The TPP’s Rules of Origin and Key Tariff Reductions

By: Dezan Shira & Associates
Editor: Ellena Brunetti, Dustin Daugherty

The Trans-Pacific Partnership (TTP) is a comprehensive free trade agreement agreed to earlier this year. As such, its main goal is to progressively reduce imports and exports duties, in order to put into place a free trade area encompassing roughly one third of global economic output.

As stated in article 2.4 of the agreement’s text addressing the elimination of custom duties, each party to the treaty, including Vietnam, is obligated to progressively eliminate its customs duties on goods imported from parties to the trade pact.

Understanding the schedules for tariff reductions in the agreement is vital for any investor, and presents a momentous opportunity in conjunction with the trade liberalizations and regulatory harmonization underway through the further integration of ASEAN into a true economic bloc. For Vietnam especially, predicted by many analysts to be the real “winner” of the TPP, the agreement’s passage will bring large investment inflows over the coming few years.

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While Vietnam is widely recognized as a rising star for manufacturing and export, as its consumers get richer and drive domestic demand the importation of goods for local sale will become an increasingly prominent business strategy.

Regarding Vietnam, the imports duties will be reduced as followed:

Rules of Origin

As in most FTAs, the TPP is governed by “rules of origin”. As goods, before reaching the final consumer, can go through several intermediary stages which can take place in several countries, rules of origin are used to determine the “nationality” of products and eligibility for accompanying tax incentives under the FTA.

The rules of origin ensure that the benefits of the TPP accrue to the countries party to the agreement.

As stated in article 4.2, in order to determine whether a good should be considered as originating under the TPP, it has to pass the regional value content test.

Indeed, a single set of rules of origin has been put into place in the TPP. However, for some products, special rules of origin apply. Those are listed in the in annex 3 of the chapter 3 “Product Specific Rules”, and “automotive,” one of the sectors in which differing regulations apply.

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Regarding exports in the textile sector – a key area for FDI in Vietnam –  there also exist special provisions in the TPP, known as the “yarn forward” rule. The rule states that Vietnam’s exports will have to meet the TPP’s rules of origin in order to receive preferential tariff treatment.

Consequences of the Rule of Origin on Vietnam and its Investors

The rules of origin will allow investors in Vietnam’s textiles and garments industry to intensify trade with TPP member countries, particularly the USA. Currently the top garment exporter to the USA is China, but as China is not a party to the TPP and its preferential tariffs, Vietnam’s garment industry is expected to gain in market share.

Some reorganization in the regional supply chain, caused by the rule of origin, is expected to take place, as Vietnam is highly dependent on China when it comes to textiles – most of textile raw materials used by Vietnamese firms is imported from China. Consequently, Vietnam will have to invest in new stages of the industry’s supply chain, such as dying and weaving manufacturing.

Thus not only does the TPP offer investors a rare opportunity in Vietnam, but may allow Vietnam to gradually add higher value-added manufacturing capacity and cut down on its supply chains’ dependence on China.

Further Support from Dezan Shira & Associates

With over 23 years of experience offering specialized foreign direct investment advice throughout Asia and nationwide coverage in Vietnam through our Ho Chi Minh City and Hanoi offices, the specialists at Dezan Shira & Associates are well placed to advise foreign investors on how to take advantage of the TPP. For more information, please get in touch at vietnam@dezshira.com. 

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