Topic: Trade and Immigration

How Will the TPP Impact Vietnam’s “Nonmarket Economy” Designation?

When deciding whether to impose antidumping duties on imports from Vietnam, the United States uses what’s known as nonmarket economy (NME) methodology.  That is, instead of comparing a product’s U.S. price with the price for the same or similar product in Vietnam, U.S. authorities compare it with a fictitious price constructed using surrogate values from third countries.

The use of NME methodology is prohibited under the rules of the World Trade Organization.  But when Vietnam and China joined the WTO, they each agreed that the use of NME methodology would be permitted against them for an additional 15 years.  For China that’s until the end of 2016, and for Vietnam it’s until the end of 2018.

Vietnam, however, is also a negotiating party to the Trans-Pacific Partnership, a 12-member free trade agreement that may be concluded this year.  Last week, Vietnam’s Ambassador to the United States implied that Vietnam was seeking to have its NME status revoked as part of those negotiations.  As reported at Inside U.S. Trade ($):

“I think on the question of the market economy status, we can do it together. Vietnam has been doing it with other countries and I think about three dozen or something countries have recognized that,” said Pham Quang Vinh, Vietnam’s ambassador in Washington. Vinh added that he hopes “when we reach a conclusion of the TPP, then everything [with regard to this issue will] be resolved.”

It certainly makes sense that Vietnam would hope to negotiate the end of NME treatment.  As the Ambassador explained, they’ve already secured market economy status in other countries.  The TPP is a natural vehicle for getting a similar commitment from the United States .  But there’s no guarantee they’re going to get it:

But his counterpart, U.S. Ambassador to Vietnam Ted Osius, seem to tamp down those expectations. Speaking at the same event, Osius indicated that while TPP might put Hanoi on strong footing to make the economic reforms necessary to become a market economy, a change in its status would be likely be further down the road. Both officials spoke at March 24 event at the Center for Strategic and International Studies (CSIS).

Osius said that the U.S. Commerce Department process to determine a country’s market economy status is non-political, and that Vietnam still needs to fulfill certain requirements, such as having a convertible currency.

The U.S. official’s characterization is telling.  The U.S. government has consistently argued that NME status is a factual question.  That is, if Vietnam or China meets the criteria under U.S. law for market economy treatment, their NME status will be revoked accordingly. 

Schumer Vs. Reid on Trade Policy

Senate Democratic Leader Harry Reid (NV) has announced that he will not seek reelection in 2016, and his most likely successor is Chuck Schumer (D-NY). No doubt a lot will be said by journalists and commentators about what this transition means for policy and politics.

If you want to get an idea of what that change might mean for U.S. trade policy in the long run, you should take a look at Cato’s congressional trade votes database—Free Trade, Free Markets: Rating the Congress.

Throughout his career, Reid has been a staunch opponent of trade liberalization. He has voted in favor of market-distorting subsidies and tariffs at almost every opportunity:

 

For instance, Reid thwarted President Obama’s attempt to secure trade promotion authority last year when Reid was still majority leader.

Will the TPP Strengthen U.S. Foreign Relations?

The Obama administration wants us to believe that even while the Trans-Pacific Partnership is shaping the global economy in favor of U.S. interests, it is also furthering U.S. foreign policy by strengthening alliances and containing China’s influence in the Asia-Pacific region. 

Alan Beattie of the Financial Times has written a scathing rebuttal to this line of argument:

This is an appealing fall-back for those who don’t like the deal’s content, but is at best one of the weaker arguments in favour. Whether or not agreements help strategic alliances, the intrusive and one-sided nature of pacts negotiated with the US can arouse resentment as well as cooperation.

The participation of countries in the TPP has less to do with enthusiasm for importing the US economic model than a grudging acceptance that yet more tribute has to be paid in order to retain access to the US market. Negotiating a trade deal with the US is not a particularly pleasant business, and nor is it becoming happier over time. You are essentially presented with a US model agreement that contains a decreasing proportion of actual free trade and an increasing proportion of intellectual property protection, and invited to sign.

It’s not clear that a country’s affection for the US will increase after being required to rewrite its patent and copyright law every few years on a model dictated by, respectively, the Pharmaceutical Research and Manufacturers of America and the Recording Industry Association of America. The US itself does not offer much liberalisation. It is highly unlikely to substantially dismantle its agricultural subsidy and protection regime to allow Australian and New Zealand farmers abundant access to its dairy market or stop its rice subsidies disadvantaging Vietnamese rice exports in world markets. America’s trading partners are thus on a permanent treadmill of enforced policy change in order to keep their trade access to the US.

Don’t Envy Senator Wyden

Being a U.S. senator can be fun. The position brings with it a certain amount of influence, fame, and stature. However, serving in the Senate also is fraught with challenges. Much time must be spent away from family. Flying back and forth between home and Washington can wear a person out. And some voters always are unhappy with you, sometimes really unhappy.

This is a complicated moment for Sen. Ron Wyden (D-OR). He has paid his dues in the Senate since 1997 and now is one of its more senior members. That seniority has brought him to the position of ranking Democrat on the Senate Finance Committee, which has the responsibility (among others) for establishing policies pertaining to international trade.

Congress is trying to decide whether to grant President Obama Trade Promotion Authority (TPA), formerly known as “fast track” authority. TPA commits Congress to an up-or-down vote (no amendments) on a trade agreement presented to it by the White House.  This procedure provides foreign negotiating partners with assurance that Congress will consider any agreement as a complete package, thus avoiding the risk that it might be amended in response to pressure from groups that are unhappy with one or more of its provisions. 

Such pressure dissuaded Congress from approving provisions that had been agreed to by the administration in the 1967 Kennedy Round of negotiations, which were conducted under the auspices of the General Agreement on Tariffs and Trade (GATT). Other countries were not amused when the United States didn’t live up to its Kennedy Round commitments. To rebuild its negotiating credibility, the United States needed to find a way to bridge the Constitution’s clear delineation of powers: the president has the right to negotiate with other countries, but Congress has authority to regulate foreign commerce. 

The response was the Trade Act of 1974, which developed the basic formula for approving trade agreements that has been used ever since. Congress granted the president five years of negotiating authority that covered both tariffs and non-tariff measures.

The most recent version of TPA expired in 2007. President Obama currently is seeking a new grant of negotiating authority in order to conclude the Trans-Pacific Partnership (TPP) with 11 other nations, and possibly also the Transatlantic Trade and Investment Partnership (TTIP) with the 28 members of the European Union. 

Senator Wyden will play a crucial role in determining whether or not TPA is approved. Sen. Orrin Hatch (R-UT), chairman of the Finance Committee, and Rep. Paul Ryan (R-WI), chairman of the House Ways and Means Committee, would like to introduce TPA legislation. However, they don’t want to do so without bipartisan support. There is a long tradition of Democrats and Republicans working together on behalf of trade liberalization. 

Rep. Sandy Levin (D-MI), the ranking Democrat on the Ways and Means Committee, generally opposes trade reforms that could lead to a greater selection of affordable automobiles for consumers. In other words, he’s a lost cause when it comes to sponsoring a version of TPA that the White House might approve. This is why all eyes are on Senator Wyden.

Regulatory Capture of Trade Agreements

This is from Ezra Klein:

I’m skeptical of the sheer size of modern trade deals and the opaque process that creates them. The negotiation process isn’t quite as secretive as some think — the congressional briefings are constant, and the advisory committees are sprawling — but it is insanely complex.

The result is that even where there is transparency, it’s a form of transparency that can only really be navigated by politically sophisticated, highly motivated actors — which is to say it’s a form of transparency that quickly becomes a venue for lobbying. That’s one reason these deals end up including so much … stuff. The process is constructed in such a way that the negotiators get a lot of special pleading from individual industries and interests. Responding to those requests feels like responding to the public, but it isn’t, and it leads to deals jam-packed with individual provisions that look a lot like giveaways.

This is a great insight about modern trade agreements.  It’s important to think of a trade agreement as just another piece of legislation.  In the past, trade agreements focused mainly on tariffs.  Now they govern a wide range of policies (“stuff”), and as a result they are susceptible to regulatory capture.  Special interest groups see them as just another way to achieve their political goals.  What this means is, as with any piece of legislation, don’t be fooled by the marketing.  Look closely at all the details.

Lego Asks U.S. to Ban Imports of “Figure with Skirt”

Lego’s patent for the “Toy Building Brick” expired in 1988, but the company still aggressively tries to claim monopoly privileges over its products.  Ten years ago, Lego tried unsuccessfully to claim trademark protection for blocks with circles on top.  Now they are going after competitors for making products that look similar to the new “Lego Friends” line of blocks marketed toward girls.  For example, Lego complains that its competitors have infringed its copyright in “Figure with Skirt”.

Figure with Skirt

Of immediate interest is the fact that Lego has filed a complaint at the U.S. International Trade Commission seeking to bar importation of certain Mega Bloks, Lite Brix, and Best-Lock products.  There are a number of reasons why the ITC should not be adjudicating patent or other intellectual property disputes, and if you’re interested in the full story, you should read my Cato Policy Analysis on the subject from 2012.

Is the TPP Necessary as a Response to China?

Paul Krugman has a blog post on the Trans Pacific Partnership (TPP) today.  Overall, he is skeptical of the need for it.  He refers to a recent op-ed by Larry Summers, and notes that Summers appears to support “an idealized TPP that could have been,” but is “against the TPP that actually seems to be on the table.”  Krugman says he feels similarly.

Tyler Cowen responds as follows:

I agree with much of the economics in his post, though I would frame the points with a different kind of rhetoric.  But I think Krugman is nonetheless wrong to oppose TPP.  You will notice the word “China” does not appear in his argument.  He closes with a question: “Why, exactly, should the Obama administration spend any political capital – alienating labor, disillusioning progressive activists – over such a deal?”  The answer is simple: this deal either happens on American terms, or an alternative deal arises on Chinese terms without our participation.  For rather significant foreign policy reasons we prefer the former, and the pragmatic side of President Obama understands this pretty well.

Cowen is one of my favorite bloggers, both for style and substance, but I want to push back a little bit here.  The alternative deal he is referring to is the Regional Comprehensive Economic Partnership (RCEP), a negotiation among 16 countries, including China and India, in the Pacific region.  There is a good deal of overlap, in terms of participating countries, with the 12 TPP parties.  I think he is making two points here: (1) If there is no TPP, there will be an RCEP, and that will be bad for the United States; and (2) the RCEP will reflect Chinese priorities, not U.S. priorities, and that will be bad for the United States.

Just briefly, let me comment on both points.  First, the RCEP may be, to some extent, a response to the TPP.  If the TPP fails, the motivation for the RCEP might also diminish.  Furthermore, regardless of what happens with the TPP, it will not be easy to complete the RCEP.  Getting India, China, and 14 other countries to agree will not be easy.  So there may never be an RCEP.

Second, the reference to Chinese terms makes it sound like this will be an agreement that establishes state-owned companies as the norm.  In reality, if you look at the topics covered, I’m not sure this agreement would be much different than any other trade agreement, except perhaps less emphasis on labor rights and intellectual property protection than in U.S. agreements.  There will be tariff lowering, services liberalization, and all the usual issues.

In my view, then, we should consider the TPP on its own merits and not worry so much about what other countries do.  If they want to liberalize amongst themselves, that’s great.  But that’s not a threat, just an incentive to do a better job with trade negotiations ourselves.