FTA software can help businesses take full advantage of the Comprehensive and Progressive Trans-Pacific Partnership agreement, saving millions of dollars in tariffs.
It has been little over 18 months since the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) came into force. In a world that continues to be buffeted by the COVID-19 pandemic, how effectively is your enterprise using CPTPP – arguably the most transformational of free trade agreements (FTA) in the last two decades – to make your supply chains more resilient and cost-effective?
The CPTPP is an FTA signed by 11 countries, spanning four continents. Its members include: Canada and Mexico from North America, Chile and Peru from South America, Japan, Vietnam, Malaysia, Brunei Darussalam, Singapore (Asia), Australia and New Zealand.
Together, these member countries represent a GDP of over USD 10 trillion and about 13.5% of global merchandise trade.
On 30 December 2018, when the agreement came into force, CPTPP started delivering immediate benefits to firms from member countries where the agreement had entered into force. Tariffs fell from the first day and have come down from 30-40% to almost zero. All clauses related to services and investment came into effect, and 160 sectors were opened up for investments for all firms in member countries. Similarly, the agreement rules on the protection of intellectual property also came into effect immediately.
Beyond tariff cuts, the key feature of the CPTPP is the way it has crafted Rules of Origin (ROOs). Traditionally FTAs look at the Regional Value-Added Content (RVC) – typically 40-50% – before granting a product preferential tariff treatment. This, however, becomes a problem for products based on globally traded commodities – petrochemicals for example – where fluctuating prices tend to throw the RVCs calculations off.
CPTPP ROOs are more flexible, factoring in multiple methods instead of just sticking to RVC. They include Change in Tariff Classification (CTC) where raw materials and finished products are classified under different tariff headings and process rules (useful for chemicals). These avoid distortions caused by volatility in exchange rates or commodity prices.
As far as services are concerned, the FTA has taken a ‘Negative List’ approach to services. This means that except for services included in this list, all services are automatically open to all enterprises in all member countries.
The other key feature of the CPTPP is that it includes self-certification of origin and specific provisions for trade facilitation and deadlines for express shipments and perishable goods. A system of advance ruling on tariff classifications and ROOs that stay stable for three years are another key trade facilitation device.
While officials negotiating the FTA have thought through various ambiguities that could arise in its implementation and tried to provide answers, this makes the CPTPP incredibly complex. The agreement itself is over 600 pages. Then there are thousands of pages of individual country schedules for goods, services, investment, government procurement, business mobility and more, plus dozens of bilateral letters.
For example, to ensure that the ROOs are fair, the CPTPP has product-specific ROOs — for every tariff line, there is a matching rule of origin. For several products, there are multiple ROOs – from RVC, CTC or process rules. Textiles are included in a separate chapter with their ROO rules.
This complexity makes it impossible for companies using manual processes to fully benefit from the FTA as they are unable to carry out the various tasks involved. These include analyzing trends, scenario planning, supplier management and final execution.
A recent Thomson Reuters survey found that over two-thirds of the responding companies did not make effective use of FTAs because they found compliance too complicated. In the process, these companies were paying millions of dollars more than needed in tariffs.
Businesses need to automate their global trade management to take full advantage of a landmark FTA like the CPTPP.
Global Trade Management
Global Trade Management (GTM) systems are cloud-based software tools that are powered by repositories of content governing various rules and regulations governing FTAs. They help businesses simplify the process of scenario planning, analyze multiple options and establish the most optimum and cost-effective supply chain routes. For an agreement like the CPTPP, which allows for various methods to determine ROOs, such systems can help in integrating highly complex bill of material structures and arriving at the best ROO methodology to follow.
GTM software also helps streamline workflows, eliminate the risks associated with manual work and reduce compliance risks. It is ideal for use in an FTA like CPTPP which allows self-certification since it automatically self-certifies error-free declarations, thereby mitigating potential penalties while building the audit trail for future preferential claims.
Such software further reduces risks in complying with FTA guidelines by streamlining trade compliance workflow, eliminating manual work, and ensuring adherence to the latest regulatory changes.
By ensuring companies reap the full benefits of an FTA like the CPTPP and pay lower tariffs than firms using manual processes, GTM software offers not only an immediate Return on Investment (RoI), but also a competitive advantage. Smart GTM solutions can increase the efficiency of trade teams by 10-15%, offering another element of RoI. Finally, there are benefits that accrue in terms of auditing and greater efficiencies with suppliers and brokers.
For businesses in Asia-Pacific, the CPTPP is a game-changer. But they will only be able to take full advantage of its various features if they invest in a smart GTM software system.