The ABCs of TPP

The ABCs of TPP

July 28, 2015

The Trans-Pacific Partnership (TPP) is a 12-nation Asian-Pacific trade agreement that seeks to increase economic integration among participating nations by lowering barriers to trade, improving trade facilitation and enhancing standards harmonization. Upon completion, the TPP trade area would comprise a region with $28 trillion in economic output, making up around 39 percent of the world’s total output. If the TPP is successfully implemented, tariffs will be removed on almost $2 trillion in goods and services exchanged between the signatory countries.

In this blog we look at some questions about the TPP and how it affects imports and exports for countries along the Pacific Rim. This blog post was written by Benjamin Burstein, summer intern at the AAFA (American Apparel and Footwear Association) and son of Mark Burstein, NGC’s president of sales, marketing and R&D.

Which countries are involved in the TPP?

The United States is currently negotiating the TPP with 11 other countries including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

How long has the TPP been in discussion?

In 2005, New Zealand, Chile, Singapore and Brunei began negotiations to engage in an unprecedented trans-pacific free trade agreement, known as the P4 (Pacific 4). In February 2008, President Bush announced that the United States would enter the P4 discussion. Over the next couple of years Peru, Australia, Vietnam, Malaysia, Canada, Mexico and Japan entered the negotiations as well.

Why will TPA help this move forward?

On June 29, President Obama signed H.R. 2146, Defending Public Safety Employees’ Retirement Act, which ultimately became the vehicle for the passage of Trade Promotion Authority. Without TPA, Congress could change significant terms of the trade agreement that is already negotiated. Knowing that sensitive provisions in trade agreements might be altered by Congress at some future date, U.S. trade negotiating partners may hold back key concessions at the bargaining table. With TPA, it is ensured that the USTR can strike the best deal that will meet the economic and political requirements to gain Congressional approval.

Another huge benefit of TPA is that Congress gave the administration over 150 specific trade policy goals that they wanted to see included. With this, Congress will now be able to publically see the true text of the TPP, which it wasn’t able to do before TPA was granted.

What is the status of the TPP negotiations?  

The United States is hosting a meeting of Trans-Pacific Partnership (TPP) Trade Ministers in Maui, Hawaii from July 28-31, which was preceded by a meeting of the TPP Chief Negotiators from July 24-27. Since they last met in May, Trade Ministers from the twelve TPP countries have been working continuously. As a result, the U.S. has made considerable progress in closing gaps on remaining issues, and is continuing to work intensively to address specific issues bilaterally. The upcoming ministerial will provide an important opportunity to build on this progress to conclude the negotiation.

What industries does the TPP effect?

The industry that will be most impacted by the TPP will be the apparel and garment sector. The average effective tariff rate on apparel companies is between 20-25%, raising the price of goods and making footwear and apparel more expensive for the American public. If the TPP were to be passed, the tariffs would begin to be eliminated, resulting in lower prices for apparel and footwear.

What are the pros and cons of the TPP? [[more]]

Yarn Forward-

A key part of the proposed format of the TPP is a rule known as “yarn forward.” “Yarn forward” would require that fabric produced from yarn made only by a TPP country would qualify for the trade agreement’s duty-free status. The rule is intended to ensure trade benefits of the TPP only apply to signatory countries, rather than outside players such as China. However, the rule also has significant effects on signatory countries, such as Vietnam. Vietnam is currently a key global garment manufacturer; however its factories often use Chinese-made fabrics in their products. In fact, around eighty-five percent of Vietnamese textile and garment companies have outsourcing contracts with foreign partners. If Vietnam wants to be eligible for the TPP benefits, such as lower tariffs in the U.S., it will have to develop its own local fabric industry or constrain itself to only importing fabric from other TPP countries.

We still do not know how the implementation of yarn forward will occur in the TPP, but if the rules of origin do not have exemptions for countries like Vietnam and Malaysia, the cost of garments will rise significantly, counterintuitive to the goals of the Trans-Pacific Partnership.

In their fight against “yarn forward,” countries like Vietnam have joined forces with retailers like Wal-Mart and Target to push for more flexibility in the rule. The USTR appears to be somewhat receptive and, in its most recent “summary of objectives,” it has included a “short supply” rule. This rule would allow raw materials “not commercially available in the United States or other TPP countries to be sourced from non-TPP countries and used in the production of apparel in the TPP region without losing duty preference.”

The USTR says this flexibility will be limited, significantly hindering garment exports from Southeast Asia to the United States.

Implementation and Phase Out

Another issue that must be resolved before the TPP is passed would deal with the implementation that will occur. There are a couple of specifics that would have to be remedied:

  1. The U.S. doesn’t have any mechanism for enforcement of the TPP statutes in member countries like Vietnam, Malaysia and Peru. Depending on the actual language of the TPP, it may not go into effect until after all member countries have put reforms into place, which may take years to accomplish. Just like NAFTA and CAFTA-DR, member countries had to put all reforms into effect before the duties began to be eliminated.
  2. Part of the TPP will be implemented in phases in order to evaluate the impacts on the international economy. Today, the USTR reports that the phasing out of tariffs will stretch between 5-12 years. They estimate that the phase-out of tariffs incrementally will allow us to avoid any immediate shocks to the apparel industry.

Why are unions against the TPP?

Some unions are against the TPP because most of their interpretations are based on prior FTAs, like NAFTA or CAFTA-DR, which the TPP is not. It is important for unions to understand that USTR and other economic ministries around the world have learned from the mistakes of prior FTAs. The problem is that our unions are in the dark on the TPP’s text, and do not understand that it will allow Americans to benefit. After Maui, most of the problems that unions believe will occur should cease to exist.

The TPP is on the cusp of coming to a consensus among participating members, and is slowly gaining approval among union members and Congress. The TPP hopes to build mutually beneficial relationships between a variety of countries and create lower prices for those in the retail industry and consumers alike. 

By: Benjamin Burstein