Ryan Greenaway-McGrevy looks at how the global supply chain poses a problem for the boffins who have to nut out the details of preferential trade agreements

This is the nineteenth in a series of articles Interest.co.nz has commissioned reviewing the key chapters and issues for New Zealand in the Trans-Pacific Partnership Agreement (TPPA). Links to all the analysis in this series are below.

By Ryan Greenaway-McGrevy*

Where do iPhones come from? The iPhone 7 has a processor made in Taiwan, Bluetooth components from Japan, and network components from Germany. And it was designed in California.

Questions like these matter for trade agreements, which grant preferential market access to goods produced within the trading bloc. But as the iPhone demonstrates, the rise of the global supply chain has made it increasingly difficult to identify where exactly a given product was made. 

The TPP covers 12 nations: New Zealand, Australia, Viet Nam, Malaysia, Brunei, Singapore, Japan, Canada, The United States, Mexico, Peru, and Chile. Since the iPhone contains parts made in Japan, Korea and the US, does that mean that they can be shipped into Mexico, Australia and Chile duty-free? Or does the fact that it contains parts made in China – which is not party to the agreement – mean that these countries are permitted to impose tariffs?

Chapter three of the TPPA deals with these so-called Rules of Origin Procedures that answer these, and related, questions. 

And the answer, I’m afraid, is: It’s complicated. 

Goods produced within the TPP bloc

Goods produced exclusively from materials originating within TPP countries receive preferential market access under the agreement. This would cover, for example, furniture manufactured in Viet Nam from wood harvested in New Zealand. 

These goods are then subject to the complex set of rules for market access set out in the Market Access chapter, which we reviewed earlier here

That was the easy case. Things get complicated if a product contains components from outside the bloc. 

Goods produced with materials from outside the TPP Bloc 

As our iPhone example illustrates, establishing the origin or origin(s) of many manufactured products is not so clear cut. For goods that are made with components from outside the TPP bloc, the rules get complicated. 

Whether or not a good qualifies as “originating” (i.e. originating from within the TPP Bloc – and therefore subject to preferential market access) depends on the proportion of constituent materials that come from TPP countries. The “minimum regional value content” required for access is specific to each product, and these minimum contents are listed in Annex 3-D for each kind of product. To make matters more complicated, there are four different possible ways that the regional value content can be calculated (as set out in Article 3.5): The focused value method (based on the value of specified non-originating materials); the build-down method (based on the value of non- originating materials); the build-up method (based on the value of originating materials); and the net cost method – which only applies to automotive vehicles. 

The nitty-gritty of these perhaps mundane accounting calculations was actually one of the final hurdles going into the last round of negotiations, with the US, Canada, Japan and Mexico at an impasse over the minimum regional value requirements for automotives. In the end, it was decided that a finished vehicle must be have a minimum regional value content of 45% to classify as originating (although there are, unsurprisingly, caveats). 

Articles 3.6 through 3.10 provide further details on how the value of materials can be calculated, and account for things like the cost of the material to the producer, the cost of shipping the material, and any customs duties paid. 

In addition, if the proportion of non-originating materials is less than 10%, Article 3.11 (De Minimis) states that – subject to some additional requirements – the good is to be classified as an originating good. Goods that are excluded from the De Minimis rule are outlined in Annex 3-C of the chapter. 

There are also additional rules that cover things like the use of recycled materials (Article 3.4); conditions for when packaging materials need to be included in the calculation of an originating good (Article 3.14); origination requirements for sets of goods (Article 3.17); and goods that transit through non-TPP countries (Article 3.18).

Certification of origin 

But how does an importer or exporter demonstrate that a product satisfies these minimum regional content restrictions? 

An enterprise seeking duty-free or preferential access under the TPP will be required to produce a certificate of origin (Article 3.20). There is no specific format for the certification, but it must meet certain minimum requirements, as outlined in Annex B of the chapter. The certificate can come from either the producer, the exporter or the importer, and must include all of their contact details. It must also include the rule of origin under which the good qualifies.

Parties are free to investigate the validity of a certificate of origin, and Article 2.27 (Verification of Origin) outlines the protocols for such an investigation. It can include a request for further documentation or even a visit to the export or production site. Textile and apparel goods are, however, treated differently, and are contained within chapter 4. 

Under Article 3.23 a certificate of origin is not required if the value of the good is under US$1,000. Parties can also waive the need for a certificate of origin for a particular good. 

Article 3.29 (Refunds and Claims for Preferential Tariff Treatment after Importation) also provides a procedure by which importers can apply for duty-free benefits after the goods have been imported – and receive a refund of the applicable duties if their claim of origin is accepted. 

The rise of the global supply chain 

The iPhone is not an exception. Many of the consumer products we use every day are comprised of components manufactured in a variety of countries. The rise of the global supply chain has supplanted the old “north-south” and “north-north” models of trade flows, and perhaps transformed how we think about why firms exist in the first place. As we have seen, however, the global supply chain also poses a bit of a problem for the boffins whose task it is to nut out the details of preferential trade agreements. 

Although it is perhaps a little on the mundane side, the rules of origin chapter will be very important to our exporters and importers going forward – should the agreement go ahead.


*Ryan Greenaway-McGrevy is a senior lecturer in economics at the University of Auckland. Prior to that he was a research economist in the Office of the Chief Statistician at the Bureau of Economic Analysis (BEA) in Washington DC.

*Amber Carran-Fletcher contributed to this article.

The series so far:

Investor-state dispute settlement

Labour standards

Settling disputes

Intellectual property

SOEs and designated monopolies

Environment

Government Procurement

Sanitary and phytosanitary measures

National treatment and market access for goods

How the TPPA could boost competition in the building materials sector

What TPPA's investment chapter says, including on housing investment

What the TPPA says about remedies for unfair trade

What the TPPA means for SMEs

We can have globalisation and more equitably share the gains

What the TPPA says about financial services

Greasing the wheels for creative & vibrant service sector firms

What the TPPA says about online retailing

What the TPPA would do for transparency & combating corruption

*And here's a video interview with Greenaway-McGrevy where he discusses the series.

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