CPTPP: Policy innovations

The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) is set to become the most transformational trade agreement in decades. What makes this FTA so important is the deep, interlocking nature of commitments that more accurately reflects the way business is conducted today. It sets up a structural framework more soundly for future economic activity.

One of the challenges that many commentators have had in describing the impact of CPTPP, however, is that most have focused attention on only one or two elements of the deal. Seen in isolation, chapters of the agreement do not always look radically different than what has gone before in various settings.

This is rather like the parable of the group of blind individuals that try to describe an elephant based on touching just one portion of the animal. The person that grasps the tusk has a different idea of the beast than the one who touched the tail or the ears.

The complete CPTPP agreement is like the elephant—30 chapters comprising nearly 600 pages of dense legal text in tiny font accompanied by thousands of pages of individual country schedules for goods, services, investment, government procurement, business mobility and more, plus dozens of bilateral letters.

Sorting out what it all means clearly and succinctly is probably impossible. Instead, individuals default to describing certain elements of the agreement or trying to measure portions of the deal that are most easily quantified. This fails to properly capture the totality of the agreement. It can lead to description of the CPTPP that suggests it is less ambitious than it actually is or will deliver fewer economic benefits to companies and consumers.

In the rush to see transformation, many have downgraded the utility of commitments for goods in the CPTPP. After all, decades of repeated tariff cuts at the World Trade Organization and a host of existing bilateral (and occasionally regional) trade agreements have dealt with market access problems for goods.

To best grasp the benefits of CPTPP, consider the humble candle. A candle company will be able to take advantage of at least a dozen different chapters in the CPTPP agreement. As a result, even a small candle company that wants to use the agreement to export to CPTPP member countries should see sales boom in the seven countries (Australia, Canada, Japan, Mexico, New Zealand, Singapore and Vietnam) that are already using the deal.

How? First, candle tariffs, which act like a tax on exports, are set to fall in the agreement. Many tariffs are quite high, making exports challenging, particularly for smaller firms. For instance, in Vietnam, the pre-CPTPP tariff was 24% and will fall over two years to zero. Canada’s 5.5% tariff went to 0 on the first day of the agreement on December 30, 2018. Mexico’s 30% duty rate falls to zero across eight years. Malaysia charges 15% which will be eliminated in even steps across 6 years. Each of these tariff reductions allow the candle company to become more competitive in these markets compared candles from non-TPP firms.

Second, candle companies, like all CPTPP members, can take advantage of the rules of origin. In brief, it means that once the company meets the criteria for making the product inside the CPTPP, it can be shipped to all other CPTPP members without any changes in manufacturing because the agreement uses the same rules of origin for all 11 member countries.

Firms can also add up or “cumulate” content from across all CPTPP countries to count towards origin. The candle company, as an example, could add citrus from Vietnam and lavender from Mexico with wax derived from chemicals in Singapore. Cumulation is a key element of a regional agreement, since it provides the firm with more sourcing options for raw materials, parts and components than requiring only local content or sourcing from just two parties like bilateral trade agreements.

The resulting candle can be shipped more easily using the trade facilitation rules in CPTPP, which allows self-certification, or shipment without a specific piece of documentation called a certificate of origin. Firms can also get customs officials to classify the candle using something called an “advance ruling” so the company can be confident that the candle will be classified as a candle and not as a product called “other” and subjected to higher tariffs or different rules of origin at the border for up to three calendar years.

The firm making candles can also more easily supply and access the key services to sell the product. Marketing, distribution and retail are critical to the success of the product. This includes online distribution of advertising and the use of e-commerce channels. The CPTPP protects and expands access for firms in services, investment, and e-commerce.

Another critically important issue for the candle company is protecting the intellectual property investment behind the product, including the brand, packaging and even the scent. The CPTPP helps protect these investments and provides for enhanced enforcement to stop counterfeit products appearing in the marketplace.

As a result of so many new benefits, a smart candle company should relook at its operations and growth strategy. Markets that were not attractive before, because the tariffs were too high, because freight was too costly, because border delays were inevitable, or because retail investments were not possible, may suddenly look much more attractive.

The candle example shows the potential benefits of the CPTPP and also the challenges of describing the deal. Commentators tend to focus on the tariff cuts, but for a candle producer, the protection of the scent is every bit as important. After all, without scent, a candle is just wax and a wick.

Equally challenging for analysis to capture effectively is that the firm may never have been present in Vietnam. Tariffs of 24% are high enough that the company may never have been competitive in the past. Once these tariffs fall to zero, however, a market that was never attractive suddenly becomes much more “in play.” Many economic models will find this type of shift impossible to capture.

The CPTPP does not merely deal with goods and then repeat existing WTO commitments for services, like many FTAs, with limited additional market access or national treatment benefits. Instead, the CPTPP opens up trade in services in profoundly new ways.

Like the candle example, the benefits of services liberalization can be hard to grasp. Even negotiators involved in CPTPP talks have sometimes struggled to explain how the agreement will help firms compete more effectively. Measuring the gains in services and investment is especially difficult. This is because, unlike many FTAs, the CPTPP opened up every single sector and subsector automatically—now and into the future—with very few exceptions, using every mode of delivery.

For more details on how arthritis companies, and other services firms, can use the CPTPP, read the full paper today and better understand how and why member states agreed to undertake such ambitious commitments in the first place.

To find out how your firm can benefit from the CPTPP or other trade agreements, contact the Asian Trade Centre now at info@asiantradecentre.org