TPP to Deliver Huge Trade Boon, but Compliance Officials Expect More Complexity

The text of the Trans-Pacific Partnership remains shielded behind closed doors, but U.S. compliance professionals are preparing for the sharp rise in trade flows and increased filing hurdles that are expected to accompany future implementation of the pact, several brokers and compliance consultants said in recent days. TPP chief negotiators are meeting in Hawaii this week, and speculation is rising over a conclusion to the deal. U.S. Trade Representative Michael Froman recently predicted a wrap-up of the talks at some point in 2015 (see 1502050058), but the U.S. has failed to meet deadlines set in the past by Froman and other TPP officials.

The compliance industry hasn’t played a particularly big role in the negotiations so far, said many of those interviewed. The most contentious TPP issues span a broad spectrum of tariffs cuts, non-tariff barriers, intellectual property, state-owned enterprises and labor and environment rules, among others. But USTR has still kept the compliance industry up to speed over the course of TPP negotiators, and the industry is primarily focused on strengthening its trade practices to accommodate the different verification processes and tariff provisions in TPP, said those interviewed. The TPP encompasses 12 total countries, including six that the U.S. already has free trade agreements with. The pact also brings Japan, the globe’s third-largest economy, to the table.

Despite the magnitude of the agreement, it’s not likely to fundamentally change the way customs and freight forwarders do their jobs, said some of those compliance officers and consultants. “[TPP] is a big one, but it’s another agreement,” said Livingston International Trade Compliance Director Phil Sutter. “It’s just another special program indicator and you’re able to make claims through that … the mechanics of it are the same.” Still, Livingston is restructuring its Global Trade Management division to prepare for the onset of TPP and other increased global trade, the company said in a March 11 press release.

The sprawling TPP pact could complicate the daily work of compliance professionals by increasing the amount of documentation required to meet tariff shifts and new country-of-origin verification materials, said many of those industry observers, including Deringer Director of Customs Affairs and Compliance Amy Magnus. “It won’t streamline anything for my industry,” said Magnus. “We will be very careful with our clients about whether countries will apply taxes and duties and fees. That may make the process less simple for a broker because it requires more time and effort to make sure the goods qualify.”

The rollout of the TPP may bring with it more audits, as well, said Pete Mento, a trade compliance expert and principal at the tax firm Ryan. “You’re probably going to have customs crawling through your stuff to verify that all the duty-free filings are legitimate,” said Mento. “That’s a good thing though. It can’t all be carrot; there has to be some stick to it.” It will fall to the compliance officers to navigate the complex regulations in FTAs, said Sutter. "With any trade agreement, there are the intricacies of the rules, whether it be tariff shifts or value shifts or anything else," he said. Also, "importers and exporters need get their costs right. So a lot goes into the shipment before you sign the origin certificate."

While the U.S. FTA with South Korea is considered to be one of the model agreements for TPP, that agreement, entered into force in early 2012, has also highlighted some problems. For example, the USTR has complained the South Koreans weren’t meeting their obligations on verification process reform for country-of-origin certificates (see 14031425). "Korean customs regimes haven’t been enforcing the free trade agreement as we expected them to," said Mento. "And we have no means of enforcing that. TPP and [the Transatlantic Trade and Investment Partnership] will have some form of oversight, with outcomes for positive compliance and consequences for countries that choose not to comply."

The Office of the USTR, which declined to comment, has said TPP will “streamline customs procedures” (here). That could indicate that the USTR will focus more on customs improvements in the other TPP countries, Mento said. Some “foreign countries don’t have the processes in place to deal with all of this,” said Mento, while noting different countries are at different stages of customs infrastructure. “We, in the U.S., Canada and Mexico and elsewhere, are relatively used to automation and predictability in customs services. Some countries don’t have that.”

DHL Head of International Trade Affairs Eugene Laney said the TPP could grow into a Trade Facilitation Agreement “plus.” That WTO pact, which will enter into force once two-thirds of WTO members ratify (see 1502240001), is hoped to improve global customs infrastructure and communication. Developed countries are obligated to contribute assistance to developing countries to meet their TFA commitments. That same concept could apply with TPP, he said. “We’ll be in a position with those [TPP] countries to give them the opportunity to work with USAID and others to move them along” with their customs processes, said Laney. USAID said it wasn't able to comment.

The U.S. may need to raise its standards to meet TPP mandates too, said others. "The U.S. is also focusing on strengthening its processes, which is why you’re seeing customs modernization and the Automated Commercial Environment," said Mento. "I don’t think that’s a coincidence. ACE was put together to deal with the reality that import volumes are increasing at incredible rates. And the compliance community needs to coexist and communicate with customs in a modern, transparent and accountable way."

The TPP and TFA may share some similar standards, such as a de minimis level. The TFA pact, however, says countries should implement de minimis thresholds only "to the extent possible." Laney noted the disparities in current de minimis levels. For example, the Canadian threshold is nearly $16, the U.S. is at $200 and Australia lets in up to roughly $769 in commercial goods duty-free, he said. Raising the Canadian de minimis to the U.S. standard through TPP would be a "fantastic arrangement to us," said Laney.

Regardless of the business opportunities and trade logistics, the TPP is poised to critically increase trust between U.S. government officials and the private sector and their international counterparts, said a number of those interviewed. “The FTAs create an environment where information flows better between brokers, carriers and countries. We depend a lot on the flow of information. We want to be more on top of security than the government,” said Laney. “This type of thing improves trust between customs officials in different countries. Sometimes they are exchanging best practices and other inputs on how to improve.”

A TPP agreement will also be a boon for trade compliance people that advise clients on market access opportunities abroad, said Magnus and Mento, both of whom said they fill that consulting role on a regular basis. “If you have a client that’s savvy and looking to reduce cost, they’ll often consult with brokers about what’s required. Brokers know what documentation is needed and how to go about filing,” said Magnus, whose firm, Deringer, is a customs brokerage that also deals with international transportation and freight forwarding. “A client may say they’re starting production in Australia or starting to export to Malaysia. They’ll ask what the relevant FTAs are and rules around those, and how can we make sure the goods qualify correctly.” USTR negotiators and TPP counterparts are still trying to hammer out a final market access package (see 1502200019). USTR officials have been tight-lipped about possible TPP tariff cuts on imports to the U.S. market.