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International business management

What is TPP… and why does it matter?

TPP is the Trans-Pacific Partnership and considered one of the most ambitious free trade agreements ever signed. The TPP is between 12 countries and is being considered as the biggest trade deal the world has seen with trade rules covering nearly 40 percent of the world economy and a collective population of about 800 million. This represents $28.5 trillion in combined gross domestic product of the 12 trade-pact countries.

TPP went through 5 years of negotiations, with opponents of the agreement complaining about the secretive negotiations and potential job losses, while proponents of the agreement were thrilled with the potential economic growth amongst participating countries and President Obama’s successful win for ‘trade promotion authority’ for the agreement; known as fast-track status.

What are the proposed benefits?

The proposed agreement is aimed at deepening economic ties between these nations, lowering trade tariffs and fostering trade with the goal of boosting growth in the participant countries. Most goods and services seem to be involved in the agreement, though not all tariffs will be removed with some taking longer than others. For example, the participant countries have said they will either eliminate or reduce tariffs and other restrictive policies from agricultural products and industrial goods.

TPP also brings in a wide range of new regulations for intellectual property, construction, research and development, transportation services, investment, agriculture, labor and the environment; to name a few.

For the United States, TPP stands to eliminate more than 18,000 taxes on exports made in America. This means that import taxes currently levied on U.S. products should be removed for quite a few industries. According to Fortune’s Jonathan Chew, “… the TPP removes tariffs that could be as high as 59% on U.S. machinery product exports to TPP countries, potentially increasing the industry’s export dollars reaped from TPP countries, which reached $56 billion last year. Other potential tariffs the TPP could remove: 40% taxes on U.S. poultry products, 35% on soybeans, 40% on fruit exports, 70% on U.S. automotive products exports, and 35% on U.S. information and communication technology exports.”

In the negotiations, Japan urged the U.S. to lower the content threshold for automotive parts sold in North America from 62% locally made to 30%. Japan won a compromise lowering the rate to 45%, causing a unified and vocal concern from the North American Automobile Industry.

Australia and New Zealand sought concessions in TPP on tariff reductions for agricultural produce, dairy and sugar. Both countries already have FTA’s with most of the TPP member countries, but TPP promises to provide these two countries with greater market access to the U.S. and Canada.

Sector Impact

While the deal is aimed at opening up commerce with the participant countries, not all industries and sectors will benefit equally.

In the automotive sector, some of the biggest car manufacturers are based in Japan and will benefit from getting cheaper access to the North American region, currently Japan’s biggest export market. The Japanese automakers will see large benefits in sourcing their products in Asia, because TPP will only enforce minimums for locally sourced materials. Today Vietnam has an extremely volatile tariff on car imports from the U.S. that reach as high as 70%. U.S. exports of automobiles are expected to grow substantially if the tariff is removed, arguably benefitting the Vietnamese population as well.

Tech firms will see restrictions removed on sales in foreign markets, along with requirements that they establish a local infrastructure to conduct business in those countries. TPP is expected to lower global roaming charges through regulation changes, which could result in increasing competition among the telecom giants.

The Pharma sector will receive up to eight years of protection for new biotech drugs, rather than the 12 years of protection pushed by the U.S. This potentially blocks rival companies from producing copies of the drugs, ultimately driving up prices and making the drugs more expensive. Conceivably, patients needing these critical medications would not have access because of cost.

What’s next?

TPP still has to be signed and this will take time. TPP is an extraordinary accomplishment given the very different approaches and standards within the participant countries, adding to the complexity of getting the approvals.

Why does it matter?

In this agreement, the TPP parties have agreed to provide transparent rules, publish their customs regulations and move toward quicker processing times for entry declarations; a dream come true for a company’s supply chain flow. As a trade professional, knowing the benefits and complexities of trade agreements and their impact on importers and exporters are one of the areas we provide value. We do this through our knowledge, expertise, and ability to implement predictable processes. While the TPP may possibly overlap the parameters of existing FTAs and may cause concerns over how existing FTAs will co-exist, the TPP is proposed to increase the list of eligible products for the TPP participants, making this agreement one for all trade professionals to watch.

Learn more

View the original story on our Tax & Accounting blog
Gain insight into TPP Trade
Check out ONESOURCE Global Trade

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