By: Bruce H. Leeds, Senior Counsel
Let us start by observing that the Trans-Pacific Partnership (TPP) has not been ratified by the United States and other participating countries, and acknowledge that the treaty is controversial. Accordingly, we will base our observations on the current version of the TPP published by the U.S. Trade Representative, and will not take a position on the merits of the agreement.
The TPP is an agreement between the U.S. and 11 other Pacific Rim countries governing trade and related subjects, such as labor, environment, and intellectual property rights. The 12 participating countries represent nearly 40% of the global GDP. Needless to say this is a big deal.
One of the principal objectives of the TPP s to promote free trade between the participating countries. To that end, the agreement will eliminate duty on qualifying products and reduce non-tariff barriers.
Those who have dealt with other free trade agreements, such as NAFTA, Australia-U.S. Free Trade Agreement, and Korea-U.S. Free Trade Agreement (KORUS) know that they have many similar features, but each one is somewhat different from the others. Expect TPP to be the same way.
Chapter 2 of the TPP covers National Treatment and Market Access for Goods. It states that the customs duties on qualifying goods will either be eliminated immediately or over agreed timeframes. “Qualifying” of course means that there are rules of origin that must be satisfied to obtain duty reduction or elimination. Let’s take a look at the proposed rules of origin for TPP.
The first category is articles wholly obtained or produced in a TPP country. This is defined as goods grown, harvested, fished, or mined, in one of the participating countries. Therefore, wheat grown in Saskatchewan, Canada, or fish caught in Japan, would qualify.
Next, goods produced exclusively from originating materials and that otherwise meet the TPP rules of origin are eligible to receive lower tariffs. This could include an article of steel made from iron and carbon mined and processed in TPP countries. It also includes goods meeting the rules of origin defined in Annex 3-D of the TPP agreement. The latter will likely be those that are most commonly used in determining whether goods qualify for TPP tariff benefits.
Annex 3-D contains two basic rules for TPP goods containing non-originating materials:
- The goods are produced entirely in a TPP country using non-originating materials and “each of the non-originating materials used in the production of the good satisfies any applicable change in tariff classification requirement, production process requirement, regional value content requirement, or any other requirement specified in this Annex.”
- The goods satisfy all other rules of origin and origin procedures in Chapter 3 of the TPP
The foregoing means that one needs to further define what is meant by “change in tariff classification,” and “regional value content” requirement. Furthermore, it means that one must examine the rules of origin procedures in Chapter 3 of the TPP.
Change in Tariff Classification – This is otherwise known as the tariff-shift rule. Similar to other free trade agreements, the specific requirements for change in tariff classification are determined by the rule applicable to the Subheading under which the article is classified.
Regional Value Content (RVC) – The RVC can be calculated in one of four ways, depending on the rule of origin specified for the Subheading under which the article is classified:
- Focused Value Method: Based on the Value of Specified Non-Originating Materials
- Build-down Method: Based on Value of Non-Originating Materials
- Build-up Method: Based on Value of Originating Materials
- Net Cost Method (for automotive only)
Each method has its own formula detailed in Chapter 3.
The TPP agreement also specifies a 10% maximum de minimis content (based on the Customs value of the article) for non-originating materials.
A claim for duty free benefits under the TPP would be supported by a certification provided by the producer, exporter, or importer. There is no prescribed format for the certification, and it may be provided in hard copy or electronic format; however it must contain the minimum data requirements in Annex 3-B to the TPP. These include many of the same data elements that are used for other free trade agreements, such as NAFTA or KORUS. They include exporter or producer name and address, importer name and address, description of goods, HTS classification, preference criterion, and authorized signature. The certification can be for an individual shipment or a blanket period not to exceed 12 months.
The rules of origin go on to state that the importer may be required to provide other documents or information to support the certification. The importer may be required to meet conditions to complete the certification. If the importer fails to meet these conditions, it may be prohibited from providing certifications. If a claim for benefits is based on a certification from the importer, the rules prohibit the importer from making a subsequent claim for the same shipment based on a certification from the producer or exporter. In other words, double certification is not permitted so the importer must choose which certification it prefers serve as the basis of the claim.
To verify a claim for preferential treatment under the TPP, the importing country may send a written request for information from the importer, exporter, or producer of the goods, or visit the premises of the exporter or producer. There are special rules for verification of textile articles.
The TPP contains rules for the Customs administration of each participating country. They include publication of regulations and procedures, expeditious release within 48 hours of arrival, issuance of advance rulings, and impartial and transparent issuance of Customs penalties.
The TPP has many other sections affecting Customs and Customs procedures. A very positive feature is an excellent set of definitions of the terms used in the rules of origin.
The TPP may, or may not ,be ratified, and if it is, the terms of the different annexes may, or may not, read exactly as they do right now. As it stands, the TPP contains some positive benefits, but also some risks for exporters and importers.
