Three U.S. Senators -- Robert P. Casey, Jr. (D-PA), Sherrod Brown (D-OH), and Elizabeth Warren (D-MA) -- have called on the Biden administration to tighten up rules of origin related to U.S. trade agreements. In a recent letter to U.S. Trade Representative Katherine Tai, the Senators called on USTR to "incorporate supplemental rules of origin related to content from non-market economies, like China, in addition to strong rules of origin."
The letter raises concerns about Chinese goods benefitting too much from U.S. trade agreements. According to the letter, current trade agreements "on average, allow half of the content of FTA goods to come from outside the FTA region." As a result, "half the content of goods entering into the United States under a trade agreement could come from China." These goods could also be deemed “American” through the FTA government procurement chapter.
The letter then states, "[t]o address these challenges, the United States must establish strong rules of origin, in addition, the U.S. must incorporate supplemental rules of origin to establish limits on FTA content that can originate in non-market economies." It specifically suggests the following:
The Market Economy Sourcing Act, which we will soon reintroduce, proposes just that. Specifically, during the first five-year period following entry into force of a free trade agreement, no more than 20% of the “remainder” of content in qualifying goods may originate from non-market economies, and no more than 10% thereafter. That is, 80% of the “remainder” (the allowable content from non-FTA party countries) must come from market economies. After 5 years, 90% of the remainder content in qualifying goods must come from market economies. With respect to critical supply chains and capacities, no content from non-market economies and foreign adversaries should be allowed following a phase-out period.
The letter concludes by stating: "We believe USTR, on its own authority, can take action which will address the fundamental issue of the CCP freeriding on trade agreements and preference programs. We request you incorporate strong rules of origin and supplemental rules of origin related to content from non-market economies, like China in any future trade agreement and you review existing rules of origin to determine whether additional action is warranted."
Practically speaking, there may not be many near-term implications from these new legislative provisions, because there do not appear to be any trade agreements on the Biden administration's agenda and the provisions do not seem to have a retroactive effect that would cover past trade agreements. However, if such a provision were to become part of U.S. law regarding trade negotiations, and these rules of origin were incorporated in future trade agreements, it could limit the utilization of the tariff preferences in these trade agreements, as it would be harder to satisfy the rules of origin. It would also serve as a disincentive for companies trying to sell in the United States to use inputs that were made in China.
The Market Economy Sourcing Act referred to in the letter was previously introduced by Senator Casey in June of 2020. Its key substantive provisions reflect the explanations in the letter and read as follows:
SEC. 2. LIMITATION ON TRADE AUTHORITIES PROCEDURES RELATING TO REQUIREMENTS ON CONTENT OF GOODS FROM NONMARKET ECONOMY COUNTRIES.
Section 106(b) of the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (19 U.S.C. 4205(b)) is amended by adding at the end the following:
“(7) LIMITATIONS ON PROCEDURES RELATING TO ORIGINATION OF CONTENT OF GOODS FROM NONMARKET ECONOMY COUNTRIES.—
“(A) IN GENERAL.—The trade authorities procedures shall not apply to an implementing bill submitted with respect to a trade agreement or trade agreements entered into under section 103(b) unless the rules of origin requirements under such agreement or agreements—
“(i) with respect to rules of origin based on value content of a good, require that, of the content of a good qualifying for preferential treatment under the agreement or agreements that does not originate (as specified in those rules) in a country that is party to the agreement or agreements—
“(I) during the 5-year period following the entry into force of the agreement or agreements, not more than 20 percent of that content may originate in a nonmarket economy country; and
“(II) after the period specified in clause (i), not more than 10 percent of that content may originate in a nonmarket economy country; and
“(ii) with respect to rules of origin that are not based on value content of a good, are consistent with the requirements under clause (i) based on processing requirements or tariff shifts as opposed to value content.
“(B) NONMARKET ECONOMY COUNTRY DEFINED.—In this paragraph, the term ‘nonmarket economy country’ has the meaning given that term in section 771(18) of the Tariff Act of 1930 (19 U.S.C. 1677(18)).”.
