The Open Road: Approaching the TPP
Summarizing the behemoth 12-nation TPP agreement in a few-hundred word blog is a task beyond the reach of a practicing attorney . . . assuming he wants to continue practicing. In this article we will examine automobiles, an area of particular interest to two big economies in the TPP, the United States and Japan.
The Washington Post provides this nice overview to get you up to speed, and numerous news outlets are publishing summaries outlining the terms of the deal. The problem with summaries is that they tend to act as superhighways, speeding you to your destination, but rolling right past the exits where minor attractions, the trade-agreement equivalent of the world’s largest ball of yarn, might catch your interest.
For that reason, and to fully run down this extended road trip metaphor, we will take you along a few of the narrow winding TPP lanes, pausing for a gander at the chapter on originating materials, stopping for souvenirs at a few of the annexes and even the appendices to annexes, where you just might find a little nugget of information that, to you and your business, could be a treasure.
Get Out the Map, Plan Your Route
Now recall that this journey is hypothetical – yes, because we’re making up the question we are going to answer for illustration purposes – but also because the individual TPP member countries still have yet to ratify the agreement. Until that time, all statements about TPP in action is simply conjecture. Nevertheless, in order to be ready when the trip begins, we boldly make our plans and hope that the conditions hold.
The Rules of Origin in TPP Chapter 3 are a good place for us to begin our journey. To trace a path through how the TPP will apply to the country of origin calculations of certain goods, we will take a hypothetical but realistic set of facts, as follows:
- You are a manufacturer producing passenger vehicles in the United States, using certain non-U.S. materials sourced from countries outside the TPP agreement.
- You source steel from China and, at your U.S. facility, you bend, form, cut, and stamp the steel into a passenger vehicle auto body.
So just how are we going to calculate the origin of your vehicle and the materials therein?
Hop in and buckle up, let’s start this ride.
Oh Look Honey, an Originating Good!
Article 3.2 of the TPP states that an originating good is one entirely obtained or grown in a TPP country or produced in the territory of one or more TPP parties exclusively from originating materials. In addition, an originating good can be a good produced entirely in the territory of one or more TPP countries using non-originating materials, provided the good satisfies the applicable requirements of Annex 3-D (Product-Specific Rules of Origin).
That’s it! We’re off to Annex 3-D to find out whether our U.S.-made passenger vehicle using some non-originating materials will be considered an originating good. Hit the gas!
Annex 3-D lists specific HTS Codes and the applicable rules determining their origin. The following note in Annex 3-D addresses how a passenger vehicle, classified under HTSUS8703, made from non-originating parts, may qualify as originating:
No change in tariff classification required for a good of heading 87.02 through 87.05, provided there is a regional value content of not less than:
(a) 45 per cent under the net cost method; or
(b) 55 per cent under the build-down method.
With respect to which method we would use for the RVC calculation, Article 3.9 Net Cost, states the following requirement:
If Annex 3-D (Product-Specific Rules of Origin) specifies a regional value content requirement to determine whether an automotive good of subheading 8407.31 through 8407.34, 8408.20, heading 84.09, heading 87.01 through 87.08 or heading 87.11 is originating, each Party shall provide that the requirement to determine origin of that good based on the Net Cost Method is calculated as set out under Article 3.5 (Regional Value Content).[emphasis added]
Pause. Let’s breathe a moment.
Ok, so in order to qualify as originating, we need 45% originating material under the net cost method and, according to Article 3.9, we will use the net cost method because our passenger vehicle is categorized under HTSUS heading 8703, which is between 8701 and 8708. Don’t you roll your eyes, kids, or I will turn this car around!
Where were we? Right, the net cost method of regional value content calculation. Article 3.5 tells us that for “automotive goods only,” we calculate the RVC as follows:
RVC = NC – VNM x 100
- RVC is the regional value content of a good, expressed as a percentage;
- VNM is the value of non-originating materials, including materials of undetermined origin, used in the production of the good;
- NC is the net cost of the good determined in accordance with Article 3.9 (Net Cost);
See, not so bad? Pretty interesting, in fact. It says right here in our guidebook that if the RVC of the U.S.-made passenger vehicle is 45% or greater, as calculated above, the automobile will be considered an originating good.
Are we there yet: Originating materials
In order to determine whether a vehicle auto body made in the United States from steel sourced from China may be counted as originating material in calculating the Regional Value Content of the automobile made with that body, we begin with Article 3.6 of the TPP, Materials Used in Production. Article 3.6 states the following:
- Each Party shall provide that if a non-originating material undergoes further production such that it satisfies the requirements of this Chapter, the material is treated as originating when determining the originating status of the subsequently produced good, regardless of whether that material was produced by the producer of the good.
The description above still leaves us to determine whether the steel undergoes “further production such that it satisfies the requirements” of Chapter 3. For that information, we make a slight u-turn to revisit those “Product-Specific Rules of Origin” contained in Annex 3-D. Then we pass onto the dirt roads of the further specific rules for automobiles and parts are contained in Appendix 1 to Annex 3-D . . . no, no I do NOT think we are lost and I will NOT ask for directions . . .
Right: Appendix 1 to Annex 3-D specifically addresses the qualification as originating materials used for a body for an 8703 vehicle.
- For the purpose of satisfying the regional value content requirement of the product-specific rule of origin applicable to a good of subheading 8701.10 through 8701.30 or heading 87.02 through 87.05, a material listed in Table A used in the production of that good is originating if:
- the production undertaken on that material in the territory of one or more of the Parties involves one or more of the operations listed in Table B
Here we see the material for auto body, 8707.10, for our passenger vehicle is listed in Table A. Therefore, according to the Appendix section quoted above, material for the production of the auto body will be considered originating if, under sub-paragraph b above, the production process used on the material involves one or more operations in Table B.
How clear is that?! The TPP spells out the exact activities that will cause a non-originating material to be considered originating through a manufacturing process. Table B appears as follows:
Table B Note 1: “Complex” means an operation that requires specialized skills and the use of machines, apparatus or tools that are especially produced or installed to carry out that operation, regardless of whether such machines, apparatus or tools were produced with the intention of carrying out that operation on a specific good.
Table B Note 2: The operations referred to in Table B do not include the mere assembly of non-originating components classified as a good in accordance with Rule 2(a) of the General Rules for the Interpretation of the Harmonized System.
Because the steel sourced in China will undergo forming, stamping, and machining in the United States as part of the auto body manufacturing process, the U.S.-made vehicle auto body should count as originating material in the RVC calculation of the automobile under TPP, even though the material to make the auto body is sourced from a non-TPP country.
Another bend in the road
The exhausting travelogue above illustrates the principles of the rules of origin, but may not get us to our final destination. Included among the voluminous TPP agreement material are letters between countries, side agreements, and other bilateral activity that must be examined closely before a final determination of TPP’s application can be made. Before embarking on your own freewheeling TPP journey, we recommend you check with your own compliance counsel to be certain you’re clear on the directions.