The Trans-Pacific Partnership trade agreement is moving forward once again. With the endorsement of the leaders of 11 countries, the deal could come into force as soon as next year.
This is not quite the same TPP deal that was in place a year ago. The U.S. is no longer part of it, 20 provisions that largely relate to U.S. negotiating demands have been suspended, and the pact itself has been renamed.
These changes should not be ignored, but the agreement is still a big deal. The revised pact, now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, will be extremely important for companies doing business in the region and will set the benchmark for future trade agreements globally.
The withdrawal of the U.S. from the agreement, of course, does impact the overall size of the economic pie. The share of world gross domestic product covered has been cut by about two-thirds to 13%. The TPP 11 states similarly account for about 14% of global imports of goods and services.
However, given the generally open nature of the U.S. economy, most companies from TPP 11 states already enjoyed easy access to the U.S. American tariffs are quite low for almost everything but textiles, footwear and some agricultural products. Companies from member countries can enter the services markets in the U.S. and have the ability to invest right now -- the CPTPP rulebook matches existing U.S. laws. For TPP 11 companies, the absence of the U.S. is not as damaging as may have first appeared.
The 20 suspended provisions of the original TPP constitute just 28 of the 622 pages of the negotiated text. The rest of the agreement remains untouched, including every single market-opening commitment made by members in relation to inbound goods, services and investments, state-owned enterprises, and government procurement. Nineteen out of 30 chapters were totally unchanged and three others had less than one sentence altered.
The suspended provisions are meant to be reinstated at some future date. Between now and then, the member governments -- Japan, Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam -- are not required to implement those rules domestically.
What makes the CPTPP so relevant is the deep, interlocking nature of the included commitments. Unlike other free trade agreements, the new accord does not simply open up trade for some goods or partially address services or investment. It manages to better reflect the way that companies actually structure business operations today.
It allows companies to more seamlessly move goods, services and investments between and across member markets. This will benefit not just the biggest companies that have always had advantages of scale, but also smaller companies that often struggle to sort out complex rules in trade deals.
The benefits can be difficult to quantify precisely. As an example, however, consider a company that makes perfume in one member country and currently exports to just one other member. It will be able to take advantage of at least a dozen different chapters in the agreement and should see sales boom.
Consider that perfume tariffs, which act like a tax on exports, are set to drop in the agreement. In Vietnam, the tariff is currently 22% and over four years will fall to zero. Canada's 6.5% tariff will be cut to zero on the first day of the agreement. Mexico's 15% levy will plunge to zero as well when the agreement takes effect. Each of these tariff reductions will allow the perfume company to become more competitive in a significant potential market.
Companies from member countries will be able to take advantage of the agreement's rules of origin. This will mean that once a company meets the criteria for making its product inside the bloc, it can be shipped to all other members without any changes, or alternatively, with content from other members; the perfume company could combine citrus from Vietnam and lavender from Mexico with oils derived from chemicals in Singapore.
The resulting perfume will be able to be shipped more easily using the trade facilitation rules in the pact. These will allow for self-certification, or shipment without a specific piece of documentation called a certificate of origin.
Companies will also be able to get customs officials to classify the perfume using something called an "advance ruling," which will mean the company can be confident that the perfume will be classified as such rather than as another product that would be subject to higher tariffs or different rules of origin.
The perfume maker will also be able to more easily supply and access key services to sell its products. Marketing, distribution and retail will still be critical to success. Pact provisions cover online advertising and the use of e-commerce channels.
Another critically important issue for the perfume company is protecting the intellectual property investment behind its product, including branding, packaging and even the scent itself. The pact will protect these investments and provide for enhanced enforcement to stop counterfeit products from appearing in the marketplace.
As a result of so many new benefits, a smart perfume company would re-examine its operations and growth strategy. Markets that were not attractive before -- because tariffs were too high, freight rates too costly, border delays too long or retail investments not possible -- may suddenly look much more attractive.
Similar benefits can be found for nearly every type of company in nearly every CPTPP member country. This agreement is the single most important trade deal in decades. It will set the rules of the game for trade in the future, as elements are replicated in other trade agreements going forward.
Deborah Elms is executive director of Asian Trade Centre, a Singapore-based consultancy.