Posted by: mulrickillion | October 7, 2011

Recent Legislative Actions, On-going Trade Negotiations Could Impact U.S. Trade with China

Hong Kong Trader, 30 Sept 2011 —

Recent actions by the U.S. Congress that could result in the enactment of legislation to address the alleged undervaluation of the yuan, the renewal of the Generalised System of Preferences and the approval and implementation of the pending free trade agreements with South Korea, Colombia and Panama, as well as the on-going U.S. negotiations on an ambitious free trade agreement under the Trans-Pacific Partnership, could potentially impact U.S. trade with mainland China in the medium term.

Perhaps the most prominent development for Hong Kong and mainland Chinese exporters is a commitment made by Senate Majority Leader Harry Reid (Democrat-Nevada) to consider possibly during the first half of October legislation to address longstanding congressional concerns about the undervaluation of the mainland Chinese currency. The legislation includes provisions from previous currency manipulation bills (including one that was passed by the Senate Finance Committee in 2007 and separate legislation introduced this year that passed the House of Representatives last year) and appears to have strong support in the Senate, including 20 original co-sponsors from both sides of the aisle. Although the bill is opposed by major U.S. business associations and the Obama administration, it is expected to be approved in the Senate if it is put up for a vote. Regardless of the Senate’s action, however, no China currency bill is likely to be approved by the Republican-controlled House this year.

A press release issued by Sen. Robert Casey (Democrat-Pennsylvania) indicates that the Currency Exchange Rate Oversight Reform Act of 2011 is intended to reform and enhance U.S. oversight of currency exchange rates by triggering tough consequences for countries that fail to adopt appropriate policies to eliminate currency misalignment and ensure that appropriate tools may be used to counter the economic harm to U.S. manufacturers caused by currency manipulation. Highlights of the legislation are as follows.

  • The currency provisions in current U.S. law would be repealed and replaced with a new framework based on objective criteria that would require the Treasury Department to identify misaligned currencies and require action by the administration if countries fail to correct the misalignment.
  • The bill would clarify that U.S. countervailing duty law can address currency undervaluation and specify the applicable standard for initiating an investigation on those grounds. That standard would require the Department of Commerce to investigate whether currency undervaluation by a government provides a countervailable subsidy if a U.S. industry requests an investigation and provides proper documentation. The DOC already has the authority to investigate whether currency undervaluation by a government provides a countervailable subsidy but it has not used that authority despite repeated requests by U.S. manufacturers.
  • In previous CV duty investigations the DOC has refused to find an export subsidy if the subsidy was not limited exclusively to circumstances of export (i.e., when non-exporters also may benefit). The bill would preclude the DOC from imposing this bright-line rule by clarifying that it may not refuse to investigate a subsidy allegation based on the single fact that a subsidy is available in circumstances in addition to export. Bill supporters contend that this clarification is backed by rulings issued by the World Trade Organisation’s Appellate Body and is the key element of the currency bill that passed the House in September 2010 with strong bi-partisan support.
  • Treasury would be required to develop a bi-annual report to Congress that identifies two categories of currencies: (1) a general category of “fundamentally misaligned currencies” based on observed objective criteria and (2) a select category of “fundamentally misaligned currencies for priority action” that reflects misaligned currencies caused by clear policy actions by the relevant government.
  • Treasury would also be required to engage in immediate consultations with all countries cited in the report. For priority currencies, Treasury would have to seek advice from the International Monetary Fund as well as key trading partners.
  • Immediately upon designation of a priority currency, the administration would be required to oppose any IMF governance changes that benefit the country whose currency is designated for priority action and consider this designation when making market economy determinations for purposes of U.S. antidumping duty law. After 90 days of failure to adopt appropriate policies, the administration would have to (i) reflect currency undervaluation in dumping calculations for products produced or manufactured in the designated country; (ii) forbid federal procurement of goods and services from the designated country unless it is a member of the WTO Government Procurement Agreement; (iii) request the IMF to engage the designated country in special consultations over its misaligned currency; (iv) forbid Overseas Private Investment Corporation financing or insurance for projects in the designated country; and (v) oppose new multi-lateral bank financing for projects in the designated country. After 360 days of failure to adopt appropriate policies, the U.S. trade representative would have to request WTO dispute settlement consultations with the government responsible for the currency and Treasury would be required to consult with the Federal Reserve Board and other central banks to consider remedial intervention in currency markets.
  • The president would be authorised to waive the consequences that take effect after the first 90 days if they are deemed to harm national security or the vital economic interest of the United States. However, any member of Congress would be able to introduce a joint resolution of disapproval concerning the president’s waiver.
  • Treasury would be required to consult with a newly-created body during the development of its report.

Another noteworthy development is the approval by the Senate on 22 September of a legislative package to renew the lapsed GSP and Trade Adjustment Assistance programmes. The GSP extension would be retroactive to 31 December 2010, when the programme expired. GSP preferences were expected to be renewed retroactively at some point this year but the expiration of the programme has fostered a climate of uncertainty among U.S. importers and investors that has probably benefited non-GSP beneficiaries like Hong Kong and mainland China. Any such benefits will vanish once the House of Representatives endorses the package and the president signs it into law.

Congressional approval of GSP/TAA legislation is one of the key pieces of a broader bi-partisan consensus on trade that should also result in the approval by the end of this year of the pending FTAs with South Korea, Colombia and Panama. As we have reported in the past, some 95 percent of U.S.-South Korea trade in consumer and industrial products will become duty-free within three years of the U.S.-South Korea FTA’s entry into force and most remaining tariffs will be eliminated within ten years. These market access benefits are expected to boost South Korea’s overall competitiveness in the U.S. market at the expense of other suppliers, including mainland China.

Hong Kong and mainland Chinese exporters should also be aware of the substantial progress made to date by the United States, Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam in the on-going TPP negotiations. The eighth round of TPP talks that took place in Chicago on 6-15 September was described by USTR as a “productive round with progress made toward the goal of concluding an ambitious, 21st-century agreement.” USTR said there are now consolidated texts in most of the 20 chapters being negotiated and that many of them are “moving toward closure,” including customs, technical barriers to trade, telecommunications, small and medium-sized enterprises, regulatory coherence, competitiveness and development. Progress was also made on texts for “somewhat longer and more complex chapters” such as intellectual property rights and investment. In addition, negotiators sought to advance the discussions on the packages for access to industrial, agricultural and textile and apparel products, as well as to government procurement markets.

One of the principal sticking points in the negotiations appears to be in the area of rules of origin, particularly as regards textiles and apparel. The U.S. apparel industry is pushing for the inclusion of a flexible origin rule for textiles and apparel that would allow goods made in a TPP country from a range of inputs from outside the TPP region to qualify for preferential duty treatment. By contrast, the U.S. textile industry is backing a restrictive “yarn-forward” origin rule that would require the vast majority of inputs used in the manufacture of textiles and apparel to come from within the TPP region. For example, a strict yarn-forward rule would require apparel to be cut and sewn in one or more TPP countries from yarn and fabric made in one or more TPP countries, and would therefore preclude the use of non-TPP yarns (except for a de minimis allowance) and fabrics in the component that determines the tariff classification of the good. A coalition of U.S. industry associations with an interest in textile and apparel trade believes that such restrictive rules would reduce rather than increase export opportunities in the region and increase prices for consumers at a time of slow economic growth. The Obama administration favours a yarn-forward rule for textiles and apparel and is considering an even more stringent rule that would require certain inputs that can be sourced from anywhere under any U.S. FTA (such as gimped chapter of Chapter 56) to be sourced from within the TPP region.

U.S. textile interests have also called for a special mechanism in a final TPP agreement “to help counter-balance Vietnam’s historic support for its textile sector.” Vietnam is already the second-largest exporter of apparel to the United States and U.S. textile manufacturers believe that eliminating tariffs on such imports under the TPP would jeopardise producers in Africa, Central and South America and the United States because “Vietnam, using primarily Chinese yarns and fabrics, exports the same type of apparel that our sectors make and send to the United States every day.”

Clearly, a TPP deal that includes extensive U.S. tariff benefits for Vietnam could have a considerable impact on U.S.-China trade, and that impact would be far broader in scope and magnitude if Vietnamese manufacturers making apparel, footwear, electronics and other products are allowed to use mainland Chinese and other non-TPP inputs and still benefit from those concessions. Hong Kong and mainland Chinese exporters should therefore closely monitor the evolution of the TPP talks in anticipation of a final deal sometime next year. – Recent Legislative Actions, On-going Trade Negotiations Could Impact U.S. Trade with China


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