Donald Trump lambasted
the Trans-Pacific Partnership at Tuesday night’s Republican presidential
debate, contending that China would use it to “take advantage of everyone” —
generating snickers
from journalists and a withering refutation
from Rand Paul, who said “we might want to point out that China is not part
of this deal.”
But Trump never suggested that China was part of the
TPP, only that the country would “come in, as they always do, through the
back door” of the agreement. And he was right.
The TPP does indeed allow China and other non-members
to reap benefits from the deal without having to abide by any of its terms.
Here’s how it works: TPP and other free trade deals
allow signatories to exchange goods without tariffs. But we live in a
complicated world, with source materials derived from one country often
traveling through a supply chain to another and completed in a third before
moving to a retail market.
To cope with this, TPP adds a “rule
of origin” chapter to determine whether an amalgamated good qualifies for
tariff-free status. This is particularly important in Southeast Asian nations
like Vietnam or Malaysia, which get a significant
amount of production
materials from China.
TPP says that all materials that go into a good,
outside of a de minimis 10 percent, must derive from TPP countries.
However, there are numerous exceptions and exemptions, along with a confusing
set of calculations to determine eligibility. Through these cracks in the
agreement, as Trump alluded, China can deliver goods to TPP countries without
tariffs.
Right now, the U.S. reserves the right to slap large
tariffs on China, as it has done on steel
(up to 236 percent), solar
panels (up to 78 percent) and tires
(up to 88 percent). But under TPP, many products, from agriculture to chemicals
to plastics to leather seating, can include up to 60 percent of material from a
non-TPP country.
Each product has a specific rule of origin that sets
the level of non-TPP material that can be incorporated in a good. The chapter
designating which products require which percentages only lists numbers instead
of product names, which have to be converted using the international Harmonized Schedule of tariffs.
Green tea, 0902.10 on the Harmonized Schedule, can
have a “regional value content” — meaning content from TPP countries — of not
less than 40 percent. But that doesn’t mean 40 percent of the content; it means
40 percent of the value of the material, which takes into account
shipping, processing, and many other variables. While the final calculations
must follow basic accounting principles, they will be by definition inexact, so
even more than 60 percent of a good, in reality, could come out of a non-TPP
member like China.
Weak rules of origin are most clearly seen in auto
production, which has its own special “net cost” method of calculating rule of
origin. As Teamsters President James Hoffa has pointed
out, while under NAFTA 62.5 percent of a car had to be made in a member
country, with TPP that number goes down to 45 percent. An additional
schedule of other parts would be considered as coming from a TPP country
regardless of its origins, lowering the rule of origin to as much as 35
percent. A car could even be labeled “Made in America,” despite having the majority
of its parts originating from China. That includes Chinese steel, currently
subject to massive tariffs for U.S. import.
Rules of origin for textiles are allegedly more
stringent, but they include a “short
supply” list, allowing TPP countries to get their materials from non-TPP
nations if they are in short supply within the TPP zone. This includes nearly
200 different fabrics, even certain types of cottons, any of which could come
from China and get preferential tariff treatment.
There are also loopholes available. Take for instance
Article 3.6, “Materials Used in Production.” This says that, if non-originating
material undergoes further production in an originating country, then that
material would be treated as originating. So you can imagine a disassembled
Chinese product, shipped to Vietnam, put on a production line for completion,
and delivered tariff-free to the United States.
Importers and exporters make certifications for the
rules of origin, and if they can source materials more cheaply from China or
elsewhere, they have an incentive to fudge the numbers to maintain their supply
chain. No certification is needed for shipments under $1,000, meaning any
scheme to ship large quantities in small segments could slip past inspection.
TPP members can inspect goods, but it’s not as simple
as looking at a shirt and divining what part of it came from a certain country;
enforcement is difficult and expensive. Brunei, Malaysia, Mexico, Peru and
Vietnam have five years to institute a certification system for rules of
origin, giving time for importers to maintain their existing systems and figure
out how to game TPP rules.
So China would not have to raise any standards or
comply with any TPP rules, yet still be able to produce millions of auto parts
and textiles for TPP countries at a lower cost, without the burden of tariffs.
“This will undoubtedly hurt the competitiveness of American manufacturers,
particularly the American auto industry,” said
Rep. Dan Kildee (D-Michl.), an opponent of TPP.
While Trump’s bluster certainly could be mistaken for
ignorance about TPP, in this case he’s right: China can get their goods to the
U.S. and other countries through the back door, in a number of ways, and take
advantage of TPP without being part of the agreement. Our trade deficit with
China, which for the first 9 months of the year stood at $273 billion,
would likely not appreciably change after the agreement, despite the additional
trading partners.
Watch the exchange between Trump and Paul:
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