The United States and 11 other countries have agreed in principle to a mega free-trade agreement to eliminate tariffs and import quotas within their boundaries.
The United States and 11 other countries have agreed in principle to a mega free-trade agreement to eliminate tariffs and import quotas within their boundaries. Known as the Trans-Pacific Partnership (TPP), the deal includes the United States, Japan, Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, and it represents 40% of the world’s gross domestic product.
In order for the TPP to become law, the agreement must now be ratified though each country’s domestic approval process. For example, Canadian officials said that its parliament was seeking a vote on the deal by the end of 2015. Passage through Congress in the United States will be tricky, given the bipartisan opposition to particular issues. It will be made even more difficult because 2016 is an election year.
Under the fast-track rules passed by Congress during the summer of 2015, legislators can only approve or reject the agreement on an up or down vote. They can’t amend it to “fix” what they don’t like or add language where they believe it is missing.
The United States announced its decision to join the TPP talks back in 2009, with the goal of removing tariff and import quotas as well as other hurdles imposed by other countries in order to protect their domestic markets. The TPP, if ratified, would just be the latest in a series of free-trade agreements that the United States is already a party to in order to eliminate similar barriers to U.S. products. (See the sidebar on p. 120 for a list of the 20 countries with which the United States has existing trade pacts.)
The United States already has free-trade pacts with six of the dozen TPP nations, including Canada, Mexico, Chile, Australia, Singapore and Peru. Therefore, if ratified, the biggest trade effect will likely be with countries with whom the United States does not have an existing trade agreement, particularly Japan, Malaysia and Vietnam.
Not invited to join the TPP are automotive manufacturing powerhouses such China, South Korea, Indonesia and Thailand. Those countries, as well as Taiwan, will likely be able to apply to join the agreement at a later date.
The main features of the pact include the following:
High Tariffs and Other Protectionist Measures Would Go Away Under TPP
Some of the biggest opportunities are likely to come from countries with which the United States doesn’t currently have a free-trade agreement and which currently impose significant trade barriers to imported autos and auto parts. For example, Malaysia has put in place a number of initiatives designed to boost domestic product at the expense of imported parts, including tax benefits for domestic producers of up to 50%, plus import quotas. Similarly, U.S. auto-parts companies seeking to export to Vietnam are hampered by a 27% Vietnamese import tariff on a wide range of products.
High Tariffs Would Be Phased Out Over a Period of Time
While some of Vietnam’s and Malaysia’s tariffs will be eliminated immediately, others will remain in effect for more than 10 years. Likewise, U.S. tariffs on light trucks—25%—will remain in effect for nearly 30 years after the agreement goes into force.
Rule of Origin/Minimum Amount of Local Content Required for Duty-Free Status
One of the most contentious issues is the rule governing auto trade that dictates how much of a vehicle must be made (i.e., “originating”) within the TPP region to qualify for duty-free status. Under the TPP, autos must have 45% of their cost based on parts made within the TPP. (This contrasts with the much higher level of local content required under the North American Free Trade Agreement rules, which require that 62.5% of auto parts come from North America.) Under the TPP, auto parts require between 35% and 45% local content.
Opportunity to Comment on Proposed Regulations
Under the TPP, autos must have 45% of their cost based on parts made within the TPP.
Under the TPP, the parties are required to allow for the public to comment on proposed technical regulations, standards and conformity-assessment procedures. They also will ensure a reasonable interval between publication of technical regulations and conformity-assessment procedures and their entry into force, so that businesses have sufficient time to meet the new requirements.
Approval of the deal itself is not a foregone conclusion in the United States or in other countries. In the United States, the deal has a number of detractors on both sides of the aisle in the Congress and among business and labor unions. In addition, passage is expected to be particularly difficult given that 2016 is a presidential
Among the two biggest concerns in the automotive sector are that the lower minimum-content laws could provide a back door for countries such as Thailand and China to participate extensively in the TPP without being a part of the agreement. They would not be held to its requirements, which affect everything from labor and environmental standards and reciprocal tariff-free status to their home markets, as more than half of the value of a finished vehicle could be built by countries that are not participating in the agreement.
The other major concern is over currency-manipulation issues. Trade tensions between the United States and Japan have focused not on tariff barriers, but rather on accusations of currency manipulation and other non-tariff barriers to entry for importers in Japan.
Many sought an enforceable ban on currency manipulation within the TPP. Because that stipulation is not part of the TPP, Ford Motor Company, among others, opposes the deal. Many claim that the near absence of U.S.-branded vehicles in Japan is due to a weakening of the Japanese yen that is supported by the Japanese government and makes U.S. product pricing less competitive in Japan, among other non-financial barriers. As supposed proof, they point to the fact that Japan imports among the fewest vehicles of any major auto market.
In a separate agreement, the United States and Japan have already agreed to a joint committee on market-opening measures, including greater transparency in their regulations regarding imports.