CPTPP - What does it mean for SEA's SMEs and eCommerce?
The CPTPP mentions SMEs as a key focus, but how can SMEs actually benefit from this? Find out about Regional Cumulation and CPTPP's history.
May 21, 2019
This article is the first of a two-part series exploring the CPTPP's impact on SMEs and eCommerce. You can find part 2 here.
The CPTPP has been heralded as a breath of fresh air for proponents of free trade. Officially implemented and ratified in seven countries in the world, it runs counter to the seeming trend of protectionism seen this past few years. The Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP) originally had a rocky start, however.
Originally called the Trans-Pacific Partnership, it seemed doomed to fail when President Trump pulled out of the agreement at the beginning of his tenure as US president. It was then revived by its remaining 11 members, led by Japan and New Zealand, as the CPTPP.
Worth noting in this agreement is that there are provisions aimed at encouraging SME (small and medium-sized enterprises) involvement in the free trade agreement as well as specific provisions pertaining to eCommerce. But what exactly is involved in this free trade agreement, and how exactly are small and medium enterprises (SMEs) and eCommerce merchants involved in all of this?
The CPTPP1 is a large regional trade agreement between 11 countries from both sides of the Pacific, with seven of them having ratified the agreement and 4 more planning to ratify the agreement sometime in the future. The trade deal is informally referred to as the TPP - 11, covers around 14% of the global economy and a market of around 500 million people.
Free trade agreements aim to encourage investment and trade in goods and services between ratifying member countries by reducing barriers to trade. These include lowering or eliminating tariffs and other removing non-tariff barriers like quotas and complicated customs procedures.
The CPTPP is expected to reduce tariffs on an estimated 95 per cent2 of goods and services traded between the member countries, which includes plenty of commodities and even finished goods like apparel, footwear and electronics.
This free trade agreement also has provisions aimed at making customs procedures less complicated and even has provisions aimed at encouraging more cross-border e-commerce trade between member countries, good news for member countries’ SMEs.
The CPTPP has entered into force for Australia, Canada, Singapore, New Zealand, Mexico, Japan and Vietnam, which means there are already tariff reductions on goods traded between them. More reductions are planned in the future and can be found on the CPTPP’s tariff schedules3.
The other four CPTPP countries, namely Malaysia, Brunei, Chile and Peru as of the time of this writing are keen on joining but haven’t ratified the agreement yet.
This regional free trade agreement could potentially become even bigger. CPTPP members have expressed interest in having other countries join the agreement. So far, countries interested in joining the free trade agreement4include Colombia, Indonesia, South Korea, Thailand and the United Kingdom.
The CPTPP differs from the TPP in a couple of ways4. Apart from the absence of the USA from the agreement, a number of provisions that were divisive among TPP members have been suspended. These include intellectual property provisions, labour and environmental rules and also provisions on investor-state dispute settlement.
Notably, these are suspensions and not removals, which means that there is room for the USA to re-enter the pact in the future. If you’d like to see the full break down of the differences between the CPTPP and the original TPP, you can find it on sites like New Zealand’s Foreign Affairs and Trade webpage5.
How does the CPTPP help SMEs and E-commerce?
SMEs are known to be significant contributors of jobs and economic growth to most countries, with Southeast Asian CPTPP members Singapore6 and Vietnam7 being no exceptions. SMEs who make use of the CPTPP will stand to gain benefits in the following areas:
Reduced Tariffs, Reduced Costs
When it comes to Southeast Asian countries, the CPTPP helps to widen the number of countries and product types that a nation’s businesses, including SMEs, can trade with more easily. Singapore, for instance, now has two new trading partners it originally had no trade agreement with, namely Canada and Mexico. Vietnam, on the other hand, is happy to trade with Canada, but also really happy that tariffs on its primary exports: agriculture, aquatic, electric and electronic products will be reduced in key markets like Japan8.
According to reports by the Straits times9 and Reuters10, countries that have ratified the agreement have already cut tariffs by an estimated 90 per cent on goods traded between them. The rest of the tariff changes are being implemented over a longer period following the CPTPP tariff schedules mentioned earlier. These lower tariffs and duties make importing and exporting from CPTPP member countries much cheaper, and also widens the trade networks of member countries.
What this means is that SMEs and eCommerce merchants who sell B2C products have the ability to source potentially cheaper or higher quality finished products or materials from any of the 11 countries at much cheaper tariff rates. Some examples like footwear and apparel face lower tariffs11 when CPTPP comes into force for trade between CPTPP members.
Another effect of reduced tariffs is that cross-border online shoppers could be charged less customs duties for their purchases. Some people balk when they see high customs duties added on top of their purchase prices. With these tariff reductions in place, e-commerce merchants who are able to comply with the CPTPP would likely see improvements in international online sales.
For example, an online store in Singapore that sells products like shoes and apparel from countries like Vietnam and Australia to their domestic under the existing ASEAN Australia New Zealand Free Trade Area (AANZFTA12) are now able to sell to newer markets like Mexico and Canada without paying hefty customs duties and import taxes.
You can also find the inpidual country tariff schedules on CPTPP’s legal text online like AANZFTA Singapore’s13and Vietnam’s14.
Regional Cumulation - Tapping into International Supply Chains
Regional cumulation15 or full cumulation rules encourage companies and SMEs in CPTPP countries to tap into the supply chains of other CPTPP members when sourcing material to create their products.
Here’s a breakdown of how that works:
Usually, in free trade agreements, a certain percentage of a product needs to be made using resources from the exporting country, known as ‘originating content’ before it can qualify for preferential tariff rates.
Regional cumulation means that materials from one CPTPP member country are treated the same as another CPTPP member1. The result is that a product that is made mostly from resources sourced from other CPTPP member countries will qualify for preferential tariff rates when being imported into other member countries.
In simpler terms, if an outfit created in Singapore is mostly made up of materials from New Zealand, Australia and Vietnam, it would qualify for CPTPP preferential rates when it goes through customs at CPTPP member countries like Japan or Canada.
This means SMEs and eCommerce merchants now have more sources for products and materials in their manufacturing process which they can sell both domestically and to other CPTPP member countries while still enjoying preferential tariff rates.
If you’d like to find out more about this, you can read the rules of origin chapter of the CPTPP15 and also its product-specific rules of origin16.
In short, the CPTPP opens more doors for SMEs and eCommerce merchants to buy and sell with other countries without needing to pay hefty tariffs. For companies in Singapore and Vietnam, it’s now easier to find sources for your inventory or your manufacturing supply chain from CPTPP countries while having greater access to countries like Japan and Canada to sell one’s products via international shipping.
While the benefits of increased sourcing opportunities and reduced tariffs and duties sound similar to any free trade agreement, the CPTPP differs in that it also has provisions targeted to increase its use by SMEs and also provisions aimed to further boost the efficiency of cross-border eCommerce. All these and more will be covered in part 2 of this series. Stay tuned!
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