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U.S. auto safeguard in TPP identical to KORUS, but different in practice

World Trade Online | 10 November 2015

U.S. auto safeguard in TPP identical to KORUS, but different in practice

The special motor vehicle safeguard that the United States has secured in its bilateral auto deal with Japan under the Trans-Pacific Partnership (TPP) is identical to the one included in the U.S.-Korea free trade agreement, but will have a different lifespan because the U.S. tariff phaseout for cars and trucks from Japan in TPP is longer and structured differently than it was under KORUS.

As was the case under KORUS, the U.S.-Japan special auto safeguard can be applied during the “transition period,” which is defined as the period between entry into force and ten years after the tariff is eliminated.

In practice, however, the auto safeguards under both FTAs only become available once the tariff is reduced or eliminated, because of the requirement that they can only be used if the tariff cuts under the agreement lead to a surge in imports to the U.S. market that cause or threaten serious injury to the U.S. auto industry.

In TPP, the U.S. will eliminate its 2.5 percent duty on cars upon year 25 of implementation, with the first tariff cut taking place in year 15 followed by several non-linear reductions. This means the total lifespan of the safeguard is 20 years for cars. For trucks, the U.S. has no gradual phaseout, with the full 25 percent tariff staying in place until its elimination in year 30. Thus, the lifespan of the safeguard on trucks is only 10 years.

In KORUS, by contrast, the U.S. car tariff remains unchanged until its elimination in year five. The truck tariff is slated to be eliminated in year 10, with the first tariff cut beginning in year eight. That means the Korea safeguard can be invoked for a total of 10 years on cars and 12 years on trucks.

Like KORUS, the U.S.-Japan auto safeguard in TPP allows the U.S. to freeze tariff reductions or raise the tariff rate back to the applied most-favored nation level if the criteria for imposing it are satisfied.

In addition to being available 10 years after tariff elimination, the U.S.-Japan motor vehicle safeguard in TPP aligns with that of KORUS in four other respects. The first is that it can be imposed for a period of up to two years, with the ability to extend by up to two additional years if it continues to be necessary to prevent or remedy serious injury to the U.S. auto industry.

This is a longer period than allowed under the transitional safeguard mechanism for all products under TPP, which can be imposed for two years with the ability to extend by one year.

The second element of the special auto safeguard in TPP that is the same as that in KORUS is that the party whose goods are subject to the safeguard cannot suspend concessions on the applying party’s goods as compensation during the first 24 months in which the safeguard is applied.

This differs from the standard TPP safeguard, which allows the non-applying party to suspend concessions on any product in an equivalent amount if it cannot reach an agreement with the applying party on compensation within 30 days of entering into consultations on the matter.

Two other elements where the U.S.-Japan auto safeguard and the KORUS safeguard are identical is that they can be applied more than once on the same good during the life of the safeguard, and do not require that the increased duty imposed under the safeguard be progressively phased out.

By contrast, the standard TPP safeguard cannot be applied more than once on the same good. In addition, in cases where the expected duration of the normal TPP safeguard is over one year, “the Party that applies the measure shall progressively liberalize it at regular intervals during the period application,” according to TPP Article 6.4.4.

The U.S.-Japan special safeguard is included in the bilateral auto deal that is appended to both party’s tariff schedules. Also part of that deal is a special auto dispute settlement mechanism for addressing non-tariff barriers in the auto sector that differs from the KORUS version in at least four key respects.

The first is by establishing a “tariff delay mechanism” in addition to the tariff snapback included in the KORUS, while the second is by laying out a formula to calculate the level of trade retaliation in a given dispute that favors the country with an automotive trade deficit at the time.

The third is that the TPP auto dispute settlement procedures allow the U.S. to snap back tariffs on cars and trucks, while the KORUS mechanism covered only cars.

Fourth, the special auto dispute settlement procedures in TPP would stay in place for five years after tariffs are eliminated, while the KORUS procedures were to stay in place for 10 years after tariff elimination if there was no finding of a violation by a panel under the procedures. KORUS does not say how much longer the procedures would stay in place if a panel convened under the auto dispute settlement mechanism found a violation.

Although it is true that the U.S. tariffs on Japanese autos and trucks will be eliminated in year 25 and year 30 of TPP implementation, respectively, the tariffs will actually be in place for less than 25 and 30 years because of technicalities in the way the phaseouts are counted under TPP.

Specifically, the auto tariff will stay in place for a period of between 23 and 24 years, depending on what time during the year TPP is implemented. Similarly, the truck tariff will stay in place for a period of between 28 and 29 years, depending on the month of implementation.

 source: World Trade Online