Does Your Product Qualify for TPP’s Zero Duties?

by | Jan 22, 2016 | Articles

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Does Your Product Qualify for TPP’s Zero Duties?

By Steve Craven

OK, you know that the Trans Pacific Partnership will lower most customs duties, among TPP signatory countries, to zero. You are selling your product from Hawaii, but does it qualify for the new low duties?

Some things are clear. If your product is 100% made in a TPP country, then it will receive TPP tariff treatment, which means that most products will enter another TPP market free of duties. If you are building surfing products in Haleiwa and you have an Australian surf shop as a customer, you are good to go. If you are simply peddling something that is made in a non-TPP country, say Italy, then it doesn’t qualify.

But what happens if your product is made up of intermediate goods that come from other countries? If they come from other TPP countries, then no worries. TPP duty rates apply to any TPP origin goods, no matter which specific country they come from. The trade techies call this “cumulation”. But problems may arise if, for instance, those surfboards you make on the North Shore are made from plastics and resins you have purchased from a Chinese supplier. China is not currently a member of TPP, so Chinese products don’t get the lower duties that apply to TPP products. Where do you draw the line? At what point does a product change from a TPP product to a non-TPP shipment? Or vice versa?

Part of the answer lies in a concept called “substantial transformation”. Rules might vary from product to product, but – as a general statement – if non-TPP inputs are changed so that they are largely unrecognizable (say, from wheat into pasta), they will be considered as “substantially transformed”. It just isn’t the same product that it was when it was imported. Those surfboards made from Chinese resins? After design, shaping and all the rest, there is no way any customs officer is going to look at them and say they are still a shipment of Chinese chemicals. They will be considered TPP products.

The other part of the answer concerns the selling price of your goods. If the majority of your price reflects work done in a TPP country, then the product will be treated as a TPP product. Things can still get dicey if your product has less than half its value from any single source, but few of you are going to be faced with that. If you are manufacturing in Hawaii, chances are your local labor and costs, back office expenses, design, etc. will put you over the top – and win you duty-free treatment in other TPP markets.

Unfortunately, not everything is simple and the TPP agreement sets up other qualifications in its rules of origin for specific products. Some of these, perhaps automotive products, may not be a big concern to Hawaii’s small exporters, but if you are dealing in food products, I strongly recommend you take a look at TPP’s Chapter 3 (Rules of Origin & Origin Procedures) and at Annex 3-D (Product-Specific Rules), which can be found atmedium.com/the-trans-pacific-partnership/rules-of-origin-and-origin-procedures-a5957e12ed26#.g74kdf9i3 and ustr.gov/sites/default/files/TPP-Final-Text-Annex-3-A-Product-Specific-Rules.pdf, respectively. Be warned, the latter rivals the Internal Revenue Code for opacity. Nobody said trade was simple.

Steve Craven advises companies on international business strategies and how to overcome problems encountered in foreign markets. He is a former consultant, American diplomat and a U.S. trade negotiator. He served as a Career Diplomat and Senior Foreign Service Officer, member of the U.S. Commercial Service, U.S. Department of Commerce. Mr. Craven also previously served as Chair of the Hawaii Pacific Export Council.

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