PMD: "Strictly Business" interpretations of a WTO rule

Regular readers of the blog will recall we have a wonkish obsession with a much debated provision in the WTO services agreement related to financial regulations taken for prudential reasons. In 2009, we put out a report and literature review on the topic, and have regularly discussed the topic on the blog. For the last several years, we've submitted Freedom of Information Act (FOIA) requests from various U.S. agencies to try to get a better picture of what this and other WTO financial service obligations mean. The disclosures have been interesting, to say the least. And not only because they involve top officials and lobbyists like Tim Geithner that are still running around DC.

But before we get into what these documents show, some background is needed. For those fortunate enough to not be initiated, here is the provision, which is contained in Article 2(a) of the Annex on Financial Services to the General Agreemeent on Trade in Services:

2. Domestic Regulation   

(a) Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system.  Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.

We'll call this PMD, and no, that's not a reunited hip-hop crew from Brentwood minus Erick Sermon. But it does mean "strictly business." (Sorry, I couldn't resist.) 

The prudential measures defense (PMD) is highly confusing. Those familiar with other text from WTO agreements will note that the first sentence sounds like it provides a lot of flexibility for financial regulators, while the second sentence seems to take it all away. After all, a country would only need a prudential defense if it were found guilty of violating WTO rules. What good is a defense if you can't use it?

There are a variety of ways a WTO panel could approach the interpretive challenge of the PMD.

As Obama Meets with Panama’s President Martinelli, U.S.-Panama Trade, Tax Agreement Folly Comes into Focus

Statement of Todd Tucker, Research Director, Public Citizen’s Global Trade Watch

As President Barack Obama meets with Panamanian President Ricardo Martinelli today, the folly of Obama’s recent push to ratify former President George W. Bush’s leftover U.S.-Panama trade deal makes it evident that Obama has not learned from past trade policy mistakes. 

Polling repeatedly shows that Americans do not like NAFTA-style trade agreements, but how does a president claiming to close our budget deficit in part by cracking down on tax havens and tax dodgers explain why it’s a good idea to do such a deal with a notorious tax haven? Before considering any trade deal with Panama, Congress should require Panama to sign a tax agreement that isn’t riddled with loopholes and wait to see if and how it is implemented.

We simply have no idea whether and how Panama will implement the modest commitments in its recently-signed bilateral tax agreement. Even if it did so fully, the country’s severe tax haven and money laundering problems will not end, and the other problems raised by Congress have been left entirely unresolved. Time and again we have seen U.S. presidents get us into trade deals based on countries’ promises to fix problems in the future, only to see the old problems get worse once the scrutiny and pressure related to a pending trade pact is removed. 

It gets worse. The proposed Panama trade deal would undermine the tools we now have to combat financial crime by newly empowering private investors to directly challenge U.S. anti-tax haven policies that they claim undermine the limits on financial regulation included in this agreement’s text. The agreement was signed before the global financial crisis and consequent moves toward stronger financial regulation. It also contains the expansive limits on financial regulation included in all of Bush’s bilateral trade pacts.

The actual language of the new tax treaty does not require Panama to automatically share information about U.S. individuals and corporations hiding their assets, but only requires Panama to respond to inquiries if U.S. officials know enough to inquire except “where the disclosure of the information requested would be contrary to the public policy” of Panama. Given Panama’s long-standing public policy of encouraging tax-haven activities, this loophole is big enough to keep its offshore economy alive and kicking.

We’ve seen this promise-now-implement-later show in the past – recently with the Peru trade deal – and it’s been a debacle. In exchange for their support for the Peru pact, Democratic trade leaders in Congress agreed to changes in that pacts’ labor and environmental terms, including a specific commitment by Peru to make changes in how it governed its forests. The Peru pact went into effect in January 2009, just as President George W. Bush was leaving office and before Peru had implemented its labor law reforms or environmental commitments. The Bush trade team simply certified Peru as having met its labor and environmental obligations, despite the protests of the Democrats who had made the 2007 deal and who outlined a host of ways that Peru was not yet in compliance. The forestry policies that Peruvian President Alan García eventually began pushing relieved the government of its obligations to consult with indigenous groups before making changes to forestry, mining or timber policies impacting their lands. The Peruvian government’s crackdown on indigenous communities protesting that pact’s implementation led to the infamous Bagua massacre. Despite the violence, which left 33 indigenous protestors and police dead, and the lack of a new forestry law, Peru’s FTA privileges have never been suspended. But, thanks to the so-called investor-state system, private investors can and currently are challenging Peru’s environmental laws.

Obama should have learned from the Peru trade deal debacle of implementing a trade deal now for promises of change in the future. Congress should require Panama to demonstrate it will end its decades of facilitating tax dodging before an FTA is approved – just as Congress should have required Peru to implement its labor law reforms and forestry policies first and taken the time to see whether they were working before holding a vote on that deal.

To see Public Citizen’s analysis of the impact of the NAFTA-style deal with Panama on U.S. anti-tax haven policies, go to http://www.citizen.org/Page.aspx?pid=519.

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Todd Tucker in Foreign Policy magazine: "Obama has swapped smart policy for the same-old job-crushing trade deals."

Check out Todd Tucker's piece in Foreign Policy magazine.

 

 

A Bad Trade

Obama has swapped smart policy for the same-old job-crushing trade deals.

"When Barack Obama was elected back in 2008, he committed to breaking with the same flawed trade policy the United States has followed for a generation. Obama promised a new page, one that focused on creating American jobs and protecting the environment. Instead, his administration has flip-flopped on these campaign promises and is now pushing free trade agreements (FTAs) that are projected to cost American jobs, undermine U.S. negotiating credibility, and could even dampen the president's electoral prospects in 2012. ..."

Read the entire piece here.

USDA's FTA Report Repeats Errors of Previous Flawed Studies

Earlier this week, the USDA released a report attempting to estimate the effects of the Korea, Colombia, and Panama FTAs upon U.S. agricultural trade. It also examined possible effects of the ASEAN-China and ASEAN-Australia-New Zealand FTAs upon the U.S.

Unfortunately, the USDA estimated the effects through a computable general equilibrium (CGE) model, which has a shoddy track record, to say the least. A 1999 U.S. International Trade Commission (USITC) study on the likely effects of China’s tariff offer for WTO accession used a CGE model to estimate that the U.S. trade deficit with China would increase by only $1 billion dollars due to China’s accession. In reality, the trade deficit with China skyrocketed by $167 billion between 2001 and 2008.

Similar studies on NAFTA were also way off the mark. An economist at the Federal Reserve concluded that a CGE-based study of NAFTA underestimated NAFTA’s impact upon U.S. imports by ten times the actual effect of NAFTA. He concluded his study with a recommendation: “If a modeling approach is not capable of reproducing what has happened, we should discard it.”

Not accounting for currency manipulation is a chief problem of CGE models, as Rob Scott at the Economic Policy Institute has demonstrated. The USDA's report even acknowledges the devastating effect currency devaluation can have upon U.S. agricultural exports:

In 1997, U.S. apple exports to Southeast Asia peaked at 150,000 tons, just as the Asian financial crisis struck. The crisis led to sharp devaluations of Southeast Asian currencies that raised the prices of imported apples and income losses that further discouraged apple buying, triggering a dramatic decrease in U.S. apple exports to the region.

As we discuss in a factsheet, Korea is only one of three countries to have ever been placed on the Treasury Department’s list of currency manipulators, having repeatedly manipulated its currency in the past. The Korea FTA contains no prohibition against currency manipulation, so the Korean government could effectively negate the tariff cuts mandated under the FTA through currency manipulation. Despite the long history of Korea manipulating its currency, the USDA’s estimates do not attempt to account for the very real possibility of another devaluation, even though they could have done so through estimating alternative scenarios.

Australia government's new investment rules: offshore no more

Australia's government broke new ground with its recent commitment to move away from the controversial investor-state system. In the Julia Gillard government's trade policy statement, it wrote:

Some countries have sought to insert investor-state dispute resolution clauses into trade agreements. Typically these clauses empower businesses from one country to take international legal action against the government of another country for alleged breaches of the agreement, such as for policies that allegedly discriminate against those businesses and in favour of the country’s domestic businesses.

The Gillard Government supports the principle of national treatment – that foreign and domestic businesses are treated equally under the law. However, the Government does not support provisions that would confer greater legal rights on foreign businesses than those available to domestic businesses. Nor will the Government support provisions that would constrain the ability of Australian governments to make laws on social, environmental and economic matters in circumstances where those laws do not discriminate between domestic and foreign businesses. The Government has not and will not accept provisions that limit its capacity to put health warnings or plain packaging requirements on tobacco products or its ability to continue the Pharmaceutical Benefits Scheme.

In the past, Australian Governments have sought the inclusion of investor-state dispute resolution procedures in trade agreements with developing countries at the behest of Australian businesses. The Gillard Government will discontinue this practice. If Australian businesses are concerned about sovereign risk in Australian trading partner countries, they will need to make their own assessments about whether they want to commit to investing in those countries. [emphasis added]

The last point is fantastic: why should any government be in the business of facilitating offshore investment? That's what insurance markets are for.

Now, the government just has to stick to its guns in the Trans-Pacific FTA talks.

Int'l Call for G-20 Action on WTO Financial Deregulation

As finance mininsters descended on Washington, DC yesterday for this week's G-20, World Bank and IMF meetings, over 125 organizations representing 121 countries called on them to end the WTO' risky financial services behavior.

The WTO has repeatedly ignored warnings from the United Nations and other experts to lift outdated restrictions on financial regulation in light of the 2008-2010 financial crisis. And so far the G-20 has not intervened to help remedy this problem. In fact, despite the G-20's stated goal of ensuring financial stability and preventing future financial crisis, repeated G-20 communiques have recommended conclusion of the Doha Round without addressing WTO limitations on some of the financial policies needed to prevent future financial crisis.

International labor, religious, farming, environment, food security and trade and finance groups are urging the G-20 finance ministers to take a more responsible position on WTO to prevent outdated WTO rules from undermining the financial regulatory reforms our governments must implement to prevent future crises. Their letter comes on the heels of a statement made by over 250 international economists criticizing trade agreement limits on capital controls.

A recent paper prepared by the Financial Stability Board, the International Monetary Fund and the Bank for International Settlements further confirms worries that int'l trade agreement limits could undermine financial re-regulation. Nancy Birdsall, President of the Center for Global Development also recently discussed trade agreement restrictions on new financial policies.

A broad range of organizations are working together to try and change these outdated international trade agreement rules. Some of the signatories to this most recent letter included the Citizens Trade Campaign, Americans for Financial Reform, Teamsters, U.S. PIRG, Public Citizen, Public Services International, the Trade Union Confederation of the Americas, the Hemispheric Social Alliance, SOMO, Third World Network-Africa, Brazilian Network for People’s Integration, Australian Fair Trade and Investment Network, Acord International- Africa, SEATINI, War on Want UK, Eurodad, Council of Canadians, Institute for Global Justice, Friends of the Earth (USA), International NGO Forum on Indonesian Development, and IBON Foundation. 

 

Loophole-ridden tax treaty passes Panama's Assembly

Americans are crying out for fair trade policies and a real crackdown on tax dodging. The Obama administration’s trade and tax agreements with Panama represent neither.

The tax agreement ratified yesterday by Panama’s legislature allows the country’s government to refuse a tax information request “where the disclosure of the information requested would be contrary to the public policy” of Panama. Given Panama’s longstanding public policy of encouraging tax-haven activities, this loophole is big enough to keep its offshore economy alive and kicking.

We simply have no idea how and if Panama will cooperate with its tax commitments and other longstanding congressional demands for tax haven reform. In fact, politicians in Panama are already discussing a constitutional challenge to the tax agreement in the country’s Supreme Court.

What we do know for certain is that the NAFTA-style trade deal with Panama will allow investors registered there to attack future U.S. anti-tax haven initiatives for cash compensation, in tribunals outside of the U.S. judicial system. Such so-called investor-state challenges are far from hypothetical: there are nearly $9.1 billion in outstanding claims under NAFTA-style deals.

President Obama has now adopted a Colombia-Korea-Panama trade package that puts corporate interests above those of American workers and taxpayers. The package represents an extension of the failed Bush-Clinton-Bush trade policies that President Obama was elected to replace.

To see Public Citizen’s analysis of the impact of the NAFTA-style deal with Panama on U.S. anti-tax haven policies, see http://www.citizen.org/Page.aspx?pid=519

Fair trader wins in Peru... again. Will US respect the outcome?

Peruvian presidential candidate Ollanta Humala, long a critic of the NAFTA-style US-Peru trade agreement, has won nearly 32 percent of the vote in the first round of voting. This marks the second time Humala has come in first in the first round: in 2006, he won nearly 31 percent of the vote.

Yesterday, Humala's partner on the ticket told reporters that Humala will determine whether past FTAs are compatible with the national interest. Humala's economic team has blasted the U.S. FTA for being between unequal trading partners.

In contrast, former president Alejandro Toledo and vice president Pedro Pablo Kuczynski - who pushed and continue to push the FTA - finished far behind.

Keiko Fujimori, the former president Alberto's daughter, came in second to Humala, and will face him in the run-off election. She has stated that she supports the U.S.-Peru FTA.

As WOLA reports from on the ground in Peru, much is uncertain the weeks ahead. And although many voters remain suspicious of Humala, "he was the only candidate to offer an alternative to the existing economic model, in a country where a significant portion of the population has not benefited from years of steady economic growth."

Now, it is incumbent on U.S. corporations, the Obama administration in the US and the Chavez administration in Venezuela to stay out of the second round of voting, which is set to occur on June 5. Peru is divided enough without all the outside interventions, and U.S. trade policy has been aggravating these divides rather than leading to healing. See here and here.

After the jump, we have a chronology of the outside interventions in Peru's last presidential election. We detail how the Bush II administration pushed through the FTA after Peru's voters had supported two candidates that were pro-fair trade. One of the fair trade candidates, Alan Garcia, had an eleventh hour conversion to support for the FTA, after being courted by Peruvian and international elites.

HI State Rep Takumi Says No More NAFTAs!

Check out this op-ed written by Hawaii State Rep. Roy Takumi (D-Pearl City, Palisades) in the Honolulu Star Advertiser today. Takumi, who has served in the Hawaii State Legislature for over 19 years, is leery of more NAFTA-style agreements.

I began serving in the state House 19 years ago, shortly before NAFTA was implemented. Since NAFTA and a batch of NAFTA-style deals with other countries, we've suffered an exploding trade deficit, the loss of more than five million manufacturing jobs, and stagnation of real median wages for American workers  at 1970s levels. Meanwhile, we have been flooded with unsafe imported food and goods, and foreign investors have used NAFTA to challenge important state environmental laws before foreign tribunals.

Further, Takumi takes on some of the rosy promises Korea FTA supporters are making to Hawaii's agricultural producers.

The reality is that even with zero Korean tariffs, most of Hawaii's agricultural products cannot come close to the low prices for which these products are sold to Korea by others. For example, Indian banana and papaya farmers sell their crop at one-fourth to one-third the price local farmers require. Peruvian farmers sell guava at $173 per metric ton; our price is $346. Farmers in Thailand, the largest pineapple producer, sell their pineapples at $120 per metric ton compared to $458 locally. How do we compete in this market?

Takumi, who has led efforts to improve trade agreements for several years - including sponsoring legislation that was enacted in 2007 to give the Hawaii legislature a formal role in determining some of Hawaii's commitments to trade agreements - is among many state officials who are critical of the undemocratic NAFTA-style model.

Just a few weeks ago, New Jersey State Senator Shirley Turner (D-Trenton) introduced a resolution supporting a New Jersey Constitutional amendment requiring that the New Jersey legislature give approval before New Jersey may be committed to certain aspects of international trade agreements. This resolution comes on the heels legislation passed by wide margins in the New Jersey legislature last session which was vetoed by the outgoing governor, John Corzine. If Turner's resolution passes, the proposed amendment will go to the ballot this fall.

Obama’s Korea Trade Deal Undermines Future of U.S. Auto Industry, Finds Government Report

The newly released study by the U.S. International Trade Commission (USITC) on the South Korea Free Trade Agreement’s (FTA) supplemental auto deal found that the already hard-hit U.S. auto industry is in for more pain under the Obama administration’s FTA with South Korea. The study was requested following a December 2010 “supplemental deal” that exempted some U.S. autos from having to meet stringent Korean auto safety and environmental standards.

The latest study confirms that, even with the supplemental agreement, very few U.S. autos will be sold in Korea, and a huge increase in Korean auto imports into the U.S. is predicted.

Moreover, the new study did not alter the previous findings that the bilateral and global balance in autos will worsen under this agreement, nor that the U.S. will see an increase in its overall global trade deficit.

The USITC’s newest findings were not unexpected, because in undertaking their congressionally mandated studies of each trade pact, the agency assumes an agreement is fully implemented and tariff reductions are already phased in. The December supplemental deal did not change the ultimate tariff phase outs, only the timelines over which tariffs go to zero. The USITC’s initial 2007 study on the Korea FTA found that the U.S. auto deficit would increase by $531-708 million as a result of the pact.

The House GOP leadership didn’t like that finding, so they requested a new one that incorporated the changes made to the pact in 2010.

In the new study, the USITC noted that slightly improved numbers on U.S. net exports to Korea “stem from changes to the economic environment (e.g., the recent economic downturn) and declines in trade flows in 2009.”

Bizarrely, House Ways & Means Committee Chairman Dave Camp (R-Mich.) celebrated the new study, touting an estimate that the supplemental deal will increase U.S. auto exports by $48-66 million to Korea. But Chairman Camp fails to note that his new study does not change the initial troubling finding that U.S. imports from Korea will also increase $907 million.
 
The findings of the new USITC study, though already bad news for U.S. autoworkers, are also likely to be underestimating the actual damage and inflating the prospective benefits of the FTA and supplemental agreement, for several reasons:

• The USITC refused to incorporate into its modeling more realistic assumptions about Korean consumer preferences, which are overwhelmingly biased in favor of domestically made goods.
• The USITC also did not incorporate into its model the fact that “South Korean” autos can be made with up to 65 percent Chinese or North Korean content, and still receive the privileges of the deal.
• The USITC did not address the concern that members of Congress, industry and unions had that the “transplant” Korean companies now producing in the U.S. South might reduce their employment there, as tariffs are phased out and it becomes easier to simply ship Korean-made cars to the United States.
• The USITC also does not attempt to model the specific non-tariff barriers that Korea promised to remove in the December negotiations, for instance exemptions from safety standards for U.S. automakers that sell below 25,000 cars a year in the Korean market and the exemptions from environmental standards from the years 2012 to 2015. The agency simply assumes that all non-tariff barriers are removed. (The USITC’s model assumes that any difference between the price of U.S. autos in the world market and the price of U.S. autos in the Korean market are attributable to a black box that is deemed one big “non-tariff barrier.” That price differential is simply assumed to disappear.)

Given Koreans are already disinclined to buy foreign cars, a high profile exemption of U.S. cars from having to meet Korea’s strong safety and environmental standards will only exacerbate Korean consumers’ notions that imports are inferior.

President Barack Obama campaigned and won on overhauling our unfair trade policies. Instead, what Americans face with the Korea FTA is the same Bush NAFTA-style agreement, with slightly altered auto tariff schedules. The Korea trade deal is still projected to increase the overall U.S. trade deficit and cost 159,000 U.S. jobs. The Korea deal requires the kind of financial deregulation that contributed to the economic crisis. The FTA’s labor chapter still contains Bush’s ban on reference to the International Labor Organization conventions when enforcing its weak labor standards. This agreement even allows South Korean goods to be given the benefits of the agreement even if such goods contain inputs or parts from North Korea, despite our sanctions on trade with that country. And it still has sovereignty-eroding, public-interest-policy-chilling rules that allow multinational corporations to sue governments in private, foreign tribunals for taxpayer money. There are nearly $9.1 billion in claims in the 14 so-called investor-state cases outstanding under NAFTA-style deals. None of them relate to traditional trade concerns; all of them relate to environmental, public health and transportation policy.

Obama’s Colombia-Korea NAFTA Expansion Is Damaging, Heartbreaking, Infuriating and Disgusting

Statement of Lori Wallach, Director of Public Citizen’s Global Trade Watch

The “action plan” being sold as a means to improve Colombia’s horrific labor rights conditions is in fact a remarkably cynical maneuver to facilitate passage of yet another leftover NAFTA-style Free Trade Agreement (FTA) developed by former President George W. Bush that many in the Congress and American public oppose.

With today’s move, President Barack Obama takes ownership of a Colombia-Korea trade agreement package that poses enormous policy and political peril.

Passing the Korea deal would kill U.S. jobs; even official government studies show it will increase the U.S. trade deficit. Passing the Colombia deal would kill any leverage Colombian union, and Afro-Colombian and other community leaders and their U.S. union and civil society friends and allies have to stop the murders, forced displacements and other acts of political violence that dominate life in Colombia.

Even on the very week that President Obama announced his re-election bid, once again the administration’s response to a GOP/corporate hostage situation has been to betray its commitments and stomp its political base to comply with hostage takers whose goal is Democrats’ defeat.

Obviously, if the goal of this administration action really was to address the conditions in Colombia – where the number of unionist assassinations has grown during the period of maximum congressional and public scrutiny from 37 when the FTA was signed in 2007 to 51 in 2010 – a very different approach would be undertaken.

To start with, the administration would have adopted the recommendations of those in Congress, unions and other civil society groups who have taken a lead on these issues, rather than springing on them a done deal that meets none of the congressional benchmarks and requires no change in outcomes in the horrible human and labor rights violations suffered daily in Colombia before a trade agreement may be considered. Instead of rushing into an easy-to-meet list of changes to laws and agencies in Colombia, which can be done largely with the stroke of a pen, the administration would have required demonstrated changes on the ground – a serious reduction of unionist and other rights defenders’ murders, successful prosecution of some of the thousands of impunity cases – then conditioned consideration of any trade pact on evidence that such changes had actually occurred. Ninety-seven percent of past murders remain unprosecuted.

The terms of a real initiative would have been enforceable as part of a trade agreement – with consequences related to a loss of trade benefits for failure to maintain real improvements. Instead, this plan is all optics, with no requirement that conditions improve all at before an FTA could be moved. And contrary to administration claims, many aspects of it fall outside the weak labor chapter in the FTA text, which relates only to “trade-related” labor issues. And, the deal would have explicitly addressed the documented and escalating human rights abuses, murders and forced displacement of Afro-Colombians, indigenous people and other vulnerable populations.

The goal was not to get a real deal, but to get something that could be announced when Colombian President Juan Manuel Santos visited the White House today.

We face a situation – an Obama Colombia-Korea NAFTA expansion – that is equal parts damaging, heartbreaking, infuriating and disgusting.

Click here to see statements on the “action plan” from members of Congress and U.S. and Colombian union leaders.

Obama to advance Colombia trade pact without requiring union murders to stop

The Obama administration announced today that it would move forward with an Action Plan on the Colombia FTA, without requiring murders of unionists to stop.  

The plan does not appear to fully address any of the 27 labor rights metrics outlined by House Democrats that were necessary to be fully implemented and yielding results before the FTA should be brought to Congress.

Democrats and labor groups quickly criticized the Obama Action Plan. The six congressional Democrats criticized the plan for failing to require actual results on the ground, and said that the plan does not meet their list of concerns. AFL-CIO President Richard Trumka said that the federation was

“deeply disappointed that the Obama administration has signaled that will move forward to submit the proposed U.S.-Colombia Trade Agreement to a vote in the near future. In our view, the situation in Colombia remains unacceptably violent for trade unionists, as well as for human rights defenders and other vulnerable populations... We have no doubt that if 51 CEOs had been murdered in Colombia last year, this deal would be on a very slow track indeed."

Colombia remains the most dangerous country in the world in which to be a trade unionist. In fact, the number of murdered unionists in the last three years – 52 in 2008, 47 in 2009, and 51 in 2010 – has exceeded the 39 killed in 2007, the year the FTA was signed. The 2008-2010 was the period when the Colombian government was under maximum scrutiny.

Indeed, in every year, more unionists are murdered in Colombia than in the rest of the world combined. According to Colombia’s National Labor School, the leading source on the topic, nearly 2,860 trade unionists have been killed since 1986.  Only six percent of these cases have resulted in any convictions. This is roughly a 94 percent impunity ratio. 

Korea FTA Benefits China at the Expense of U.S. and South Korean Workers

We’re continuing our series of facts in response to the Korean Embassy’s misleading claims on the Korea Free Trade Agreement (FTA). Our full response can be viewed here. This is the final installment, focusing on the Korea FTA’s lax domestic content requirements for autos.

Lori Wallach’s Huffington Post piece: “The FTA allows its benefits to accrue to autos that contain only 35 percent U.S. or Korean content.”

Korean Embassy’s claim: “The KORUS FTA stipulates that 35% of the components used to manufacture products (under the build-up method/net cost method) or 55% of the components of the final product (using the build-down method) must originate in one of the two countries to be eligible for preferential treatment. A 45% maximum foreign content rule under the Korea-EU FTA corresponds with the minimum 55% domestic contents rule under the KORUS FTA (using the builddown method). Also, the EU’s standard foreign content rule was 40%, not 45%.” Elsewhere, the Embassy has gone further, stating that the build-up and build-down methods “are supposed to be equivalent to each other. The 20% difference between the methodologies reflects the operation cost in the final product processing stage and manufacturers’ dividends, etc.”[i]

Facts: These two methods are not equivalent. Multinational companies have pushed for rules that intentionally allow them the discretion to include as much as 65 percent content from outside the FTA countries, at the expense of workers in both the U.S. and South Korea.

As the United Autoworkers and others have repeatedly noted, Korean automakers have the option to use the “build-up” method to calculate the domestic value content under the US-Korea FTA, which requires that only 35 percent of the value of the motor vehicle be comprised of domestic parts to qualify for FTA benefits. This method allows – but does not require – that importers deduct certain “fringe” costs like transportation when calculating the maximum permissible share of content from non-FTA countries.[ii]

The EU-Korea FTA provides for only one way for automakers to calculate the domestic value content. Under the EU-Korea FTA, a Korean motor vehicle qualifies for FTA benefits only if its foreign content comprises 45 percent or less of the vehicle.[iii] Put differently, the minimum domestic value content for the EU-Korea FTA is 55 percent. Given that the EU-Korea FTA mandates that 55 percent of the value of a Korean auto must be of domestic components, while the “build up” method of the US-Korea FTA mandates that only 35 percent of the value of a Korean auto must be of domestic components, Korean automakers will be able to put a much greater portion of Chinese components into vehicles destined for the United States, undercutting auto production in the United States.

Members of Congress and fair trade groups have long raised concerns about the low percentage of originating content required for goods to qualify for duty-free FTA treatment. The Labor Advisory Committee for Trade Negotiations and Trade Policy has warned that the lax rules of origin in the Peru, Oman, and Korea FTAs would allow large quantities of goods from third countries such as China to enter the United States duty-free under the FTAs.[iv] Reports on previous FTAs have made similar points.[v] However, industry representatives have successfully pushed the U.S. Trade Representative to include lax rules of origin in FTAs.[vi]

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[i] http://www.koreauspartnership.org/pdf/Other%20Issues.pdf

[ii] See Annex 6-A of the Korea FTA,  Available at: http://www.ustr.gov/sites/default/files/uploads/agreements/fta/korus/asset_upload_file680_12704.pdf. See also: International Union, United Automobile, Aerospace & Agricultural Implement Workers of America (UAW), “The Social and Economic Impact of the US-South Korea Free Trade Agreement (KORUS FTA),” September 14, 2010, Available at: http://www.imfmetal.org/files/10102608591310005/UAW_KORUS_FTA_ENGLISH.pdf

[iii] See Protocol 1 of the E.U.-Korea Free Trade Agreement, Available at: http://trade.ec.europa.eu/doclib/html/145192.htm

[iv] Labor Advisory Committee for Trade Negotiations and Trade Policy, “The U.S.-Oman Free Trade Agreement,” November 15, 2005, at 9, Available at: www.citizenstrade.org/pdf/omanLACreport_11152005.pdf

Labor Advisory Committee for Trade Negotiations and Trade Policy, “The U.S.-Peru Free Trade Agreement,” February 1, 2006, at 1, Available at: www.citizenstrade.org/pdf/peruLACreport_02012006.pdf

Labor Advisory Committee for Trade Negotiations and Trade Policy, “The U.S.-Korea Free Trade Agreement,” April 27, 2007, at 28, Available at: http://ustraderep.gov/assets/Trade_Agreements/Bilateral/Republic_of_Korea_FTA/Reports/asset_upload_file698_12781.pdf

[v] See Labor Advisory Committee for Trade Negotiations and Trade Policy, “The U.S.-Singapore Free Trade Agreement,” February 28, 2003, at 14-15. Available at: http://ustraderep.gov/assets/Trade_Agreements/Bilateral/Singapore_FTA/Reports/asset_upload_file77_3220.pdf

[vi] For example, the Industry Sector Advisory Committee on Transportation, Construction, Mining, and Agricultural Equipment urged USTR to allow the build-down method to calculate the domestic content for autos in the Chile FTA after the initial draft agreement only included the build-up method. The final agreement allowed the both methods. See ISAC 16, “Report for the Chile Free Trade Agreement,” February 2003, at 6; USITC, “U.S.-Chile Free Trade Agreement: Potential Economywide and Selected Sectoral Effects,” June 2003, at 80; Chapter 4 of U.S.-Korea FTA.

The Korea FTA: Putting Corporations Before the Public Interest

We’re continuing our series of facts in response to the Korean Embassy’s misleading claims on the Korea Free Trade Agreement (FTA). Our full response can be viewed here. This time, the focus is on the Korea FTA’s investor-state dispute resolution mechanism that threatens public interest laws.

Lori Wallach’s Huffington Post piece: The Korea FTA’s investor-state dispute resolution mechanism “empowers foreign investors to skirt domestic courts and seek cash compensation for regulatory costs before foreign tribunals…”

Korean Embassy’s claim: “The investor-state dispute resolution mechanism in the KORUS FTA is a common feature of free trade agreements and bilateral investment treaties, of which there are more than 3,000 worldwide. NAFTA has an identical investor-state dispute resolution chapter. Since it took effect in 1994, Mexican and Canadian companies have filed 18 requests for arbitration against the U.S. government. They have won none of them.” Elsewhere, the Embassy adds that, “Some opponents of the FTA have alleged that this section will provide Korean companies with rights greater than those afforded to U.S. companies. Not only is that not true, it is directly rebutted in the text of the agreement which says, ‘foreign investors are not hereby accorded greater substantive rights with respect to investment protections than domestic investors under domestic law where, as in the United States, protections of investor rights under domestic law equal or exceed those set forth in this Agreement.’”[i]

Facts: Opposition to the investor-state system is at an all time high, in part because of such callous attitudes from governments. In July of last year, 110 members of Congress sent a letter to President Obama opposing the investor-state mechanism in the Korea FTA, among other provisions.[ii] A bipartisan group of 146 legislators (including the majority of House Democrats) cosponsored the TRADE Act, which called for elimination of the investor-state system. And in September 2010, over 550 faith, family farm, environmental, labor, and consumer protection organizations signed a letter to President Obama urging that he remove the investor-state mechanism from the Korea FTA.[iii]

The Embassy would like to portray the investor-state dispute settlement mechanism as mundane and uncontroversial. Nothing could be farther from the truth. In October 2010, Korean legislators and members of the U.S. Congress sent a joint letter to President Obama and President Lee that called on them to change the text of the FTA to eliminate the threat of investor-state lawsuits.[iv] The recent joint statement of Korean lawmakers, labor unions, farmers and civil society groups highlighted in Lori Wallach’s Huffington Post piece reiterates the deep concern of Koreans that the investor-state mechanism would allow multinational corporations “to bring our government to the foreign arbitration tribunals to demand compensation over public policy standards, even those that apply to domestic and foreign corporations alike.”[v]

Language cited by Embassy is non-binding. To counter the fact that the FTA’s clear language in Chapter 10 does provide Korea firms operating here better rights than domestic firms, the Embassy quotes a provision of the FTA (e.g. “foreign investors are not hereby…) that is in the preamble of the agreement and thus non-binding. The non-binding nature of the preamble was noted most recently by the U.S. State Department in the Grand Rivers et. al. vs. United States investor-state arbitration under NAFTA, which stated: “the key to interpreting the provisions of the NAFTA must be the text itself, as informed by the treaty’s context, object, and purpose, only to the extent those additional sources are relevant to, and consonant with, the substantive provision at issue. This approach is grounded in the well-accepted principle that general objectives can shed light on treaty provisions, but cannot impose independent obligations on treaty signatories.”[vi]

The Korea FTA’s Contribution to the U.S. Trade Deficit

We’re continuing our series of facts in response to the Korean Embassy’s misleading claims on the Korea Free Trade Agreement (FTA). Our full response can be viewed here. This time, the focus is on the Korea FTA’s projected increase in the U.S. trade deficit.

Lori Wallach’s Huffington Post piece: The “U.S. International Trade Commission has concluded that the Korea agreement will increase the overall U.S. trade deficit.”

Korean Embassy’s claim: “The ITC clearly cautioned users of its data against doing exactly what Ms. Wallach and others have done: the ITC’s simulation results “should not be interpreted as changes in total imports and exports, or as implying meaningful information about the balance of trade impact of the entire U.S.-Korea FTA.” In its 2007 report, “U.S.-Korea Free Trade Agreement: Potential Economy-wide and Selected Sectoral Benefits,” the ITC predicted that the agreement would increase U.S. merchandise exports to Korea by $9.7 billion to $10.9 billion and merchandise imports from Korea by $6.4 billion to $6.9 billion.”

Facts: Embassy continues to dodge the fact that the Korea FTA will be lose-lose. While it cites the USITC projections on the bilateral trade balance showing Korea would lose, it ignores the fact that the U.S. global trade deficit is expected to increase – and it is the U.S. global balance that will affect jobs here.

The USITC’s study on the Korea FTA predicted that implementation of the Korea FTA would cause total U.S. exports to rise by $4.8-5.3 billion dollars and total U.S. imports to rise by $5.1- 5.7 billion, resulting in an increased trade deficit of $308-416 million.[i] This result is inseparable from the other findings in the report, including those that the FTA boosters prefer to highlight.

Interestingly, the USITC has not in the past made caveats like the one quoted in regards to its findings, despite the fact that its model’s track record has proven to be overly optimistic. For instance, a 1999 USITC study using roughly the same model estimated that China’s tariff offer for WTO accession would increase the U.S. trade deficit with China by only $1 billion dollars.[ii] In reality, the trade deficit with China skyrocketed by $167 billion between 2001 and 2008.[iii] Although China’s WTO accession alone (and the favorable trade treatment that came with it) likely did not cause the entirety of the huge rise in the trade deficit with China, it almost certainly contributed more than $1 billion dollars to the rise in the deficit. The USITC should indeed provide caveats that show that its own predictions have been overly optimistic.