The following article by the Stikeman Elliott Tax Group will be of interest to many readers. The Trans-Pacific Partnership’s promise of significantly enhanced trading relationships between Canada and Pacific Rim markets such as Japan, Vietnam, Malaysia and Singapore – to name just a few — will enhance the value of Canadian companies to foreign and domestic acquirors alike.
On October 5, 2015, Canada announced that it had successfully concluded negotiations with respect to the Trans-Pacific Partnership (the "TPP"), an ambitious free trade agreement among 12 countries: Canada, the United States, Mexico, Chile, Peru, Japan, Vietnam, Brunei, Malaysia, Singapore, Australia and New Zealand. Purporting to be the world's most comprehensive trade agreement, the TPP promises to strengthen Canada's economic ties within the Asia-Pacific region as well as enhancing its existing partnerships within the Americas, including with its NAFTA partners.
According to Canada's Department of Foreign Affairs, Trade and Development ("DFATD"), the twelve nations of the TPP have nearly 800 million people and a combined GDP of $28.5 trillion. The significance of the agreement is underscored by the expected economic growth in the Asia-Pacific region, which is expected to include two thirds of the world's middle class by 2030 and one half of global GDP by 2050.1 The TPP is essentially aimed at the reduction or elimination of tariffs and import quotas among participating countries, which include such traditionally high-tariff jurisdictions as Japan, Vietnam and Malaysia.
The full text of the TPP was released on November 5, 2015 by the Ministry of Foreign Affairs and Trade of New Zealand, which currently acts as depositary for a number of international treaties, including the TPP. The documents published include 23 side instruments that clarify a range of bilateral matters between Canada and certain other signatories. While agreement on a final text represents an important milestone in the TPP process, ratification by all 12 countries may take as long as several years. As noted below, Canada's new Liberal Party government, whose leaders have longstanding concerns about certain aspects of the TPP negotiation process, has yet to give a clear indication of its intentions with respect to the finalized agreement. Having said that, the new government appears to be generally favourable to efforts to expand free trade agreements.
Canada has now signed free trade agreements with 51 countries comprising over 60 percent of the world's economy. In addition to the TPP, recent agreements include the Canada-Ukraine Free Trade Agreement (July 2015), the Canada-Korea Free Trade Agreement (April 2014) and the agreement-in-principle with the European Union on a Comprehensive Economic and Trade Agreement ("CETA") (October 2013). Once these agreements are fully ratified and in force, Canada should be strategically positioned as the only G7 nation with free-trade access to the United States, Latin America, Europe and the Asia-Pacific region.
Objectives of the TPP
The TPP aims to promote economic integration among the participating nations through mutual tariff elimination and improved market access. These objectives are to be achieved by the following means:
Reducing trade barriers and minimizing non-tariff technical barriers to trade;
Establishing common regulatory frameworks and eliminating regulatory barriers;
Strengthening existing economic partnerships (including NAFTA);
Developing comprehensive rules with respect to e-commerce; and
Creating a strong regional standard for the protection and enforcement of intellectual property rights, among other collective initiatives.
The elimination of tariffs and increased market access offers obvious benefits for Canadian producers, manufacturers and processors. The TPP includes measures designed to improve conditions for foreign investment by providing greater certainty, transparency and protection for investors.
Sectoral Effects of the TPP
Key sectors of focus of the TPP, as highlighted in the DFATD announcement, include:
Dairy products (and other supply-managed products);
Agriculture and agri-food;
Fish and seafood;
Forestry and value-added wood products;
Services and financial services; and
DFATD emphasized that the TPP will reduce or eliminate tariffs and enhance market access in each of the aforementioned key Canadian industries, by strengthening trade relationships with Asia-Pacific markets and leveraging Canada's North American integrated supply-chains.3
The TPP will eliminate tariffs on motor vehicles and auto parts among all TPP countries, although the timelines applying to the various participating nations were negotiated individually and are therefore not uniform. For its part, Canada has agreed to eliminate its 6.1 percent tariff on imports of Japanese vehicles over a 5-year period (to 5.5 percent, 5 percent, 2.5 percent, 2 percent, then zero). This represents a significantly shorter timeline than that negotiated by the U.S., which agreed to a 25 year phase-out of the 2.5 percent U.S. tariff on passenger cars from Japan and a 30 year phase-out of the 25 percent U.S. tariff on Japan-built trucks.
The TPP will grant preferential access to Canadian automotive exporters and, within 12 years, will eliminate tariffs on vehicles and vehicle parts exported to Vietnam and Malaysia, where existing tariffs range as high as 74 percent and 35 percent respectively. Japan already offers duty free market access for Canadian passenger vehicles and automotive parts. The TPP will also eliminate quantitative restrictions on imported vehicles from Canada to Malaysia, the government of which has also committed to make its customs valuation rules more trade-friendly and to foster co-operation in the automotive sector between Canada and Malaysia.
With respect to rules of origin for vehicles and vehicle parts, the agreement will lower the required content threshold of vehicles and certain key Canadian-produced vehicle parts to 45 percent in order to for them to qualify as tariff-free under the TPP. Other key Canadian-produced vehicle parts will require a cost base of 40 percent to qualify as TPP-originating content.
DAIRY PRODUCTS (AND OTHER SUPPLY-MANAGED PRODUCTS)
The TPP will provide new market access for TPP countries in Canadian supply-managed products sectors. As indicated by DFATD, Canada is expected to allow foreign imports in the following sectors, as a percentage of current annual production:
3.25 percent for dairy;
2.3 percent for eggs;
2.1 percent for chicken;
2 percent for turkey; and
1.5 percent for broiler hatching eggs.4
Based on Appendix A to Tariff Schedule of Canada (Tariff Rate Quotas)5, TPP would not only allow additional foreign imports of milk but also cream, yogurt, butter, ice cream and different types of cheese. For milk, although it will take 18 years for the aggregate quantity of TPP-originating goods that shall be permitted to enter Canada on a duty-free basis to reach 56,905 metric tons (from 8,333 metric tons in year 1), 50,000 metric tons will be allowed to be imported into Canada duty-free after 5 years. For cheese alone, additional Tariff Rate Quotas equivalent to 16,502 metric tons will be allocated for TPP-originating goods over the first 19 quota years. In comparison, Canada has accepted to create new Tariff Rate Quotas for 18,500 metric tons of cheese originating from the European Union upon entry into force of CETA.
Under the TPP, Canada will also eliminate its 208 percent tariff on whey powder over 10 years and its 55 percent tariff on margarine over 5 years.
AGRICULTURE AND AGRI-FOOD
The most significant gains from tariff elimination and improved market access for Canadian agriculture in the TPP are in Japan, Malaysia and Vietnam, but the advantages extend to all TPP countries. New market access opportunities will arise for Canadian pork, beef, pulses, fruits and vegetables, malt, grains, cereals, animal feeds, maple syrup, wines and spirits, baked goods, processed grain and pulse products, sugar and chocolate confectionery, and processed foods and beverages.
Immediately upon implementation, 32 percent of Japan's tariff lines on TPP-originating agriculture and agri-food products will become duty free, 31 percent in Vietnam, 92 percent in Malaysia, almost 99 percent in New Zealand and close to 100 percent in Australia, with further tariff reductions staggered over the 20-year period thereafter.
FISH AND SEAFOOD
Canadian exports of fish and seafood products are currently subject to significant tariff barriers in Japan, Malaysia and Vietnam. In this respect, the TPP will fully eliminate tariffs on fish and seafood products within 10 to 15 years. However, immediately upon implementation, approximately 66 percent of Japan's and 83 percent of Vietnam's tariff lines on fish and seafood will become duty-free. Malaysia will offer duty-free entry to all imports of TPP-originating fish and seafood immediately upon entry into force. The TPP will give Canadian exporters a competitive advantage in the Asia-Pacific market over fish and seafood exporters from non-TPP member nations, such as China, Thailand and Russia.
FORESTRY AND VALUE-ADDED WOOD PRODUCTS
In this sector, Canadian exporters are also currently facing high tariff barriers from certain TPP countries. In this regard, the TPP will eliminate such high tariffs on forestry and wood products imposed, inter alia, by Japan, Malaysia and Vietnam.
Most of the tariffs on forestry and value-added wood products will be eliminated immediately upon implementation. For certain TPP countries, tariffs will be eliminated within three to fifteen years upon entry into force with respect to, inter alia, lumber, builders' joinery and wood carpentry, oriented strand board, newsprint, uncoated paper and paperboard, carton boxes and packing containers, sanitary and household papers, printed materials, plywood and veneer panels, worked coniferous and non-coniferous wood and sheets for veneering.
SERVICES AND FINANCIAL SERVICES
The TPP will provide service suppliers and businesses with more transparent and predictable access to TPP markets. In particular, enhancements include professional services, such as architectural and engineering services; research and development, environmental, construction and transportation services; and services in the extractive sector, such as services related to the oil and gas industry, as well as mining. The TPP will enhance existing trade relationships beyond the World Trade Organization's General Agreement on Trade in Services (GATS) as well as other existing trade agreements among Canada and TPP participating nations.
The TPP will eventually eliminate all tariffs on TPP-originating industrial goods. Immediately upon implementation, the majority of Canadian industrial goods exported to TPP markets will be duty-free. The remaining tariffs on industrial goods will be eliminated within 10 or 20 years. For example, Japan's current tariffs of up to 11.7 percent or ¥44/kg (whichever is less) on imported metals and minerals will be eliminated within 10 years; Malaysia's current tariffs of up to 50 percent on imported chemical products will be eliminated within 10 years; and Vietnam's current tariffs of up to 40 percent on certain imported iron and steel products will also be eliminated within 10 years.
While negotiations on the TPP were officially concluded on October 5, the TPP text released on November 5 continues to undergo legal review and must be translated into French and Spanish language versions prior to signature by each of the parties to the TPP.6
Procedurally, the final text will have to be signed and ratified according to the ratification procedures that apply in each of the participating countries. While the consequences of a failure to ratify on the part of one or more of the participants remain uncertain, it is possible that the TPP could be ratified and brought into effect by only some of the twelve countries that are currently involved. The ratification process could take as long as several years to complete, according to some observers.
The TPP represents an ambitious and important expansion of Canada's capacity to trade freely on a global scale. It is not without opponents, however; notably those who have expressed concerns about the agreement's potential effects on the domestic automobile, agriculture (including dairy) and (in certain cases) commodities sectors. Notwithstanding these are not insignificant concerns, DFATD is clearly of the view that the TPP will increase and create new market access and secure investment opportunities for many Canadian businesses in a region whose economic importance will only continue to grow in coming years.
While Canada's newly elected Liberal government has affirmed its commitment to free trade, it has yet to specifically endorse the TPP. Incoming Prime Minister Justin Trudeau stated prior to the October 19, 2015 election that, if elected, his party would ensure that a full and open debate on the TPP takes place in Parliament.7 This position appears to have been confirmed by a tweet published on November 5 by Canada Trade, the official Government of Canada source for international trade updates, in which Minister of International Trade Chrystia Freeland stated: "As Minister of International Trade, I look forward to engaging with Canadians on the TPP Agreement. As well, our government is committed to holding a full and open public debate in Parliament to ensure Canadians are consulted on this historic agreement."8
Stikeman Elliott will provide further updates as information becomes available.
The authors would like to thank Jason Paperman for his contribution to this article.