USTR Tai Declined to Endorse Permanent Ban on Tariffs on Digital Goods

U.S. Trade Representative Katherine Tai, in responses to Senate Finance Committee members, talked about changes needed in USMCA, declined to endorse a permanent e-commerce tariff moratorium and called for more money for CBP, to address Section 301 tariff circumvention.

She appeared before the committee in the spring; her responses to their written questions were posted late last week.

The chairman, top Republican and one other Republican on the committee all asked her if she supports a permanent prohibition on tariffs in the World Trade Organization for digital goods like streaming video and music downloads. Sen. Mike Crapo, R-Idaho, said other countries said USTR's ambassador to the WTO said she only supported it "for now," and that was unhelpful in securing an extension of the moratorium.

Tai replied, "While the moratorium and work program enjoy broad support among WTO members, it is clear that the WTO membership needs to have a more robust discussion about the future of the moratorium and the impact of the digital economy on developing members."

Sen. Thom Tillis, R-N.C., complained that a North Carolina manufacturer "is facing unfair competition from a Chinese company that has set up a new factory in Thailand to circumvent the China Section 301 tariffs. It is using cheap Chinese inputs in its production in Thailand and bringing the final products into the United States tariff-free ... ."

He said the company is trying to get antidumping and countervailing duties put on those imports, but that takes time, money, and is uncertain. "What emergency authorities or policies could combat this clear circumvention of U.S. tariffs?" he wrote.

"Despite the significant increase in trade actions under section 301, section 201, and section 232, the budget for CBP does not have funds specifically allocated for the enforcement of these trade actions," Tai replied, and if there was more funding for CBP, those trade actions would be more effective. "These tariffs promote diversification of supply chains away from China, but they may encourage PRC-based companies to set up operations outside China, whether in the United States or in other jurisdictions, to avoid the tariffs," she said, so Congress may want to address that challenge.

Sen. Sherrod Brown, D-Ohio, one of the most imperiled senators up for re-election, and a long-time trade skeptic, told Tai that in the USMCA review, "it will be critical to revisit the automotive rules of origin to address growing concerns in the automotive supply chain, particularly threats from countries seeking to circumvent duties like China, that present challenges to the United States auto industry and auto workers. Does USTR intend to revisit the automotive rules of origin to address the potential for countries outside of the agreement to exploit the current rules?"

She replied, "We will continue to consider any necessary changes to the USMCA rules to ensure the competitiveness of the North American automotive and aluminum industries and that the USMCA’s benefits continue to accrue to U.S. and North American workers. In addition, USTR is assessing other potential policy responses, given that the USMCA duty preference is only one element of Chinese automakers’ calculus in shifting production abroad." She added that customs rules that confer country of origin status "have left openings for those Chinese firms to benefit from Most-Favored Nation (MFN) treatment (avoiding Section 301 tariffs)."

Sen. Tim Scott, R-S.C., said that more imports of fruits and vegetables from Mexico, "which benefit from unfair labor and pricing practices," are a large part of the more than $30 billion agricultural trade deficit, and said that those imports "continue to cause widespread harm to growers in South Carolina and throughout the Southeast United States." He asked when would the administration restore fair competition for his state's produce farmers?

She said that the Seasonal and Perishable Agricultural Products Advisory Committee formed four months ago, and that her office and the Agriculture Department "will work with the Committee and Members of Congress to develop possible administrative actions and legislation that would provide real benefits to producers of seasonal and perishable produce in the Southeastern United States."

Three senators, including Sen. John Cornyn, R-Texas -- who could be the next leader of the Senate -- asked Tai about the African Growth and Opportunity Act, with two asking her what should change in the renewal's language. Sen. Michael Bennet, D-Colo., co-sponsor of a renewal bill, asked her to name "specific improvements."

She replied that a new AGOA should support continental economic integration through the African Continental Free Trade Agreement, should spur more countries to use it for exports, should provide "additional tools for assessing and reinstating eligibility," and should explore "ways to deepen economic engagement post-graduation."

Sen. Mark Warner, D-Va., told Tai he's intrigued by the idea of using AGOA to encourage more trade in critical minerals from participating countries.

"Including a critical minerals-specific provision in AGOA could have multiple benefits, including building resilience in the U.S. critical mineral supply chain, deepening U.S economic relationships on the continent, and providing a significant alternative to China," he wrote, and asked her if she thought AGOA was the right place to address that trade.

Tai replied that the government wants to create opportunities for businesses to find new places to source, "including and especially those located domestically, facilitating the movement of supply chains to trusted partners through friend-shoring and nearshoring ... . The Administration remains committed to exploring ways to work more closely with African partners on critical minerals and supply chain resilience more broadly, in a way that advances U.S. values, including labor rights and environmental protections."

Sen. Catherine Cortez Masto, D-Nev., asked Tai if the administration supports her bill to suspend the 15% tariff on titanium sponge, since there is no domestic production.

Tai didn't answer her question. Instead, she wrote, "I understand your concerns regarding the lack of domestic production of titanium sponge, the impact of the existing 15 percent tariff rate on American manufacturers, and reliance on imports from our key ally Japan and other countries. My team is carefully assessing this issue and welcomes engagement with Members of Congress and affected stakeholders on the matter."

On exports, Sen. Todd Young, R-Ind., asked what is the USTR's plan for concluding the Indo-Pacific Economic Framework’s trade pillar, and what hurdles are preventing that conclusion?

She did not say what is preventing the negotiations from concluding, and said she could give no timeline for finishing them, but said the administration is committed to doing so. She wrote, "We are specifically focused on negotiating provisions that can help American businesses and workers compete in the global economy and are seeking to include commitments on labor, environmental sustainability, the digital economy, agriculture, transparency and good regulatory practices, competition policy, and trade facilitation. The Administration’s focus is developing high-standard rules that can increase competitiveness among Parties to the agreement, which can generate increased access to foreign markets for U.S. exporters."

Sen. Steve Daines, R-Mont., asked Tai how her office is addressing intellectual property issues in Mexico, and she said it is monitoring Mexico's compliance with its IP-related USMCA commitments "including those with transition periods that end in 2024 and 2025. In addition, I share your concerns about regulatory delays, which remain a primary barrier to entering the Mexican market for pharmaceuticals. USTR will continue to raise concerns about the regulatory delays and underscore the importance of the full implementation of all pharmaceutical commitments under the USMCA."

Cornyn pointed out that China has applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), formed the Regional Comprehensive Economic Partnership free trade agreement, and has signed other FTAs in Africa and Latin America.

"Are you concerned that the U.S. is losing leverage to set trade terms in the region because we are not negotiating free trade agreements?" he wrote. "Do you agree that free trade agreements with countries in the Indo-Pacific would help the U.S. counter China’s influence? Are your policies creating greater trade opportunities for China that will disadvantage U.S. firms?"

Tai said USTR has worked within the Group of Seven (G7), with the EU and "with diverse like-minded partners" to "find solutions to the many serious problems posed by China’s state-led, non-market approach to the economy and trade."

"In the current negotiation regarding a further agreement under the U.S.-Taiwan Initiative on 21st-Century Trade, the United States and Taiwan are seeking to adopt provisions to collaborate on ways to address unfair, anti-competitive nonmarket policies and practices," she added. "Given that China’s approach to the economy and trade poses so many serious risks and potential harms, it is in the United States’ interest to enhance our trade relationships with like-minded economies."

Sen. Marsha Blackburn, R-Tenn., complained that China did not make the agricultural purchases it promised to make as part of President Trump's phase one deal, and asked what Tai would do to hold China accountable for not making those purchases.

"We remain open to meaningful improvements from China for our agricultural products and to mitigate against retaliation. But one of the challenges we have with China is an over reliance on China as a customer," Tai replied. "Our strategy therefore has expanded to include working with allies and partners on issues of common concern and market opportunities while also pursuing the vigorous defense of our values and economic interests from the negative impacts of China’s unfair economic and trade policies and practices."