The Pacific Rim trade deal, formally known as the Trans Pacific Partnership (TPP), obtained a great deal of media coverage in June as Congress debated legislation aimed at providing the President with “fast-track” approval authority. The intensity surrounding debates and opinions led me to believe that this proposed multi-lateral trade agreement would soon come to fruition. Not even close.
Examining the Details?
Logistics is inexorably linked to international trade. At ARC, we conduct research on logistics processes and technologies that directly support international supply chains. Some of the technologies include global trade management (GTM) systems, transportation management systems (TMS), and supply chain planning and network design tools. Due to the potential impact of this trade deal on these markets, I decided to dig deeper into the details to obtain insight into the imminent changes slated to occur. The scope and structure of the agreement are available on The Office of the US Trade Representative for those interested in viewing the agreement framework. However, obtaining specific details on the proposals is proving to be more difficult. Although details are not yet available, there are some features worth noting.
Reduction of Trade Barriers and Development of International Supply Chains
The TPP participating countries are working to eliminate many of the tariffs placed on each other’s exports. This will serve as an important step toward increased integration of multi-national supply chains through the reduction in government imposed competitive barriers. Examples of current tariffs outlined on USTR.gov include a 27 percent Vietnamese tariff on US made auto parts, a 40 percent tariff on poultry entering Malaysia, and tariffs from a number of countries on US made textiles. The removal of government duties such as these is likely to make customs management less complex for companies and will also shift the competitive landscape toward those with comparative advantages and increase international trade volumes. The increase in global trade is likely to increase international sourcing, extend production lead times, and increase demand for supply chain visibility solutions that provide insight into upstream supply chain events and status changes.
Rules of Origin
The elimination of tariffs between TPP countries opens the opportunity for non-participating countries to use TPP countries as a transshipment intermediary, or a “pass through” to avoid tariffs and duties. To assure compliance, the TPP countries are looking to develop a common set of rules of origin to determine whether or not a given product or item originates within the TPP region, and therefore qualifies for preferential treatment. It is questionable how quickly these rules will be developed, as the WTO harmonization program was originally expected to be completed in 1998, but is still ongoing due to unforeseen complexities. However, specific rules such as the yarn forward rule of origin is being proposed to assure that only properly sourced items will receive the preferential duty treatment. The complexity of the rules of origin and ongoing updates to the agreement will assure that item classification software will remain a critical application for those companies that produce complex products and engage in substantial international trade activities.
Intellectual Property Rights
The World Economic Forum publishes an annual global competitiveness report leveraging its Global Competitiveness Index (GCI). The Index categorizes the most advances economies to be those driven by innovation. It should therefore be no surprise that the US is seeking strong intellectual property rights and protections to be included in the TPP. Patent, copyright, and trademark infringements are major concerns for companies that invest heavily in research and development. Increased protections will help alleviate theft and counterfeiting concerns and encourage additional investment in product innovation. Pharmaceutical IP provisions are specifically mentioned as an area of focus for the US. Also noted is US-Japan bilateral negotiations on motor vehicle trade, IP rights, and phased out US tariffs on Japanese automotive products.
The Trans Pacific Partnership is still a deal in the making. It is a complex, multi-lateral negotiation that is likely to hit a number of speed bumps going forward. Reduction of trade barriers, standardization of processes, and international supply chain integration are all key tenets of the proposed agreement. NAFTA trade flows increased from $290 billion in 1993 to over $1.1 trillion in 2012 (about 7 percent CAGR by my calculation). If NAFTA trade flows are an accurate barometer, then the TPP shows promise to propel pacific trade forward at a rapid pace.