A New Awakening? The WTO and Star Wars

Last week two beloved institutions attempted to hit the reset button.  Both institutions started strong, capturing a certain kind of magic that included hope and optimism.  Both appeared to have taken wrong turns in mid-life that left many feeling alienated or just uninterested.  The weekend represented a new “toss of the dice” to rekindle the agenda for the future. 

It is likely too soon to tell how successfully both institutions managed their reboot. The early measures showed one group dominating headlines and generating staggering sums of money.  The other barely rated a mention in leading newspapers and websites. 

The franchise hauling in revenue, of course, is Star Wars.  The launch of The New Awakening  generated more than $500 million in ticket sales in the opening weekend. 

By contrast, the World Trade Organization (WTO) held a ministerial last week in Nairobi, Kenya, that limped to a finish line after a delay.  The biggest story from the event was something that did not happen—the final ministerial statement did not reaffirm the importance of the Doha Development Agenda (DDA).

Early signs may ultimately be misleading, of course.  The new Star Wars picture may rapidly vanish from public view, particularly with a planned zillion more sequels in the pipeline.  The WTO might take advantage of opportunities created by quietly killing off a plot line that was advancing nowhere.

The parallels between the two were striking.  Without spoiling too much of the plot, consider:

The latest Star Wars movie was not so much a refresh of the original than a remake of the 1977 movie (with a dash of the next two films thrown in).  It begins with a teenager wearing what appears to be linen struggling to eke out an existence on a barren desert planet.  Into this situation, insert one squat, round droid that becomes attached to our teenage hero. 

This droid is—wait for it—carrying a vital set of plans that are critical to the survival of a ragtag resistance force.  But the evil Dark Side knows that the droid is present and destroys the village.  Our teenage hero shows off an impressive range of skills, narrowly escapes with the droid and the plans, and is thrust into a galactic battle to save humanity. 

How does our hero escape the village carnage?  In a beloved spacecraft that, despite the passage of time and a complete lack of use for decades, still manages to leap off the ground and outrun all the existing aircraft (which are, strangely, also using exactly the same models and technology as before).   It flies to planets that are either all green and lush with trees or all snowy white and angular. 

Without giving away the limited plot of the movie, the adversary is using EXACTLY the same primary weapon that our ragtag group of heroes have faced twice before with eerily similar weaknesses.

The WTO has been stuck in a similar time warp.  The Doha Development Agenda (DDA) was first outlined decades ago.  It was launched with much fanfare in November 2001 in Doha, Qatar. 

The DDA represented a new hope.  Following the success of the Uruguay Round negotiations, the new WTO institution had a mandate to pursue trade agreements that went beyond tariff cutting for goods.  The very methods used to reach agreement would be new, with regular consultations that included every member. 

But as years turned to decades, the DDA remained stagnant.  The negotiating methods proved difficult to manage as the number of members soared to over 160 and the diversity of membership increased. 

The agenda got stuck in amber.  Basically, every time the organization might have tried something new, it got sent back to a desert planet to scavenge for spare parts.  Some members argued that nothing new could be attempted without first fixing old issues.  Given that every member has an effective veto over the actions of the army, the entire machinery ground to a halt. 

Technology, time and attention moved on while officials argued over tariff cutting formulas for agricultural goods.  This is not to argue that tariff cuts or agriculture are not important, but it is a bit like relying on a 40 year old spacecraft to outrun new competitors. 

The battle lines in the WTO got ever more complicated, as members organized themselves in various and proliferating groupings.  Perhaps the WTO could have used a droid with a map, or even a fragment of a map, to keep the effort on track.  Unlike Star Wars, WTO members cannot count on a villain wearing helpful black cape and face mask made from a trashcan.  Members probably could not agree on what adversary they are even trying to fight. 

Since the Dark Side in Star Wars seems unable to create a new approach to weapons or spacecraft or immense battle weapons, the rebel alliance refought old battles.  Something similar happened in the WTO as officials spent endless hours circling exactly the same territory over and over again.  They could not advance any other element of the agenda until tariff discussions for agriculture were completely addressed. 

The WTO’s version of victory last week was not a satisfying massive implosion of a planet with an enveloping roar, but was instead the accession of Afghanistan and Liberia to the grouping.   A subset of 53 members reached agreement on an extension of product coverage for information technology products (ITA2). 

Also, members agreed to limit the use of export subsidies and credits for agriculture in non-legally binding ways.  This sounds like a major accomplishment, but actually likely applies to very few.  Members can still subsidize agriculture (and lots of other things), just not directly for the purpose of exporting agricultural goods to other WTO members.  

The most relevant paragraph and meaningful element of the final declaration from Nairobi reads:

30. We recognize that many Members reaffirm the Doha Development Agenda, and the Declarations and Decisions adopted at Doha and at the Ministerial Conferences held since then, and reaffirm their full commitment to conclude the DDA on that basis. Other Members do not reaffirm the Doha mandates, as they believe new approaches are necessary to achieve meaningful outcomes in multilateral negotiations. Members have different views on how to address the negotiations. We acknowledge the strong legal structure of this Organization.

This is not exactly a light saber thrust through the heart, but in diplomatic terms it shows that change is finally coming to the WTO.  What shape it will take is not yet clear, particularly as decisions still have to be taken by consensus.

If this were Hollywood, the WTO just set itself up for the next movie—will our rebel alliance manage to achieve compromise in the future?  Will the battle be rejoined a fourth time with the same type of evil master weapon?  Will the ragtag alliance simply fold, content to sit back and hear legal disputes based on violations of rules written back when Luke Skywalker was a younger man?  Will our heroes be outgunned by a newly organized Dark Side with cutting-edge technology? Or will the parties find new battlefields entirely?  Stay tuned.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Using the Trans-Pacific Partnership to Foster Value Chains

APEC Currents December 2015

Companies are increasingly structuring or restructuring their value chains to take advantage of new opportunities. In a value chain world, firms have been using advancements in technology and transportation to fundamentally restructure their existing operations.  Companies can increasingly locate exactly the right “slice” of an operation in exactly the right geographic location. Even the smallest firms in remote locations can plug into chains and deliver goods or services to other companies or directly to consumers. 
 
New trade agreements, and particularly the Trans-Pacific Partnership (TPP), should make it even easier for companies to create or contribute to value chains across the member countries.   
 
The TPP brings together 12 countries:  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. The agreement is complex and broad with 30 chapters and includes many changes at the domestic levels for member countries.
 
Under the agreement, companies can gain substantial benefits from being located in TPP member countries and selling goods and services into other TPP member markets. 
 
The most obvious change in a post-TPP world will be the reduction of tariffs. On the date of entry into force of the agreement, 90% of all goods tariffs in all 12 members will drop overnight to zero.  The remaining tariffs will also drop, over time, with many eventually becoming duty free.
 
The tariff reductions mean that firms may no longer have to contend with tariff peaks—specific items or sectors where tariffs can easily reach 30, 50, or 150%. In many of these markets, companies hoping to export products have not been competitive.  With the reduction in tariffs, new TPP markets should now be attractive to many firms.
 
Dropping duties to zero also improves the prospects for firms to add value to products at home.  In the past, tariff escalation meant that low tariffs might apply to raw and unprocessed materials like raw coffee beans. But once processed, like roasted coffee beans, firms might face higher tariffs. Worse still, ground coffee might draw higher tariffs yet and a bottled coffee drink could have had tariff rates so high as to be completely impossible for firms to compete with locally produced bottled beverages.
 
After the TPP is implemented, however, all tariffs may drop to zero, including reductions in processed goods. This is especially critical for food manufacturers who can take advantage of duty free access for raw, roasted, and ground beans as well as bottled coffee. Firms can shift into higher-value sectors now and are not limited to exporting only unprocessed goods and raw materials to remain competitive.
 
The rules of origin (ROOs) in the TPP are the same for all products across all 12 member countries. This means that once a product qualifies for preferences in one country, it automatically is eligible for preferences such as reduced or zero duties in all members.
 
The TPP also allows cumulation across TPP member markets. This lets firms add up (or cumulate) the materials and inputs for any given good from across all 12 TPP markets.  For example, a firm that produces packaged soups can add up vegetables, broth and noodles added from TPP markets like Australia or Malaysia to “count” towards meeting the overall rule of origin for soup exported to Canada, Japan or the United States. 
 
Cumulation across a dozen participants means that the TPP is likely to be more helpful for companies than bilateral free trade agreements agreements where firms can only include the contents sourced from the two partners. Bilateral deals also only work for selling the finished goods back to the partner.
 
Each product or tariff line has a specific rule of origin attached.  Firms will need to research their product categories to determine how best to meet TPP origin criteria. (Soup 21.04 requires a change in tariff heading, so nearly all soups should easily qualify as “TPP originating.”)
 
The changes in tariffs are to be accompanied with new procedures in customs. For instance, TPP members are going to make a host of changes designed to speed up and reduce costs at the borders. 
 
Many firms will be eligible for self-certification of origin, eliminating the need for time-consuming trips to chambers of commerce or other bodies to obtain a certificate of origin (CO).  Customs officers will grant firms advance rulings that will clarify the specific rules of origin to be applied to particular products and ensure that these classifications will not shift for a year. As noted earlier, once a product qualifies for benefits, it qualifies under the origin criteria for entry into all 12 member markets.
 
The agreement also includes specific rules for express shipments and other expedited delivery processes. Customs officials are to allow pre-arrival processing and guaranteed release within specific time periods. 
 
Supply chain and logistics companies themselves may also benefit directly from TPP changes.  This is because the agreement also opens up services sectors for easier access to TPP firms. 
 
Other key services may include back office processing of all types, legal services, HR, accounting, transportation, warehousing, or construction.  The method of opening service sectors is also important, as member governments promised to allow TPP member participation in services sectors automatically, unless an individual government has specifically exempted a service from market opening. The actual numbers of reservations lodged by member governments are relatively modest.
 
TPP firms also have significantly improved investment opportunities in member countries, including market opening and better protection of investments.
 
The TPP also contains the first agreement on e-commerce. For smaller firms, this chapter may be particularly important as small companies can more easily plug into supply chains using e-commerce. 
 
Note that firms need not automatically be registered, headquartered or file taxes in a TPP member country in order to count as a TPP firm—what matters is largely where, in geographic space, production takes place.  The final products must also be sold into TPP markets.  It is not possible to use the agreement and qualify for benefits into non-member markets. 
 
As an example, a company cannot create soup in Singapore using largely TPP content and sell this with zero tariffs into the EU. The EU is not a participant in the TPP and none of the provisions of the agreement apply for items destined for European markets. Soup destined for the Japanese or Australian markets, however, is eligible for TPP benefits since Japan and Australia are partner countries.

TPP negotiations are complete, but domestic procedures must be completed before the deal will be implemented. In general, officials created three means to bring the agreement on line.  First, if all 12 members finish domestic procedures within 2 years, the deal takes effect 60 days after the last member agrees to implementation. If, however, all 12 have not agreed within 2 years of final signing, then the TPP can automatically take effect in 26 months if at least 6 members representing 85% market share (in practice, the United States, Japan and four other members) have completed their domestic procedures. Finally, if the internal approvals process drags on longer than two years, the TPP can come into effect 60 days after the 6th member (at least) finishes domestic procedures for implementation.
 
The agreement provides potentially significant benefits for qualifying firms and products.  Companies may find that existing supply chains should be altered or adjusted to allow specific products to qualify for TPP benefits into TPP member markets. Some changes in sourcing of inputs and raw materials may be necessary to reach the necessary level of content for the agreement to be applicable.
 
This complex trade deal, however, will also require an investment by companies that intend to use the agreement into understanding specific provisions.   Firms must determine which benefits may or may not apply. But the payoff from successful use of the TPP could be substantial.
 
The release of the TPP texts also allows other APEC economies to study the agreement carefully and consider how similar rules and procedures might be implemented in different settings.  For example, some of the provisions currently found in the TPP might be usefully picked up in the ongoing Regional Comprehensive Economic Partnership (RCEP) negotiations. APEC members may also want to think about how rules that help foster value chains could be incorporated into a potential Free Trade Area of the Asia Pacific (FTAAP). 
 
Finally, since the benefits of the TPP could be substantial for many companies, excluded parties may need to examine their own domestic rules and regulations with a keen eye towards improving competitiveness conditions on the ground.  Firms are mobile and will move to take advantage of opportunities for growth and expansion wherever they find them. Countries that have an uncertain or risky policy environment or expensive, time consuming or complicated procedures in place may not be well positioned to compete going forward. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Lipstick, Bicycle Chains and Durians: All Free Trade Agreements Are Not The Same

Free trade agreements (FTAs) have been mislabeled—they ought to have been called preferential trade agreements (PTAs) instead.  The agreements are not so much about “free” trade as they are about giving preferences or benefits to member state firms that non-member firms do not receive.  The net effect might be more “freeing” but this is not the same thing as giving the same set of benefits for everyone. 

We can argue about whether or not granting different access to various partners is helpful or harmful.  Rather than engage in a philosophical discussion about the merits of global vs. regional vs. bilateral trade deals, this post highlights differences in one important element of existing trade agreements:  various tariff preferences granted for specific products into just one country.  Showing how existing trade agreements signed by Vietnam handle the same limited set of products like lipstick, bicycle chains and durians helps illustrate variations across FTAs.

The primary outcome of existing FTAs has been to grant member firms lower tariffs than non-members receive.  FTAs may do lots of other economic things, including opening up markets for services or investment or creating new commitments or rules for intellectual property rights or competition policy.  But most of the focus and use of existing FTAs has been to receive lower tariffs (that can be thought of as a tax on imports) than firms could receive before an FTA came into existence.

Whenever we assess “quality” of an FTA, a key element is the extent to which the agreement provides new market access for firms by lowering tariffs on goods.  Countries can agree to make no new commitments at all—the existing tariff on imported goods in a category remains unchanged (at the MFN level that applies to all WTO members).  Or countries can agree to lower tariffs in certain product categories.  They can do so all at once at the very beginning of the deal or they can do so gradually over time (in even stages or in “lumpy” reductions where a tariff might drop a little bit up front and steeply at some distant time). 

More ambitious deals generally offer 1) deeper tariff cuts on 2) more products in 3) a shorter time frame.  Because FTAs are the result of negotiations, the content of any individual FTA varies—all parties have to agree on the final commitments.

As newer agreements get signed, the old agreements are not retired.  Instead, companies can opt to use whatever deals provide the most useful benefits for their products.  For many products, FTAs provide no difference in tariffs as the MFN rate is already 0.

But for other items, FTAs do provide benefits that can vary by agreement.  To see how this works in practice, consider specific products that firms may want to export to Vietnam.  Vietnam has multiple agreements in force, mostly centered on ASEAN.  The country has enthusiastically been signing new deals, including the TPP and a bilateral agreement with the EU and another with South Korea, but these have not yet taken effect.

A company that wants to ship lipstick into Vietnam from a country with no existing FTA has to pay the MFN rate of 20%.  But firms in ASEAN can ship lipstick into Vietnam with no tariff at all using ATIGA.  The ASEAN-China agreement (ACFTA) also allows Chinese companies to ship lipstick duty free to Vietnam. 

As with any FTA, firms do have to meet rules of origin (ROO) criteria to be eligible to receive lower tariffs.

Korean companies currently have no benefits for lipstick in their ASEAN-Korean FTA (AKFTA).  This means that, while many Korean products receive lower tariff rates on products using this agreement, lipstick exporters are out of luck and must pay the MFN rate of 20%. 

Japanese exporters are granted a slight duty reduction at 20% in the ASEAN deal (AJCEP) but a bilateral agreement between Vietnam and Japan gives Japanese companies an improved deal at 14.5% (VJEPA). 

Australian and New Zealand (AANZFTA) companies get access to the lipstick market of Vietnam with a 10% duty and India receives (AIFTA) a reduction to 20%. 

Under the TPP, the 11 parties in the agreement can look forward to 0 duties, but only after the current rate drops in four equal installments across 4 years.  Hence, in relatively short order, Japanese, Australian and New Zealand companies can expect to receive the same 0 duty preferences that their ASEAN competitors already receive.  Since the TPP will grant better benefits than existing deals, firms should start using the TPP.  For American or Mexican or other TPP lipstick companies that only had MFN rates before, the post-TPP preferences are especially important.

Vietnamese customers might be asking whether all these trade deals mean that they can expect to pay less for lipstick in the future.  The answer is that they might—if firms decide to pass the tariff savings through into lower prices.  Firms could also opt to keep the savings in the form of higher profits or greater shareholder returns. 

It’s also possible that lipstick manufacturers will not take advantage of FTAs, as the market in Vietnam is not attractive enough—for whatever reason—to ship lipstick no matter how high or how low the tariffs might be on the product.

The same uneven set of benefits can be seen for other firms shipping goods to Vietnam.  Bicycle chains are surprisingly complicated, with multiple categories of chain.  For a roller chain of expanded metal (HS73151111), the MFN rate is 40%.  ASEAN firms pay a 5% duty.  Chinese firms pay 20%.  Korean firms have no specific benefits under AKFTA and pay 40%.  Japanese firms (under both the ASEAN agreement and the bilateral deal), Australian and New Zealand firms all pay 35%.  Indian firms are charged 36%.  TPP members will pay 0 duty in four years.

Durians and many other fruits are subject to an MFN rate of 30%.  But ASEAN, Chinese, and Korean farmers can ship durians duty free now.  Japanese firms get better benefits under the ASEAN agreement than the bilateral (20% vs. 22.5%).  Australia and New Zealand are currently subject to 10% tariffs on durians and Indian companies pay 20%.  Post-TPP entry into force, however, members will pay 0 duties immediately for durian shipments to Vietnam.

The examples show the differences across trade agreements.  For most products where the existing MFN rate is higher than 0, ASEAN already grants duty free access to Vietnam.  Some of the existing trade agreements match these 0 tariff rates or at least provide lower tariff levels than non-FTA members receive.  Since the TPP is both broader and deeper than existing agreements for Vietnam, firms should expect better benefits (or tariff cuts that match ASEAN) for nearly all products either on entry into force of the agreement, or in the near term. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

TPP: Investor FAQs

I have spent an amazing amount of time in the past week talking with investors, investment companies, hedge funds and the like about the Trans-Pacific Partnership (TPP).  I thought it might be useful to share some of the frequently asked questions (FAQs) about what the TPP does and does not deliver for investors.

As always, for more details or help figuring out what the TPP might do for your company, please contact us at the Asian Trade Centre.

Who is in the TPP?

12 countries are currently members:  Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam

Who is not in the TPP?

Notably: China, South Korea, Taiwan and 6 ASEAN countries including Indonesia, Thailand and Philippines

Who might be in the TPP later?

I am projecting up to 20 members in total, with the addition of South Korea, China, Hong Kong, Taiwan, Philippines, Columbia, Costa Rica and Panama

When will expansion take place?

First we have to get the TPP approved and implemented with the current membership.  Then it will likely need to run for at least a year before anyone is able or willing to talk about expansion.  But if you do the math, expansion is possible in 3-5 years.

Can I see what is in the TPP?

Yes.  The complete 1200 page set of texts, plus 5000 pages of country-specific schedules, and more than 100 side letters are available for your reading pleasure.  Check out your favorite TPP member’s trade website for details or use the official repository documents from New Zealand at: http://www.mfat.govt.nz/Treaties-and-International-Law/01-Treaties-for-which-NZ-is-Depositary/0-Trans-Pacific-Partnership-Text.php

Wow.  That’s a complicated agreement

Yes it is.  Note that the benefits for your specific firm or industry are likely to be scattered across multiple places in the agreement, so you cannot simply check one chapter.  I would note, however, that while the texts are dense, the possible savings or increased business opportunities for most companies makes it worthwhile to invest time and money in figuring out this deal. 

When will it take effect?

Ah.  This gets more complicated still.  The short answer is that the United States has to approve the TPP by a majority vote in both houses of Congress before the TPP can enter into force and companies can start enjoying the benefits of the agreement.  Thus, the timing is really dependent on how fast the Americans can get approval.  Other TPP members are likely to wait until the United States has finished its messy internal procedures before they act.  In a world of miracles, the TPP could come into effect by next fall.  The second default option is entry into force in April 2018.  The third default is any time after this date when the United States joins Japan and at least four other members. 

Do you have to be a TPP registered company or pay local taxes or something to get the benefits of the TPP?

Not necessarily.  The TPP is intended for use by TPP member firms for use in buying and selling goods and services with other TPP members.  But what constitutes a TPP member firm is not the location of the headquarters or the tax domicile address.  It gets a bit complicated, but basically what matters most is where, in geographic space, a firm creates and delivers products or services.  A firm that makes orange juice inside Malaysia is likely to be a covered entity even if the headquarters of the firm is in Amsterdam. 

Can I link up the TPP with other trade agreements?

No.  You cannot take orange juice made in Malaysia and sell it in Europe using the TPP.  The TPP is intended for companies buying and selling from TPP member countries into other TPP member countries.  While member firms are likely to receive the greatest benefits from sourcing from TPP countries, note that the content in goods need not be 100% from TPP countries.

What does the TPP do for investors that they don’t get otherwise?

Please review the specific provisions of the investment chapter (also read my blog post from November 11).  In brief, there are several key elements that make the TPP extremely helpful for investors.  First, TPP investors have significantly enhanced market access.  Basically, in the TPP, if a sector is NOT listed, it is opened for investment.  Across all 12 members, the number of closed sectors or areas is extremely small and many of the closed areas are unlikely to be of much commercial interest to investors in any case.  Second, TPP investors receive better protection of investments.  The details are many but basically investors should have less risk and uncertainty arising from TPP investments in the future.

So, who wins and who loses in the TPP?

This is sneaky.  If you are sitting in a big investment company, bank or hedge fund, you should be paying for this kind of information!  All I will say here is that previously protected sectors may offer the most substantial benefits and market opportunities.  Countries that were less open in the past will likely reap more benefits, all else being equal, than countries that have been extremely open.

What about non-members?

The potential implications of the TPP are substantial.  Savvy firms will be carefully combing through the agreement to determine what benefits might apply and thinking hard about how to structure the company to take the greatest advantage of this deep and broad set of commitments.  Not everything changes, of course.  Firms that had substantial markets outside the TPP may continue to operate without impact.  But the competitiveness of some firms may shift and create new opportunities that weren’t present before.  Trade and investment may well be shifted from non-TPP members to TPP countries in the future.  Whole factories could be unbolted and moved, however the more likely outcome is a gradual change in suppliers or customers or increased investments in member countries and a decrease in investment in non-members. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***