Six of the eleven party countries to the recently released Trans Pacific Partnership Agreement (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, making the review a cumbersome task.
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.
What do Importers need to do?
While we are awaiting clarification on the impact of TPP, importers should be taking steps to become more informed on the rules of TPP and how it impacts their future business.
If an importer is taking advantage of preferential duty rates under a currently existing FTA, it is important the importer is aware of how TPP could potentially change how the exporter qualifies the product as eligible for duty free treatment. Both importers and exporters must determine how TPP rules affect their products and if the products are treated the same as the current FTA in use; and concurrently if the rules are different.
This can be complicated. First, the tariff reduction schedule uses 2010 HTS codes. If products are all properly classified, then most likely companies have the current 2015 HTS codes in their system. Importers will have to go back and correlate the 2015 HTS code to the 2010 HTS code before it is established what kind of duty treatment their products may have in the future. Second, the product specific rules are in 2007 HTS codes. In order to determine whether a product qualifies for preferential duty treatment again there must be a correlation between the 2015 HTS code to the 2007 HTS code for all final products AND their components in order to properly determine whether the product qualifies for preferential duty treatment. Typically, for exporters in the U.S., Customs creates the correlation in the General Notes of the HTS for free trade agreements in force. If a company wants to be proactive, they would benefit by conducting a thorough review until the TPP gets ratified and incorporated into the General Notes.
Importers hoping to take advantage of the new preferential treatment rules should start conversations with their exporters to ensure they are aware of the regulations to properly qualify their products for preferential import under TPP. To accomplish this:
- The first step is for exporters to understand the product specific rules and how to properly qualify a product for TPP certification. The exporter must be able to effectively determine the origin of their product by classifying components and applying the product specific rules. This could be a labor intensive process for new exporters.
- The second step is for exporters to understand and plan for the record keeping requirements and for providing proof a product qualifies under TPP.
An important fact of this new trade agreement is that TPP allows direct verification (or direct auditing) of exporter’s origin claims. This means that U.S. Customs (or any party country) can request to verify whether the imported product qualifies under the TPP rules. This is something that NAFTA countries and South Korea are well aware of as this “direct verification” policy exists in their current free trade agreements. This policy could come as a shock to those who are not familiar with the process.
TPP is a very complex trade agreement. Importers should begin to become familiar with the rules of the agreement and how it could potentially affect their future business whether they choose to participate or if their customers and suppliers are planning to participate. Importers should start discussions with suppliers in order to ensure a seamless and error free implementation of TPP compliance. Implementing a process to stay ahead of any new developments of the co-existence of existing free trade and any explanations on the possible inconsistencies between them, would aid in preparation for the date TPP is in force.
 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.