Duty Elimination and What's Next for the TPP

10/27/2015
Earlier this month, the United States completed negotiations on a massive free trade deal with 11 Pacific Rim trading partners. The Trans-Pacific Partnership (TPP) covers nearly 40 percent of the world economy and is the largest free trade agreement ever negotiated.

Now that the TPP trade talks have been concluded, the number one question from the industry is: How soon can I import my sneakers/shirts,/backpacks/etc. duty-free from Vietnam into the United States?

The question is not to be unexpected. After all, U.S. imports of garments, shoes and travel goods carry some of the highest tariffs imposed by the U.S. government, amounting to a whopping $15 billion in duties paid into the U.S. Treasury in 2014. That's 46 percent of all duties collected by the United States, even though these items represented only 5 percent of all imports (by value).

And Vietnam, one of the TPP partner countries, is of particular interest. Its U.S. duty bill is massive – $2.4 billion in 2014, the second largest amount of duties the U.S. collects from any country (between China and Japan). And virtually all of that (94 percent) comes from clothes, shoes, and travel goods.

To find out when products will be duty-free, it's important to understand the mechanics of free trade agreements.

TPP may take several years to take effect

The agreement will not "enter into force" or take effect until it is approved by the U.S. Congress (which itself is not guaranteed) and signed by the President. That may not take place until the end of 2016. And the 11 other countries that are part of the TPP must also approve the agreement. This could take several years.

Other recent free trade agreements, such as Peru and Colombia, took three and five years, respectively, to "enter into force."

In the case of TPP, there is another added twist. Because so many countries are part of the TPP, it is possible that it may not enter into force on the same day for all countries. This is called a "rolling implementation," which is what happened for the U.S./Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), a free trade agreement (FTA) that was much less complicated than the TPP.

Bottom line: Folks eager to see duty-free trade with Vietnam may have to wait a number of years just until the agreement starts working.

Duty elimination for products follows a schedule, and is subject to eligibility rules
While all products will ultimately become duty-free, that path to duty-free status will be subject to a different schedule for different products. In some cases, duty-free status will take effect on the first day the agreement "enters into force," or takes effect. For some, it may be delayed by a decade or more.

It is important to remember as well that the TPP's duty savings provisions take effect only with respect to goods that meet the agreement's rules of origin (ROO). As with past FTAs, the TPP ROOs will likely be complicated and require close scrutiny to make sure supply chains are compatible and compliant.
                                                                
The agreement is not just about Vietnam
Ten other countries signed on to the TPP. Duty reductions, on both finished products and on intermediate goods, will occur among all of these countries. As companies examine the deal, they should look beyond the opportunities that Vietnam-U.S. trade presents. Countless possibilities exist, whether they involve exporting U.S.-made shoes to Japan, importing Malaysian textiles into Mexico, or exporting New Zealand wool into Chile.

The final, publicly-released terms will ultimately dictate which opportunities are commercially viable, and they all deserve scrutiny.
 
 
Steve Lamar is a trade policy expert and executive vice president for the American Apparel & Footwear Association, a national trade group representing apparel, footwear, and other sewn products companies, and their suppliers, which compete in the global market.
X
This ad will auto-close in 10 seconds