“We have yet to come up with a solution to this issue,” says a source close to the TPP-11 negotiations. Participating nations hope to reach a broad agreement on this multilateral trade agreement by this autumn. A major point of contention has surfaced, however, concerning rules for eliminating tariffs on apparel products. Vietnam, chair of the ministerial conference, has expressed opposition to the stringent rules the U.S. put in place in exchange for opening up its markets. This dispute could lead to a demand for partial amendments to the pact, and that is of great concern to the negotiators.
The contested provision involves what is called the rules of origin, which govern which textiles will qualify for the trade agreement’s duty-free status. In free trade agreements among Asian nations, including Japan, garments made through a two-step manufacturing process of cutting and sewing domestically produced fabric are eligible for tariff removal. However, the U.S. pushed for more stringent rules of origin in the TPP in an effort to protect its domestic textile industry. These rules are known as “yarn forward” and require a three-step process. In essence, “yarn forward” would require that only fabric produced from yarn made by a TPP country would qualify for duty-free status under the trade agreement.
According to negotiators, Vietnam requested a review of these rules at the TPP conference held in Australia in late August. Vietnam has limited production capacity and largely depends on sourcing yarn and fabric from partners like China, so it would not be able to enjoy the tariff-free status under current provisions.
The eleven remaining signatories’ chief negotiators will hold a conference later this month in Tokyo with the goal of concluding a broad agreement before the ministerial meeting in November. Certain disputed topics, such as intellectual property rules, will be “frozen” out of the new pact in order to eliminate obstacles. Rules of origin cannot be excluded, however. As one negotiator explains, “They cannot be frozen out because without them, the tariff elimination system for textiles will not function.” This creates the need to amend the original agreement.
While it may be possible to expand the list of exceptions that allow yarn sourced from non-TPP countries, like camel wool, things could easily get out of control if signatory states started demanding various amendments. Also, cotton producers in Latin America, including Mexico and Peru, could oppose the removal of the yarn forward rule to protect their own textile industries.
While Japan and Australia are seeking ways to address this issue without freezing out the topic or amending the agreement, it is highly likely that the matter will need to be resolved at the ministerial level.
Textiles are not the only challenge. New Zealand, which founded the TPP and led negotiation efforts, has a general election coming up on Sept. 23. The anti-TPP Labor Party has continued to surge in popularity and has caught up to the ruling National Party. Should there be a regime change that caused TPP negotiations to stall or another signatory to drop out, it would be a devastating blow to the overall momentum.
Mexico and Canada are in the middle of renegotiating NAFTA. Canada would prefer to keep its TPP import ceiling low as the U.S. may push Canada to lift its import ceiling for dairy products.
Chile and Peru have been working to expand the Pacific Alliance, which is made up of four Latin American nations, to diversify their trading horizons.
With only nine more weeks until the November TPP conference, Japan’s ability to bring alignment to the negotiations will be tested.