Ensure Full Reciprocity In U.S. Trade Treaties

J. G. Collins Managing Director, Stuyvesant Square Consultancy
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The Senate may vote as early as this week to give the president Trade Promotion Authority, or TPA.

TPA, also known as “fast-track,” will allow the president to submit trade treaties to the Senate for a straight up or down vote without amendment. The Senate will only be able to vote all or nothing for whatever treaty provisions the White House has negotiated.

But before the Senate takes the vote on TPA, it should ensure that the upcoming Trans-Pacific Partnership (“TPP”) trade treaty, as well as subsequent trade treaties, ensure that the U.S. marketplace is open only to companies from countries that have given U.S. companies fully reciprocal entrance to theirs.

Existing trade treaties have no such provisions.

A limitation of benefits article, or LOBA, which can be found in many U.S. income tax treaties, would ensure that only that only those companies from foreign countries that permit fully reciprocal trading rights to U.S. companies could claim TPP treaty benefits.  Companies from countries that have not signed the TPP would not be able to benefit from its provisions.

In tax treaties, LOBAs require a company claiming treaty benefits to be owned by bona fide residents of the nation that is a party to the treaty, or that its stock be traded on that country’s national stock exchange. This prevents companies from third party nations – those that are not parties to the tax treaty — from establishing subsidiaries in a county where the U.S. has a favorable tax treaty and then claiming the treaty benefits that reduce the U.S. withholding tax on U.S. source income.

There was no LOBA in the North American Free Trade Agreement. As a result, companies from any foreign country claimed NAFTA benefits on exports to the United States simply by establishing a wholly-owned subsidiary in Mexico and then claiming residence – and NAFTA treaty benefits – from there.

The absence of a LOBA in the NAFTA treaty has had a devastating effect on U.S. jobs and created one-way, in-bound trade from the world to the United States.

NAFTA allowed Asian and European companies like Mercedes-Benz, Panasonic, Volkswagen and others that required North American manufacturing to access the U.S. marketplace by simply setting up Mexican subsidiaries, building Mexican factories and hiring lower-wage Mexican workers. Before NAFTA, companies that required North American manufacturing operations, like Toyota and Sony, built manufacturing plants in places like Kentucky and California, respectively.

The absence of a LOBA also allowed higher-wage U.S. employers to copy their Asian and European counterparts.  After NAFTA was passed, companies like GM and Maytag simply set up wholly-owned manufacturing subsidiaries in Mexico and moved U.S. manufacturing operations there. With NAFTA, goods manufactured by American companies in Mexico could move into the U.S. marketplace almost as easily as they did when they were manufactured in Detroit or Iowa. Americans soon heard the “giant sucking sound” of high-wage, blue-collar jobs moving from the U.S. to Mexico that Ross Perot had warned them to fear in his 1992 presidential campaign.

LOBA’s in trade treaties are absolutely essential to ensure truly “free” — and reciprocal – international trade. Without a LOBA, a company in China – which will not be a signatory to the TPP — could easily exploit the benefits of the proposed treaty by establishing a subsidiary in, say, South Korea, and then obtain all the advantages of TPP membership as it does business in the United States. But U.S. companies doing business in China would enjoy no TPP reciprocation; China will not be a signatory.

Truly free trade, and the trade treaties that are necessary to achieve it, require a strong constituency of political support among the rank-and-file of the American electorate. Trade treaties that allow foreign companies to exploit the U.S. marketplace without ensuring U.S. companies reciprocity in foreign countries will ultimately draw the rightful ire and opposition of American voters.

So will the Senators that pass them.