TPP Will Hurt China Companies

China, the world’s largest economy, is not one of the twelve countries currently negotiating a Trans-Pacific Partnership (“TPP”) multilateral trade agreement. The United States and Japan, respectively the world’s No. 2 and No. 3 largest economies, are anchoring the negotiations. Nonetheless, a concluded TPP could adversely impact companies in China that manufacture and export goods.

By way of background on the TPP, please reference my blog posts here and here.

One of the principal objectives of any free trade agreement, and specifically the one being pursued under the TPP, is eliminating or significantly reducing participating countries’ import tariffs. As referenced in one of my previous blogs about the TPP, the Office of the U.S. Trade Representative (“USTR”) used an example of U.S. automobile parts exports to Vietnam to show the importance of import tariff reductions to U.S. companies.

In the USTR’s example, exports of certain automobile parts to Vietnam are subject to a 27% Vietnamese import tariff. Because China, the European Union, and India have free trade agreements (“FTAs”) with Vietnam, exports of these countries’ automobile parts are not subject to Vietnam’s 27% import tariff. If the TPP eliminates Vietnamese tariff rates for U.S. automobile parts, U.S. exporters will have achieved a level and more competitive playing field in Vietnam against exporters from China, the EU, and India. Trade in Goods, USTR. In the example and after TPP, Vietnamese imports of automobile parts from China, the EU, India, and the United States will all be subject to no import tariffs.

Based on other FTAs signed by the United States, we can assume that the TPP would have strict requirements for determining an imported good’s country of origin and whether it qualifies for lower import tariffs under the TPP. For example, under the 2012 U.S.-Korea Free Trade Agreement (“KORUS”), a product traded between the United States and Korea generally must meet one of the following criteria to be eligible for 0% or reduced import tariffs:

• wholly obtained from one of the countries –an example of which is an agricultural product (like a tomato) that was grown from seed in the country;

• produced in either Korea or the United States, with any input originating in another country having undergone a shift in Harmonized Tariff Schedule or “HTS” classifications as outlined in KORUS – for example, KORUS may require that a product’s components originally classified under one subheading chapter be ultimately included in a finished product that is classified under another subheading; or

• produced in either Korea or the United States with any other country’s inputs accounting for less than a total percentage of the product’s net value or cost.

Referencing USTR’s automobile parts example above in the context of the TPP, we can understand how the TPP could adversely impact companies in China that manufacture and export parts and components. Let’s assume that the TPP is signed by the 12 participating countries and that under USTR’s example, Vietnam’s 27% import tariff is eliminated for automobile parts from the TPP countries. Let’s also assume that a U.S. company (“Company ABC”) makes automobile parts and sources some subcomponents from China.

If Company ABC wants to export its automobile parts to Vietnam with no import duty, and thus be competitive with Chinese, EU and Indian companies whose companies’ parts have no import duties, Company ABC will first need to determine whether its parts will be deemed of U.S. origin under TPP. This is a significant concern for Company ABC because it sources certain subcomponents from China and because its product will be subject to a 27% import duty if Company ABC cannot demonstrate its product is of U.S. origin. If the value or cost of auto subcomponents is too great or the subcomponents do not undergo the required HTS shifts so that Company ABC can claim U.S. origin for the finished auto part, Company ABC may reduce or eliminate sourcing of parts from China for exports to Vietnam.

As demonstrated by this example, manufacturers and exporters in China could lose customers or current product demand levels because companies under TPP would want to ensure their products qualify for TPP benefits. Companies in those countries negotiating the TPP will be carefully evaluating TPP country of origin requirements and the impact on their goods. So will companies in China.

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