Today the U.S. is conducting large-scale trade talks with the European Union (EU) and the nations of the Pacific region (TPP — the Trans-Pacific Partnership). The U.S. administration attaches great importance to the success of these talks which, in the words of the official website of the U.S. trade representative, “will unlock opportunities for American workers, families, businesses, farmers and ranchers by providing increased access to some of the fastest growing markets in the world.”
America has free trade agreements with 20 countries, which account for 46 percent of exports and 40 percent of trade in finished products overall. Of course, it’s worth taking into account that Canada and Mexico — America’s partners in the North American Free Trade Agreement (NAFTA) — account for 27 percent of total U.S. trade turnover. However, with the inclusion of Japan in negotiations over TPP membership, the partnership will account for 40 percent of global GDP and a third of all world trade. In 2013, the U.S. exported $65 million in goods to Japan and $48 million in services.
Analysis of the numerous documents and reports on bilateral negotiations on the creation of preferential trade agreements (PTA) with various nations allows one to make the assumption that the chief reasons for establishing PTAs, including NAFTA, lie within U.S. foreign policy goals. At least, that is what is always discussed during the process of considering and ratifying the treaty in Congress. Arguments in favor of expanding exports are supported by foreign policy and national security considerations. U.S. interests related to preferential trade are gradually shifting to the Southeast Asia region. It’s enough to say that Americans ship products worth $1.9 billion to TPP countries every day. It’s understood that any tariff or nontariff trade barrier leads to higher distribution costs for businesses and reduced competitiveness.
A typical feature of recent trade negotiations has been an emphasis on the demand for internal market reforms within the partner country in the direction of regulation of developmental institutions and investment.
Another feature of the pursuit and conclusion of foreign trade agreements is the active participation of congressmen and senators, taking to the floor with narrow pro-lobby positions and the interests of their constituents. In this regard, it’s worth remembering that NAFTA was passed by a majority of only 34 votes, and only after Chairman of the Joint Chiefs of Staff General Colin Powell took to the floor claiming that NAFTA was primarily needed for security along the Mexican-American border. Since then, Democrats have reluctantly supported the ratification of trade agreements and proposed protectionist positions against imports from countries where workers receive low wages, their rights are not protected, and environmental standards are not met. Interestingly, the free trade agreement with the countries of Central America was passed with a majority of only two votes. It’s understandable that with this politicization of the foreign trade agenda, a fast-track mechanism is crucial for concluding new trade agreements between the U.S. and its partners. On May 10, 2007, Congress approved an agreement on “A New Trade Policy for America” in which U.S. negotiators were ordered to place environmental and labor rights questions at the center of trade negotiations. Now, whenever a PTA is considered, the American side must include a provision in the text whereby the partners agree to change internal labor legislation in accordance with the 1998 ILO Declaration on Fundamental Principles and Rights at Work. Partners must also agree to be bound by seven special provisions on environmental protection.
The majority of experts believe that Republicans’ victory in the November 2014 congressional elections will facilitate the passage of trade agreements through an expedited process, as they are more likely to take into account business interests and expansion into foreign markets.
One can confidently claim that the U.S. position in PTA negotiations is being implemented in accordance with a developed model, one which has a clear structure of requirements for partners and mandates the achievement of certain goals.
Features of the Negotiation Model
In the first place, the basic content of the American approach to negotiations is liberalization and the removal of trade barriers for goods and services, as well as the formation of rules and regulations relating both to traditional trade as well as to questions of reforming national regulatory policies which may discriminate against foreign companies and give local firms an advantage.
In the second place, U.S. negotiators clearly indicate those sectors which they are planning to protect, referring to acute political pressures within the country. Most often these are the sugar and dairy industries, as well as issues relating to the origin of light industry goods (clothing) and consumer electronics. If the U.S. delegation does compromise on these issues, it does so slowly, gradually and little-by-little.
In the third place, the U.S. negotiating position includes “forbidden” zones and topics, which permit no compromise. For example, as it comes to issues pertaining to immigration, as well as temporary employment services. Here the U.S. refuses to take on the standard obligations normally found in a PTA.
In a broad sense, the objectives of U.S. negotiating policy are the achievement of a comprehensive agreement on the removal of barriers to trade for goods and services, the establishment of new approaches to labor issues, the environment, investment, competition and regulation of public sector enterprises. Negotiations are focused on developing new approaches to the regulation of the flow of goods and capital.
At the same time, U.S. officials insist on strict compliance with, and fulfillment of, obligations arising from the PTA, with an emphasis on transparency of procedures and intelligibility of arrangements for resolving disputes in general, and on defending intellectual properties in particular.
The emphasis on the implementation of the PTA involves the preparation of a very detailed and complex legal text which can stand up to the test of litigation if necessary.
The U.S. negotiating position in concluding PTAs, as a general rule, is based on the commitment to remove all barriers to “nearly all” trade in finished goods. However, there is no quantitative measure of what percent of trade “nearly all” means. Therefore, the American side’s argument for excluding agricultural products and textiles from agreements on the basis that they only account for 10 percent of turnover in finished goods sounds vague and ambiguous.
American PTAs include more liberal standards of mutual trade than the majority of PTAs registered with the WTO, although there are two well-known exceptions on certain agricultural products. The U.S. excluded sugar from free circulation in the U.S.-Australia free trade zone. And South Korea excluded rice from its free trade agreement with the U.S. Besides that, it’s worth pointing out that trade in dairy farm products between the U.S. and Canada has not been completely liberalized.
However, besides these examples, nearly every commodity is discussed in preferential trade negotiations.
A part of tariffs are canceled immediately after an agreement is reached. In some cases the transitional period can last up to 15 years. With particularly sensitive groups of goods, liberalization can take on a selective and piecemeal character. For example, in the free trade agreement between the U.S. and Korea, nearly 95 percent of bilateral trade in consumer and industrial goods will become duty-free over the course of three years from the time the agreement comes into effect. The remaining 5 percent of trade will become duty-free within 10 years.
Another important priority for the U.S. in trade negotiations is improving access to markets in trade and investing in services.
For the last quarter of a century, the issue of trade liberalization has advanced in all U.S. negotiations in fundamental service sectors: finance, insurance, telecommunications and express package delivery. The Americans consider this agreement to be a model, and would like to see that same standard achieved in the TPP.
Another arm of market access reform in the course of PTA negotiations is the U.S. position on reducing restrictions on access to government procurements. The basis for this is the WTO’s Government Procurement Agreement (GPA). However, the GPA is a multilateral agreement and only applies to those who signed it. Only five of the 21 APEC countries, for example, have signed the GPA: the U.S., South Korea, Japan, Hong Kong and Canada. Australia, Chile, China and New Zealand maintain observer status.
In PTA negotiations, the U.S. strives to include Government Procurement Agreement norms in treaties in order to assure American companies nondiscriminatory access to public procurement contracts from their partners in negotiations. For countries that have signed the GPA, the Americans attempt to expand the list of public institutions to which American service providers can present their bids.
A comprehensive chapter on PTA investments can replace a Bilateral Investment Treaty (BIT) in the same way that PTA provisions on public procurements replace and supplement obligations taken on within the framework of the WTO’s GPA. BITs are a type of investment treaty which serve to defend the interests of private American investors abroad. In the U.S., BITs must be ratified by a two-thirds Senate majority, a difficult result to attain. On the other hand, a PTA requires a simple majority in both houses of Congress, which is achieved within the framework of the accelerated procedure. Investment-related issues involve taking on four commitments: a) The right to establish financial institutions or service providers without operational restrictions (for example, on the number of providers who are permitted to operate); b) the requirement to obligatory use or purchase of (a firm-allotted percentage of) local products; c) effective protection from expropriation; and d) a clear procedure for resolving conflicts between investors and the government.
In January of 1993, U.S. President Bill Clinton set a new standard in trade negotiations when he announced that NAFTA would not be put into place until parties’ responsibilities in issues of environmental protection and labor legislation were considered. Canada and Mexico reluctantly agreed to support the treaty with the additional obligations and a department for resolving conflicts stemming from the original text. Each party’s agreement was supplemented by a bilateral cooperation agreement aimed at creating an assertive position in countering environmental and labor abuses.
It must be assumed that no projects founded on the basis of mutual cooperation fail to be implemented due to lack of targeted funding. However, environmental issues created an important precedent for future American trade agreements. Labor rights issues have likewise been ignored in practice for many years.
Subsequent American PTAs included a chapter on environmental issues in their main body. The respective obligations of the parties are considered through a general dispute resolution procedure, which distinguishes them from the NAFTA arrangement. Recent PTAs with Colombia, Peru and South Korea contain new commitments on issues of controlling deforestation and global oceanic biomass, greater transparency in government regulation, technical assistance and cooperation in the context of a bilateral environmental treaty.
The U.S. wants to spread this precedent in a chapter on the environment in the TPP. America is particularly interested in wildlife conservation. The U.S. wants to force member nations of the TPP to pass national regulatory measures which forbid the interstate trade of “wild fauna and flora that, based on credible evidence, were taken or traded in violation of that party’s law or a foreign law, the primary purpose of which is to conserve, protect or manage wild fauna or flora.” Some of these issues (illegal logging and trade) have already been included in the free trade agreement with Peru.
Protection of Interests
As has already been pointed out, political restrictions influence trade deals. Consequently, trade liberalization often occurs inconsistently: two steps forward, one step back. The template for U.S. delegates in PTA negotiations allows them to give ground in two areas: agriculture and textiles/knitwear.
The partial liberalization of trade in agricultural products takes place through the mechanism of tariff-rate quotas (TRQ). TRQs unite two implements of protectionism: the quota and the tariff. One could say a tariff quota is a two-tiered tariff: goods within the volume of the quota are subject to a low tariff, while imports exceeding the quota are subjected to prohibitive tariffs.
The free trade agreement between the U.S. and South Korea includes a significant number of tariff-rate quotas. South Korea’s tariff plan includes TRQs for 19 tariff lines, including fish, citrus fruits, milk, whey, corn starch, barley, etc. The majority of the TRQs (14 of 19) will be canceled over a period of 10 to 18 years, while five TRQs will remain, although the actual quotas will increase over time. America’s tariff plan is similar: it includes TRQs on 26 tariff lines and involves sensitive manufacturing sectors: milk, cream, butter, whey and sugar. Trade in these products will become duty-free in 10 years from the TPA’s inception. Free trade agreements with Colombia and Chile also include TRQs on sensitive products: sugar, beef and milk products. Chile received unlimited access to American markets, in terms of TRQ tariff limits, four years from the day the agreement entered into force. According to the U.S.-Australia free trade agreement, TRQs on sugar and milk products (cheese, powdered milk, condensed milk and whey) will be completely canceled after 12 years. In their agreement with Colombia, the U.S. set a quota on sugar exports in the amount of 50,000 tons a year, with an annual increase of 750 tons. Quotas on meat will be abolished in the 10th year, quotas on milk and butter in the 11th, and on cheese in the 15th.
When the U.S. provides access to sensitive economic sectors within the framework of a PTA, the arrangement always provides for a gradual removal of border barriers, as well as other mechanisms which protect local producers from possibly damaging surges in imports. They provide special paragraphs in the treaty which are designed to respond to abrupt increases in volume by returning to tariff levels provided by most-favored nation status (MFN). For example, in their agreement with Colombia the U.S. provided this type of paragraph in relation to imports of Colombian beef. The measures provided in the paragraph begin to kick in when import levels reach 140 percent of the tariff quota. In this case the tariff begins to shift at the rate of 100 percent to 50 percent of the difference between the TRQ tariff and the MFN tariff, depending on how long the infringement continues.
What does this mean for the TPP negotiations? In short, sensitive goods might be “on the table,” but with slow and reluctant reformation in mind. In many cases the negotiations can lead either to commitments to complete reformation, conducted in long, drawn-out phases or to partial liberalization.
Textiles and knitwear are another sector in which the “gold standard” of the American negotiating model for PTAs is roughly disregarded. American PTAs have gradually abolished relatively high American tariffs, but demand compliance with country of origin (COO) rules and the inclusion of protective paragraphs in case of sudden rises in imports. Such measures reduce the net advantage of liberalization.
In their free trade agreement with South Korea, the U.S. committed to immediately reducing 61 percent of tariffs on textiles and knitwear: 19 percent of tariffs will be canceled within five years and the rest within 10. South Korea committed to immediately cancelling 72 percent of its tariffs, 13 percent within three years and the remaining 15 percent within five years.
The agreement provides protective measures in the case of a sudden rise in sugar imports, in which case either country can transition to the MFN tariff or halt further reduction of tariffs.
In terms of country of origin, the U.S. applies the so-called “yarn forward” rule for imported textiles and knitwear. According to the “yarn” rule, textiles must be tested in three forms in order to receive preferential market access. This means that the production of fiber, its transformation into material and the transformation of that material into a product must all occur on the territory of TPP member states. The agreement with South Korea allows the use of the “yarn” rule with certain allowances: Some fibers, produced by countries outside the agreement, are permitted to be used on a preferential basis if neither of the PTA member states possess a sufficient quantity of the material for commercial purposes.
The consistent harmonization and reduction of MFN tariffs to the level of the lowest national tariff seems to be a practicable approach to resolving the issue of determining the country of origin. This approach will be fairly difficult to implement in the course of TPP negotiations due to the fact that most member states use MFN tariffs to protect their own industries from Chinese products.
At the beginning of any negotiations, U.S. diplomats announce that no topics are off-limits and anything can change over the course of discussions. However, they don’t mention that the “price” of changing certain internal American laws and rules is most likely too high for their trading partners. Experience in PTAs with the U.S. clearly shows this: America has consistently refused its partners’ requests to change U.S. laws in the field of anti-dumping regulations and labor laws in the service sector.
Members of Congress are insistent that no trade agreements concluded by the U.S. should complicate the task of national economic sectors in defending against imports with the help of anti-dumping legislation. Increasing selectivity through the levying of tariffs, including changes in the standards for determining dumping and the extent of damage used by U.S. authorities in administrating the law, cannot be corrected by outside influence.
U.S. officials often take it upon themselves to keep anti-dumping laws from being relaxed, planning to occupy a corresponding appointment. America carries out reforms aimed at increasing transparency and demands for accountability in the enforcement of anti-dumping legislation and practical application. There are no other changes related to anti-dumping in PTA negotiations.
Another key “forbidden” topic is immigration policy, which members of Congress broadly define as including questions on temporary workers. Political doubts stem from the fear that temporary workers will remain in the U.S. illegally, no matter what guarantees of their return are included in the PTA. The political intensity of the sting of the illegal immigration problem in the U.S. doesn’t allow U.S. lawmakers to ignore the issue when considering specific issues of trade policy, as they fear being accused of encouraging illegal immigration.
Analysis conducted on the U.S. negotiating position when concluding PTAs proves convincingly that having a clear statement of approved principles and procedures, as well as formulated national interests in the foundational documents of the U.S. administration and Congress, allows negotiators to achieve their goals with greater success.
Barbara Konstantinovna Remchukova — Graduate student at MGIMO University Ministry of Foreign Affairs of Russia and member of the board of directors at Nezavisimaya Gazeta.