Although much commentary about the TPP has concentrated on China losing parts of its manufacturing sector to Vietnam, the reality is that the TPP agreement also offers a ‘back door’ for American companies in particular to enter the ASEAN, China and Indian consumer markets at vastly reduced import tariffs. This route also specifically applies to fellow TPP members Canada, Japan, and Mexico.
The TPP agreement offers these benefits via a rout that doesn’t impact upon Australian companies or those from Chile, New Zealand and Peru, as these countries already possess their own Free Trade Agreements with China. The TPP ASEAN members of Brunei, Malaysia, Singapore and Vietnam are also covered in this regard via the ASEAN-China FTA.
As I have previously noted in an earlier piece, the TPP allows for member countries to conduct trade with very specific items. Much of the benefits of this are to be found in the agricultural, automotive, pharmaceutical, oil & gas and textiles industries, as well as machinery manufacturing. An important part of this new trade dynamic is the impact upon U.S. trade with Vietnam. Examples of this can be seen in the U.S. automotive and textiles industries, which are covered in the TPP deal and will be able to export their raw products to a country such as Vietnam to add value. This could be by finishing products, or for products such as component parts to be incorporated into local Asian production.
The reason for this is the imbalance caused by the ASEAN-China FTA which has priced American, Canadian and Mexican products out of the Asian production market. As the United States Trade Representative (USTR) has noted in comments about that agreement: “This has meant that as an example, Vietnamese auto parts buyers pay a 27 percent tariff if they choose American parts, but only five percent or no tariff at all on similar Chinese- or Thai-made auto parts under the China-ASEAN FTA.”
However, that same ASEAN-China FTA can now work to the advantage of American, Canadian or Mexican companies willing to invest in TPP manufacturing or processing facilities in the Asian TPP members of Brunei, Malaysia, Singapore and Vietnam. Attention to detail needs to be paid here, as each of these markets offer different opportunities. However, in investing in a wholly owned or joint venture company in any of these countries, foreign companies will also be covered under the ASEAN-China (and ASEAN-India) FTA.
The caveat – and beauty of the TPP agreement – is that doing so will require a condition that the TPP agreement has insisted upon: that production be sourced locally. I covered exactly what this entails in my earlier article on how the TPP has imposed a “Yarn Forward“
This is actually more stringent than ASEAN’s own FTA provisions on locally sourced products, commonly known as “Rules of Origin”. ASEAN’s Rules of Origin have a relatively simple and transparent structure: many take the form of a 40 per cent regional value content rule or the change-of-tariff-heading approach. Often, businesses have the flexibility to use either approach to demonstrate that their exports qualify for lower tariff under the terms of the ASEAN FTAs. Because of the inclusion of a Rules of Origin clause in the ASEAN-China FTA, and the same, even more rigid structure appearing in the TPP agreement, it appears highly likely that American, Canadian and Mexican businesses investing under the TPP agreement into Malaysia or Vietnam will easily pass the ASEAN FTA criteria. For businesses invested into ASEAN that qualify for this, this means access to the ASEAN-China FTA itself, the China consumer market as well as the ASEAN trade bloc and the Indian consumer market.
Of course, these are huge markets and research needs to be conducted on the feasibility and industrial sectors that stand most to benefit. But the TPP agreement, and especially those local production / Rules of Origin sections, appear tailor made for American companies to gain access to ASEAN through Malaysia, Singapore or Vietnam. Such companies can take those Rules of Origin criteria and apply them to the ASEAN bloc itself, as well as the ASEAN-China and ASEAN-India FTA.
Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
Chris can be followed on Twitter at @CDE_Asia.
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