Club goods and regulatory opportunism: Trans-Pacific Partnership and rules of origin for autos.

• Author: Bast, Carol M.

INTRODUCTION

The twelve Trans-Pacific Partnership (TPP) (1) parties vary widely in geographical location, level of economic development, political institutions, and interconnectedness. The parties to the TPP include the three North American Free Trade Agreement (NAFTA) (2) parties, the United States, Canada, and Mexico; three additional developed countries, Australia, Japan, and New Zealand; an advanced economy, Singapore; two rapidly-growing economies, Vietnam and Peru; a well-to-do economy dependent on gas and oil, Brunei Darussalam (Brunei); and middle income countries, Malaysia and Chile. (3) The United States, Canada, and Mexico have developed many integrated supply manufacturing chains as a result of NAFTA. (4) For Japan and the United States, TPP is the countries' first bilateral trade agreement of this depth and breadth. (5)

The twelve countries became signatories to TPP to take advantage of the benefits that a regional trade agreement offers. (6) In a way, being a party to TPP is similar to joining an exclusive club and receiving the benefits of "club goods." (7) The detriment of not being a TPP member is being discriminated against in not receiving the benefits of the club goods. (8) Non-members may be tempted to use opportunistic behavior to take advantage of the spillover benefit of the TPP regulatory system even though they were not the intended recipients of TPP. TPP members might assume that non-TPP parties will use regulatory opportunism to benefit. (9) The hypothesis of this article is that TPP will have an overall positive effect on the auto and auto parts industry of the TPP parties and that TPP will have a slightly negative effect on China, a non-member.

Part I of this article reviews the economic, political, and institutional dimensions of a regional trade agreement. Part II describes the auto industry, paying special attention to the auto industry in the United States. Part III provides information on rules of origin in general and TPP rules of origin for autos in particular. Part IV analyzes the effect of TPP on the auto industry.

1. THE ECONOMIC', POLITICAL, AND INSTITUTIONAL DIMENSIONS OF A REGIONAL TRADE AGREEMENT

   Fiat Chrysler Automobiles, Ford Motor Company, and General Motors, sometimes referred to as the Detroit Three, still have a strong presence in the United States. (10) They have been joined by other car makers who import vehicles into the United States and who manufacture foreign cars in the United States. (11) In addition, the Detroit Three manufacture vehicles outside the United States, either in their own plants or in partnership with foreign car makers, some of which are imported into the United States. (12) The global value chain is central to the automotive sector in that auto components and the parts that make up each component often originate from far-flung locations all over the world. (13)

   A regional trade agreement has economic, political, and institutional dimensions. TPP is an exercise in balancing domestic needs, which might demand protectionist provisions, in the face of an increasingly global economy whose foundation is trade liberalism. (14) The United States representatives to TPP negotiations kept interest groups in the United States in mind because of the potential opposition interest groups could cause in Congress if they did not see benefits for them under TPP. (15) This part considers each of the three dimensions in turn.

   1. The economic dimension

      The economic dimension of an international trade agreement ranks just above the political dimension in criticality. (16) Valuing the effects of TPP is extremely difficult, even for economists. Much depends on how TPP is interpreted and applied into the future. Economists and attorneys may spend many months working up a regulatory impact assessment of a trade agreement ex ante; (17) however, an ex post regulatory impact assessment may differ significantly. (18)

      The auto industry is a multi-national enterprise that is extremely competitive. (19) As a significant stakeholder, the auto industry will be performing its own regulatory impact assessment of the strengths, weaknesses, opportunities, and threats. (20) The cffect of the TPP on the auto industry has much to do with the rules of origin.

      The United States has both strengths and weaknesses in the automotive industry; these strengths and weaknesses must be considered when evaluating the effects that TPP might have on those industries. The United States strengths lie in research and development, technology innovations, and a workforce with the advanced skills used in certain phases and sectors of manufacturing. (21) Portions of the auto industry that are high-skilled and high-paying depend on the integration of the United States auto industry into the global value chain. (22)

      The United States vulnerability lies in lower-skill level manufacturing. (23) One of the sensitive sectors for the United States is the automotive sector because of the potential job loss in lower-skill level auto and auto component manufacturing. (24) The fear is that lower-skill level production of autos and auto components will move to other countries that have lower labor costs. (25) However, well-meaning but protectionist policies, if instituted by the United States, would likely result in retaliatory action from international trading partners and loss of foreign direct investment in the United States. (26) As a result of the United States auto industry's integration into the global value chain, protectionist moves by the United States would be counter-productive by resulting in the loss of foreign investment and high-skilled and high-paying auto industry jobs in the United States. (27)

      China, a TPP non-party, Japan, and the United States, as TPP parties, all have significant ties to the automotive industry. (28) A key question is what effect TPP will have on the automotive industry of the three countries. The table below shows the importance of total worldwide exports of cars and car parts for China, Japan, and the United States as far as the top thirty export industries for those countries. (29) For Japan and the United States, the car and car parts industries were among the top thirty exporting industries, while only the car parts industry was among the top thirty exporting industries for China. (30) When comparing exports to imports, one sees that the exports and imports of car parts for China was nearly equal; (31) for Japan, car exports were approximately nine times imports, and exports of car parts were approximately five times imports; (32) for the United States, car exports were a little more than one-third the amount of imports and car part exports were approximately four-fifth of imports. (33)

      Trade in cars and motor vehicle ranked by value of exports, 2013 (billions of dollars) (34)

      Country Rank of HS Description Export code China 8 of 30 8708 Parts and accessories for motor vehicles Japan 1 of 30 8703 cars Japan 3 of 30 8708 Parts and accessories for motor vehicles United States 3 of 30 8703 cars United States 4 of 30 8708 Parts and accessories for motor vehicles Country exports imports trade Import balance ratio China $25.5 $24.2 $1.4 94.7% Japan $91.7 $10.6 $81.1 11.6% Japan $35.3 $7.1 $28.8 20.2% United States $57.1 $155.7 $98.62 72.5% United States $42.9 $58.9 $15.91 37.1% The TPP Rules of Origin for autos recognize (35) that the automotive industry is critical for the economies of a number of the parties to the TPP as well as being critical for non-members. One indication of the criticality of the trade in cars and car parts is the convoluted nature of the extremely lengthy rules of origin for autos with all their bewildering cross-references that were heavily debated; (36) another indication of the critical nature of the auto industry to the economies of several TPP countries is that the TPP provisions concerning autos were reportedly some of the latest agreed upon in the negotiations. (37)

      The reason to implement TPP is in part due to its projected economic benefits. Economists have long thought that integration of the markets of countries with differences in labor costs, productivity, capital, and natural resources will result in greater efficiency and growth; (38) global value chains account for eighty percent of international trade. (39) United States multi-national enterprises, such as automakers and auto part suppliers use global supply chains to reduce labor costs, increase productivity, and expand their shares of the global market. (40) TPP should produce aggregate economic gains because of the wide variances in labor, capital, and natural resources among the parties to TPP. (41) Another benefit of a regional trade agreement may be in reducing non-tariff barriers. (42) The reality is that the welfare of sensitive sectors of the United States economy, such as the auto industry, must be balanced against an economically-sound trade system favored by most economists. (43)

   2. The Political Dimension

      The political dimension is critical because it involves spending political capital. A trade agreement involves giving up some sovereignty and the question is to what extent. Each country must provide bargaining chips that can be used to entice a needed concession from another signatory. A trade agreement can lock-in domestic reforms; because it operates over the long term, it can provide stability over many changes in government administration. (44) A trade agreement can provide shelter to a new government administration against pressure to change a domestic reform made by a prior government administration; at the same time, a foreign direct investor expects predictability based on the trade agreement. (45)

      After the United States becomes a signatory to a trade agreement, it must be ratified by Congress to make it become part of the country's domestic law. (46) The United States is typically a standard-setter because of its large market share and the...