Trans-Pacific Partnership - Consumer Products, Agriculture, Automotive, and Other Customs Issues
On November 5, 2015, the official full text of the Trans-Pacific Partnership (“TPP”) was released by Canada’s Department of Foreign Affairs, Trade, and Development. Following an extended period of challenging negotiations, 12 Pacific Rim countries reached an agreement on what has been called one of “the largest, most ambitious free trade initiatives in history.” The TPP parties include Canada, Brunei, Chile, Japan, Australia, New Zealand, Singapore, Peru, Malaysia, Mexico, the United States, and Vietnam. The full text of the agreement is still subject to legal review and translation into French and Spanish versions.
In this alert, we highlight the import of the TPP on customs requirements and sectors such as consumer products, agriculture, and automotive.
A link to the TPP text, and Canada’s side agreements, is provided by the Department of Foreign Affairs, Trade, and Development here. Our previous analysis of the technical summary released in advance of the full text of the agreement is available here and a statement of the key aspects of the TPP can be found here. Our detailed analysis of the investment protection chapter of the TPP, and its impact on Canadian and other TPP investors, can be found here.
The participants in the TPP comprise almost 40 percent of GDP globally, and the agreement touches on numerous aspects of today’s global economy. The agreement will come into force sixty days after receiving domestic legal approval from all participating member countries, although it may come into force within two years of the signing date if at least six participants with a combined total of, at minimum, 85% of the GDP of the original participants have completed this process. The United States and Japan, as the first and second largest economies, are required to meet the 85% threshold. If either one refuses to ratify, the TPP cannot come into force.
The goal of the agreement is to liberalize trade among member countries through the removal of both tariff and non-tariff barriers to trade in order to create an environment of greater market access opportunities.
Consisting of thirty chapters spanning over 6,000 pages of text, the agreement itself is both large and comprehensive. In addition to the actual text of the agreement, Canada has also released multiple side letters in conjunction with the agreement, intended to clarify important bilateral obligations with other TPP parties in specific sectors. Prime Minister Justin Trudeau has also released Mandate Letters to Cabinet Ministers that outline policy objectives and include reference to participation in the TPP in various contexts.
One of the key aspects of the TPP is how it impacts specific sectors including consumer products, agriculture, and automotive sectors and how the TPP addresses other customs issues.
Consumer Products & General Customs Issues
The TPP includes over 18,000 products and thousands of lines of specific tariff changes distributed over hundreds of pages. The agreement has the potential to impact multiple sectors in many ways and will have long term implications and effects for consumer products and services. By eliminating and reducing both tariffs and non-tariff barriers to trade, in addition to removing other restrictive measures, such as those often applied to agricultural products, the TPP will increase transparency and facilitate trade in consumer goods for Canadians.
The TPP explicitly incorporates Article III of the General Agreement on Tariffs and Trade. This will require Parties to extend no less favourable treatment to foreign like products as they do to their own. This will extend beyond simple tariff elimination and border measures, and will include all measures of both central and regional governments of the Parties.
The TPP also prohibits barriers that prevent goods from travelling from one Party to another for repair and alteration by expressly prohibiting any customs duty or fee on goods returning from being repaired or altered in another Party. This applies regardless of the origin of the original good. However, Canada has expressly reserved certain ships imported under Chapter 89 of the Customs Tariff from this provision.
While the TPP does incorporate Article XI of the General Agreement on Tariffs and Trade 1994, and generally prohibits export and import restrictions, it also allows for import and export licensing requirements. Such licensing must be non-discriminatory and transparent, with clearly delineated procedures. However, the TPP expressly recognizes the need of States to engage in non-proliferation and general security actions. Chapter 2 explicitly recognizes the need to comply with various international agreements including, United Nations Security Council Resolutions, the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, the Nuclear Suppliers Group, the Australia Group, and the Treaty on the Non-Proliferation of Nuclear Weapons. Compliance with such international measures will not be in violation of a Party’s commitments under the TPP.
Duty and Fee Elimination
The TPP eliminates tariff and non-tariff barriers to liberalize trade within the TPP region for qualifying goods that comply with the applicable rules of origin. The TPP also eliminates ad valorem fees in all countries (with only a few exceptions).
The TPP includes schedules for duty and fee elimination. These schedules are specific to countries and, within those national schedules, specific products. The TPP plans for these duties to be eliminated in batches, some will be eliminated immediately, while others are transitioned over a period of time ranging from a few short years to over well over 20. TPP Parties have the option to reduce these transitional time frames as applicable and upon consent of the other Parties.
Customs Administration and Trade Facilitation
The TPP includes in Chapter 5 a rules structure that is intended to promote compliance and transparency with regards to customs processes and administration, to prevent fraud and smuggling, to promote supply chains, and expedite customs and border processing. Transparency is a key element of these provisions, and TPP countries are expected to make rules, laws, and regulations readily published and available. Goods cannot be held unnecessarily and release cannot be delayed. Cooperation is a key element, and TPP members agree to assist with information gathering and law enforcement where required.
This provision will also require the Parties to authorize their customs departments to render advance rulings on classification, application of the rules of origin, and other matters related to the TPP. Parties will also be required to maintain a way of appealing or judicially reviewing all such determinations.
There must also be a public method for persons of the other Parties to contact these customs organizations to request information and advice regarding requirements for qualifying for quotas, application of duty drawback, eligibility of goods for the re-entry exemptions contained in the TPP, and other TPP-related matters.
Rules of Origin and Origin Procedures
In Chapter 3, the TPP provides for a single set of rules of origin in order to define a good as “originating,” although there are several sets of product specific rules of origin (such as those in the automotive sector). Compliance with the rules of origin creates eligibility for the preferential treatment under the TPP. The TPP also provides for accumulation of materials during origin calculations – in other words, materials from one TPP Party are considered equivalent to those from any other TPP Party. There is a single verification process and compliance system for ensuring the rules of origin considerations are followed – so long as documentation is available, preferential treatment must be granted. The TPP also establishes a committee on the rules of origin and origin procedures to ensure that the “spirit and objectives” of the agreement are being fulfilled.
The trade remedies section, Chapter 6, like the customs administration and facilitation provisions, strives for transparency and cooperation in order to fulfill TPP objectives. The rights of Parties under the WTO are not affected. Important features of the TPP include transitional safeguard measures for up to two years (plus one extension opportunity) where serious injury occurs to a domestic market as a result of the phase-in of TPP tariff cuts. Only one safeguard may be used at a time per product, and safeguards include consultation and notification provisions and requirements.
Chapter 25 of the TPP deals with regulatory coherence and includes provisions to ensure that regulations are clear, concise, transparent, and publicly available online. TPP parties agree to try to provide annual public notice of regulatory initiatives and measures, and periodically update and review existing regulatory measures for efficiency and effectiveness in achieving intended objectives. Chapter 25 establishes a committee with a continuing reporting obligation on implementation, cooperation, best practices, and areas for improvement.
The TPP includes Chapter 29 on Exceptions and General Provisions, which covers a broad number of general exceptions for items such as protecting public morals and resource conservation, among others. Of note is the self-judging exception for security interests, which applies to the entire TPP agreement, and allows a TPP party to take any necessary measures required for security and public welfare. Temporary safeguard measures are also described for special circumstances, for example, in the case of economic crisis.
Specific Products and Industries
Chapter 4 of the TPP is specifically dedicated to textiles and apparel, and, like the rest of the agreement, was created with the goal of eliminating tariffs - current tariff rates can reach as high as 30%. The majority of tariffs on textiles will be eliminated immediately, although there are provisions for longer implementation periods for certain products (such as polyester t-shirts, for example).
As usual with textile provisions in free trade agreements, the devil is in the details regarding rules of origin. There are specific rules of origin for yarns and fabrics from TPP parties. In the TPP, “clothing” refers to everything from the yarn used to create an item to the garment itself. The approach is based on the default “yarn-forward” rule of origin, where textiles produced from yarn and fabric from within the TPP region are duty-free. Essentially, the tradeoff for the lower tariff rate is a requirement that the textile or garment be made within the TPP trade region, and with materials from TPP member countries. There is also a separate section for the treatment of handmade or folkloric goods.
The textiles chapter includes a “short supply list” that allows for specific yarns and fabrics not readily or generally commercially available within a region to be sourced from locations outside the TPP region. This functions to allow a certain degree of flexibility where other TPP members do not produce enough of a certain fabric or yarn to meet demand for production needs.
The short supply list contains both “temporary” items, which will be removed five years after entry into force, and a permanent short supply list. The temporary list contains eight items, all but one of which (items under harmonized tariff subheading 6001.92) must meet specific end uses. The permanent short supply list covers 194 different items, most of which also set out specific end use requirements for the input to qualify for the short supply list. The full details of the short supply list can be found here.
Chapter 4 contains specific provisions for emergency actions, cooperation, monitoring, verification, determinations and the creation of a committee on textile and apparel trade matters. These provisions include specific customs commitments related to cooperation, duty evasion, fraud, and smuggling. The strong enforcement provisions included in this chapter, in combination with the customs cooperation commitments, mean that quality control will be ensured in the application of the lower tariff rates for qualifying goods. For example, there are provisions for site visits, in which the facilities of exporters or producers can be inspected for verification and compliance purposes. In addition to the cooperation provisions to fight customs offenses, there are also textile-specific provisions to protect domestic industry from a sudden import surge, including special safeguards through which higher duties can be temporarily implemented in cases of such import surges.
Telecommunications are addressed specifically in Chapter 13 of the TPP, which includes numerous measures to ensure a competitive approach to telecommunications services across participating countries, and includes rules for commercial mobile services providers. The chapter provides for a discretionary approach that allows the Party to meet obligations under the agreement using whatever method may be most appropriate given the needs of the market, including “any other appropriate means that benefit the long-term interest of end-users.”
Chapter 13 contains provisions:
- requiring parties to ensure enterprises of other parties receive access to public telecommunications services on reasonable and non-discriminatory terms and conditions. Parties are entitled to regulate to protect end user privacy and data protection.
- creating obligations for suppliers of public telecommunications services to provide interconnection with suppliers of public telecommunications services of the other Parties. This includes requiring regulatory bodies to maintain reasonable interconnection rates.
- endorsing international mobile roaming cooperation and transparency through aspirational and non-binding terms aimed at improving transparency.
- requiring that major suppliers of public telecommunications services in the territory of a Party provide treatment no less favourable to major foreign suppliers than they do to their own subsidiaries and affiliates regarding availability, rates, and quality of services and technical interfaces for interconnection.
- establishing safeguards to prevent anti-competitive behaviour by its major suppliers of telecommunications services.
- allowing for resale of public telecommunications services and prohibiting any rules that would prevent such resale at reasonable rates to suppliers of another Party.
- creating rules requiring suppliers in a Party’s territory to offer network elements to suppliers of the other Parties on an unbundled basis.
- requiring Parties to ensure major suppliers provide leased circuits services in a reasonable period of time and on reasonable and non-discriminatory conditions.
- obligating the Parties to allow for access to structures owned or controlled by major suppliers by suppliers of the other Parties.
The provisions are intended to function together to promote a competitive environment in mobile services.
Forestry and Value-Added Wood Products
The TPP essentially eliminates the vast majority of tariffs on forestry and value-added wood products, a sector in which Canadian exporters currently face high tariff barriers from several TPP countries (including Japan, Vietnam, and Malaysia). Extended timelines for tariff elimination are provided for in respect of particular TPP countries as they relate to items such as lumber, newsprint and printed materials, sanitary and household papers, and packing containers and cartons, among others.
Canada’s position on the trade of forest products is further discussed in Canada’s side letter to Japan, confirming a maintenance of the status quo for the export of B.C. logs, the export of which is subject to regulatory controls by both the federal and provincial levels of government.
In time, the TPP will eliminate all tariffs related to industrial goods, with the majority of reductions occurring immediately. Countries that are intended targets for exports in key industries, such as Japan, Vietnam, and Malaysia, will eliminate other tariffs over an extended time period, up to 20 years.
Unless specifically excluded, the TPP applies to all service sectors. Canada has excluded social service sectors such as health, public education, and cultural industries. Services, including provisions related specifically to financial services, will be discussed in more detail in a future legal update.
Agriculture and the Supply Management System
The TPP will create better market access to other TPP countries for Canadian agricultural products, most notably in areas with traditionally high tariff rates, such as pork products. Canada currently exports in excess of $34 billion of agricultural products to TPP member countries annually, so the potential gains that may be realized in this sector are substantial. For example, Japan, a key market for agricultural exports, will immediately eliminate over 30% of their tariffs related to agricultural products, and markets such as Australia and New Zealand will eliminate over 90% of their tariffs on day one. There are other specific provisions aligned with the goals of the TPP that apply to the agricultural sector, for example, an elimination of export subsidies and limiting time frames for restrictions on food exports.
Dairy and Supply Management
Under the Canadian supply management system, imports face what are often described as prohibitively high tariff rates. The TPP will give the following new duty free access to foreign imports as percentage of domestic production, which will rise by 1% per year for 13 years:
- 3.25% for dairy (measured by butterfat content);
- 2.3% for eggs;
- 2.1% for chicken;
- 2% for turkey; and
- 1.5% for broiler hatching eggs.
The increased foreign imports of dairy products will be primarily comprised of value-added products such cream, yogurt, butter, ice cream, and cheese – 85% of most dairy product imports will be reserved for industrial uses. Additionally, Canada will also eliminate tariffs on whey powder and margarine over ten and five years respectively. The side letter from Canada to Australia notes that Australian dairy products, including milk protein concentrates, can be imported into Canada to be incorporated in dairy processing “to the fullest extent possible, including in cheese making.” A side letter between Canadian and the United States contains particular provisions for notice in the event of item classification changes to the tariff rates for supply managed products.
The former Conservative government originally promised a $4.3 billion compensation package for the sectors affected by increased access for imports of supply management goods under the TPP. These programs include:
- The Income Guarantee Program – to provide 100% income protection for dairy, poultry, and egg producers for ten years, plus an additional five year transition period of income support.
- The Quota Value Guarantee Program – to protect producers against reductions in quota value for ten years.
- The Processor Modernization Program – to support processors in competitiveness and growth.
- The Market Development Initiative – to assist groups in promoting and marketing products.
However, the Liberal Government has raised questions as to whether they will honour these programs.
Well known Canadian products, such as whisky and ice wine, will face lower barriers to entry into TPP countries, some of which will occur immediately while others are implemented over varying extended time frames. Australia and New Zealand duties on wine (currently 5%) will be eliminated immediately, while Japan will implement tariff reductions over a seven year phase-in period. For whisky, high tariffs (of up to 55%) in Malaysia and Vietnam will be reduced over 15 and 12 years, respectively. The side letter from Canada to New Zealand notes that no product can be sold as Canadian Whisky or Canadian Rye Whisky unless it has been manufactured in Canada and is in compliance with applicable Canadian regulations for sale and export, effectively creating a Geographic Indicator for these products.
Beef and Pork
From 2012 to 2014, Canada beef and pork producers exported $2.6 and $1.3 billion dollars, respectively, worth of product to TPP countries, so the gains in these industries under the TPP are expected to be substantial. Canadian exporters currently face high tariffs and no preferential access in important markets.
The most significant gains in these markets will be seen in Japan and Vietnam. Japanese tariffs on an expansive range of pork products will be eliminated over ten years, and the current 50% tariff on beef will be reduced to less than 10% within the next 15 years. Other countries, will eliminate tariffs on beef products within a much shorter time span (for example, Vietnam will eliminate tariffs, which often exceed 30%, over the first two years).
Fish and Seafood
Like beef and pork, tariff barriers exist in key export markets such as Japan, Malaysia, and Vietnam. The TPP provides for tariff elimination in these markets over 10 to 15 years in certain circumstances, although there will be a substantial immediate reduction in tariffs in both Japan and Vietnam and an immediate elimination of all tariffs in Malaysia.
Tariffs on both crude and refined canola oil will be phased out over five years, including in key markets such as Japan and Vietnam.
The TPP provides for both the elimination and reduction of tariff rates on non-alcoholic beverages and other processed food products, such as maple syrup and value-added grain products.
Wheat and Barley
Japanese tariffs on feed grade grain (wheat and barley) will be eliminated immediately, with no quotas, and food grade barley tariffs will be reduced over an eight year period. Tariffs on wheat entering Vietnam markets will also be eliminated immediately.
The TPP includes many features that are specifically applicable to the automotive sector, including a separate dispute settlement procedure that involves tariff snapback protection, regulatory measures, non-tariff barrier protections, and a bilateral committee on motor vehicles. The end result will be an elimination of tariffs for vehicle and vehicle parts among TPP countries, although the time frames for these changes are subject to bilateral agreements between parties and thus vary widely from country to country.
Under the TPP, Canada will receive preferential access to markets such as Malaysia and Vietnam, where extremely high tariffs are currently a barrier. Malaysia has also promised more favorable customs valuation rules and greater cooperation for Canadian automotive exporters.
Canada’s tariff reduction from 6.1% for Japanese vehicles will be phased in over five years, compared to the much longer 25-year transition period negotiated by the United States for its 2.5% tariff on Japanese cars and a 30-year transition period for its 25% rate on light trucks.
The agreement requires that parts be sourced from TPP countries. Under NAFTA, the rules of origin for vehicles and vehicle parts required a regional content of 62.5% - the TPP figure comes in at 45% for vehicles and major parts, and 35% for certain key auto parts produced in the Canadian automotive industry (such as engine parts). The practical outcome of this is that up to 65% of parts, in some circumstances, can be sourced from countries outside of the TPP region. The Conservative party originally announced $1 billion to support the auto sector through transitions associated with the TPP, but later declared that this was only a campaign promise.
The new Liberal Government has announced that they will be reviewing the compensation package promised to the automotive sector as part of broader consultations it is conducting with Canadians. To date, there has been no decision as to whether the Conservative promise will be honoured.
The focus of the TPP on transparency and cooperation to enhance trade opportunities for member countries is a modern approach that will help lower both risk and cost for exporters and create greater opportunities for Canadian businesses to bring their products to new markets across the globe. While concessions were made in both the automotive and supply management sectors, the risk and cost of Canada being left out of an agreement such as the TPP could have been far more significant than the sector specific concessions that were made.