On October 5, 2015, the Canadian government agreed to the historic Trans-Pacific Partnership Agreement. Billed by trade and cross border specialists as a “deal of a generation”, this new free trade agreement will significantly expand the potential importing and exporting partners and opportunities for many Canadian businesses – both large and small.

Here’s a primer on free trade and the TPP, and the five key sectors the TPP will affect and the import/export opportunities it opens for them.

FREE TRADE

In today’s economy, businesses, both big and small, can – and arguably must – take advantage of global export and import opportunities. But this can be a complex journey. One of the most crucial decisions in the export/import journey is selecting the country to target for export or from which to import. Free trade agreements reduce trade barriers and increases global opportunities, giving access to imported materials at a lower cost and to higher margins on exported goods and services – and this is critically important to Canadian businesses, since Canada’s international trade makes up more than 2/3 of its GDP. It’s also crucially important to the Atlantic region, where provincial leaders and businesses strongly encourage exporting; for example, in 2014, NS exported over $1B worth of goods to other nations; NB continues to be Canada’s most trade-active province.

So choosing a country with which Canada has a free trade agreement can be very beneficial. To read more about the benefits of choosing a country with which Canada has a free-trade agreement, read McInnes Cooper’s: The Export/Import Journey – 3 Key Ways Choosing A Free Trade Agreement Country Can Simplify The Trip.

And the options just got a whole lot broader in terms of both countries and goods.

TPP PRIMER

After years of negotiations, the Trans-Pacific Partnership Agreement (TPP) will be one of the world’s most comprehensive trade agreements. There have been several contentious aspects to the TPP, including the overall secrecy of the negotiations and more recently the negative impact on Canada’s dairy and auto sectors, but TPP proponents argue concessions have to be made for the better of each partner’s economy as a whole.

Partners. The TPP applies to 40% of the global economy. The current trade partners are Canada, Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the US (some argue the US is using the TPP to isolate China, but it’s possible that other Asian-Pacific countries such as China and India will join the deal in the future). The TPP is also a plurilateral agreement: it’s designed to allow partners to make sub-agreements if desired.

Trade Issues. The TPP is designed to be exhaustive in terms of addressing trade issues. Initially, it was framed around these five features:

1)     Comprehensive market access.

2)     Fully regional agreement.

3)     Cross-cutting trade issues (including regulatory coherence, competitiveness and business facilitation, small and medium sized enterprises), and development.

4)     New trade challenges.

5)     Living agreement.

NAFTA Effect. When the TPP comes into force, NAFTA will still be in effect – but of little practical impact. Since the TPP includes the same (and more) parties, and subsumes the same (and more) subject-matter, it will essentially trump NAFTA.

Effective Date. Though the TPP has been finalized, each partner country must still ratify it – no small feat, particularly south of the border – before it comes into effect. So businesses should have time to ramp up to take full advantage of the TPP’s opportunities, and be ready to hit the ground running when it kicks in.

Full Agreement. Read the full scope of the TPP in this Foreign Affairs, Trade and Development Canada’s Technical Summary.

 5 KEY SECTORS AFFECTED

Here are the five key sectors the TPP affects, the negotiated terms of the TPP in relation to each and the import/export opportunities it opens for them:

1. Agriculture & Dairy Industry. Canada is the world’s 5th largest food exporter, and one of the few nations that produces more food than it consumes. The agriculture industry has been largely supportive of TPP because Canada will gain access to more markets, and specifically to emerging countries and Japan. However, one of Canada’s key negotiating issues was market access for dairy. Canada has one of the world’s most restrictive agricultural trade barriers, and the US pushed for Canada to open up its dairy sector.Under the TPP, Canada will provide TPP partners with tariff-free access to 3.25% and 2.1% of its dairy and chicken markets, respectively. The supply management system for the poultry and dairy industry will remain intact, but the Canadian government will compensate farmers for losses from the deal at a rate of $4.3B over the next 15 years to keep them “financially whole” for the concessions on supply managed dairy and poultry sectors that will permit more duty-free imports of products from TPP countries. Canada will also assist farmers in the opened market by implementing a quota system over the next five years.
2. Manufacturing & Auto Industry. The auto, steel and plastic sectors expressed concern that the TPP could weaken existing rules requiring regional value content (or “rules of origin”) NAFTA imposed. Particularly in the auto sector, the US and Japan sought aggressive changes that will impact Canada and Mexico. Currently the regional value content for cars, light trucks, engines and transmissions to qualify under NAFTA is 62.5%, and 60% for other auto parts.The TPP imposes a 45% regional value content threshold for “core” and “priority” auto parts, and a 40% threshold on all other parts to achieve tariff-free access.The TPP’s long-term benefit for the manufacturing industry isn’t yet clear, the TPP should increase access to cheaper inputs that could lower the price to end goods. Manufacturers should begin to proactively consider how access to cheaper import inputs (i.e., determine the parts and pieces needed from outside of Canada that can be used to manufacture goods in Canada) could reduce production costs. For example, in NS, rubber is a key export; the TPP should increase access to cheaper inputs that could lower the price of end goods – like tires.
3. Drug & Pharmaceutical. This sector’s biggest concerns are measures and procedures to endorse intellectual property (IP) rights. The drug and pharmaceutical industry wants greater protection of IP rights while also encouraging competition, particularly in the context of, for example, generic pharmaceuticals.The TPP’s terms on this front haven’t been publicly released; in fact, last minute negotiation over biogenics and pharmaceuticals actually delayed the final release agreement.
4. Financial Services. There are conflicting trends in financial services and the global economy at hand. On one hand, increased regulation resulted from the 2008 financial crisis.  Although Canada fared relatively well in that crisis, a move more toward a principle-based system like the UK’s (FSA) has been considered; ultimately some degree of financial regulation is required to ensure stability. On the other hand, free trade is generally intended to deregulate, create consistencies, and increase accessibility.The TPP’s focus in this sector will be on regulating cross-border finance, and the TPP attempts to achieve increased consistency and accessibility of foreign finance markets. The TPP’s terms vary depending on the specific service – but the TPP’s full scope in this sector hasn’t yet been publicly released.
5. SMEs. The TPP attempts to reduce obstacles for SMEs that don’t traditionally have the resources or economies of scale to take advantage of trade agreements. While the TPP might create some short-term uncertainty for SMEs, it also increases long-term opportunities particularly for importing goods and services. The TPP should make importing more cost effective – a new opportunity, since importing has long been considered more expensive than exporting and a less attractive option when the Canadian dollar is low.  But the TPP won’t eliminate the know-how SMEs require to comply with the Canada Border Service Agency’s (CBSA) import regulations. Importing is generally more complicated and expensive than exporting. Any business should determine if there’s an import opportunity, then consider if it’s allocated sufficient human resource to importing goods or services. If not, the business should consider consulting with custom brokers to better understand the import process or allocate the resources necessary to devote personnel to trade.

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Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Cross-Border Team to discuss this topic or any other legal issue.

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McInnes Cooper has prepared this document for information only; it is not intended to be legal advice.  You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

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