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TPP start date means faster changes on tariffs

Focus on Trade Law
|Written By Dale Smith
TPP start date means faster changes on tariffs
Jessica Horwitz says free trade agreements are advantageous for the Canadian economy.

The Comprehensive and Progressive Trans Pacific Partnership will come into force on Dec. 30, and because of the way in which the treaty was drafted, the year-one tariff reductions will only be in effect for two days before the year-two tariff reductions come into force on Jan. 1.

Lawyers say this can present clients with opportunities in some TPP countries such as Japan, but it could have other consequences for clients who do business with Mexico.

Jessica Horwitz, an associate at Bennett Jones LLP in Toronto, says free trade agreements are advantageous for the Canadian economy.

She says the federal government’s focus on trade diversification has reminded Canadians about the importance of access granted through agreements such as the trade agreement with the European Union, CPTPP and the new Canada-United States–Mexico Agreement to replace NAFTA.

“For trade lawyers, increased trade means increased exposure to companies of the compliance obligations that come along with the international trade,” says Horwitz.

“If you’re claiming tariff preferences, that you’re meeting the required rules of origin, that you’re meeting the required documentation and record-keeping requirements to claim that status.”

Horwitz says the effect of the shortened year-one phase-out in the CPTPP means that companies will have access to the tariff lines that are still restricted essentially a year earlier than they might have otherwise.

“The CPTPP is quite a complex agreement when it comes to the specific tariff elimination, because each country has its own schedule, and each schedule is basically item by item,” says Horwitz.

“It all depends on the political sensitivity of those sectors to a particular country.”

Daniel Hohnstein, a partner at Tereposky & DeRose LLP in Ottawa, says that while the tariff phase-outs may be on a calendar year basis, the phase-outs for tariff rate quotas can vary from country to country.

“For example, Japan’s TRQs will be administered on a year ending March 31 and beginning on April 1,” says Hohnstein.

“The same benefit that we see with respect to quick turnaround on the first couple of years on tariff elimination won’t necessarily extend to TRQ market access.”

Hohnstein says that because Canada already has tariff levels that are lower than the World Trade Organization rates and other CPTPP members, the benefits of tariff elimination tend to favour Canadian exporters.

Hohnstein adds that until the U.S. returns to the CPTPP, the TRQs in Japan for certain goods provide Canadian producers with a competitive advantage over the U.S., particularly around agriculture products.

“It doesn’t mean that Japan will stop trading with the United States, but it does mean that Canadian producers now have a competitive advantage in terms of growing their market share and establishing new lines of supply,” says Hohnstein.

Horwitz notes that the CPTPP tariff elimination isn’t universally a good thing for Canadians who have been doing business in Mexico, because it means the erosion of the Canadian tariff preference in that country.

“Canadian exporters in Mexico, whose goods were duty-free under NAFTA, now will be subject to heightened competition from substitute goods from CPTPP parties that are receiving tariff reductions from Mexico under the agreement,” says Horwitz.

“From that perspective, the accelerated tariff reduction means there’s no buffer period to adjust to the increased competition.”

Horwitz adds that Canadian businesses may still have an advantage in Mexico owing to the longer-standing relationships they’ve developed, but she says that it will erode over time as other competitors break into the market.

Given the overlap between the CPTPP and CUSMA for Canadian exporters to Mexico, Horwitz adds that lawyers will be able to help clients assess which agreement’s rules they want to go under, depending on what kind of business they’re doing.

While most tariffs have already been eliminated, the CPTPP offers some advantages that NAFTA doesn’t, given that the rules of origin are more flexible under the CPTPP, says Horwitz.

“NAFTA is based on a tariff-shift principle, which is a little difficult to meet because it requires that there’s a shift from a particular tariff heading to another heading, and often what that means is that mere assembly of a good is not sufficient to make that shift,” says Horwitz.

“Under the CPTPP, most tariff lines have a choice, so you can choose to either achieve origin by tariff shift or regional value content,” says Horwitz.

She adds that what’s unique to the CPTPP is that it provides a number of flexible accounting methodologies to calculate the regional value, including a new methodology called the focused value method.

When it comes to services, such as government procurement, Canada will lose access to procurement markets for services in the U.S. and Mexico under CUSMA, but there is a procurement chapter in the CPTPP that covers Canada’s entry into Mexico, says Horwitz. Similarly, CUSMA did away with the investor-state dispute resolution mechanism, but a robust arbitration system does still exist under the CPTPP with respect to Mexico, she adds.

Clifford Sosnow, a partner and co-chairman of the international trade and investment group at Fasken LLP in Ottawa, says that for clients who are interested in procurement rules, clients will have three different sets of rules — the World Trade Organization rules governing procurement between Canada and the United States, CUSMA between the United States and Mexico and the CPTPP between Canada and Mexico.

“Understanding what can be a challenge, what can be potentially discriminatory, what can be accessed without worrying about discrimination is going to be a call to the lawyers to ask which agreement applies, what do I need to be concerned about and can I bid on this project?” says Sosnow.

“It’s a question of understanding the different layers of rules that apply.”

Sosnow says that, whereas the CPTPP works to integrate the economies, CUSMA works in some ways to separate the economies with different sets of rules for energy, procurement, investment and things such as national security tariffs.

“The big problem for Canada and Mexico is that the United States is not part of the CPTPP, so if you’re a Canadian business, you’re trying to figure out which market makes the most sense, and as a lawyer, one of the best things you can do for your clients when they come knocking is [to say] these are the rules that apply, these are the protections you have and these are your opportunities under the various agreements,” says Sosnow.

He adds that, for in-house counsel, it’s especially important to understand what the advantages are.

Robert Glasgow, an associate at McCarthy Tétrault LLP in Toronto, says the two categories most affecting Canadian businesses are vessels and passenger vehicles.

“This is different from the European trade agreement, which has an equal ramp-down,” says Glasgow.

He says lawyers need to pay attention to the subtle variations in the treaties when it comes to procurement rules.

“You can find quirks in the coverage schedules for what entities are covered or what goods and  services are covered that you get protected under one trade agreement but not another,” says Glasgow. “You’re very well served to rigorously go through each to ensure that you’re fully protected.”

Hohnstein says lawyers won’t see much synergy between the CPTPP and CUSMA for the first few years as the new agreements enter into force.

“One thing that lawyers will be analyzing is whether there are synergies for products that contain Canadian and Mexican materials under both the NAFTA and the CPTPP,” says Hohnstein.

“To the extent that materials or products could be originating under both NAFTA and the CPTPP, there may be new supply chain opportunities and new investment opportunities coming from other CPTPP members.”

Hohnstein says lawyers will need to look at the products, the applicable product-specific rules of origin, where the inputs come from and where the client is looking to send the product.

“Different tariffs or specific rules might apply to that particular product, depending on the market to which it’s being sold,” says Hohnstein.

“Lawyers assisting their clients who are manufacturers and exporters will be carefully looking at that analysis in terms of new exporting opportunities but also looking at what synergies might exist under Canada’s other regional trade agreements that can be leveraged.”

Clients looking to sell to both the United States and TPP countries need to look at what is the most rigorous standard, says Glasgow.

“You’re best served by remembering to find the strictest rule and live with it,” he says. “When you’re trying to help your clients, you have to factor in compliance costs, monitoring and auditing to ensure that you’re shipping the requisite products to the requisite jurisdictions.”


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