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TPP: Automotive industry’s new NAFTA

Taneli Ruda  SVP and Managing Director, Thomson Reuters ONESOURCE Global Trade

Taneli Ruda  SVP and Managing Director, Thomson Reuters ONESOURCE Global Trade

Over the past 20 years, NAFTA has become one of the most successful Free Trade Agreements in the world, with the automotive industry as one of its main beneficiaries. Not only has NAFTA boosted the auto parts and car assembly industry in Mexico, but the agreement has also enabled and streamlined the automotive supply chain crossing the US-Canada border.

The Trans-Pacific Partnership (TPP) currently faces political headwinds in the US, but there’s a good chance the deal will pass despite delays because of its strong underlying economic benefits for all the 12 participating countries. As with NAFTA, TPP will be a game-changer for the automotive industry, but this time with a more global scope.

TPP ties together some of the largest auto makers in the world – US, Japan, and Mexico – along with a few leading low-cost manufacturing locations including Vietnam and Malaysia.

Since TPP comes with massive duty rate reductions for the sector, including removing approximately 80% of US auto part tariffs and eliminating duties on automobiles coming from Malaysia and Vietnam, it will have a huge impact on the shape of the industry value chains.

The inclusion of Vietnam and Malaysia as cost-effective auto parts manufacturing and automobile assembly locations is big news, but the impact does not stop there. An FTA tying Japan directly with the US opens new doors for the auto industries in these two countries to collaborate and address each others’ markets.

In the US political debate, USA is often depicted as a victim of trade deals, but in reality TPP opens up many doors for the US auto industry to succeed across Asia and Latin America.

Needless to say, the industry is working relentlessly to identify and evaluate these new opportunities to restructure the supply chain as we speak.

TPP also has a deep impact on the more technical aspects of trade compliance. One of the biggest benefits is that instead of working with a patchwork of multiple FTAs with different and incompatible origination and inclusion rules, TPP provides a harmonized framework across 12 countries on which goods qualify, streamlining compliance and making it easier to design bills of material (BoM) and supply chain structures that allow serving the entire TPP area.

In addition to duty reductions, TPP includes provisions that extend US-driven environmental and labor standards to all the participant countries, helping advance sustainable business practices around the world. Thus, automotive vendors sourcing from the TPP area can have reasonable assurances that their supply chains adhere to acceptable environment and labor standards – no small benefit in the era of the ethically conscious consumer.

This is a point that often gets lost in the noisy US debate around TPP: If America does not lead by setting the rules of engagement for global trade, someone else will, and those terms will not be as compatible with the American values.

If you want to learn more about how TPP impacts the automotive sector, I’d like you to download our new whitepaper on the topic, or attend one of our upcoming webinars and seminars around the world on the topic.

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