A number of associations representing a broad spectrum of the U.S. economy, such as the National Association of Manufacturers, the U.S. Chamber of Commerce, the Emergency Committee for American Trade, the American Farm Bureau Federation, the Business Roundtable and the Coalition of Service Industries want “a comprehensive agreement that covers every commercial sector and sub-sector of the U.S. economy”. These organizations argue that if the United States excludes any specific sectors from the negotiations, our TPP partners will exclude sectors of interest to American exporters.
Several U.S. sectors, however, are pressing for limiting trade liberaliza- tion, including the sugar, beef, dairy, textile, footwear and automobile sectors. In some of our free trade agreements with TPP countries, these sectors have successfully demanded that market access be limited or that they be excluded from trade liberalization.
The key issue in this tug-of-war is whether the final TPP agreement should preserve the rules and carve-outs in the existing free trade agree- ments that the participants have among themselves or whether they should be reopened for negotiation. How this issue, which is known as the “Architecture of the TPP”, is resolved will have a significant impact on the extent to which trade actually expands as a result of the agreement.
Preserving the rules and carve-outs in the existing free trade agreements is politically easier, since it would not stir up opposition from the industries where market access is limited in a specific agreement by opening up nego- tiations for greater liberalization. For example, sugar was exempted from trade liberalization in our agreements with Australia and Canada, but not in our other FTAs, and the industry is opposed to opening the U.S. market to Australia and Canada in the TPP. To date, USTR has supported this ap- proach and has opposed re-opening the market access schedules in any of our current FTAs with TPP countries. If the negotiations really were to be concluded by the end of 2012, it is probable that this could only be done by retaining the market access provisions in each of our current FTAs.
However, the United States is pressing our TPP partners for full access to their markets. We want duty free access across the board to all these markets, and some currently have relatively high tariffs; for example, Malaysia has average applied tariffs of 10.9 percent on agricultural goods and 7.6 per- cent on non-agricultural goods, and Vietnam’s average applied rates on ag- ricultural goods are 17 percent and 8.7 percent on non-agricultural goods. Additionally, we want Brunei, Chile and Vietnam to eliminate all trade barriers to information technology products and to join the WTO agree- ment on information technology. In the services area, Malaysia has limits on foreign participation in many sectors, and Vietnam has never negotiated a trade agreement to open its services market. If we press for carve-outs, the other TPP countries will do likewise.
Economic theory also indicates that the more ambitious approach is desirable. Import barriers produce distortions in the domestic economy, and lead to overproduction and inefficient deployment of capital and labor. Common rules are also important economically. For example, different free trade agreements among the TPP participants have different rules of origin; this might mean that a U.S. exporter could qualify for the TPP zero duty rate in selling to Canada but not to New Zealand. Common rules of origin would promote economic efficiency.
The more ambitious market access approach should be adopted, since it is now clear that the negotiations will almost certainly extend into 2013 and perhaps 2014. A common tariff schedule and rules of origin would result in a greater level of trade expansion and potential economic ben- efits. It would also provide a better template for future expansion of the agreement to other APEC members.
However, trade liberalization can cause unemployment and economic difficulty in sensitive industries, and strong opposition to an agreement by a number of adversely impacted industries can result in rejection of the agree- ment by Congress. Some considerations regarding the sensitive U.S. sectors are the following...
Sugar: The United States sharply limits access to our sugar market through a tariff rate quota, which causes prices on the U.S. market to be sharply higher than prices globally. Sugar was exempted from our FTAs with Australia and Canada and both countries would like improved ac- cess under the TPP. Users of sugar, such as manufacturers of soda and baked goods, would also like to see greater market access to our sugar market, since this would enable them to compete better in global markets. However, the sugar industry strongly opposes market liberalization.
The United States is the sixth largest producer of sugar, producing 7,521 metric tons in 2011/12, according to the U.S. Foreign Agricultural Service (FAS). Of our TPP partners, Australia is the ninth largest producer at 3,900 metric tons, while Canada only produces 135 metric tons. The sugar industry employs some 40,000 workers (including both field and factory workers), ac- cording to an August 2011 report for the American Sugar Alliance.
Dairy: The United States is the largest producer of cow’s milk, producing 87.5 million tons in 2010; New Zealand is the eighth largest at 17 mil- lion tons, while Canada produced 8.2 million tons. New Zealand has a relatively open market and is globally competitive (accounting for some 35 percent of world exports), while both the United States and Canada have protected dairy markets. The dairy sector, which includes milk, cheese, but- ter and other dairy products, was excluded from the NAFTA agreement.
U.S. producers want improved access to the Canadian market, while im- proved access to U.S. and Canadian markets is one of New Zealand’s high- est priorities in the TPP negotiations. The U.S. dairy industry wants dairy products to be excluded from any agreement with New Zealand, on the basis that some 90 percent of New Zealand’s dairy industry is controlled by one company, Fonterra, and that this distorts world trade.
Beef: The United States is the largest producer of beef, producing 12 mil- lion metric tons of beef and veal in 2011, most of which is consumed do- mestically. Australia was the number one exporter in 2011 at 1.4 million metric tons, New Zealand was number five at 0.5 million and Canada was number six at 0.4 million.
The U.S. tariff on beef that exceeds a country’s quota is generally 26.4 percent, while the rate under the quota is much lower. For example, New Zealand can export up to 213,402 tons to the United States at a duty of 4.4 cents per kilogram. The U.S. Cattleman’s Association is opposed to removing this tariff rate quota. The Cattleman’s Association also wants a more predictable safeguard mechanism when imports disrupt the domes- tic market. The U.S. dairy and beef industries, along with a number of other agricultural sectors, are pressing for better discipline on the use of san- itary and phytosanitary (SPS) measures. If these are incorporated in a TPP agreement, opposition by these two industries may be reduced to some extent.
Textiles, apparel and footwear: One of Vietnam’s top goals is better access to the U.S. textile, apparel and footwear markets; this is controversial within our textile and apparel industries and New Balance, the largest domestic footwear producer, opposes increased footwear access for Vietnam. It may be possible to deal with much of the concern of the domestic industry through the rules of origin...
Autos: Negotiations in the auto sector in particular will be very difficult if Japan joins the TPP. An Economic Strategy Institute paper notes that Japanese barriers to auto imports include government targeting of support for the domestic industry, currency manipulation and a dealership struc- ture that is controlled by the Japanese auto producers. Because of its closed market to auto imports, the American Automobile Policy Council opposes Japan’s entry into the TPP.