Travels in Canada - Part Eight: Toronto, Ontario — The TPP: Eyes Wide Open

Dateline: Detroit, Michigan and Toronto, ON

It’s been a little over a month since the release of the long anticipated text of the Trans-Pacific Partnership (TPP) agreement. Since then I have travelled to Ontario and Michigan, spoken with a number of trade associations and participated in conference calls with both Ottawa and Washington in an effort to best understand how the Agreement changes the rules of the road. The text runs over six thousand pages of trade legal speak and covers thirty chapters, four annexes and fifty-five critical side agreements between one TPP member and another. The range of the agreement’s coverage is staggering - from cooperation on animal offal to natural disasters.
 
Early analysis of the TPP has been somewhat sparse but over the past several weeks, my colleague and I have pored over the agreement’s provisions specifically related to the automotive sector – from the various side agreements the US has concluded with some TPP members on market access, US tariff schedule for automotive parts imports from key TPP member countries, the Agreement’s “co-existence” provision for existing trade agreements such as the NAFTA, US tariff differential rules as well as the TPP regional value content rules covering the intra-TPP trade on automotive parts.
 
Almost every North American (NA) automotive company small and large will be affected by the new TPP rules. Unfortunately, the TPP was not written to be industry user friendly. There is no “tab” labeled for the automotive sector. Nor did negotiators appear to take into consideration the highly integrated nature of the North American automotive manufacturing base. Instead the twelve member accord reads as a zero sum game for twelve individual members as if each were a stand alone manufacturing hub.
 
At the November 5^th board meeting in Toronto of the Automotive Parts Manufacturers Association (APMA) my colleague and I spoke of the agreement’s provisions and how the TPP differs from the NAFTA. Two weeks later, in Livonia Michigan we met with members of the Automotive Industry Action Group (AIAG) and fielded similar questions. These associations’ leadership must be applauded for their timely efforts to ensure that their members are fully briefed on what the TPP has is in store for them, beyond the media headlines. In short, the TPP rules will apply to twelve competing countries, not three.
 
As mentioned above, the TPP covers a number of side agreements on automotive trade such as that between the United States and Japan, Canada and Japan and the United States and Malaysia. Whether your product is made in only one of the TPP countries or several you will need to know what each of the side agreements means in order to best prepare for the competitive years ahead. Why? Because:

1. They dictate when automotive parts will get duty free access and from which TPP countries;
2. They specify which automotive parts will be deemed TPP qualifying and therefore which will receive TPP duty free treatment
3. They describe how certain automotive part manufacturing processes within TPP countries can offer a competitive domestic value content and
4. They will shape the cross-border trade rules and therefore the competitive landscape for the TPP automotive sector from day one.

In addition, the NA automotive parts sector must “see” the TPP rules from the perspective of the automotive assembler. The TPP gives Japan access to the finished light vehicle market in Canada duty free in five years and in twenty-five years for the US marketplace. Given that automotive parts makers tend to locate near assembly plants, the TPP will influence where assembly plants could eventually relocate and why.
 
Here in Washington, it is difficult to predict when the TPP will come into force. Congress is likely to vote on the Agreement during the “lame duck” session of November/December 2016, if not earlier. Automotive industry associations in Canada and the U.S. are already contemplating not only the value proposition the TPP presents for their members in the long term but how they can translate the agreement’s consequences in the near term. In short, our meetings clearly demonstrate that the NA automotive supply chain itself is hardly waiting for the shoe to drop.
 
From automotive assemblers to key tier three suppliers, companies in North America have started to look at their customer and supplier base to determine what changes should be made to remain competitive in the new TPP world. Large companies with global plant locations will want to understand the various net cost methods used in the TPP content rules both in terms of their own products and suppliers but equally in terms of their exposure to new competitors using these same new rules. Those automotive parts manufacturers with a NAFTA geographic base will want to compare the new rules and decide which of the two is best for their competitive environment – and under what circumstances. And for all of these companies, they will need to take into consideration the various manufacturing processes contemplated by the TPP (and which is new from the NAFTA) that could provide a make or break “bump” of five or even ten percent in the all-important domestic content calculations that will apply to many key automotive parts.
 
The arrival of the TPP on the scene is a game changer. The NA automotive sector faced similar challenges when the NAFTA was released but has since succeeded to create one of the world’s most successful manufacturing sector. The economic slump of a few years ago appears to be abating and consumers are once again visiting showrooms and driving off with their car of choice. Yes, the TPP is a tome to read let alone understand. But an early commitment to understanding the new rules will pay off – with eyes wide open.