Rules of origin, labour standards and the TPP

Vietnam is in a process of active negotiations to participate in Trans-Pacific Partnership (TPP) — a free trade agreement among Pacific economies, including the United States but excluding China. The negotiations are considered of high priority for Vietnam, because the likely impacts are thought to be positive. Although the negotiations have not yet been completed, the three sectors likely to benefit most in Vietnam include textiles, apparel and footwear. However, Vietnam may face major constraints in maximizing TPP’s potential benefits due to restrictive rule of origin requirements. Furthermore, Vietnam may be obliged to improve its labour standards, for example by allowing freedom of association. The likely effects of these restrictions are quantified using a general equilibrium model. The methodology used here involves several steps. We take the GTAP version 8 data, which has a reference year of 2007, and project it forward to 2025, the year by which the TPP is expected to be fully implemented. The projection is based on expected growth in labour, capital, natural resources and productivity growth for each of 20 countries and regions. The next step is to model the removal of all tariffs between all TPP countries assuming no RoO restrictions. This provides a benchmark of potential gains. The third step involves modelling the expected exemptions to the tariff cuts. These are based on existing agreements, including the US with Korea and Vietnam with Japan. For Vietnam, Japan is chosen as a model because Japan is a developed country. The fourth step involves taking account of RoO. This is done by reducing the scheduled tariff cuts according to the degree of self sufficiency of the upstream sector into production. For example, Vietnam’s apparel exports to the US face a 13 per cent tariff. Because Vietnam is 54 per cent self–sufficient, the tariff is reduced by 13*0.54. If Vietnam produced none of its intermediate inputs, the effective tariff reduction would b...