Earlier this month Politico reminded us that, in the talks with the Koreans about KORUS, the Trump Administration is not following the procedures set out under Trade Promotion Authority. The theory is that the Administration doesn’t plan to change U.S. law, no Congressional vote is required, and thus TPA isn’t applicable.
So far so good. But it’s important to note that rules of origin – a signature issue for this Administration – are legislative. They are enacted by Congress as part of implementing legislation. While set out in the Harmonized Tariff Schedule of the United States, which is published by the U.S. International Trade Commission, they are nevertheless statutory. As such, any change to the rules of origin requires Congressional approval, unless Congress has otherwise delegated to the President the authority to make changes unilaterally.
The Administration has emphasized the importance of the auto rules of origin in the NAFTA context and has set out aggressive negotiating proposals. Advocates for imports outside of the NAFTA region assert that such strict rules will result in offshoring, not onshoring. While critics of those pushing for stronger rules have complained that little empirical evidence is being deployed to craft new rules, it is far from clear that rule of origin negotiations have ever involved meaningful empirical analysis. Rather, these rules have tended be reflect the power of various constituencies.
Given the Administration’s aggressive stance in NAFTA, the absence of any parallel effort with Korea is notable. If the Administration considers NAFTA’s 62.5% content requirement too low, what does it think of KORUS’ content requirement, which is only 35%? The chart at the end of this Ways and Means Democratic staff report compares automotive content requirements under the two agreements (and TPP).
There are valid reasons to have a lower requirement in KORUS than NAFTA. NAFTA created a truly integrated North American automotive production regime, such that automakers use components from all three NAFTA parties to make their vehicles. But as KORUS only includes the United States and Korea, the Mexican and Canadian content of U.S. exports to Korea does not count toward the 35% requirement. Thus, a 62.5% requirement in KORUS would make it nearly impossible for U.S.-made vehicles to qualify for tariff preferences. The Korean market is likely not large enough to drive a change in U.S. producer sourcing patterns.
On the other hand, the 35% threshold means that up to 65% of a Korean car exported to the United States can come from China and still qualify for duty-free treatment. As we have previously discussed, this is problematic in that Korea is obliged to abide by labor, environmental, and intellectual property standards, whereas China is not.
Furthermore, China is largely responsible for a global glut of steel and aluminum — important inputs in vehicles — that is putting producers in other countries out of business. Korea is an effective passthrough to the United States for excess Chinese steel and aluminum production. Rules of origin requiring U.S. or Korean steel and aluminum to be used in autos is one tool the parties have to curtail the pathways for Chinese excess production to end up on U.S. shores – at least, to end up on U.S. shores duty-free.
There could be a simple reason that the Administration is focused on NAFTA, and not KORUS: NAFTA’s deficiencies were a significant point of discussion during the 2016 campaign. So was TPP. The automotive provisions were particularly controversial, and in this speech, Candidate Trump cites, approvingly, Sandy Levin’s view on TPP automotive rules. One of Levin’s grievances was that the TPP auto rules threatened to undermine the NAFTA rules because the TPP thresholds were lower; inasmuch as vehicle producers could elect to import under either agreement, the lower-content TPP rules would de facto replace the NAFTA rules. No similar discussion was held with respect to Korea, given that Korea was not part of TPP.
Regardless of the reason, if the Administration is concerned about free riders to U.S. trade agreements, then the rules in KORUS are as viable a candidate for reconsideration – perhaps moreso – as those in NAFTA.