The Trojan Horse of protectionism

The Trojan Horse of protectionism
© Greg Nash

The three U.S. senators who co-sponsored the “Market Economy Sourcing Act” insist the bill is about securing U.S. supply chains and reducing dependence on China. It’s really a protectionist Trojan Horse. It would wreck future U.S. trade deals from inside, beginning with the Trans-Pacific Partnership (TPP).

Penned by Sens. Bob CaseyRobert (Bob) Patrick CaseySenate Democrats call for diversity among new Federal Reserve Bank presidents Manchin, Sanders to seek deal on Biden agenda Democrats struggle to gain steam on Biden spending plan MORE (D-Pa.), Sherrod BrownSherrod Campbell BrownWhen the Fed plays follow the leader, it steers us all toward inflation Which proposals will survive in the Democrats' spending plan? Senate Democrats call for diversity among new Federal Reserve Bank presidents MORE (D-Ohio) and Elizabeth WarrenElizabeth WarrenSinema's office outlines opposition to tax rate hikes The CFPB's data overreach hurts the businesses it claims to help Runaway higher ed spending gains little except endless student debt MORE (D-Mass.), the bill focuses on rules of origin. These define a good’s nationality where inputs are had from global supply chains. They determine eligibility for preferential tariffs, based on the value of the content sourced from countries in the trade deal.

Rules of origin are used to prevent the transshipment of goods from nonmembers through members. In U.S.-Singapore, for example, a shoe must have roughly half its content value sourced from either or both countries (35 percent to 55 percent depending on the methodology used). This is meant to stop Vietnam, for example, from trying to use Singapore as an export platform to the U.S. without local sourcing.

ADVERTISEMENT

The “Market Economy Sourcing Act” takes aim at non-market economies. Under U.S. law, 11 countries are currently considered non-market economies, the common denominator being that the Department of Commerce sees these governments are being overly interventionist. 

In truth, the bill is about China and Vietnam, not the “stans” or other former Soviet satellites. The bill says that for the first five years after a trade deal goes into force, “not more” than 20 percent of a good’s value content can be sourced from a non-market economy, falling to 10 percent after that. So, what’s the point? 

In a letter to Ambassador Katherine TaiKatherine TaiAs EU moves on carbon pricing, US must work with WTO to avert trade war Biden holds Trump's line when it comes to China Is Biden creeping toward a trade strategy? MORE, Casey, Brown and Warren explain that they simply want to better secure U.S. supply chains by making them less dependent upon China and other nonmarket economies. They claim their goal is to better integrate “our supply chains with democratic and like-minded countries.” Really? These senators’ support for using stringent rules of origin under the U.S.-Mexico-Canada Agreement (USMCA) to re-shore auto supply chains suggests otherwise.

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

The reality is different. Autos will be more expensive, and many jobs will move offshore, given that cars face a low 2.5 percent U.S. most-favored nation tariff under the World Trade Organization (WTO). Moreover, Mexico and Canada have asked for talks under USMCA to resolve their differences over how auto rules of origin are calculated. This type of confusion within a trade deal is exactly what the “Market Economy Sourcing Act” is meant to create. Again, it’s a protectionist Trojan Horse. 

The bill will cause two additional problems. First, it will complicate any effort by the Biden administration to rejoin the TPP, which apparently is under consideration. That’s because Vietnam is already a member, and China applied this week for membership. How could the “Market Economy Sourcing Act” not keep the U.S. out of TPP?

Second, the “Market Economy Sourcing Act” would violate WTO law where either China and/or Vietnam weren’t members of a U.S. trade deal. One of the WTO’s key provisions on trade deals is that members can’t be more protectionist against non-members than they were before they joined. Yet, this is exactly what the “Market Economy Sourcing Act” would commit the U.S. to doing. China and/or Vietnam could sue at the WTO. Ironically, the template for the litigation has already been drafted by the European Union, which considered challenging USMCA over its rules of origin on autos.

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

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