KPMG report: Initial impressions of Trans-Pacific Partnership (TPP)

Trans-Pacific Partnership (TPP)

A notice released today for publication in the Federal Register announces that President Obama has notified Congress of his intention to enter into a free trade agreement, known as the Trans-Pacific Partnership (TPP) agreement.

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The TPP is a comprehensive international trade agreement between 12 major trading partners in Asia and the Americas. The 12 TPP nations are: the United States, Australia, Canada, Japan, Malaysia, Mexico, Peru, Vietnam, Chile, Brunei, Singapore, and New Zealand. Text of the TPP was released earlier this week. Read TaxNewsFlash-Trade & Customs

 

Professionals with KPMG’s Trade & Customs practice have conducted an initial review of the text, as briefly summarized below. While the TPP has the potential to change many global trade and sourcing strategies, the agreement has not yet been approved by Congress, and it is not yet clear when Congress would consider the agreement.

National treatment and market access

Broadly speaking, the TPP would harmonize trade regulations and tariff schemes between the 12 signatory nations and would increase mutual market access for trade in both goods and services. The TPP would require parties to eliminate customs duties according to set schedules, and to provide "national treatment" to qualifying goods originating from countries within the TPP.

Duty and fee elimination

The TPP would reduce duties between the member states and would also eliminate many other trade-related fees. Duties on goods would be eliminated according to a product-specific and country-specific schedule, indicated by “staging category.” For many products (those under staging category “EIF”), duties would be completely eliminated on the day the agreement is implemented. Customs duty elimination for other product categories would take place incrementally, with timeframes for total duty elimination ranging from three years to 20 years. Member states would also have the ability to accelerate the duty-reduction schedule upon agreement by the parties. 

Also noteworthy is that the TPP would eliminate all “ad valorem” fees in all countries, including Merchandise Processing Fees (after a three-year period) in the United States, with some minor exceptions. Caps all other associated entry fees would be set according to a “reasonable cost for services” standard. Refer to the U.S. Tariff Elimination Schedule and read text of the General Notes on the Tariff Schedule of the United States [PDF 38 KB]

Country of origin rules

In addition to the common qualification methods of wholly obtaining or producing the materials that go in to the finished good, TPP would provide a tariff shift agreement that employs the "regional value content" build-up and build-down valuation methods. TPP would be the first U.S. free trade agreement to use the "focused value method."  This method is much like the build-down method in that it subtracts non-originating material from the overall value of the good, but it allows the importer to calculate only the non-originating material from a certain chapter or heading against the total value. This focused value method typically requires an amount greater than 50% of the good in order to qualify, although in some circumstances it can be as high as 65% (Annex 3-D, 9028.30).

Like most multi-party trade agreements, TPP would allow for accumulation. That is, as long as the qualifying materials that go into making the product come from one of any of the parties of the agreement, that product would qualify for preferential treatment (Article 3.10).  These qualifying products could maintain their qualifying status even though they could be shipped to a non-party as long as the product does not enter the commerce of that country and remains under a party’s customs control at all times (Article 3.18). 

As with most newer free trade agreements, preferential treatment certification would not be necessary at time of import (Article 3.21(4)), but certain data elements would be necessary when requested by customs authorities (Annex 3-B).

Dispute settlement

The "Dispute Settlement" section allows for TPP parties to transparently manage and resolve official disputes related to the agreement. The first step of the dispute process involves consultations between parties to attempt to resolve the issue. If consultations fail, a dispute panel would be created to determine if there has been noncompliance by either party. If a noncompliant party fails to remedy the issue, trade retaliation mechanisms (such as the suspension of tariffs or implementation of fees) could be implemented by the opposing party. Refer to Chapter 28: Dispute Settlement.

Timeframe

The White House today officially notified Congress that the president intends to sign the TPP. Under the Trade Promotion Authority (TPA), Congress has 90 days to review the agreement, and can vote to either approve or reject the agreement—no congressional amendment is allowed. Read the notice [PDF 310 KB]  in the Federal Register.

In the event of ratification by the member states, the TPP would enter into force 60 days after the signatories have legally approved the agreement Refer to Chapter 30: Final Provisions.

KPMG observation

U.S. companies need to consider and follow TPP developments in the coming months, as the agreement is presented and considered by Congress. The outcome of congressional review is uncertain at this stage. 

 

For more information, contact a professional with KPMG’s Trade & Customs practice:

Douglas Zuvich | +1 (312) 665-1022 | dzuvich@kpmg.com

Andrew Siciliano | +1 (631) 425-6057 | asiciliano@kpmg.com

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