Trade Deals Need to Reconsider Supply Chain Risks – GAO Report

U.S. trade agreements “historically focused on trade liberalization and maximizing economic efficiency” rather than on supply chain resiliency, USTR officials told the Government Accountability Office (GAO), in a report published this month.

The old approach pretended free trade with low tariffs would fix everything with cheap imports while turning a blind eye to weak environmental rules from the exporting country, geopolitical risks, forced labor, and subsidies. But some in Washington, especially those inside the U.S. Trade Representative office, are saying that other fair trade and labor rules, supply chain risks can no longer be ignored.

The 36-page report by the GAO was published this month in response to the February 2021, Executive Order 14017 requesting a review of U.S supply chain resilience.

The report was heavy on Washington’s preferred “work with allies” approach, and rather dim on building capacity in the United States. As it stands, the U.S. is nearly reliant or fully reliant on imports for a number of sectors of the U.S. economy, such as pharmaceutical drugs.

*** See CPA’s report on supply chain risks in the U.S. pharmaceutical market.***

Supply chain risks were brought to the fore by never-before used public health policies to battle the pandemic.

Based on the GAO chart above, the U.S. has a window of opportunity to move on this issue before supply chain risk pressures revert back to the mean.

Supply chain pressures and U.S. dependence on China were major reasons why Congress and the Biden administration worked to pass the CHIPS Act last year. It was done to address the risk posed to the U.S. over our nation’s dependence on Asia—and more specifically China if it ever invaded Taiwan—for semiconductors.

The semiconductor supply chain affected a range of U.S. industries.

In 2021, for example, automakers were forced to furlough workers because they needed basic chips for cars sourced from Asia. While many of these shortages were due to the Covid public health policy adopted by the West and much of Asia, the pandemic highlighted how many manufactured commodities deemed not sexy enough for U.S. manufacturing led to massive tripwires in the supply chain, adding to inflation pressures.

In May 2022, U.S. agencies led by the State Department, USTR and Commerce announced a pilot program with European counterparts for a joint early alert system to more effectively share data on potential bottlenecks in the semiconductor supply chain. They said they needed additional staffing resources to focus on this issue. They would have to reach out to hundreds of private companies to gather intel on where their products are made. Some companies don’t even know where some of their products are made, the GAO report said.

The GAO report on supply chain risk was centered on what the three agencies named above were doing to address the Feb 2021 EO. The State Department’s Bureau of Economic and Business Affairs requested seven new staff positions to “diversify critical supply chains.” According to State officials, the additional staff will help the Bureau’s supply chain diplomacy efforts. In this case, it warrants the question whether diversification just means pulling certain critical products out of one country – China – and spreading their manufacturing throughout the world.

At no point do the agencies mention domesticating critical supply chains, let alone any supply chain reliant on imported goods. (In 2022, the U.S. broke its goods trade deficit record last set in 2021, hitting $1.19 trillion, the Bureau of Economic Analysis reported on Tuesday. See CPA’s report on the numbers.)

Some 43% of U.S. workers are in supply-chain industries, meaning they are either employed at lead firms or work for their suppliers, according to one 2020 study highlighted by the White House. The structure of supply chains has significant implications for job quality and availability for these workers.

“It is nice to see officials saying trade deals need to be renegotiated because they don’t address supply chain risks,” said CPA’s chief executive Michael Stumo after reading a review of the GAO report. “But if we are going to give preference to regional goods, instead of local production, we should raise tariffs on all goods, and then give the preference to the regional ones. We should be raising WTO-bound tariff rates under GATT article 28.”

The U.S. default tariff rate, or WTO-bound rate, is 3.4% on average. U.S. tariffs are the lowest average tariff in the world.

The Friendly Shores. This topic was mentioned in White House report titled “Building Resilient Supply Chains”. The Feb. report by GAO is part of the Executive Branch’s efforts to improve supply chains, but there is almost no talk about reshoring. Here is a list of countries that would be considered ‘friend-shoring’ nations.

The White House’s 100-day supply chain reviews developed under Executive Order 14017 refers collectively to “allies and partners” as nations that are not geopolitical competitors with the United States for key products, and are thus major components in the supply chain solution. That report, highlighted again by the GAO, states that supply chains used by the United States could be strengthened if they were moved to “friendly shores”, but no nations were named. If it were to include nations in our Most Favored Nation (MFN) trading policy, it would mean all nations minus Russia, Cuba, Belarus, and North Korea.

“Trade deals need to include more clauses to respond to national policy circumstances, rather than constrain us forever,” said Stumo. “Is China a friendly shore? If not, why is it part of our MFN policy?”

The GAO report also highlighted “rules of origin”, saying some trade deals may even need some retooling. Existing free trade agreements (FTA) already come with rules of origin, but they are porous, not exactly heavily policed, or are simply ignored. This means a part that had to be from Mexico, for example, could just as well have come from China and few would know, if any. Stronger, verifiable rules of origin should be a prerequisite to gain preferential FTA tariff treatment.

“Rules of origin” could serve as a mechanism “in free trade agreements for the U.S. government to promote supply chain resilience with trading partners,” the GAO report stated.