TPP: An Embrace, Distance or Disaster Decision? And What About China?

Although China did not participate in or sign on to the Trans-Pacific Partnership Agreement (“TPP”), the agreement is an issue many of our China clients are monitoring. The countries that signed the TPP together represent 40% of global GDP. Several of the signatory countries – including Japan, Malaysia, Singapore, and Vietnam – represent key Asian markets for companies operating in China. This is especially true for those that engage in manufacturing in China and already have a “plus one” country or are contemplating one. The United States and other countries are getting ready for legislative and governmental procedures to fully accept TPP and make it a legally binding agreement. During this time, and specifically as the TPP’s text is released to the public, companies operating in China should stay informed about TPP details and exactly what TPP signatory countries have agreed upon. This is especially true for those companies in China that export to countries that signed the TPP. To provide you with this necessary information, we plan to post regularly about TPP. It’s been almost a month since the Trans-Pacific Partnership Agreement (“TPP”) was concluded on October 5, but the final TPP text has not yet been released to the public for analysis and comment. This hasn’t stopped folks – particularly 2016 U.S. Presidential candidates – from talking about the historic trade deal. Former Secretary of State Hilary Clinton distanced herself from the deal, stating that it did not seem to meet her “high bar” standards for creating good American jobs and higher wages. Donald Trump went further and called TPP a “disaster.” Those of us in the United States not running for President and not currently serving in the Administration or Congress do not enjoy access to the TPP text. Consequently, for now, we must rely on the words of the office that negotiated the TPP on behalf of the United States: U.S. Trade Representative (“USTR”) Michael Froman. The following information about the TPP was provided by the USTR in a report entitled 18,000 Tax Cuts on Made-in-America Exports.

• The TPP will eliminate more than 18,000 taxes and other trade barriers on U.S. products exported to the other 11 countries that signed the TPP.

• Currently, the average U.S. tax applied to all imports from other countries is 1.4%; the average tax other countries impose on U.S. imports is over twice as high.

• Other TPP signatory countries impose up to 100% import taxes on U.S. manufactured products and up to 700% import taxes for U.S. agricultural goods.

• As a result of TPP, signatory countries’ import taxes of up to 55% on wine will be eliminated, as will the current import taxes of up to 35% on certain seafood products and up to 20% import taxes on U.S. iron and steel products.

• The TPP has a dedicated chapter on small- and medium-sized businesses and how such businesses can enjoy trade benefits.

• The TPP protects workers’ rights by including provisions on minimum wages, collective bargaining, free association, and workplace safety.  Under the TPP, countries that violate these workers’ rights provisions can face trade sanctions.

• If the TPP is signed and implemented, other countries’ import taxes on U.S. cars will be cut by as much as 70%, by as much as 40% for poultry and tires, and by as much as 25% for paper.

USTR has summarized some of the most important benefits that TPP can offer U.S. companies: reduction of other countries’ import taxes or tariffs on U.S. products. An important question for U.S. companies will be what qualifies as a “U.S. product” such that it enjoys a reduction in other countries’ import tariffs under TPP. Specifically, U.S. companies must analyze TPP requirements for original U.S. content that must be satisfied before a product qualifies for reductions in other TPP countries’ import tariffs. By way of example, if an automobile manufactured in the United States contains over 40% of input parts and materials imported from other countries, will it qualify for the up to 70% reduction in TPP countries’ import taxes? The USTR’s details about specific tax cuts is informative, as is the way in which the USTR report identifies benefits on a state-by-state basis for U.S. companies exporting products to TPP signatory countries. However, the USTR summary data is just that – a summary. We need the details before we can participate in an informed, meaningful public discourse about TPP’s advantages and disadvantages. Only after reviewing the full agreement can we determine whether we should embrace, distance or “disaster” the TPP. Nonetheless, as you can see from the above, TPP will no doubt lead to big trade changes that will necessarily impact U.S. China trade. For more on the TPP and on the steps the United States has taken and must take to finalize the TPP, check out the following:

• TPA ⇒ TPP – Part 1
• TPA ⇒ TPP – Part 2
• TPP Will Hurt China Companies
• The Calm Before the TPP Storm

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