The Trans Pacific Partnership (TPP) agreement President Obama negotiated with 11 countries has many potential ramifications on the auto distribution chain. Congress will vote on the TPP in an up-or-down vote, no amendments allowed; but that won't happen before March 2016 at the earliest, and may not happen at all while Obama is president.
The auto provisions, particularly those affecting imports from Japan, with regard both to automobiles and auto parts, have become a key, controversial issue which, along with pharmaceutical provisions, will in good part dictate whether this new, mega trade pact actually goes into effect.
The 11 signatories besides the U.S. are Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
Broadly, the auto provisions will determine the extent to which various auto sectors are able to better penetrate foreign markets, and the extent to which imports from the 11 countries are more attractive – read cheaper – to U.S. buyers. With regard to automotive aftermarket retailers, for example, the issue will be whether imported Japanese auto parts, benefitting from an elimination of a 2.5 percent tariff, replace Mexican and Canadian imported and U.S.-produced auto parts now on retailer shelves. Mexican and Canadian auto parts already come in duty free as a result of the North American Free Trade Agreement (NAFTA).
U.S. auto parts imports from Japan last year totaled $14.5 billion, down 2.3 percent, according to the U.S. Commerce Department. Parts imports from Mexico were up 11 percent, to $46.6 billion, and imports from Canada up 6 percent, to $17.4 billion.
Not only will Japanese imports be cheaper because of the immediate elimination of that 2.5 percent tariff, they will be able to lower their prices further as a result of generous "rules of origin" which determine how much of an imported product can be sourced outside the TPP country doing the importing.
Those rules of origin are set on a product-by-product (based on the Harmonized Tariff Schedule) basis, and the required TPP domestic content for auto parts ranges from 35 percent to 45 percent, according to Andres Castrillon, Senior Counsel, International Affairs, Auto Care Association. Castrillon points out that Mexico and Canada negotiated the higher 45 percent level for some categories that are particularly important to them.
To the extent Japanese auto parts can contain relatively high amounts of, say inexpensive Chinese metal, they will benefit even more compared to, for example, Mexican auto parts. Japan obviously has a supply chain advantage because of its closeness to inexpensive Asian suppliers of metals such as China and Thailand.