Also featured: US-UK trade treaty in early discusssion, Biden endorses the Jones Act, Raimondo confirmation runs into China problems, Biden’s Buy American plans face obstacles, EU to try to resolve WTO Appelate Body crisis
The weekly trade report with L.C.
As expected, the United Kingdom will formally ask to join the Trans-Pacific Partnership (CPTPP) on February 1st and hopes to launch accession talks later this year. Prime Minister Boris Johnson released a statement saying, “One year after our departure for the EU we are forging new partnerships that will bring enormous economic benefits…. Applying to be the first new country to join the CPTPP demonstrates our ambition to do business on the best terms with our friends and partners all over the world and be an enthusiastic champion of global free trade.”
The official name of the CPTPP is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. It is the third largest free trade area in the world by GDP. The European Union is the largest, followed by the US-Mexico-Canada Agreement (USMCA).
UK International Trade Secretary Liz Truss said that the UK application to join will put it “at the front of the queue” in being the first new country to seek to join. She said she will speak with Japanese Economy Minister Yasutoshi Nishimura and New Zealand Trade Minister Damien O’Connor on Febrary 1st regarding the request. Japan is the 2021 CPTPP chairman and New Zealand is the CPTPP’s administrator.
Benefits anticipated
Truss added that CPTPP membership would bring trade benefits, including “lower tariffs for car manufacturers and whisky producers, and better access for our brilliant services providers, delivering quality jobs and greater prosperity for people here at home.” The UK bid was immediately welcomed by New Zealand, saying “It will be important to set a strong precedent which reinforces the commitment of new members to fully deliver the high standards, including on market access, that are a hallmark of the CPTPP.” That could be a signal to the UK that it will have to provide access for sensitive agricultural products – think New Zealand lamb and butter – but could also be a signal to Beijing that it won’t be accommodated with lower standards.
In addition to furthering London’s goal of concluding more international trade agreements, its CPTPP request is part of its general interest in closer ties with Asia, for which it is also seeking partnership status with ASEAN. South Korea is also a likely near-term CPTPP entry.
US-UK talks
Separately, regarding the US-UK trade talks, Truss reported that a “majority” of provisions in the negotiations have been settled. She said London remains eager to conclude a bilateral free trade agreement even though the President Biden has made clear he won’t turn his attention to trade agreements until he has dealt with his domestic priorities.
Should the UK join the CPTPP, it would put the US in an even weaker position in talks with the UK and possible future talks to join the CPTPP because London and the CPTPP would have set positions in their agreement that wouldn’t be changed to accommodate the US. If Beijing were to carry out its suggestion that it too will join the CPTPP, that would put the US even further behind in being able to influence global trade rules.
Biden executive order endorses Jones Act
The Biden administration continues to demonstrate its determination to be no less protectionist than its Trump administration predecessor. Through an early executive order, Biden reiterated his support of the disastrous Jones Act. Official known as the “Merchant Marine Act of 1920,” the Jones Act is a century-old protectionist cabotage law that Biden strongly endorsed during his campaign. It is strongly opposed by most of the private sector; imposes a significant cost on the US economy by requiring goods traveling between US ports to be carried on US vessels; makes goods in Hawaii, Alaska, and Puerto Rico unnecessarily expensive; is a constant source of irritation to US trading partners; and has arguably destroyed the US merchant marine and civilian shipbuilding industry. We devoted a previous issue of Founders Broadsheet to the Jones Act, but the premier analyst of the Act’s flaws is Cato.
Raimondo’s confirmation hearing turns turbulent over China
The Senate Commerce, Science & Transportation Committee held its confirmation hearing for Commerce Secretary-designate Gina Raimondo on January 26th. Initially a non-controversial choice, Raimondo came out of the hearing on shakier ground. Her non-committal stance got her into trouble when she gave it as her answer to a question from Sen. Ted Cruz (R-TX) regarding whether she would keep Huawei on the Commerce Department Entity List (of foreign companies that must get licenses to purchase US tech). Raimondo didn’t directly promise to keep Huawei on the list. Cruz said he was “deeply concerned” by her evasive response.
The day after the confirmation hearing, White House spokesperson Jen Psaki was asked about the controversy. She indicated that all the previous administration’s actions toward China are up for review. That still wasn’t adequate, and things escalated with a January 29th letter by three Republican senators, Marco Rubio of Florida, Ben Sasse of Nebraska, and Tom Cotton of Arkansas. “We ask that you respond in writing with your view of whether you foresee any scenario in which you would, if confirmed as Secretary… remove Huawei… from the Entity List” or relax rules blocking it from US 5G technology. “The company has not changed alongside the US presidency.”
Republicans to press tough China policy
While it is likely that Raimondo will be confirmed, the committee vote on February 3th will indicate if she is in trouble. Republicans are using the controversy to put the administration on notice that it will be attacked for any indication of a softening line on China.
The Commerce Department will be under conflicting pressures regarding the various export controls under its authority. Many US companies want an easing of restrictions imposed by the prior administration, including those slapped on foreign companies on the Entity List. This week the international semiconductor industry association SEMI said Commerce should review (with an eye to relaxing) the foreign direct product rule as well as others that constrict technology trade.
Raimondo made clear that she won’t immediately end the Section 232 steel and aluminum tariffs – which are under the Commerce Department’s purview – though she will consult about them with allies. How they feel, however, is no secret. They’ve been challenging the US tariffs at the WTO. But she did not rule out terminating the metals tariffs.
Other appointments face little Republican opposition
Regarding other Biden appointments, the full Senate confirmed Antony Blinken as Secretary of State on January 26th by a vote of 78-22. It confirmed Janet Yellen as Secretary of the Treasury on January 25th by a vote of 84-15. This followed the pattern for other nominees: Director of National Intelligence Avril Haines and Defense Secretary Lloyd Austin also won by overwhelming majorities. Agriculture Secretary-designate Tom Vilsack should have an equally easy time. His confirmation hearing before the Senate Agriculture Committee is set for February 2th. His nomination is expected to go to the full Senate quickly for an easy vote. Vilsack was Ag secretary in the Obama administration and is currently the head of the US Dairy Export Council. The Agriculture Department plays a key role in trade policy and negotiations, with the important position there being the Under Secretary for Trade & Foreign Agricultural Affairs, for which a nominee has not yet been announced.
Republicans in 2020 vs. Democrats in 2017
Deputy USTRs also remain to be announced, as do nominees for two positions important for China policy – ambassador to China and the head of the Commerce Bureau of Industry & Security, which enforces export controls. James Mulvernon is reportedly under consideration for the BIS post. A speaker of Chinese, he’s now at SOS International and is considered a leading expert on cyber threats, tech transfer, and espionage issues with China. His appointment would displease China and signal to industry that the new administration is unlikely to pull back on export controls.
The easy confirmation process that most administration nominees have been receiving from an evenly divided Senate is astonishing, given the behavior of the minority Senate Democrats in 2017, who used every time-wasting trick in the books to prevent President Trump from getting his nominees approved so that his administration – and the US – could have a functioning government. The Democrats have not uttered a word of thanks to the Republicans for their astonishing forbearance. Whether Senate Republicans have erred in not punishing the Democrats for their prior despicable behavior is a matter for consideration.
Buy American
The day before leaving office on January 20th, President Trump’s administration published a final rule amending the Federal Acquisition Regulations (FAR) in line with a presidential executive order issued over a year ago. That EO called for onerous increases in the government procurement domestic-content requirement for iron and steel. Doubling down on Trump’s folly, President Biden issued his own Buy American executive order as one of his first acts.
The problem here is that the US is party to the WTO Government Procurement Agreement, and it has similar procurement provisions in its free trade agreements. These are supposed to override Buy American regulations. Any effort to tighten US Buy American rules will run into foreign challenges claiming the move breaches international agreements, unless a huge number of trading partners — those in the GPA and with FTAs with the US — are exempted from these “Buy American” edicts.
Business support for GPA
Leaving the GPA wasn’t considered realistic even under President Trump. The GPA is viewed very favorably by US business. As US Chamber of Commerce VP John Murphy pointed out in response to the last-minute Trump EO, “Expanding ‘Buy American’ rules may send a negative signal to potential foreign investors in the US,” which would be a further blow to the US economy. Another criticism of Buy American efforts is that they simply are not that significant. Because of already long-standing Buy American rules, only a small portion of federal tax dollars are spent on imports as it is.
“Buy American” often counterproductive
The dollars that are spent on US government purchases abroad are generally spent for good reasons of availability and price. Although services are included, the focus of Buy American is on manufactured goods. But manufactures make up less than 20% of the modern US economy. Although manufacturing jobs are being cut, the sector itself is thriving. Workers are being replaced by technology that is keeping the US on the cutting-edge of productivity, boosting the whole economy. Moreover, as manufacturing jobs continually require higher and higher skills, fewer and fewer are unionized jobs, which now are concentrated in low-skill services (e.g., unions for government workers, healthcare and other services workers). These are almost irrelevant to Buy American rules and won’t be helped by them. In fact, the lower-skill services jobs will be hurt if the rules force the government to spend more money on its projects and purchases than it otherwise would.
It should finally be noted that executive orders more often than not don’t result in significant on-the-ground changes and often peter out without much impact. Sometimes the implementing agencies don’t even bother with reporting requirements. But their vague wording leaves unclear just what will be done, creating confusion and uncertainty for businesses contracting with the government. Some even choose not to bid on government projects because compliance with the new rules would be overly burdensome. This loss of competition raises prices for the government.
Biden weighs in
Despite this, President Biden climbed up on the hot-air bandwagon to issue his own Buy American executive order with great gusto and much counterfactual rhetoric:
We’re getting to work to rebuild the backbone of America: manufacturing, unions, and the middle class…. [W]e are going to use taxpayers’ money to rebuild America. We’ll buy American products and support American jobs, union jobs.
…
The federal government… owns an enormous fleet of vehicles, which we’re going to replace with clean, electric vehicles made right here in America…. this will be the largest mobilization of public investment in procurement, infrastructure, and R&D since World War Two.
Cartoonists had a field day depicting US Army tanks hooked up to Tesla charging stations.
WTO’s Appelate Body crisis
The EU is preparing to offer next month a proposal for breaking the Appelate Body (AB) impasse, with a clear expectation that the US will respond favorably. EU Director-General for Trade Sabine Weyand tweeted on January 25th, “We need a new EU-US understanding on the reform of the WTO appellate body,” and said publicly that “We are ready to go back to 1995 and say, ‘What did members want then?’ and where the AB has gone against what members wanted, it is up to the membership to clarify the rules through interpretive statements or through renegotiations.” The EU proposal, she said, will build on the principles developed through consultations on the matter that General Council Chairman David Walker has been holding with all members.
Complaints date back to Obama administration
Some of the concerns the Trump administration raised regarding the AB’s functioning are shared by other members. They are largely willing to talk about changes that would satisfy the US complaints. US Trade Representative Robert Lighthizer made it clear that he wasn’t interested in negotiating but only in blocking the dispute settlement system. The Biden administration is likely to share most of Lighthizer’s complaints. In fact, they largely precede him and were also raised in Geneva by the Obama administration. But the Biden administration is expected to seek a solution acceptable to the WTO membership, clarifying, reinterpreting, and revising the current rules.
To recap the Trump Administration’s gripes. The Appellate Body sometimes
- overreaches its authority by adding or diminishing rights or obligations not stated in the WTO agreements,
- disregards WTO rules by taking longer than the mandated 90 days to reach a conclusion and allows judges to complete cases after their terms end,
- deals with matters that do not fall within its appellate purview, such as reviewing domestic laws or issues of fact, and
- improperly treats its rulings as precedent.
L.C. reports on trade matters for business as well as Founders Broadsheet.
Leave a Reply