The Trojan horse of protectionism

The three US senators who co-sponsored the Market Economy Sourcing Act insist the bill aims to secure US supply chains and reduce dependence on China. It is truly a protectionist Trojan horse. It would ruin future US domestic trade deals, starting with the Trans-Pacific Partnership (TPP).

Written by Sens. Bob caseyRobert (Bob) Patrick Casey Caring for every woman’s life is tough, but right Democratic senators call for inquiry into Amazon’s treatment of pregnant workers Abortion rights groups want Biden uses the bully pulpit after Texas law PLUS (D-Pa.), Sherrod BrownSherrod Campbell Brown Lawyers Call on Top Democrats to Invest $ 0 Billion in Housing Democratic Senators Call for Inquiry into Amazon’s Treatment of Pregnant Employees (D-Ohio) and Elizabeth warrenElizabeth Warren’s Federal Reserve officials’ stock trades prompt ethical review (D-Mass.), The bill focuses on rules of origin. These define the nationality of a good when inputs come from global supply chains. They determine eligibility for preferential tariffs, based on the value of content from countries in the trade agreement.

Rules of origin are used to prevent the transshipment of non-member goods by members. In the US-Singapore, for example, a shoe must have about half of its content value coming from one or both countries (35% to 55% depending on the methodology used). This is aimed at preventing Vietnam, for example, from trying to use Singapore as an export platform to the United States without local sourcing.

The “Market Economy Sourcing Act” targets non-market economies. Under US law, 11 countries are currently considered marketless economies, with the common denominator being that the Department of Commerce considers these governments to be too interventionist.

In truth, the bill concerns China and Vietnam, not the “stans” or other former Soviet satellites. The bill states that during the first five years after the entry into force of a trade agreement, “no more” than 20% of the value of a good can come from a non-market economy, falling to 10%. afterwards. So, what is it for ?

In a letter to the ambassador Katherine TaiKatherine TaiThe Hill’s 12:30 p.m. report: Biden increases vaccine needs for federal workers Asian American leaders keen to discuss voting rights with Biden’s trade agenda Biden gets off to a rocky start MORE, Casey, Brown, and Warren explain that they just want to better secure U.S. supply chains by making them less dependent on China and other non-market economies. They say their goal is to better integrate “our supply chains with democratic and like-minded countries”. Truly? These senators’ support for the use of strict rules of origin under the United States-Mexico-Canada (USMCA) agreement to relocate auto supply chains suggests otherwise.

The North American Free Trade Agreement (NAFTA) had an auto origin rule of 62.5% of the value of North American content. Under the USMCA, the Trump administration increased that figure to 75%. The idea was to create jobs in the US manufacturing sector by reducing the amount of foreign inputs in a car that would qualify for duty-free market access.

The reality is different. Automobiles will be more expensive and many jobs will be moved overseas, as cars are subject to a 2.5% most-favored-nation tariff in the United States under the World Trade Organization (WTO). Additionally, Mexico and Canada have requested USMCA talks to resolve their disputes over how automatic rules of origin are calculated. This kind of confusion within a trade agreement is exactly what the “Market Economy Supply Act” is supposed to create. Again, this is a protectionist Trojan horse.

The bill will cause two additional problems. First, it will complicate any effort by the Biden administration to join the TPP, which is apparently under consideration. This is because Vietnam is already a member and China applied this week. How could the Market Economy Sourcing Act not prevent the United States from participating in the TPP?

Second, the Market Economy Sourcing Act would violate WTO law when China and / or Vietnam were not members of a US trade agreement. One of the key provisions of the WTO on trade agreements is that members cannot be more protectionist towards non-members than they were before they joined. Yet that is exactly what the Market Economy Sourcing Act would commit the United States to do. China and / or Vietnam could sue before the WTO. Ironically, the model for the dispute has already been drafted by the European Union, which has considered challenging the USMCA over its rules of origin on automobiles.

The “Market Economy Sourcing Act” is clever. But like any Trojan horse, this bit of trade protectionism can only work if it’s allowed in a trade deal. Congress, beware.

Marc L. Busch is Karl F. Landegger Professor of International Trade Diplomacy at the Walsh School of Foreign Service at Georgetown University. Follow him on Twitter @marclbusch.

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