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Report | April 2014

TPP agreement and its implications for Indian T&C sector

Exporters from TPP member countries will get preferential access in the US market vis-a-vis exporters from non-TPP member countries, i.e., India, writes Gaurav Agarwal.

The Trans-Pacific Partnership (TPP) agreement is a proposed regional free trade agreement (FTA) currently under negotiation among 11 Pacific Rim countries. The negotiating partners are the United States, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, Canada and Mexico.

For the first time, a once-protectionist Japan is also planning to join the US in a region of free trade and investment. The unstated but clear Japanese signal is that China must be checked. For this, it is willing to consider dismantling its traditional trade and investment barriers.

Another big FTA under negotiation is the Transatlantic Trade and Investment Partnership (TTIP), covering the US and the European Union. Historically, Europe has felt threatened by US multinationals, technology, and farm produce. Europe is now ready to consider a grand bargain with the US, mutually opening up investment, trade and services.

Earlier, the three economic giants-the US, Europe and Japan-saw one another as global rivals. Each sought to conclude FTAs with neighbours and selected developing countries, creating trade blocks within which each had tariff advantages. Now, for the first time, the three big players are seeking FTAs with one another.

Though, US, EU and Japan will deny animatedly that either the TPP or TTIP is intended against China, they will claim to be merely carrying forward the logic of globalisation and global integration. But the strategic anti-China aim is clear.

Textiles and the TPP negotiations

Textiles are a major issue in the ongoing TPP negotiations to establish a free-trade zone across the Pacific. Because the negotiating parties include Vietnam, a major apparel producer that now mainly sources yarns and fabrics from China and other Asian nations, the agreement has the potential to shift global trading patterns for textiles.

Textile and apparel trade is governed by very specific rules. Most of the bilateral and regional FTAs and trade preference programmes negotiated by the United States over the past two decades include extensive provisions governing textiles and apparel.

The key issue is typically rules of origin (ROOs), which specify how much of the content of textile and apparel products must come from the region in order for the products to qualify for duty-free access.

Possible rules of origin generally stipulate how much processing must occur within the region if a product is to obtain trade benefits. The major distinctions are:

  • Fibre forward: Fibre must be formed in the FTA member territory. Natural fibres such as wool or cotton must be grown in the territory. Synthetic fibres must be manufactured in the free trade area.
  • Yarn forward: Fibres may be produced in any country, but the yarn used to make the textiles or apparel must be formed within the free trade area. This rule is sometimes called "triple transformation," as it requires that spinning of the yarn or thread, weaving or knitting of the fabric, and assembly of the final product all occur within the region.
  • Fabric forward: Producers may use fibres and yarns from any country, but fabric must be knitted or woven in FTA member countries.
  • Cut and sew: Only the cutting and sewing of the finished article must occur in FTA member countries.

The United States, most often, has applied the "yarn forward" standard for textiles and apparel. Mostly US FTAs also include exceptions allowing limited quantities of fibres, yarns, and fabrics to be sourced from outside the FTA partner countries under certain conditions.

In general, US tariffs increase with eac

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