Potential winners, losers from the Trans Pacific Partnership

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.

However, Castrillon points out that Mexican and Canadian suppliers have an advantage over Japan given what has become a North American market for auto parts.

"Due to the close proximity, the markets are very much integrated and they enjoy shorter lead times," he explains, referring to Mexican and Canadian companies.

While auto aftermarket retailers may be the lucky beneficiaries of an imported auto parts trade war, U.S.-based parts suppliers face a more balanced fate. Trade deals like NAFTA have hurt U.S.-based manufacturers who do not export. They come up against, and will with regard to the TPP, new competition from inexpensive suppliers. U.S. jobs are lost. Those suppliers who do export, generally the large parts companies may benefit from the elimination and relaxation of non-tariff trade barriers in countries like Japan. Some companies that do not export now may take a look at Malaysia or Vietnam and decide to establish manufacturing facilities there, given the suddenly receptive business climate.

The TPP is jam packed with separate side deals, some affecting the auto sector. In one instance, Japan has committed to respect seven specific Federal Motor Vehicle Safety Standards. That is important for U.S. car manufacturers, who may have had trouble entering Japan because of standards in the area of full-wrap frontal collision (FMVSS 208) and rear-end collision (FMVSS 301) to cite two of the seven.

Castrillon said that the Japanese acceptance of those FMVSS, which was probably problematic before, also means that, over time, cars on the road in Japan will start looking a little more like those manufactured here, opening up export possibilities for parts suppliers in specific auto component areas.

That said, U.S. auto parts supplier groups have been unwilling to take a stance pro or con on the TPP. A spokesman for the Motor & Equipment Manufacturers Association supplied this statement post-signing of the TPP. "The TPP represents an important milestone in U.S. trade relations and the views of the supplier industry will be critical in the upcoming debate. MEMA will not express any views on the agreement until the supplier industry has an opportunity to review the agreement."

Castrillon says, "We are closely reviewing the full terms of the final text with our membership to examine all of the details of this agreement, and to assess whether it will significantly enhance our members’ ability to grow and compete on a level playing field."

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