FTAs and the Auto Sector Department of Commerce 21 June, 2016

Overall Strategy Conservative Approach on tariff modalities Exclusion list in FTAs with ASEAN Japan Korea Conservative Rules of Origin CTSH + 35% (ASEAN) CTSH +40% (Korea) CTSH + 40%; CTH +40% (Japan)

Key Engagements of Interest Expansion of India-Chile PTA Expansion of India-Mercosur PTA India-Peru Joint Study Group (JSG)

Key Issues in an FTA Trade off between lowering tariffs & ‘Make in India’ Plugging into global value chains Broad based “zero duty” FTAs could lead to problems of inverted duty structure Revenue loss implications of FTAs New TPP trade architecture that emphasises zero customs duty. Indian interest better served by moderate tariff regimes.

The Way Forward Trade agreements are moving into areas beyond goods and services e.g. intellectual property rights, labour, environment, investment, government procurement, State owned enterprises India needs to: raise standards of products, services and diversify move up the value chain address constraints within the country, e.g. infrastructure bottlenecks, high transaction costs, complex procedures, constraints in manufacturing, inadequate diversification in services exports leverage SEZs as manufacturing hubs

Size of mega FTAs ($ trln in 2014) Mega FTA (major cty) Goods trade Services Trade GDP Value % share TPP 8.51 22.4% 2.23 22.9% 26.62 34.2% US 4.03 10.6% 1.14 11.7% 17.42 RCEP 10.78 28.3% 2.24 23.0% 22.56 29.0% China 4.30 11.3% 0.61 6.3% 10.70 13.7% ASEAN 2.53 6.6% 2.48 3.2% TTIP 16.32 42.9% 5.12 52.7% 33.76 43.4% EU 12.29 32.3% 3.98 41.0% 16.34 21.0% GLOBAL 38.09 100% 9.72 77.87

Timelines in the TPP Transpacific Strategic Economic Partnership Agreement (TPSEP) was concluded in 2005 by Brunei, Chile, New Zealand and Singapore. TPP Negotiations began in February, 2008 among 5 countries namely US and the TPSEP countries. The other 7 countries namely Australia, Canada, Japan, Malaysia, Mexico, Peru and Vietnam joined later TPP finalised on 5 October, 2015 in Atlanta. It has 30 chapters. TPP signed on 4 February, 2016 in Auckland Countries who are interested in joining the TPP: Colombia, Philippines, Thailand, Taiwan, South Korea, Indonesia with the latest country showing interest being Sri Lanka

Entry into force 60 days after the ratification by all the 12 TPP countries or By 2 April, 2018 (2 years + 60 days after signature) if atleast 6 countries comprising atleast 85% of the total TPP GDP (2013 figures of IMF) ratify the same 60 days after atleast 6 countries comprising atleast 85% of the total TPP GDP ratify the same

Tariff modalities on goods Highlights: Ambitious with entry into force ranging from 77% (Mexico) to 100% (Singapore) of total lines Tariff phase out periods vary from 3 years to 24 years Longer phase out periods in specific sectors: Canada: clothing, footwear, automotives Japan: marine, leather, footwear US: chemicals, textiles, clothing, footwear, automotives Vietnam: leather, automotives

TPP Commitments (% EIF lines) TPP Country Percentage share of TPP lines where tariff eliminated on EIF Iron & Steel Base Metals Mech. Machinery Elect. Machinery Auto Instruments Sports Australia 81.4% 97.5% 95.3% 94.1% 78.1% 95.5% 100.0% Canada 83.6% Japan 99.0% 93.9% Malaysia 54.1% 82.7% 81.8% 81.7% 29.1% US Vietnam 47.7% 75.4% 69.6% 58.6% 4.9% 87.0% 61.8%

Sectors of export interest for India TPP Country Percentage share of sectoral exports to total exports in TPP country(2014-15) Iron & Steel Base Metals Mech. Machinery Elect. Machinery Auto Instruments Sports Australia 6.3% 1.9% 4.0% 3.2% 8.9% 1.7% 1.0% Canada 13.3% 1.8% 5.5% 2.2% 0.5% 0.2% Japan 5.2% 0.8% 3.7% 2.1% 2.3% 0.6% 0.0% Malaysia 4.1% 6.1% 3.0% 1.3% US 5.3% 1.5% 4.6% 3.1% 2.9% 0.9% 0.1% Vietnam 4.3% 2.5% 1.6%

Sector/Countries where Indian exports may be affected TPP country Iron & Steel Australia, Canada, Japan & US Other Base Metals Australia, Canada & Malaysia Mechanical Machinery Australia, Canada, Japan, Malaysia & US Electrical Machinery Automotives Australia, Japan & US Instruments/ Appliances Australia & Malaysia Sports Goods Australia

Possible drop in Indian Auto exports to US ($ mln) EIF 5yr 10yr Other Total Loss India Total % loss 14 1.9 15.9 1038 1.5%

Rules of Origin – General Product specific rules (PSRs) Criteria used i.e. CTC (change in tariff classification), Value Addition CTC or VA Full cumulation: (Art 3.6)VA includes Value of processing non originating material Value of originating material used in TPP ctys

Wholly Originating or Produced wholly obtained or produced entirely in the territory of one or more of the Parties produced entirely in the territory of one or more of the Parties, exclusively from originating materials a good that is: (i) waste or scrap derived from production there; or (ii) waste or scrap derived from used goods collected there, provided that those goods are fit only for the recovery of raw materials;

Value Addition Focused Value Method: Based on the Value of Specified Non-Originating Materials (FVNM) Value Addition = Value of the Good – FVNM x 100 Value of the Good 2. Build-down Method: Based on Value of Non-Originating Materials (VNM) Value Addition = Value of the Good – VNM x 100 3. Build-up Method: Based on Value of Originating Materials (VOM) Value Addition = VOM x 100 4. Net Cost Method or NC method (for Automotive Goods Only) RVC = NC - VNM x 100 NC

Value Addition Net cost = cost – (sales promotion + marketing costs + after sales + royalties + shipping + packing + non allowable interest costs) 4 categories of value addition Options given in many HS lines Difference in the value depending on the choice of value addition Lowest: Build up and net cost Lowest + 10% Build down Lowest + 20% Focussed value method

Remanufactured Goods Wholly originating status: Waste and scrap derived from imported second hand goods Remanufactured goods from this waste and scrap No prohibitions or restrictions on imports. Preferential treatment for remanufactured goods

Certification of Origin Self Certification By exporter, producer or importer 5 year grace period for Brunei, Malaysia, Mexico, Peru & Vietnam Data required – certifier, exporter, producer, importer, HS code, origin criteria Verification Procedures: Communication with importer, exporter, producer

Auto PSRs CTH, CTSH, CTH or 30%/40%/50%; 45%/55%, CTSH or 40%/50%,

TPP-Implications for Automotive Sector Adverse effect on exports of Autos & auto parts to Australia, Japan & US Auto exports may be affected due to access for remanufactured goods within TPP. Full cumulation could also affect Indian exports

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