World Trade Online | 7 January 2016
Final TPP auto RoO package differs from expected outcome in two ways
by Matthew Schewel
The final automotive rules of origin in the Trans-Pacific Partnership (TPP) as detailed in the text released this past November differ in two key ways from how TPP officials and other sources described the rules immediately after the talks concluded — both of which effectively allow for the use of more content from non-TPP countries.
The first difference is that the regional value content (RVC) threshold for some key auto parts made in North America is 35 percent, as calculated under the so-called net cost method. By contrast, officials and some auto industry sources had previously signaled that all of the most sensitive parts for North American manufacturers would require either 40 or 45 percent TPP content.
Under the TPP, auto parts must meet either 35, 40 or 45 percent RVC threshold under the net cost method to qualify for tariff benefits, depending on the part. Finished vehicles must meet an RVC of 45 percent under net cost.
The second previously undisclosed aspect of the TPP’s rules of origin is that a special methodology for calculating the RVC applies not only to finished automobiles, but to auto parts as well. Informed sources said this alternative methodology had initially been described to them as only applying to finished vehicles.
Critics of these developments fear that they will effectively weaken the rules of origin and allow more content from countries outside the TPP region like China, and argue this could have a negative impact on automobile-related jobs in the region. But they also concede that the full impact of the alternative methodology is difficult to project.
Japan had originally sought lower RVC thresholds than the U.S. was willing to accept, but ultimately backed the alternative methodology as a compromise. It argued this methodology would ease the paperwork burden of applying for tariff benefits for parts that are typically produced near automobile production plants anyway for logistical reasons — rather then opening the door to sourcing these parts from outside the TPP region. Some sources familiar with the auto industry said they were skeptical of this reasoning, however.
Examples of key auto parts made in North America that ended up with a 35 percent RVC are certain auto bodies, mufflers, radiators and engine parts.
Flavio Volpe, president of the Canadian Automotive Parts Manufacturers Association (APMA), said in an interview with Inside U.S. Trade that this outcome came as a surprise to his group.
Volpe said some of the auto parts that have an RVC of 35 percent under TPP are made by a large number of Canadian companies, and that this contradicts earlier assurances he had received from the Canadian government that such parts with the highest concentration of Canadian producers would get the 40 or 45 percent RVC.
For instance, there are 26 Canadian companies currently producing auto bodies for motor vehicles other than passenger cars that are classified under tariff heading 8707.90, and 18 Canadian firms producing certain engine parts classified under 8409.91, according to APMA. Both of these auto parts ended up with an RVC of 35 percent.
Similarly, U.S. steel industry representatives serving on the Industry Trade Advisory Committee for their sector (ITAC-12) complained in their report on the TPP deal released on Dec. 5 that many steel-intensive auto parts require an RVC of 35 percent or 40 percent rather than the 45 percent. For instance, body stampings require 40 percent regional content to qualify as originating, while mufflers and radiators ended up with the lowest 35 percent, the report noted.
The alternative methodology for calculating the regional content value of autos and auto parts is laid out in Appendix 1 to Annex 3-D of the TPP’s chapter on rules of origin. This alternative methodology — described by some sources during the negotiations as the "flexibility mechanism" — effectively makes it easier to meet the designated RVCs for vehicles and auto parts by providing a shortcut for counting some constituent materials as originating.
Specifically, if certain materials have undergone one or more production processes listed in Table B of the appendix, they can be counted toward the originating value of the vehicle or auto part into which they are incorporated. This makes it easier to meet the RVC for that vehicle or auto part than the normal method, which would require such materials to meet their own product-specific relevant rule of origin specified in the TPP agreement.
The 11 processes listed in Table B are complex assembly, complex welding, die or other casting, extrusion, forging, heat treating including glass or metal tempering, laminating, machining, metal forming, moulding, and stamping including pressing.
But there are important differences in the way this flexibility mechanism functions for finished vehicles and auto parts. For vehicles, there is a finite list of seven products that can qualify as originating using the flexibility mechanism, listed in Table A of the appendix. These are tempered safety glass; laminated safety glass; auto bodies for passenger cars; auto bodies for other vehicles; bumpers; body stampings and door assemblies; and certain drive axles.
This finite list places a limit on the extent to which vehicle producers can take advantage of the flexibility mechanism to qualify materials as originating.
The ability of companies to use the flexibility mechanism for auto parts is limited in a different way. First, it can only be used to help qualify materials going into 14 specific auto parts, including engines, bumpers, seat belts, brakes, steering wheels and airbags, which are listed in Table C of the appendix.
Second, the appendix states that the materials for which the flexibility mechanism is used can only account for a specified percentage of the total value of the listed auto part.
For example, the regional value content requirement for bumpers is 45 percent under the net cost method. Materials that go into that bumper can be qualified using the flexibility mechanism, but such materials can only account for 10 percent of the total value of the bumper. The remaining 35 percent of the value of the bumper needed to meet the RVC must use the standard methodology for qualifying materials as originating.
Ten out of the 14 auto parts in Table C require an RVC of 45 percent, and for all of these parts the limit on the value of materials that can qualify using the flexibility mechanism is 10 percent. The four remaining auto parts require an RVC of 40 percent, and on these the flexibility mechanism can only be used to qualify materials making up 5 percent of the value.
After TPP was concluded, sources had described a similar cap on the use of the flexibility mechanism for vehicles, but that was not borne out by the text released on Nov. 5 (Inside U.S. Trade, Oct. 9).
The ITAC-12 report said it was unclear to what extent this flexibility mechanism would allow more content from outside the TPP region to be included into qualifying goods. Apart from this mechanism, the TPP already provides two options for many auto parts to qualify as originating — either meeting the RVC or undergoing a change in tariff classification.
"It is not known how this alternative system system differs from existing rules regarding a tariff classification change following a substantial transformation, and how it might ultimately result in more non-TPP content becoming deemed as originating in a TPP country," the report said.
ITAC-12 recommended that, in order to provide more clarity, the production processes listed in Table B of the appendix be defined in the Statement of Administrative Action that will accompany the TPP implementing bill.
Overall, ITAC-12 said it was "very concerned" that the TPP auto rules of origin are "likely to lead to greater use of non-U.S. and non-TPP steel in vehicles and automotive goods, which is a negative result for both U.S. steel companies and U.S. manufacturing in general."
That assessment was more critical than that of ITAC-2 covering automotive and capital goods, which was internally divided over whether to support the auto rules of origin (Inside U.S. Trade, Dec. 25, 2015). Neither ITAC-12 nor ITAC-2 took a firm position on whether to support or oppose the TPP overall.
Critics of the flexibility mechanism argue that it further weakens the TPP RVC thresholds, which are already lower than those included in the North American Free Trade Agreement, thereby opening the door for more content from non-TPP countries to be included in originating vehicles and auto parts.
They provided two counterarguments to Japan’s assertion that the materials in Table A are typically sourced from close to the vehicle assembly plant and therefore are not likely to be imported from outside the TPP region anyway.
The first is that Japan had claimed the flexibility mechanism was necessary in order to allow it to maintain its current supply chain, which includes non-TPP countries like Thailand and China. If that is true, then the flexibility mechanism must somehow allow the continued utilization by Japanese companies of non-TPP inputs, they reasoned.
Second, these critics argue that some of the products in Table A — such as bumpers — are indeed traded internationally, and that others may become more feasible to trade in the future because of advancements in materials and shipping technology. One source noted that the only way for auto manufacturers to meet new higher emissions standards required by the U.S. and European Union is to incorporate lighter materials, which could make these materials more tradeable.
Despite these worries, Volpe said some Japanese companies have expressed an interest in investing in auto parts production in Canada in part to diversify their supply chain away from China. He said this was counterintuitive since the TPP’s rules allow Japanese automakers to continue sourcing from non-TPP countries.
"In spite of all this academic discussion of what the end result would be, I’ve been surprised to hear about the interest of Japanese capital coming into the Canadian manufacturing landscape," he said. "That would be counterintuitive … and it would be an unexpected benefit."