CPTPP - What’s in it for SEA's SMEs and eCommerce? (Part 2)

Benedict Leong

 

Flags of the 11 countries party to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership as of 19th May 2019

Disclaimer – this represents the opinion of the writer and in no way constitutes legal advice when it comes to free trade agreements or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. If you’d like to get more detailed information on this, please contact your local chambers of commerce or organisations like Enterprise Singapore, Vietrade for more information.
 

In part 1, we covered that the CPTPP opens more doors for SMEs and eCommerce merchants to buy and sell with other countries without needing to pay hefty tariffs. The CPTPP also has some provisions aimed specifically at SMEs as well, but how useful are these for SMEs?

Here, we’ll examine the following CPTPP points to see how they could likely benefit SMEs and eCommerce merchants:

  • Product Specific Rules of Origin
  • Easier Certificate of Origin Rules
  • Advance RulingsFacilitative
  • Framework for the Digital Economy
  • Encouraging CPTPP Use by SMEs

One of the main benefits of the CPTPP is providing more access to the markets and supply chains of the 11 CPTPP member countries. SMEs in different member countries can now create partnerships with other companies to source and sell goods amongst CPTPP member countries.

Here, we’ll explore how two Southeast Asian SMEs, a hypothetical Singaporean online fashion store and a Vietnamese clothing manufacturer, could make use the CPTPP’s benefits. In essence, we’ll be looking at the benefits that Southeast Asian SMEs can receive in a similar vein to this article.

Vietnam is a strong exporter in Southeast Asia. With exports in the US$ 220 billion range, Vietnam is the 21st biggest exporter in the world according to the Observatory of Economic Complexity by the MIT Media Lab. Its biggest exports include phones, textiles, computers and electronic goods, footwear and machinery, with textile exports reaching more than US$ 36 billion by 2018. The Vietnamese government expects the CPTPP to add 1.3 %to its economy as well.

Both of these Singaporean and Vietnamese SMEs are aware of the lower tariffs they can enjoy lower tariff access to markets such as Canada and Mexico via the CPTPP. In Canada for instance, base tariff rates for certain imported clothing tariff lines can be around 17 – 18% of the product’s value if preferential rates aren’t applied. Under the CPTPP, Canada will progressively reduce tariffs for goods imported from CPTPP countries and eventually eliminate these tariffs by the fourth year of the CPTPP’s transition period.

To make use of the cheaper tariffs, the two SMEs decide to develop and sell a new line of wool jackets in Canada. But first, they’ll need to meet the rules of origins requirements.

Product Specific Rules of Origin

For SMEs who want to make use of an FTA’s preferential tariffs, those who export and import large quantities of products must meet the rules of origin of the free trade agreement they’re participating in.

Rules of origin are the criteria used to determine the ‘nationality’ of a product. These rules are usually in place to encourage more trade among member countries of a free trade agreement while limiting the usage of materials or products from non-member countries.

As we previously covered in part 1, the CPTPP’s regional cumulation means that all CPTPP-sourced materials are treated the same as locally sourced material. If it meets these criteria, the product is known as an ‘originating good’ and can qualify for preferential tariff rates. This doesn’t mean that all the materials need to be from CPTPP sourced countries to count as originating goods, however.

One important counterpart to part 1’s Regional Cumulation section is the existence of CPTPP’s Product Specific Rules of origin. This ruling allows CPTPP-manufactured certain types of products to use some amounts of non-originating materials (non-CPTPP sourced material) while still counting as originating goods if it satisfies certain conditions, depending on the type of good.

There are currently three main Product Specific Rules that are applicable to the CPTPP – the Change in Tariff Classification (CTC) method, Regional Value Content (RVC) method, and the chemical rules requirement. For this article, we’ll just be exploring the Change in Tariff Classification product-specific rule.

How the Change in Tariff Classification Product Specific Rules of Origin Works

To illustrate this, here’s an example by the Australian Government Department of Home Affairs.

Each type of good has a tariff classification or Harmonised Commodity Description and Coding System, which functions like a ‘bar code’. These are a set of numbers that helps customs officials identify what’s being transported without needing to physically open the package or container.

For a wrist watch made in Singapore, a CPTPP member, that uses batteries from a non-CPTPP member like China, the non-originating components must not have the same ‘bar code’ as the wrist watch.

Depending on the type of good, how specifically the ‘bar code’ needs to change will vary. The full product specific rules of origin for different types of goods can be found for textiles and other goods in the CPTPP’s legal text.

Here’s an infographic that helps show how these ‘bar codes’ work:

Breakdown of how Harmonised Commodity Description and Coding System (HS) or Tariff Classification chapter, headings and subheaders work

In this wrist watch example, the tariff classification 9101 consists of tariff classification chapter 91 (clocks and watches) and a subgrouping of 01 (wrist watches, pocket-watches and other watches; with case of precious metal or of metal clad with precious metal).

Batteries that can be used in the wrist watch have a tariff classification chapter of 85 and a subgrouping of 06.

For wrist watches using material not originating from CPTPP member countries, its non-originating components must not have tariff chapter of 91. These types of rules vary with the type of product. The original text for wrist watches is below:

The Product Specific Rules of origin of heading 9101 is: “A change to a good of subheading 9101.11 through 9101.29 from any other chapter”

In this case, wrist watches of tariff classification heading 9101 are made in a CPTPP member country, in this case Singapore from moving parts and leather watch straps from other CPTPP countries, but the batteries are from a non-CPTPP country, China, with a tariff classification heading 8506.

Since the non-originating batteries’ tariff chapter isn’t 91, the Singapore-manufactured wrist watch meets the requirement. Therefore, the wrist watch counts as a CPTPP originating good and qualifies for preferential tariffs.

What Product Specific Rules Mean for SMEs

These rules allow SMEs some leeway in using small quantities of non-CPTPP sourced materials in their product’s manufacture. SMEs need to pay attention to the different rules for different products set out in the legal text, however.

These product specific rules are in place to limit the use of different types of material from non-member countries and increase inter-member sourcing. For instance, the agreement would like to encourage more use of CPTPP-sourced raw materials for textiles and clothing instead of depending on resources from China.

Unfortunately for our Singaporean and Vietnamese SMEs in this case, the change in tariff classification Product Specific Rules for their type of clothing is stricter, demonstrating this effect. Fabrics need to be both formed and finished from yarn that is made in one of the CPTPP member countries, which means the Vietnamese SME is prevented from using fabrics and yarn imported from China to meet the rules of origin requirements.

To work around this, they turn to other CPTPP countries. They opt to use wool from New Zealand, another CPTPP member, which would meet the yarn and fabric rules of origin while sourcing additional inputs from Vietnam itself. This way, the wool jackets would qualify as an originating good and would be eligible for preferential tariffs.

Depending on what other SMEs are manufacturing or selling, SMEs in Southeast Asian CPTPP member countries may not necessarily face this hurdle in getting preferential tariff rates. Depending on the type of product, a change in tariff code from the material to the manufactured product would be sufficient to count the product as an originating good, like in the Singaporean wrist watch example.

For certain types of products where the tariff classifications don’t change in the course of manufacturing, a product could still qualify as an originating good if a certain percentage of the materials the good is made CPTPP-sourced.

The above doesn’t apply to all products however. Cases where these ruling applies are shown in the product specific rules section of the legal text; links provided below. To meet this requirement SMEs, including those who sell products online, could add more CPTPP-sourced materials to their supply chain.

These rules all vary depending on the types of products being manufactured so SMEs might want to see if their products are eligible for lower tariffs. In case you want to see the product specific rules of origin for different types of goods, here are the links for textiles and other goods from the CPTPP’s legal text.

Easier Certification of Origin

The CPTPP’s rules allow for self-certification which means that importers or exporters like our NZ wool supplier and the Vietnamese clothing manufacturer, no longer need a document called a certificate of origin.

Usually, certificates of origin are issued by local chambers of commerce or government of an exporting country to verify that a product originates from that country. For example, if Vietnamese exporters of the wool jackets made in Vietnam want to use a non-CPTPP free trade agreement, they would need to get certification of origin from Vietnam’s Ministry of Industry and Trade or other authorised organisations like the Vietnam Chamber of Industry and Commerce.

While certificates of origin are usually procured by exporters, self-certification now allows this to be done by importers under CPTPP rules, provided they have sufficient documentation of the manufacturing process and costs involved of the products they are importing. In this case, the Vietnamese clothing manufacturer can self-certify the imports of NZ wool to more easily get preferential tariffs on them.

Under the CPTPP, the self-certification for multiple shipments of the certified goods can last for 12 months, although record keeping purposes require the documents to be kept for longer. For more information on self-certification, you can check out Singapore Customs circular here.

On the other hand, some SMEs in CPTPP countries may not even need certificates of origin to gain CPTPP preferential tariffs. Under CPTPP’s Article 3.23, the CO requirement is waivered if:

A) the customs value of the importation does not exceed US$1000 or the equivalent amount in the importing Party’s currency or any higher amount as the importing Party may establish; or

B) It is a good for which the importing Party has waived the requirement or does not require the importer to present a certificate of origin.

This is encouraging news as smaller businesses who may not ship high valued shipments would be able to use these provisions to more easily gain preferential tariff rates when selling to other CPTPP countries. In the case of the wool jackets manufactured in Vietnam, our SMEs won’t need to self-certify their products until one of their export shipments to Canada exceeds US$ 1000.

The simplified paperwork also means that cross-border trade and cross- border eCommerce becomes more efficient and less complex.

Advance Ruling or Pre-clearance

In addition to self-certification, another point that should be added to the earlier benefits list is advance rulings, or pre-clearance. Advance rulings allow the Singapore online fashion store to get customs officials, in this case Canadian customs officials, to ensure the Vietnamese wool jackets are classified as such and not as a different product. This ruling will last for up to three years.

What this means is that their wool jackets imported into Canada will enjoy preferential tariff rates for wool clothing with a decreased chance of being classified as another product and charged higher tariff rates. The decreased chances of it getting classified wrongly also reduces the chances of these shipments getting trapped in customs. The advance rulings also help to speed up customs proceedings since a decision to allow those products to enter the country was made prior to the goods arriving at the border.

In our example, this can be used by the Vietnamese clothing manufacturer with regard to the New Zealand wool imports and the Singaporean online fashion store owner can use this for exports of the wool jackets to Canada.

To apply for advance rulings, they would need to write to the relevant customs authorities they are importing the goods into. For the Singapore online fashion store, that will be Canadian customs authorities while the Vietnamese clothing manufacturer will have to contact Vietnamese customs authorities.

Usually, the following kinds of information would be requested but the overall requirements could differ from one country to another:

  • Tariff classification
  • Detailed description of goods and the materials used to make it
  • Information on the manufacturer and the manufacturing process
  • Whether a good is ‘originating’
  • And more

The relevant customs authorities will follow up on the request in writing. This process could take a few months but the few years’ of benefits will make this process worth it.

As an example of how you can apply for an advance ruling, here’s Canada’s advance rulings page.

Facilitative Framework for the Digital Economy

The CPTPP has a chapter aimed at setting out common rules to facilitate cross-border eCommerce between member countries. The aim of this section is to reduce barriers to eCommerce usage without compromising consumer and personal information protection.

While most of the provisions are largely aimed at digital products such as streamed movies, digital games, and music, these are still some aspects that are relevant for eCommerce businesses selling physical goods.

Freer Cross-border Data Flows and Removal of Data Localisation Requirements

In today’s day and age, many companies thrive on making use of the free-flow of data across borders to drive sales, engagement and to make strategic decisions.

To ensure the free-flow of data goes unhindered, “The CPTPP sets out rules on eCommerce to ensure CPTPP members do not unnecessarily impede cross-border data flows, or impose localisation requirements that force businesses to place data servers in individual markets as a condition for serving consumers in that market.” the Singapore Ministry of Trade and Industry says.

This means that companies in CPTPP countries have fewer barriers in using personal data in the course of providing their services or products. For example, a Singaporean online fashion store who needs to collect personal data like names and addresses of international customers wouldn’t need to jump through hoops like setting up local servers in multiple target CPTPP countries to do so.

In addition to that, the CPTPP prohibits countries from charging tariffs on electronic transactions, although that doesn’t stop internal taxes, fees or other internal charges within the member country itself.

Encouraging SMEs to use the CPTPP

SMEs, including those who make use of eCommerce, are known to be significant contributors of jobs and economic growth to most countries, with Southeast Asian CPTPP members Singapore and Vietnam being no exception. However, unlike our hypothetical SMEs, many other SMEs don’t seem to be making use of FTAs.

Research by the Economic Research Institute for ASEAN and East Asia reveals that SMEs believe insufficient information is available regarding the benefits of FTAs and the procedures to make use of them. Business leaders in Singapore also mention that many SMEs are unclear about the treaty’s benefits.

In an effort to bring more SMEs onboard, the CPTPP has a chapter of provisions to try and fix this problem (chapter 24). According to ACCA Global, this is the first time this has happened in a free trade agreement. In summary, the chapter mentions the following:

CPTPP members will make the full text on the agreement publicly available while providing a summary of the agreement’s main points – 

The economies that ratified the CPTPP have pledged to work together to support SMEs. Officials will meet regularly to review how well the CPTPP is serving SMEs:

  • Consider ways SMEs can make use of the CPTPP
  • Enhance participation of SMEs in regional supply chains
  • Develop and promote seminars, workshops or other activities to inform SMEs of the benefits available to them under this agreement
  • Facilitate the development of programmes to assist SMEs to participate and integrate effectively into the global supply chain
  • Share best practices and explore capacity building opportunities like export counselling, assistance and training programmes for SMEs
  • Etc.

You can find the full text of this Chapter here.

One could argue that local governments would like to encourage the participation of as many local enterprises in free trade agreements as possible. But on the other hand, many acknowledge that FTA usage by SMEs could always be better. By having this chapter in the CPTPP’s legal text, member countries are at least committed to try and increase SME participation in FTAs instead of leaving the CPTPP’s benefits limited to mostly government-linked companies and medium-large enterprises.

CPTPP members have been working to educate their local SMEs on the agreement’s benefits, addressing the knowledge gap that keeps them from participating in it. In Singapore for instance, CPTPP Outreach seminars are being conducted while the Vietnamese government has been holding conferences highlighting how local enterprises can make use of the CPTPP.

Agencies and government bodies like Enterprise Singapore and Vietrade have also been working to improve their local SMEs, including encouraging their usage of FTAs like the CPTPP. Consultation sessions, making information and tips publicly available online and hosting events are among some of the ways these bodies reach out to local businesses.

Hopefully, if all goes well the CPTPP might mark the beginning of increased free trade agreement usage by SMEs in Southeast Asia.

Companies in SEA’s CPTPP members like Singapore and Vietnam would be able to work with the following agencies to get a head-start:

Apart from working with these government bodies, SMEs and eCommerce businesses looking to make use of FTAs like the CPTPP have other ways of doing so. These include ‘hunting in packs’ with larger companies who are from non-competing industries. The larger companies could take the lead in paving ways to newer CPTPP markets together with SMEs, even more so if these larger companies are given incentives to do this by local governments as suggested at an Institute of Singapore Chartered Accountants pre-budget roundtable in 2019.

On the other hand, Southeast Asian SMEs can even focus on finding local partners in their target CPTPP country to gain headway in their market while making use of the preferential tariffs.

So what does it all mean for SEA’s SMEs and eCommerce merchants in the end?

SMEs and eCommerce merchants in Singapore and Vietnam can look forward to having wider access to newer markets with lower tariffs and supply chain options if they take part in the CPTPP. The eCommerce rulings can help to reduce barriers to entry for some tech-based SMEs, which can help them expand quickly to other member countries. To try and encourage more SME participation, member countries are committed to educating SMEs on how to make use of the CPTPP.

There’s potential for more SEA merchants beyond Singapore and Vietnam who could benefit. Southeast Asian countries like Brunei and Malaysia are still in the process of ratifying the CPTPP. Countries like Indonesia have also expressed interest in joining the agreement in the future.

The CPTPP seems to have quite a number of things going for SMEs and eCommerce merchants, in particular the commitment to helping SMEs overcome free trade agreement knowledge barriers. If all of these go well, it might mark the start of more inclusive free trade agreements where their benefits aren’t only limited to medium-large enterprises or government-linked companies.

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