Over the weekend, negotiators from the US, Canada, Mexico, Japan, and eight Pacific Rim countries agreed to the Trans-Pacific Partnership, the largest regional trade accord in history, accounting for more than 40 percent of the global economy.
Each of the 12 countries must ratify the agreement before the TPP takes effect. In the US, that could come as early as February, although it appears likely President Barack Obama will delay providing Congress with the required 90-day signing notice until the necessary political support is achieved. During this 90-day period, Congress can only vote up or down on the agreement – in other words, there can be no changes or amendments to the agreement.
As reported in our previous Arent Fox alerts on the TPP, this agreement will have a profound effect on the North American automotive sector. What has been for over 20 years a highly integrated sector among the NAFTA countries – and in particular the US and Canada – now will include nine other countries, most importantly Japan.
At best, the TPP does not have uniform support in the automotive sector. Ford executives in the United States announced today that it is concerned about the lack of currency manipulation provisions. Some press reports this morning stated that despite market access potential in other TPP countries, such as Japan, the TPP could be “bruising” on the NAFTA auto parts sector.
And in both Washington and Ottawa, public statements have focused on the export opportunities for the North American automotive parts sector with little insight into the other side of any trade deal coin – import competition.
At the same time, it has become apparent that the NAFTA governments – particularly Canada and the US – believe that it is better to be part of a TPP agreement that may be flawed in many respects than to be shut out of the Pacific Rim benefits entirely. Accordingly, we will be following the TPP ratification process and reporting on details as they become available in order to assist the North American automotive sector in managing this significant emerging risk, which is now one giant step closer to becoming a reality.
Our team has received a number of questions over the months in regard to the TPP. Current details are scarce at this time, but for now, we understand the following:
- Inputs from one TPP country are treated the same as materials from any other TPP country used to produce a good in a TPP country – there do not appear to be special rules applicable only to the NAFTA countries.
- As is the case with recent free trade agreements post-NAFTA, the onus on producing the documentation to support a TPP preferential claim will likely lie with the importer and not the producer or exporter, as is the case with NAFTA and the NAFTA Certificate of Origin. The details of the level of documentation required and how the importer will be able to substantiate the information from the producer or exporter will be critical.
- The agreement authorizes TPP countries to develop audit procedures for verifying that goods produced in a TPP country meet the TPP rules of origin. Given the enforcement concerns voiced by Congress over the TPP and trade agreements generally, we expect that US enforcement of the TPP agreement rules of origin will be vigorous like no other, including deeper reaching US audits.
- Specific phase out periods are being confirmed, with some reports indicating that the US duty of 25 percent on trucks will be phased-out over 30 years, as will the 2.5 percent duty on light duty vehicles over 25 years.
- For US auto parts imports into the United States, the TPP will eliminate all remaining duties for 80 percent of imports upon the pact’s implementation with remaining duties phased out for as long as fifteen years.
- Reports on the TPP rules of origin regional value content for automotive goods appear consistent with our past reports – no lower than 40 percent and no higher than 45 percent for most auto parts, and 45 percent for passenger vehicles and light trucks, all significantly lower than their respective content requirements under the NAFTA. The rules under which this percentage is calculated, however, could be very different than how a value content is determined under the NAFTA – for example in the area of counting “tracing” materials.