Talking Trade blog
Special edition: Why trade negotiations are so hard—the details of orange juice
Published 17 August 2016
The Brexit debate has given rise to many bewildered discussions about the apparent difficulties of negotiating trade agreements. After all, as at least one commentator said, if we can put a man on the moon, surely the UK can negotiate a few trade agreements?
Of course. Compared to putting a person on the moon, many things seem easy.
But the complexity of negotiating trade is not to be underestimated either. To illustrate why this is so challenging, just consider the following example of orange juice.
This example happens to be drawn from the Trans-Pacific Partnership (TPP), but since the UK both apparently wants to join the TPP and this is the sort of high quality deal the newly independent trading nation aspires to create, it is worth pondering at some length.
The TPP, unlike many (or even most) trade agreements, cuts tariffs on all products including highly sensitive products like agriculture. Many existing tariffs can be quite high and many products will receive duty reductions all the way to zero as soon as entry into force.
The reduction in tariffs is important, but not every product crossing the border into a TPP member country will automatically qualify for these reduced duty rates. The TPP has a single set of rules of origin (ROOs) that applies to all members. The ROOs are all product-specific. Each tariff line has a specific, matching ROO that must be met in order to qualify for the tariff reduction as indicated in the TPP tariff schedules.
Hence TPP goods access has to be read with a careful eye towards both the tariff reductions and the ROO commitments for the same product. It is possible that duty free access promised in the agreement will be easy or completely impossible for companies to use. It may very well be the case that companies will need to shift current sourcing patterns, especially for processed agricultural products, to ensure that finished goods meet the ROO and qualify for tariff reductions into TPP member markets. As always, TPP benefits apply only for goods being shipped into TPP countries.
The TPP uses “wholly obtained” and “substantial transformation” as the two principle criteria to determine origin of goods. Many agricultural products are wholly obtained, but some processed foods and other manufacturers are also keenly interested in the rules for transformation.
For substantial transformation, the TPP allows three different calculation methods:
(i) A general Regional Value Content (RVC) Rule, ranging from 30% to 55% content value, depending on the method of calculation (Focused Value Method, Build-Down Method or Build-Up Method);
(ii) Change in Tariff Classification Rule: Requires that for the final good to qualify for preferences, it has to be classified under a different tariff category (usually at 4 or 6 digit level) as compared with the original inputs; or
(iii) Process Rule [basically about where, in geographic space, the good was produced]
For certain tariff lines, businesses may opt to use either one of the three methods to determine origin. For some other tariff lines, only one option is specifically allowed. The TPP Chapter 3 outlines the specific methods for calculating origin under each method.
This brings us back to the case of orange juice. Fresh juice is HS code 2009.12 and frozen juice is 2009.11. The matching ROO (2009.11-2009.39) reads, “A change to a good of subheading 2009.11 through 2009.39 from any other chapter except from heading 08.05 (fresh oranges).”
What the rule above says in ordinary English is that orange juice cannot be made using fresh oranges from outside TPP countries and still qualify for lower tariffs. Companies can still make orange juice by squishing fresh oranges from non-member states, but juice made with non-qualifying content has to be brought in under normal, MFN tariff rates and not under lower, TPP member tariff rates. MFN rates for orange juice are often quite high into many TPP member markets, however, giving companies an incentive to figure out TPP rules.
[It should be noted that orange juice happens to have some additional complications, including a special provision that prevents companies from using de minimus rules allowed elsewhere in the agreement.]
Efforts to support orange juice had to be coordinated between officials working in the market access in goods chapters with the rules of origin negotiators. It will not only be tariffs and ROOs that matter, however, but standards in the sanitary and phytosanitary (SPS) chapter, procedures in customs and trade facilitation, rules in services and investment and the rest of the agreement that may also affect juice. The distinguishing feature of a high-quality agreement is the interconnected nature of the final deal.
Future trade negotiators for the UK will need to quickly get up to speed on all the complicated terminology and interconnected elements of different chapters used by trade experts. Just as challenging may be building up understanding of how specific industries work and what, exactly, consumers and companies need to receive.
In the orange juice example for the TPP, the ROO has been carefully crafted. It is meant to encourage the use of content from within TPP members while excluding content added from non-members. This ensures that the benefits remain with TPP countries and cannot be captured by others.
However, creating the right rules requires officials to know a lot about how their local industry works. For example, officials need to know that it is not commercially viable to create orange juice with frozen oranges—thus the ROO need not cover the use of frozen oranges, just fresh or frozen concentrates.
Just as important, officials need to know how other countries are organized. They need to know who makes orange juice, what sort of production processes are used, using oranges from where, for sale in which markets, with what sort of capacity for expansion in the future, and so forth. Without this kind of knowledge about the industry, it could easily be the case that officials are focused on creating outcomes in the wrong places and ignoring growth sectors. This same sort of information has to be gleaned from thousands of product categories in complex, modern economies.
It is the combination of deep technical knowledge of trade details and understanding of the commercial significance that makes negotiating over trade so difficult to master in short order.
Even decades of experience didn't make it easy or fast to unravel the orange juice rules--let alone write them in ways that would be most favorable to local interests.
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