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Trans-Pacific Partnership Text Released

The Office of the U.S. Trade Representative on 5 November released the text of the Trans-Pacific Partnership, which is still subject to legal review, transposition and verification by the parties. While the full breadth and scope of the various provisions included in the agreement will only become apparent as the text is analysed in depth in the coming weeks and months, an initial review shows that the United States will provide duty-free treatment to a broad range of originating products upon entry into force of the agreement. These products include, among others, most machinery, equipment and other products of HS Chapters 84 and 85; all clocks, watches and parts thereof of Chapter 91; most furniture, furnishings and fittings of Chapter 94; most games and sports equipment of Chapter 95; a broad range of textile, clothing and footwear products of Chapters 50 through 64; the vast majority of precious and semi-precious stones and imitation jewellery of Chapter 71; a range of plastic articles of Chapter 39; and most travel goods of heading 4202.

In all, the United States will eliminate an estimated 91 percent of duties on industrial products upon entry into force of the agreement, with tariffs on the remaining nine percent phased out within 15 years or less. Japan, for its part, will eliminate 75 percent of duties on industrial products upon entry into force of the agreement, while Canada will eliminate its duties within a decade and Mexico within 15 years. U.S. duties on a broad range of apparel products will be removed immediately, while duties on sensitive apparel items will be completely eliminated by 1 January of years five, 11 or 13.

Trade in Goods

According to a USTR summary, the national treatment and market access for goods chapter incorporates broad World Trade Organisation obligations regarding import and export restrictions as the fundamental framework for trade in goods between the parties. It prohibits import licencing conditioned on performance requirements as well as requirements that exporters establish contractual relationships with domestic distributors as a condition of importation. The chapter includes provisions for parties to notify each other of their respective import licencing procedures, including any conditions and eligibility requirements, and to regularly update these notifications. In addition, parties cannot apply import licencing procedures to TPP goods without notifying all parties of the licence requirement and the reason for it.

The market access for goods chapter also requires the parties to provide duty-free treatment for repairs and alterations; the temporary admission of goods like professional equipment, commercial samples, goods for display and demonstration, and sports equipment; and commercial samples of negligible value and printed advertising material. In an effort to enhance transparency the parties must publish all information related to import and export procedures and requirements, tariff rates, taxes and fees related to importation, tariff quotas, and import and export restrictions. The agreement also includes commitments to eliminate agricultural export subsidies on goods sold in TPP markets and work together in the WTO to develop multi-lateral disciplines on export credits, export credit guarantees and insurance programmes.  

Moreover, the agreement limits export restrictions on foodstuffs to six months, requires notification of other TPP parties in advance when a country imposes such restrictions, and mandates consultation with interested TPP importing countries if the restriction remains in place for more than 12 months. An innovative provision included in the market access for goods chapter specifies that parties cannot apply restrictions on the importation of used goods to remanufactured goods, although they may require remanufactured goods to meet all technical requirements for equivalent new goods and/or be identified as remanufactured for sale or distribution. TPP is also the first U.S. free trade agreement to include a provision related to transparency in export licencing procedures, which requires parties to publish such procedures as well as references to the measures that the procedures are used to implement.

Rules of Origin

A USTR summary indicates that the rules of origin chapter creates a fundamental commitment that only “originating goods” —  that is, goods genuinely produced in TPP countries  —  will benefit from lower tariffs under the agreement. These rules are specific to each product, defining the operations it must undergo in order to be considered a TPP good. As in other FTAs, a good will be deemed to originate in the region if it is wholly obtained or produced in one or more TPP countries, is produced in one or more TPP countries exclusively from originating materials, or complies with a product-specific origin rule requiring certain production operations to take place in one or more TPP countries and limiting the type or amount of non-TPP materials that can be used.

The agreement includes fairly flexible product-specific origin rules for certain products and stricter provisions for other products. For example, travel goods of heading 4202 must comply with a single transformation rule, requiring that the production process that takes place in one or more TPP parties results in a change in tariff classification from a different HS chapter. In the case of textile travel goods, those goods must also have been cut or knitted to shape, or both, and sewn or otherwise assembled in the territory of one or more of the parties.

A tariff shift from a different chapter also applies to footwear, although the use of non-originating footwear parts, other than uppers and parts thereof of subheading 6406.10 and/or assemblies of uppers of subheading 6409.99, is allowed provided there is a regional value content of at least 45 percent under the build-up method or 55 percent under the build-down method.

The origin rule for apparel is generally yarn-forward, requiring the yarn and fabric to be made and the apparel to be cut or knitted to shape, or both, and sewn or otherwise assembled in the territory of one or more of the parties. The use of certain foreign yarn and fabric is allowed, however, namely silk yarn, woven silk fabric, flax yarn, jute yarn, yarn of other non-cotton vegetable fibres, woven fabrics of flax, woven fabrics of jute, woven fabrics of other non-cotton vegetable fibres, high tenacity yarn of viscose rayon (subheading 5403.10), other single yarn of viscose rayon (subheadings 5403.31 and 5403.32), and multiple or cabled yarn of viscose rayon (subheading 5403.41). In addition, gimped yarn, gimped strip, chenille yarn and loop wale-yarn of heading 5606 is required to originate in one or more of the parties if used in certain specific apparel items. As an exemption to the general yarn-forward rule, babies’ synthetic knitted garments and clothing accessories classified under HTSUS 6111.30, babies’ synthetic woven garments and clothing accessories classified under HTSUS 6209.30, and brassieres classified under HTSUS 6212.10 will be able to use yarn and fabric of any origin.

The agreement also requires narrow elastic fabric classified under HTSUS 5806.20 and/or 6002 used in apparel to be formed and finished in the parties from yarn that is formed and finished in the parties. Similarly, apparel articles containing sewing thread of heading 5204, 5401 or 5508, or yarn of heading 5402 used as sewing thread, will be considered originating only if such sewing thread is formed and finished in the territory of one or more of the parties. Elastomeric yarn must also be wholly formed in the region when used in the component that determines the tariff classification of apparel goods.

The apparel provisions include a list of inputs deemed to be in short supply in the region. A permanent short supply list includes 186 items while a temporary list that will expire five years from the date of entry into force of the agreement includes an additional eight items. The United States will also establish an “earned import allowance programme” for men’s and boys’ and women’s and girls’ cotton woven trousers, breeches, shorts, and bib and brace overalls classified under HTSUS 6203.42.20, 6203.42.40, 6204.62.20 and 6204.62.40 from Vietnam, requiring the use under certain conditions of eligible U.S. fabric in Vietnamese trouser production.

The agreement allows for full cumulation between the parties, which according to USTR will strengthen incentives for TPP businesses to integrate production and supply chains within the region, making it more attractive to do business with producers in the United States and other TPP countries than with producers in other countries. The agreement also ensures that recovered materials used in the production of a remanufactured product count as TPP materials, allowing more remanufactured goods to qualify for preferential duty treatment. USTR notes that, because remanufacturing is a complex, high-value and labour-intensive production process, these commitments reduce the need for companies to import materials and components from outside the TPP region and incentivise domestic production.

Moreover, the origin rules ensure that TPP goods do not lose preferential status simply because of the routes they transit to reach consumers. At the same time, to prevent circumvention the agreement imposes strict limits on the production processes that can be conducted while in transit outside the TPP region in order for a product to still be eligible for TPP tariff preferences. Specifically, an originating good may be transported through the territory of one or more non-parties provided it (1) does not undergo any operation outside the territories of the parties other than unloading, reloading, separation from a bulk shipment, storing, labelling or marking required by the importing party, or any other operation necessary to preserve it in good condition or to transport the good to the territory of the importing party; and (2) remains under the control of the customs administration in the territory of a non-party.

Investment

A USTR fact sheet indicates that the investment chapter includes a set of core obligations that provide basic protections in TPP markets for U.S. and other investors or investments, including:

  • providing for national treatment (i.e., treatment no less favourable than a TPP country provides, in like circumstances, to its own investors or investments) as well as MFN treatment (i.e., treatment no less favourable than a TPP country provides, in like circumstances, to another country’s foreign investors or investments);
  • providing a “minimum standard of treatment” for investments, defined narrowly based on customary international law, including protections against denial of justice and failure to provide police protection;
  • ensuring that if a TPP government expropriates an investment it does so for a public purpose, in accordance with due process of law, and subject to prompt, adequate and fully realizable and transferable compensation;
  • allowing for transfer of funds related to an investment covered under the agreement  —  such as contributions to capital, transfers of profits and dividends, payments of interest or royalties, and payments under a contract  —  to be made freely and without delay, subject to exceptions to ensure that governments retain the flexibility to manage volatile capital flows (including permitting countries to impose non-discriminating temporary safeguard measures and restricting investment-related transfers in the context of a balance of payments crisis and certain other economic crises, or in the context of prudential measures to protect the integrity and stability of the financial system);
  • barring specified “performance requirements,” including local content requirements, export requirements, and technology transfer or technology localisation requirements;
  • ensuring investors have the ability to appoint senior managers without regard to nationality; and
  • ensuring that any nationality-based restrictions on the appointment of board members do not impair an investor’s control over its investment.

TPP countries have agreed to accept these core obligations on a “negative-list basis,” meaning that all obligations apply to all sectors and activities apart from limitations negotiated and explicitly set out in a list of specific reservations describing the nature of any “non-conforming measures” that would be permissible even after the agreement enters into effect.

The investment chapter allows a TPP party to deny benefits to “shell companies” owned by persons of that party or a non-party that establish in another TPP country in order to take advantage of treaty rights but that lack substantial business activities in that country. It also allows the denial of benefits to companies that invest in a TPP country but are owned by persons of non-parties with whom a TPP party prohibits certain transactions, such as under sanctions regimes.

The USTR fact sheet adds that TPP investors will have the right to pursue neutral, international arbitration in the event of a dispute between an investor of a TPP party and another TPP party over a violation of one of the commitments of the investment chapter. The chapter specifies that these proceedings will be conducted in a transparent manner, with opportunities for public participation and safeguards to prevent abuse and help deter frivolous or otherwise non-meritorious claims.

USTR states that new features in the agreement include obligations to address the growing problem of discriminatory measures that provide advantages to foreign state-owned enterprises, national champions and others by forcing U.S. investors to favour another country’s domestic technology. The deal also includes clarifications that TPP investment disciplines apply to SOEs and other persons exercising delegated government authority  —  whether delegated formally or informally  —  so that SOEs acting on behalf of governments cannot take actions that discriminate against foreign investors and then evade challenge by asserting that they are not covered by the disciplines of the agreement.

In addition, the agreement includes stronger safeguards to close loopholes and to raise the standards of investor-state dispute settlement, such as underscoring that countries can regulate in the public interest, including on health, safety, financial stability and environmental protection; expanding the rules discouraging and dismissing frivolous suits; clarifying that the claimant bears the burden to prove all elements of its claims; allowing governments to issue binding interpretations of the agreement; making proceedings fully open and transparent; and providing for the participation of civil society organisations and others parties that are not a direct party to the dispute. Moreover, the investment chapter will for the first time clarify key concepts in the non-discrimination and minimum standard of treatment obligations such as the significance of legitimate public welfare objectives in the non-discrimination analysis and addressing the concern that frustrating investor expectations in and of itself could result in a minimum standard of treatment claim.

Intellectual Property

USTR indicates that the intellectual property chapter combines strong and balanced protections with effective enforcement of those protections, consistent with existing U.S. law. This is expected to promote high standards of protection, safeguard U.S. exports and consumers against intellectual property rights infringement, and provide fair access to legal systems in the region to enforce those rights. Drawing from and building on other bi-lateral and regional trade agreements, it includes commitments to combat counterfeiting, piracy and other infringement, including trade secret theft; obligations to facilitate legitimate digital trade, including in creative content; and provisions to promote development of, and access to, innovative and generic medicines.

Among other things, the chapter defines a robust standard for patentability, consistent with international norms drawn from the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights as well as other international best practices, including relevant exclusions. TPP parties also agreed to adopt the best practice of allowing a grace period in which certain public disclosures of the invention (e.g., in papers published by university researchers or small inventors) will not be used to deny a patent application.

The agreement also includes commitments to promote not only the development of innovative, life-saving drugs and treatments but also robust generic medicine markets. For example, it includes transitions for certain pharmaceutical IP provisions that take into account a party’s level of development and capacity as well as its existing laws and international obligations.

Technical Barriers to Trade

TPP parties will co-operate to ensure that international standards and recommendations likely to form the basis for technical regulations do not create unnecessary barriers to trade. They will provide “national treatment” to one another’s conformity assessment bodies ,  that is, testing and certification performed by another party’s qualified conformity assessment body will be accepted as confirmation that its products, services or systems meet requirements of the other party. The TBT chapter ensures a reasonable interval between publication of regulations and entry into force so that stakeholders have sufficient time to meet the new requirements. Similarly, TPP countries have committed to provide producers a reasonable amount of time to demonstrate the conformity of their goods with any relevant requirements. USTR states that the United States will not alter in any way its regulations for health, food safety, product safety or other substantive public policy goals.

Financial Services

The financial services chapter includes commitments relating to (i) regulated financial institutions; (ii) any investors or investments in financial institutions; and (iii) cross-border trade in financial services. It does not apply to public retirement plans or social security systems. Core obligations include national treatment for investors and investment in financial institutions, MFN treatment and market access. Other important provisions involve minimum standard of treatment allowing for claims for denial of justice or failure to provide police protection, bounded by customary international law, as well as claims for damages due to civil strife. The chapter also includes rules that would allow a party’s financial institution to supply a new financial service in the territory of another party when that party already permits the supply of that service by its local financial institutions.

Content provided by Picture: HKTDC Research
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