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Why free trade agreements don’t really deliver free trade

Aug 13, 2015

As officials last week approached what they hoped would be the final week of negotiations of a Pacific Rim trade deal involving nearly 40% of the world’s economy, one of the most contentious issues between the U.S. and Japan turned out to be the handling of the 25% U.S. tariff on pick-ups and SUVs. Since the weighted average American tariff on industrial products is 1.5% on industrial products, one might think that there was some scientific or policy reason that exists for high protection on these very popular vehicles.

Actually, that high tariff stems from a spat that took place 50 years ago. When the European Common Market was being formed in the 1960s, it restricted imports of chicken from America, and could not be convinced to budge of the new high protection, there ensued the so-called “Chicken War.” To even the score for the fact that chickens from America couldn’t cross the Atlantic in reasonable numbers, the United States placed high tariffs on cognac, potato starch, dextrin, and yes, small trucks. This last was to penalize German trade at a time when Volkswagen busses were a popular import. All of these tariffs were applied against imports from all countries, but were designed to hit European products. The tariffs on three of the retaliation items gradually got reduced, but not the truck tariff. Why? Because Japan became highly competitive in small trucks. So, although the penalty tariff was originally aimed at Germany, it never was removed, as it came to protect Detroit against Japan – sort of.

As a result of the light truck tariff, Japanese auto companies relocated much of their production to the United States. So it was that a fight with Europe over chickens gave the initial impetus causing Toyota, Nissan, Honda and Subaru to open pick-up truck and later SUV plants across the United States, although these Japanese car companies no doubt found value in being closer to this very large market.

In 2012, a new “free trade agreement” (FTA) between the United States and Korea came into force. Under this agreement, Korea is slated to gain duty free access to the U.S. market for light trucks phased in over the closing three years of this decade. FTAs are discriminatory; that is, the benefits apply only to the signatories. For this reason, as Japan negotiates with other world leaders on a Trans-Pacific Trade agreement, Japan would like to get the U.S. light truck tariff down for direct shipments from Japan. Had the deal closed in Maui in July, Japan would have gotten its wish, but conditionally, and phased in over an extended period.

Of course there would have been U.S. requests of Japan as well – with U.S. carmakers to gain additional access to the Japanese market. In addition, Detroit would like as an additional preconditions for Japan gaining duty-free access to the U.S. market, an enforceable provision against currency manipulation.

Other major problem blocking a TPP agreement from coming together in Maui were longstanding protections against sugar and dairy imports. In colonial times, the British crown imposed sugar tariffs on sugar and molasses entering from the Caribbean to maintain a profitable trade for the crown, America’s colonial master. While British rule was ended, the tariffs persisted well past American independence, however.

The original purpose for the 1789 American sugar tariff was to raise revenue (in those days almost all Federal tax revenues came from tariffs), but thanks to the income tax coming into effect in 1913 and global trade barriers generally being reduced, tariffs are no longer a large portion of U.S. government revenues. Nevertheless, tight restrictions on sugar imports remain, affording protection to sugar beet production in the Midwest and cane in the Gulf states. The net result – the price of sugar in the United States is almost half again as high as world market prices. Were American consumers told that they were to pay a 40 cents per pound tax on sugar, and a proportional tax on sugar-containing candy and baked goods, there might be another American rebellion, this time by consumers. But the cost of the protection in sugar is buried deep in the supply chain and appears to go unnoticed.

Australia exports sugar at the far lower world market prices. In the current TPP agreement, Australia never aspired to getting the U.S. to scrap its entire sugar import quota system. It simply wanted (and wants) to ship more of its sugar to the U.S. The two parties are still far apart. The reported Australian request is a very small fraction of the U.S. market and the reported U.S. offer is only a fraction of that fraction.

Yet another area of steep protection is dairy – cheese, milk, milk powder, butter and the like. The request for trade liberalization has been made by a number of TPP parties having efficient dairy production (most prominently New Zealand) to the U.S., Canada and Japan. In the talks at Maui, no great willingness was shown to agree to dramatically liberalize trade in these products. This greatly complicates trying to strike a deal where dairy and sugar are important export interests of a number of the parties.

Nor will there be much far-reaching change to allow greater freedom for trade in apparel products. Another substantial trade interest.

The irony of “free trade agreements” is that they do not deliver truly free trade for everything among the parties. The agreements do make progress — within the bounds of what is considered politically feasible at the time. And there is always the hope that the progress could be really substantial.

Looking at the needs of the world economy as a whole, and the U.S. in particular, more will be required. We cannot get what we want if others cannot achieve some of their objectives. And that goes not only for the U.S., but for Canada and Japan as well. A major push should be made in September for a high value Trans-Pacific agreement.

Alan Wolff practices law in Washington D.C. with Dentons and chairman of the National Foreign Trade Council. He is a former U.S. Deputy Trade Representative.

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