How can current FTAs co-exist with the TPP?
Part 1 of this article discussed how the U.S. tariff reduction schedule found in the Trans Pacific Partnership Agreement (TPP) applies different duty reduction rules to different countries. Part 2 will compare a few of the differences between existing U.S. free trade agreements to the TPP reduction schedules and how differences can be remedied.
Six of the eleven party countries to TPP have already outlined preferential trade rules between themselves and the U.S. Importers have been taking advantage of preferential duty treatment for products imported from Canada and Mexico under NAFTA since 1993, Singapore since 2003, Chile since 2004, Australia since 2005, and Peru since 2006.
U.S. importers run into a problem when analyzing the TPP because some tariff reduction schedules within TPP contradict the duty free treatment found in the five existing trade agreements with the U.S. Not all the tariff reduction schedules in the TPP correspond with the individual tariff reduction agreements found in the five existing FTAs listed above and it is still unknown how existing trade agreements and TPP will work together.
Comparing NAFTA to TPP
As of the most recent 2015 HTS code (rev. 2) there are 18,050 individual 10 digit HTS codes for importing into the U.S. Thirty-six percent of these HTS codes are always entered duty free into the U.S. regardless of where it is made. Preferential trade agreements focus on the other 64% of item codes that are taxed or “dutiable”. Preferential trade agreements like NAFTA allow even more of the HTS codes to be entered tax free or duty free if they meet the requirements of being considered made in a NAFTA country. With the application of NAFTA, 98% of all HTS codes are duty free if produced in a NAFTA country. This leaves only 2% of codes in the HTS to be subject to duties upon entering the U.S. from Canada or Mexico.
Similar to other FTAs, one objective of the TPP is to reduce import tariffs, to allow more of an open market between the 12 signing countries. Instead of increasing the duty free codes from Canada to 98% similar to NAFTA, the TPP only allows 94% of HTS codes to be entered duty free from Canada.
In order to compare NAFTA to TPP it is important to compare the 2015 HTS code to the 2010 HTS code since the current NAFTA rules are listed in 2015 HTS in the General notes and the rules in the TPP tariff reduction schedule are listed under the 2010 HTS. Importers must compare HTS codes not at the 10 digit level but at the 8 digit level since that is the level of detail provided in the TPP tariff reduction schedule. In the 2015 USHTS there are 10,688 8-digit HTS codes. 3,915 (36%) are entered in duty free regardless of origin and 6,773 (64%) are subject to duty. The NAFTA rules modify these numbers and allow an additional 6,548 to be entered in duty free from Canada. In the 2010 USHTS there are 10,568 8-digit codes. 3,842 (36%) are entered duty free regardless of origin. The TPP rules also modify these numbers but allow only an additional 6,109 (94%) to be entered in duty free from Canada.
This indicates that the TPP actually reduces the number of Canadian duty free articles allowed into the U.S., potentially decreasing the market share of Canadian goods negotiated under NAFTA. In fact, the TPP reduces the number of duty free HTS codes for all of the 6 countries that have existing free trade agreements with the U.S. The table below compares the immediate duty free percentage rates in TPP to the rates that are currently allowed by the existing agreements.
How Can the FTAs Co-Exist?
There are at least 425 HTS codes that are currently eligible for duty free entry under NAFTA, where the TPP does not grant duty free status and instead gradually reduces the duty rate to zero over a certain number of years. The concern is whether importers can still take advantage of duty free entry under NAFTA once TPP takes effect.
Many of the affected HTS codes are clothing items classified under Chapter 62 of the USHTS. Currently entering duty free from Canada, they could be subject to 50% duty in the first year of the TPP. It is a similar case for textile products coming to the U.S. from Mexico. Currently under NAFTA they are duty free. Under TPP they are only duty free 5 to 13 years after TPP effective date. In aggregate, at least 500 HTS codes coming to the U.S. from Mexico would now be dutiable if TPP replaces NAFTA.
The TPP states that the intention of the parties is to have the TPP “coexist” with existing international agreements.  In Chapter 1, Section A, Article 1.2 of the TPP it states that the parties agreed to “reach a mutually satisfactory solution” when the provisions of one agreement is inconsistent with another. The issue is how to define the word “inconsistent.” The footnote in the section attempts to narrow the definition by stating that “the fact that an agreement provides more favorable treatment of goods, services, investments or persons than that provided under this Agreement does not mean that there is an inconsistency.” This section identifies that the TPP can coexist with the existing agreements but this is not a guarantee that this is the case. The parties may “reach a mutually satisfactory solution” as they see fit. These “satisfactory solutions” may not all be harmonized therefore adding even more complexity to an already complex situation.
While the TPP may possibly narrow the scope of some existing FTAs and may cause concerns over how existing FTAs will co-exist, the TPP also has the capability to expand the list of eligible products imported into the U.S. This expansion comes not only from the new countries not previously afforded free trade into the U.S. but from the duty free treatment of products from Canada and Mexico that contain components from Japan, Malaysia, and the other party countries. Prior to TPP products containing “non-originating” material were prohibited from preferential treatment but now the definition of “originating” material is expanded from one or two countries to all twelve party countries.
 These party countries are Australia, Chile, Peru, NAFTA (Canada and Mexico), and Singapore. Full text from these agreements can be found at https://ustr.gov/trade-agreements/free-trade-agreements.
 2015 HTS (rev 2): http://hts.usitc.gov/current
 The 2015 USHTS has 10,688 different 8-digit HTS codes. 3,915 HTS codes are entered duty free regardless of origin. 6,724 HTS codes are eligible for duty free treatment under the US-Chile FTA. (3,915 + 6724)/10,688 = 99.5%
 6,739 HTS codes are eligible for duty free treatment under the US-Singapore FTA. (3,915 + 6739)/10,688 = 99.6%
 6,548 HTS codes are eligible for duty free treatment from Canada per NAFTA. (3,915 + 6548)/10,688 = 97.8%
 6,545 HTS codes are eligible for duty free treatment under the US-Australia FTA. (3,915 + 6545)/10,688 = 97.8%
 6,599 HTS codes are eligible for duty free treatment from Mexico per NAFTA. (3,915 + 6599)/10,688 = 98.3%
 No free trade agreement is in existence between the US and Brunei, Malaysia, New Zealand, Japan, or Vietnam.
 6,770 HTS codes are eligible for duty free treatment under the US-Peru FTA. (3,915 + 6770)/10,688 = 99.9%