces and eliminates tariffs associated with trading textiles and apparel between member states. Taking advantage of the TPP’s preferential tariff treatment by trading with other member states could result in significant cost savings for retailers and producers in Canada. The specific rates of preferential tariff treatment, including the base rates of duty applicable to each item and the timeline for tariff elimination, can be found in each member state’s Tariff Elimination Schedule.
Generally, for an end product to qualify for preferential tariff treatment, it must originate within the TPP region in accordance with the Agreement’s rules of origin. As a general rule, an end product must be comprised of yarns and fabrics from the TPP region to qualify as originating within the TPP region. This requirement is often referred to as the “yarn forward” rule.
However, the TPP also provides a degree of flexibility with respect to the yarn forward rule. Article 2 of Annex 4-A outlines that an end product qualifies as originating if it is produced entirely in the territory of one or more TPP parties using non-originating materials that have undergone the production process requirements or changes in tariff classifications specified in the Annex, and the end product otherwise satisfies the rule of origin requirements set out in Chapters 3 and 4 of the TPP.
Additionally, the Short Supply List, found in the TPP as Appendix 1 to Annex 4-A, provides TPP members with an exemption to the yarn forward rule in situations where producers are unable to source certain fibers and fabrics from within the TPP region. The Short Supply List essentially allows producers to take advantage of the preferential tariff treatment for end products whose fibers and fabrics originated from outside the TPP region, if the fiber or fabric is listed on the Short Supply List. There are 194 fibers and fabrics on the Short Supply List, however, some fibers and fabrics are listed as temporary and will be removed from the list five years after the TPP has taken effect.
Finally, the TPP also allows for an end product to be comprised of up to 10 percent non-originating production materials and still qualify for preferential tariff treatment. Consequently, textile and apparel goods set out in Annex 4-A may qualify as TPP originating goods even if they contain non-originating materials, where the total weight of the non-originating materials is not more than 10 percent of the total weight of the good.
The bottom line for retailers and producers
The TPP offers the Canadian textile industry expanded and preferential access to many strategic global markets. To the extent that Canadian textile and apparel retailers and producers are able to organize their operations in such a way as to work within the TPP’s new textile and apparel rules of origin, they will have the opportunity to take advantage of significant reductions in the rates of duty with which they contend when importing products into Canada.