Free-Traders, Protectionists Tell Administration How to Spur Supply Chain Resiliency

In the first third of its first public hearing on promoting supply chain resilience, the Office of the U.S. Trade Representative and interagency officials heard from groups disputing the premise of the project -- that liberalizing trade was harmful to U.S. workers and manufacturing -- and from those who say the worker-centered trade approach of the Biden administration is not going far enough to restore American manufacturing.

USTR asked for information particularly about aerospace components, automotive parts, critical minerals, pharmaceuticals, semiconductors and electronics, and renewable energy.

But the first witnesses on May 2 were mostly big-picture think tank representatives and trade groups, with strongly opposing views.

Coalition for a Prosperous America questioned the framing of friendshoring, saying all allies are also economic competitors.

Jeff Ferry, the group's chief economist, praised USTR for leaving behind "misguided comprehensive free trade agreements," which he said depress the income of U.S. workers and exacerbate the trade deficit.

News reports have said that former USTR Robert Lighthizer is advocating for a second Trump administration to devalue the dollar, in order to bring down the trade deficit. Ferry called America's market-based exchange rate misguided, and, in its written submission, CPA said "exchange rates and capital inflows should be managed to achieve a re-aligned dollar that balances trade." They said managing the dollar would reduce the need for tariffs and industrial subsidies.

In the written submission, CPA called for "a global protective tariff," which would not allow duty-free imports from anywhere but "other high-wage countries with which we have something even close to reciprocal trade volumes. For example, while we run an automotive trade deficit with Canada and Europe, it is not nearly as stark as with Mexico and Japan."

CPA also asked the administration to consider a broad 15% tariff on imports to raise revenue and to impose tariff rate quotas for goods where there is some domestic production, but not enough to meet demand. It also wrote that "announcing phased-in, future indefinite duties are an obvious tool to incentivize investment and growth in domestic manufacturing that remains untried in the United States."

Victor Ban, special counsel at USTR, asked what he meant by indefinite duties, and Ferry said 10 years of "rock-solid protection" from import competition is needed, and complained that safeguards only last four years.

The written submission said there should be Section 232 tariffs or quotas to protect "the auto market, solar production market and others," and that Section 301 also should be used more aggressively.

None of the other five witnesses that appeared on the panel with CPA had proposals as ambitious as CPA's for protecting U.S. manufacturers from import competition, but many did support higher tariffs.

Scott Paul, president of the Alliance for American Manufacturing, said Congress should reform de minimis rules, pass trade remedy laws with Level the Playing Field Act 2.0 and the Fighting Trade Cheats Act, and should suspend or revoke permanent normal trade relations status for China. Paul said his group doesn't want rollup provisions in rules of origin, and thinks free trade agreements shouldn't use tariff shifts for eligibility of benefits. He said AAM supports tightening the rule of origin for all automotive content.

In questions after their presentations, Doreen Parekh, acting deputy director of Commerce's Supply Chain Center, asked Paul which sectors should be the first focus when working toward supply chain resiliency. He said the areas the administration identified -- semiconductor manufacturing and packaging, critical minerals, large capacity batteries, public health and pharmaceuticals, information and communication technologies, and defense -- are a good place to start.

Paul said domestic microelectronics production needs reviving, and also recommended that the center "look at sectors subject to consistent unfair trade practices -- steel, aluminum, glass and other commodities."

Daniel Rangel, an economist at Rethink Trade, also talked about the challenge of consumer electronics, saying that, because of competition with China for legacy chips, it may be hard for new domestic production to gain a foothold. He suggested increasing most favored nation (MFN) tariffs on certain electronic devices for manufacturers that "excessively source overseas" for chips, and providing subsidies for buyers of mature node chips made in the U.S. He also said that rules of origin need to be revised to increase regional value content for electronic goods.

USTR special counsel Ban asked Rangel if he assumes the country of origin for chip production is what establishes the country of origin for the good. Rangel said that chip packaging, printed circuit board or motherboard assembly and electronic assembly are not likely to return to the U.S., but it would be good if those steps could be nearshored. But since currently electronic production only requires a tariff shift to qualify for USMCA, all those steps except final assembly are likely to stay in Asia.

Abigail Hunter, from SAFE's center for critical minerals, said that while requirements such as the Inflation Reduction Act's foreign entity of concern for EV batteries can provide the "necessary breathing room to scale up [domestic critical mineral processing] and become globally competitive," Chinese subsidization is not the only reason that their critical minerals are cheaper. She warned there are "inherent trade-offs between protecting nascent industries and cost for downstream customers."

Among a collection of free-trade advocates, U.S. Chamber of Commerce Vice President for International Affairs John Murphy questioned the framing of the investigation, that globalization harmed America. He argued that new tariff-liberalizing free trade agreements are still needed. He noted that reshoring is not the solution to supply chain fragility, and noted that baby formula and eggs, which have gone through price shocks and shortages in recent years, are almost exclusively domestically produced.

Even the argument that offshoring of personal protective equipment left us vulnerable in the COVID-19 pandemic is misguided, he argued. He said that 80% of N95 mask demand was met by domestic producers before the pandemic -- the problem was that demand rose 40-fold. He said that government pandemic planners had known stockpiling was the answer to this problem, but it was never fully funded.

The Chamber argued in its written submission that USTR should be more active in urging Congress to pass another Miscellaneous Tariff Bill. It also supports the Medical Supply Chain Resiliency Act. It also said the tariff on titanium sponge should be eliminated, and Section 301 exclusions should be made permanent, or should at least be effective for a long period.

Murphy testified that if there was more light manufacturing in Central America, it could deter emigration, and that many believe more flexibility in the Dominican Republic-Central America Free Trade Agreement's apparel rules of origin and short supply list could achieve that, "and yet, there is little real policy action to translate this potential into reality."

Ed Gresser, vice president of the Progressive Policy Institute, suggested that the array of issues that USTR is including under resilience is too broad to be practical, and that trade policy should focus on diversity of vendors and countries for inputs and sales markets.

Gresser, a former USTR career staffer, like many on the more pro-trade panel, said the agency's framing that trade policy that supports low-cost production is destructive is wrong. He said that while cost per unit is a factor in where factories offshore, so is infrastructure, social compliance, speed to market, quality of production, rule of law, availability of the kind of labor needed, and familiarity with the country and potential vendors.

Gresser said government intervention to shape sourcing can be either incentive-based -- duty reductions, incentives for domestic sourcing -- or disincentives, such as higher tariffs on certain products from certain countries, or bans on sourcing from particular countries. But he said the latter should be used sparingly, because they raise costs for domestic manufacturers.

USTR asked about rules of origin, and Gresser said that rules of origin in FTAs are tricky -- they need to be strict enough to prevent free-riding, but rules that are too complex and demanding will lead importers to either import from elsewhere or bring the goods in without taking advantage of the duty break. He said that CAFTA's yarn-forward rule and 22-page product-specific rules of origin clearly haven't worked to advantage Central American production over Asian competitors, given that the region's market share in apparel has been flat for 15 years.

He expressed concern over USMCA's new auto rules of origin. He said that in 2008, only 1% of the 2 million North American vehicle imports didn't take advantage of NAFTA, while in 2023, 468,000 vehicles, representing 20% of the 2.15 million vehicle imports that year, chose the 2.5% tariff rather than trying to meet the USMCA auto rules of origin.

Ban told Gresser that USTR appreciated his analysis of rules of origin, and asked if the lower number of autos claiming USMCA benefits is a temporary dip, but later, there will be more local content in North American cars.

Gresser said: "It may be a temporary adjustment to new and quite demanding rules, but it could be a decision that the rules of origin are so expensive as to not be worth using." He said he's not confident that it's evidence that the tighter auto rules of origin failed, "but it shows it's possible."

He added: "Before we conclude a stronger rule of origin is going to always be better, we should study [autos in USMCA] very closely."

John Pickel, senior director of international supply chain policy at the National Foreign Trade Council, said globalization didn't hollow out manufacturing -- the export of U.S. manufactured products is at a 30-year-high.

Pickel argued that USTR should focus on vulnerable key inputs -- critical minerals, over-the-counter medicines, printed circuit boards. Pickel said NFTC supports the Medical Supply Chain Resiliency Act, which eliminates trade barriers with allies.

In response to Ban's question on rules of origin, Pickel said that the lack of consistent interpretation of rules of origin is also problematic. (USTR changed its position on rollup in the USMCA auto rules of origin; a dispute panel ruled for Mexico and Canada, which argued that rollup was allowed in the text, but the U.S. has not complied with that ruling.)

Mark Kennedy, director of the Wilson Center's Wahba Institute for Strategic Competition, argued that although we're importing more from Southeast Asia as a result of the Section 301 tariffs, we're not importing any less Chinese content, because those factories are importing so many Chinese inputs.

"As America has been talking about friendshoring, China has been doing it," he said. He said it would be difficult, if not impossible, to improve supply chain resiliency without negotiating more tariff-liberalizing free trade agreements.

Jennifer Thornton, vice president for international trade at the Business Roundtable, suggested that the administration change its existing FTAs to allow cumulation across the agreements -- for instance, lithium mined in Chile could be processed in South Korea.

She said private sector initiatives to create more agile supply chains are well underway, and that cost is just one of many factors -- the investment climate, IP protection, workforce and transportation issues are also key. She complained that the Indo-Pacific Economic Framework has no language to protect foreign investors from arbitrary government measures.

She also agreed that too-strict rules of origin will cause importers to avoid using the duty benefits in FTAs.

In addition to the pro-trade groups that spoke at the hearing, USTR received written comments from the National Association of Manufacturers and Advamed, both supporting the Medical Supply Chain Resiliency Act. NAM argued that sectoral agreements with allies to reduce duties and trade barriers to medical goods, as suggested in the act, could be applied to other critical sectors. NAM and Advamed also said traditional tariff-liberalizing FTAs should be expanded.