Last week, I posted a short article on three pro-TPP arguments that often get buried under the anti-TPP hype. In this, I talked of the need to neaten the so-called “spaghetti bowl” of the international trade system; Since so many TPP prospects are already in active FTAs with each other, a Trans-Pacific partnership could fuse these pre-existing FTAs together into one coherent set of rules. So just how “tangled” is trade between the potential TPP signatories and why should this matter to American businesses?
The above chart shows how the status quo of TPP member-trade is structured via pre-existing FTAs. What looks like a perpetual entanglement of cable wires to us looks equally as daunting to American exporters. What tariff applies where? And how can opportunities for profit be calculated when the transaction costs of trade are more-or-less up in the air?
If the dizzying array of different tariff rates weren’t bad enough, rules of origin turn the problem into a nightmare of even larger proportions. Rules of origin establish what percentage of an export needs to be made of content from the exporting country in order to qualify for reduced tariff rates. In other words, rules of origin determine where a product “comes from”.
With the proliferation of global supply chains, the crisscrossing of intermediate goods has made calculating what tariffs apply where a considerably difficult task. But factor in that rules of origin are different for each product and each FTA, and determining the “origin” of one’s goods soon becomes a mathematical feat of mammoth proportions.
The confusion that varying tariffs and rules create are not just an inconvenience, they are a discouragement for American industries to sell abroad, especially for those smaller businesses.
Derek Scissors, a senior research fellow at The Heritage Foundation, writes:
“The U.S. and other TPP members have multiple trade agreements with multiple outside parties, often featuring complex rules themselves—“noodles” that are hard to separate. If the TPP’s rules of origin are also complex, it will be difficult for firms and individuals to determine how to take advantage of the TPP liberalization without risking penalty. Many economic actors could proceed without regard to the TPP, neutralizing its impact.”
To be clear then, TPP is an opportunity for a more coherent trade network, but it doesn’t guarantee it. Surely, the special interest groups of every TPP member will be fighting to manipulate the new rules of origin in their favor. But the window of opportunity is nevertheless there to make engaging in trade a less overwhelming task for the American businessman. Rules and tariffs therefore need to be converged to be as simple as possible. Only by doing this can the “spaghetti bowl” of the Pacific become untangled.
Brendan Connell is a Research Assistant & Intern at the American Security Project covering American competitiveness and issues in trade.
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