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Richmans' Trade and Taxes Blog
Congress should reject the Free Trade Agreements unless a Balanced Trade Clause is added
Howard Richman, 6/29/2011
With growing trade deficits preventing the U.S. economic recovery, how could Congress and the President leave balancing trade clauses out from new trade agreements? Have they learned nothing?
Coalition for a Prosperous America has published a press release giving six reasons why Congress should reject the Korean, Colombian and Panamanian trade agreements that are currently being considered. Here are their six reasons:
1. Trade deficits: The trade agreements will cause worsening trade deficits. Trade deficits depress GDP growth and increase unemployment because U.S. facilities are offshored, or because components and subassemblies are procured offshore. Any foreign market share gained is overwhelmed by domestic market share lost.
2. Job loss: The trade agreements will cause job losses. Government data shows no support for a net job gain argument. Third party studies, supported by historical trade agreement data, conclude that net job losses will result from these trade agreements.
3. Non-tariff barriers: The trade agreements fail to address foreign non-tariff barriers practiced by trade rivals. These non-tariff barriers eviscerate hoped-for U.S. net export gains even after tariff are reduced. Currency manipulation, border adjustable taxes and state subsidies are prime examples. South Korea is a known currency manipulator. South Korea has a 10 percent value added tax that is charged to virtually all imports, and can increase that import charge without restriction. Like China, South Korea practices a form of state managed capitalism. South Korea is not a "free trading nation" and this agreement does not change that fact. Any concessions by South Korea are easily negated by its pre-existing non-tariff tactics. Indeed, the NAFTA and CAFTA countries all used currency devaluation and/or the addition of border adjustable taxes on U.S. exports to negate the tariff concessions they made.
4. Sovereignty Loss: The U.S. will be handicapped in domestic trade law enforcement. South Korea, Colombia and Panama will have special rights in our trade law systems. Under these agreements, the U.S. will be prevented from enacting tough financial industry reform, despite the need shown in the Great Recession. Further, hundreds of foreign companies will receive special standing to challenge U.S. laws which they can claim interfere with those companies’ investment expectations, and which claims are judged in unaccountable foreign tribunals.
5. Gateway from China/Transshipment through Korea: The South Korea trade agreement allows Chinese companies to produce 65 percent of a products’ value, with only 35 percent South Korean content, and still qualify for low U.S. tariff rates. China is South Korea’s largest trading partner and has proven particularly aggressive in routing its products through third countries to either avoid antidumping duties or to achieve lower tariff rates. The volume of future Chinese transshipments must not be underestimated.
6. Food and product safety: The U.S. border control, food safety and product safety agencies will be hampered in verifying that imported food and other products are safe. The inspections of imported products are nearly non-existent. Yet, U.S. companies must fully comply with food and product safety rules.
Reasons 1, 2, 3 and 5 would all be addressed if these free trade agreements included a scaled tariff clause allowing either party to enact a trade balancing tariff if the conditions of the scaled tariff are met. The wording of that clause can be taken directly from our proposed Scaled Tariff for Balanced Trade Act. In other words, Congress could add the following additional article to the Korea Free Trade Agreement:
Article 23.5. Trade Balancing Scaled Tariff.
SECTION 1. DEFINITIONS
In this Agreement:
(1) TRADE SURPLUS COUNTRY- The term `Trade Surplus Country' means a country which had a trade surplus (Goods plus Services) of at least $500 million with the other party during the most recent four economic quarters and whose exports to the other party (Goods plus Services) were more than 110% of its imports from the other party (Goods plus Services) during the most recent four economic quarters.
(2) TRADE DEFICIT COUNTRY- The term `Trade Deficit Country' means a country which had a current Current Account Deficit with all of its trading partners of at least 1% of its GDP as determined by its Commerce Department during the most recent calendar year for whch such data is available.
(3) GOODS- The term `Goods' means all products that are traded which are not services.
(4) TRADE DEFICIT- The term `Trade Deficit' means the dollar value of a country's imports in Goods and Services from the other country after subtracting the dollar value of exports of Goods and Services to that country.
(5) SCALED TARIFF- The term `Scaled Tariff' means a duty applied to Goods imported from a Trade Surplus Country by a Trade Deficit Country. The rate of the duty is adjusted quarterly and calculated as the rate that would cause the revenue taken in by the duty upon imported Goods from the Trade Surplus Country to equal 50% of the Trade Deficit with that country over the most recent four economic quarters.
SECTION 2. OPERATION OF A SCALED TARIFF
(a) IN GENERAL- A Trade Deficit Country shall impose a Scaled Tariff upon Goods produced by a Trade Surplus Country. In order to make the rate of the duty sensitive to changed policies in the Trade Surplus Country, the Trade Deficit Country shall recalculate the duty rate of the Scaled Tariff quarterly, based upon bilateral trade data for the most recent four quarters, and should redetermine, quarterly, whether the other country is still a Trade Surplus Country.
(b) VALUATION OF IMPORTED GOODS- The Trade Deficit Country shall establish a method for the valuation of Goods imported into the Trade Deficit Country.
(c) APPLYING THE SCALED TARIFF TO IMPORTED GOODS. The Trade Deficit Country will charge the Scaled Tariff on all Goods originating from the Trade Surplus Country.
The purpose of trade is for one country to trade a basket of goods which it values less for another basket of goods which it values more. If trade is balanced both countries benefit. This scaled tariff clause would insure that neither country manipulates non-tariff barriers and exchange rates to steal its trading partner's industries. Instead of one country gaining income and jobs while the other loses jobs and gains debt, both countries would gain from the growing trade between them.