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Comments Concerning the Costs and Benefits to U.S. Industry of U.S. International Government Procurement Obligations

An excerpt from Global Trade Watch's official comment submission on U.S. procurement obligations is below. For the full report, please click here

Public Citizen welcomes the opportunity to submit comments to the U.S. Department of Commerce and the Office of the U.S. Trade Representative (USTR) on U.S. government procurement obligations in trade agreements. Public Citizen is a nonprofit consumer group with more than 400,000 members. A mission of Public Citizen is to ensure that in this era of globalization, a majority can enjoy economic security; a clean environment; safe food, medicines and products; access to quality affordable services; and the exercise of democratic decision-making about the matters that affect their lives.

In the context of a creeping expansion of the scope of “trade” agreements negotiated behind closed doors with hundreds of official corporate advisors, Americans across the political spectrum have become aware and upset about the ways in which today’s “trade” pacts conflict with their goals and values. As agreements have expanded far beyond traditional matters such as cutting tariffs and limiting quotas, more Americans have become engaged in demanding a new approach. As a result, the status quo U.S. trade policy model now faces unprecedented crises politically, economically and socially.

Thus, a review of trade-pact procurement terms is timely. These terms constrain how the public can direct our federal and state officials to spend our tax dollars. The rules require firms operating in trade partner countries to be treated like U.S. firms – and foreign goods to be treated as if they were made in America – with respect to many types of government contracts over a set dollar-value threshold, with some limits for U.S. defense agencies and some products. Effectively, these rules offshore our tax dollars rather than investing them to create jobs and innovation at home. As a result, currently “Buy American” now actually means companies and products from 60 countries must be given the same access to U.S. government contracts as U.S. firms and products for all but the lowest-value contracts. And 37 U.S. states are bound to such rules with respect to the 45 signatory countries of the World Trade Organization (WTO) Agreement on Government Procurement (GPA).

These terms also eliminate a reason that U.S. businesses profiting from U.S. government contracts choose to produce domestically. Such firms advocate for the current trade pact procurement rules because they allow them to relocate production to low-wage countries with U.S. trade pacts – profiting from leaving their U.S. workers behind and often also avoiding U.S. tax obligations – and still obtain lucrative taxpayer-funded contracts. Fifty-six percent of the top 50 U.S. government federal contractors in FY 2016 were certified under just one narrow U.S. government program as having engaged in offshoring, and 41 percent of the top 100 FY 2016 contractors were certified as having offshored American jobs. More than a third of total U.S. government contract spending in FY 2016 went to firms certified as having offshored jobs. This totaled $176 billion in U.S. federal government contracts in 2016. As a candidate, President Donald Trump pledged to punish firms that offshore American jobs. However, in 2017 the flow of federal contract awards to major offshorers has continued, with United Technologies, for instance, receiving 15 new awards despite offshoring 1,200 of its 2,000 Carriers job to Mexico, and notorious offshorer General Electric obtaining scores more. As described in this submission, a U.S. president has the unilateral authority to reverse the waivers to Buy American policies that facilitate this business conduct.

In addition to supporting job offshoring, the current trade pact rules on government procurement also limit the criteria governments can use to describe the goods and services they seek and what conditions may be imposed on bidders. The terms reflect the interests of U.S. corporate trade advisors interested in acquiring access to procurement opportunities in other countries and thus limiting the conditions and terms governments may require of them. But the rules apply reciprocally, meaning that they also severely constrain the ability for U.S. citizens and our elected officials to use procurement as an important policy tool. If the federal government – or a state – does not conform its policies to these constraints, then countries that are part of the agreement can challenge our policies in foreign tribunals that can impose trade sanctions against the United States until our laws are eliminated or changed.  

Given that total U.S. government procurement activity is $1.7 trillion, the implications are significant. When able to set criteria on government purchases, the U.S. federal government and our state governments have the capacity to spur innovation and further other policy goals by creating demand for specified goods and services or those produced under specified conditions. However, currently, the trade agreements with procurement terms to which the United States is a signatory impose constraints on the federal government and, to differing degrees, the 37 U.S. states now bound to comply with some of these trade pact terms. It is worth noting that in the early 1990s, when U.S. states were asked to opt in to being bound to the WTO’s GPA, few governors or state legislatures recognized that doing so would result in a form of international pre-emption that would severely limit their policymaking. As states became more aware of the threats posed, fewer and fewer were willing to become bound to these terms. By the mid-2000s, fewer than a dozen states opted in to these policy constraints in the last Free Trade Agreements (FTA) negotiated by the George W. Bush administration. Reflecting this reality, the Trans-Pacific Partnership did not cover state procurement. However, 37 U.S. states remain bound to WTO procurement policy constraints.

As this submission enumerates, the current procurement terms in U.S. trade pacts represent bad economics and limit domestic policy space, and must be eliminated. Even if the underlying notion of offshoring our tax dollars and imposing one-size-fits-all policies about how taxpayer funds may be expended was a good one in general, doing so is a losing proposition for the United States. The U.S. procurement market is much larger than any but that of the European Union. Thus in exchange for some U.S. firms obtaining some contracts in significantly smaller procurement markets, access on equal terms to U.S. firms is provided to the entire massive U.S. procurement market for any firm operating in a trade partner nation or for goods produced in such a nation, including with respect to firms from nations that provide no reciprocal access, such as China. Improved statistical reporting and information exchange is essential to track the exact impact of such terms.

Notably, a U.S. president has the authority to unilaterally exit the WTO GPA by providing 60 days written notice to the WTO Director-General and thus eliminate U.S. obligations with respect to 41 of the 45 WTO GPA parties with which we do not have FTAs. WTO rules do not provide for penalties in response to such an action. The procurement provisions of various FTAs can be eliminated or altered through renegotiation. With respect to U.S. law effectuating these international law obligations, a U.S. president also has unilateral authority to eliminate the waiver for trade pact partners of domestic procurement preferences. This element of our trade agreements is implemented by regulation, rather than in the trade agreement implementing legislation. The economic and social benefits of overhauling the U.S. approach to trade pact procurement terms are sizable.

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North Korea Crisis No Reason to Preserve Failed Trade Deal; U.S. Exports to South Korea Dropped, Deficit Nearly Doubled Since Pact

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

 “How to peacefully resolve North Korea’s nuclear escalation is a thorny question, but what should happen with the 2012 U.S.-South Korea Free Trade Agreement is an entirely separate question that is not complicated. We opposed the U.S.-Korea Free Trade Agreement in 2011 when it came before Congress because we knew that any deal that has at its heart new rights and powers for corporations to offshore jobs, raise medicine prices and attack environmental, health and financial stability safeguards is bad for people and the planet.

In its five years in effect, this U.S.-Korea trade agreement proved even worse than expected. The unique outcome is that U.S. exports to South Korea actually declined after the pact was implemented. As with most other U.S. FTAs, imports into the United States soared. Thus, the U.S. goods trade deficit with Korea increased by 85 percent in five years. U.S. average monthly exports to South Korea have fallen in nine of the 15 U.S. sectors that export the most to South Korea, relative to the year before the FTA. U.S. exports to South Korea of agricultural goods have even fallen 5.4 percent in the first five years of the FTA.

Claims that U.S.-Korean cooperation on a mutually shared existential priority will somehow be undermined by cancelation of a trade deal that has done the opposite of what was promised is absurd. The 28,000 U.S. troops stationed in Korea are just one demonstration of U.S. support for South Korea and commitment to its defense. Hysterical foreign policy arguments are always the claim of last resort in support of a failed trade agreement, and time and again they have proved meritless. Given the broad public opposition to the FTA in Korea, ending a deal negotiated in secret with 500 official U.S. advisers representing corporate interests would be viewed by many in Korea outside the foreign policy elite as good news.”

Background information and our previous press release summarizing the Korea FTA five-year data release by the U.S. International Trade Commission on May 4, 2017

With respect to the economics of the deal’s termination, Korean tariffs would not rise to 14 percent as suggested by former-U.S. Trade Representative Robert Zoellick. An oped he wrote that ran earlier this week says levels “could” rise, a hedge to cover the reality that he is citing Korea’s bound World Trade Organization tariff rates, not their actual applied rates. (It is the “applied” rate that reflects the actual tariffs charged while the “bound” rate is the highest level to which a country could raise tariffs although only on a Most Favored Nation basis, which means with respect to all countries.) The relevant data is the applied trade weighted mean tariff level provided by the World Bank, which for Korea is 4.78 percent. The United States is at 1.63 percent. (The applied trade weighted mean is the actual average tariff level based on actual trade flows.)


May 4, 2017, Public Citizen press release

Today’s Five-Year Korea FTA Data Show March Imports from Korea Higher than Any Month But One Since Pact Started: What Is Trump’s Plan for Pact?

U.S. Trade Deficit With Korea Has Soared as U.S. Exports Fell, Imports Jumped Under 2012 U.S.-Korea Free Trade Agreement

 WASHINGTON, D.C. – Despite the Trump administration’s tough rhetoric about the U.S.-Korea Free Trade Agreement (FTA) pact, imports from Korea in March 2017 were higher than any month but one in the pact’s five years in effect.

Today’s release of new U.S. Census trade data for the first full five years of the Korea FTA spotlight statements from both President Donald Trump and Vice President Mike Pence in the past month that the agreement’s outcomes are not acceptable. While the Trump and Pence statements were notable for coming despite escalating military tensions on the Korean Peninsula, what the administration will do about the pact and when remains a mystery.

“Our trade deficit with Korea has increased dramatically under this agreement Trump bashed on the campaign trail, and workers in the swing stats that elected  Trump  have been hardest hit, so what will Trump do about it,” asked Lori Wallach, director of Public Citizen’s Global Trade Watch.

While then-Representative Pence voted to pass the agreement in 2011, now-Vice President Pence, in an April 2017 trip to Seoul, declared the pact to be “falling short” and needing review and reform. Later that month, Trump declared of the Korea deal: “We’ve told them that we’ll either terminate or negotiate. We may terminate.”  Trump spotlighted the “job-killing trade deal with South Korea” in his nomination acceptance speech and on the stump, where he also often noted that “this deal doubled our trade deficit with South Korea and destroyed nearly 100,000 American jobs.”

Many of Trump’s trade-related campaign pledges were broken in his first 100 days, calling into question the prospects for action on the Korea pact. A powerful White House faction opposes the trade policy changes that Trump promised would deliver more American jobs and lower deficits

The agreement, sold by the Obama administration with a “more export, more jobs” slogan, has resulted in U.S. exports to Korea declining 7.8 percent ($3.7 billion) and imports from Korea increasing 13.1 percent ($8.1 billion) by the end of its fifth year. The 85 percent trade deficit increase with Korea under the pact – from $14 billion in the 12 months before the pact went into effect on March 15, 2012 to $26 in its fifth year – came in the context of the overall U.S. trade deficit with the world decreasing by 5 percent.  While U.S. goods imports from the world decreased by 7.1 percent, goods imports from Korea increased by 13.1 percent.

Defenders of the pact claim the results stem from weakness in Korea’s economy, but in fact Korea’s GDP has risen by 15 percent from 2011 to 2016 while unemployment rates have averaged 3.4 percent, hardly the indicators of a weak economy.  

Meanwhile, the U.S. service sector trade surplus with Korea has increased by only $2 billion from 2011 to 2015 a growth rate of 29 percent in its five years in effect that is notably 64 percent slower than our services surplus growth over the five years before the FTA went into effect. (Service sector data for the full fifth year of the deal will be released in October.)

Despite the Korea FTA including more than 10,000 tariff cuts, 80 percent of which began on Day One:

  • Record-breaking U.S. trade deficits with Korea have become the new normal under the FTA – in 59 of the 60 months since the Korea FTA took effect, the U.S. goods trade deficit with Korea has exceeded the average monthly trade deficit in the five years before the deal.
  • Since the FTA took effect, U.S. average monthly exports to Korea have fallen in 10 of the 15 U.S. sectors that export the most to Korea, relative to the year before the FTA.
  • The auto sector was among the hardest hit: The U.S. trade deficit with Korea in motor vehicles grew 55.7 percent in the pact’s first five years. U.S. imports of motor vehicles from Korea have increased by 64.2 percent, or $6.4 billion by the fifth year of the Korea FTA.
  • Exports of machinery and computer/electronic products, collectively comprising 27 percent of U.S. exports to Korea, have fallen 20.6 and 20.1 percent respectively.
  • U.S. exports to Korea of agricultural goods have fallen 5.4 percent in the first five years of the Korea FTA, despite almost two-thirds of U.S. agricultural exports by value obtaining immediate duty-free entry to Korea under the pact. U.S. agricultural imports from Korea, meanwhile, have grown 45.4 percent under the FTA. As a result, the U.S. agricultural trade balance with Korea has declined 8.1 percent, or $554 million, since the FTA’s implementation. The Obama administration promised that U.S. exports of meat would rise particularly swiftly, thanks to the deal’s tariff reductions on these products. However, despite U.S. officials’ promises that the pact would enhance cooperation between the U.S. and Korean governments to resolve food safety and animal health issues that affect trade, South Korea has imposed temporary bans on imports of American poultry in each of the last three years, including 2017. Comparing the fifth year of the FTA to the year before it went into effect, U.S. poultry producers have faced a 78 percent collapse of exports to Korea – a loss of 82,000 metric tons of poultry exports to Korea. U.S. pork exports have also dropped 1 percent.
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