TPP Mythbusting: The Tortured Myth of "Made in America" Chinese Cars

Just hours after the Obama administration released the full text of the Transpacific Partnership (TPP), Matt Stoller, beloved Left wing blogger and Bernie Sanders' personal hire to the Democratic staff of the Senate Budget Committee, released the following tweet:

That is impressive. Impressive that is, given the timestamp of the tweet, Stoller (and his boss, Sen. Sanders) seem to have digested the entire 2000 page text in a little over three hours - speedreading skills seemingly surpassing Borg assimilation tubules.

But Stoller is wrong. Fist, prima facie wrong. Contrary to the Ideologue Left's fantasy land, free trade agreements actually have nothing to do with what can and cannot be labeled "Made in America."

What does happen when a free trade zone is established, such as under the TPP, is that the agreement defines "origination" - that is, it defines what products can be considered as having originated within the trade zone. This is important to remember, because the agreement is concerned only with what is originated anywhere within the trade zone, and not the particular partner country it is originated in - hence, it's idiotic to believe it's some kind of "Made in [XYZ Country]" proposition.

The reason this is important to do is so that only products originated within the countries that are party to the agreement are treated duty-free for export and import purposes (and only for those purposes). For example, free trade zones would be meaningless if Canada could import items from China and then pass it to the United States despite American tariffs that may be applicable to China.

For those of you wondering, yes, President Obama has imposed tariffs on China. The President imposed tariffs on Chinese tires in 2009, for example, and on Chinese made solar panels in 2012 and 2014.

But let's return to the matter at hand. What Stoller is pointing to very inartfully (to be very kind to him) is how the matter of origination - once again, not the same as "Made in America" labeling - is decided under the TPP. Well, we have the agreement handy, so let's have a look:

Article 3.2: Originating Goods

Except as otherwise provided in this Chapter, each Party shall provide that a good is originating if it is:

(a) wholly obtained or produced entirely in the territory of one or more of the Parties as established in Article 3.3 (Wholly Obtained or Produced Goods);

(b) produced entirely in the territory of one or more of the Parties, exclusively from originating materials; or

(c) produced entirely in the territory of one or more of the Parties using non-originating materials provided the good satisfies all applicable requirements of Annex 3-D (Product-Specific Rules of Origin),

and the good satisfies all other applicable requirements of this Chapter.

Basically something is considered an "originating good" - that is, originating within TPP countries but not a specific country - if (a) it's grown or produced within a country or within TPP partners - this is referring to agricultural products, (b) everything made from material within the TPP countries, for example cardboard boxes made from US or Canadian lumber, or (c) something produced entirely inside the TPP countries, but from material that are not from a TPP country (i.e. "non-originating") as long as the resulting product satisfies certain requirements, outlined in Annex 3-D. These include the precise math of how much of this "non-originating" material can be included.

This is what Stoller is talking about in his tweet, and more precisely, he's talking about how this applies to automobiles. He is also wrong here. TPP clearly requires that to be considered "originating", at least 55% of the value has to have come from the TPP zone. The TPP opponents' entire claim in this regard is based on this: The regional value content for most automobiles has to be at least 55% under the build-down method, but 45% under the net-cost method.

You have one of two reactions from this: First - the reactionary one: SEEEE? We told you Obama is going to sell us out! Up to 55% of the net cost can come from foreign places like China! CHINA!!

The second, the inquisitive response. I hope for this reaction in my reader: 'the fuck is "regional value content" and what exactly is the "net cost method"?

Regional Value Content or RVC is a mathematical formula, expressed in percentage. There are four ways provided in the TPP to calculate it, but we will take the two relevant ones here. The build-down and the net-cost methods. What are they? Why are they different? And what does it all mean?

The build-down method is a value method: simply put, the requirement here is saying that at least 55% of the value of a product must come from sources within the TPP zone. It's calculated by taking the difference between the final value of the product and the value of its non-originating parts as a percentage of the final value.

Let's demonstrate. Let's say we are talking about a car that is valued at $10,000 (value is basically the actual price it is sold when exporting - think of it as dealer cost, not the cost to the end consumer). TPP is saying that no more than $4,500 of that value - again this value too is calculated by the actual price paid by the manufacturer - can come from goods that originated outside the TPP zone.

The "net cost" method, on the other hand, is a cost-based method, as the name indicates. The net cost of a vehicle, as defined in the TPP, is the total cost less any advertising, royalties, services, etc. The net cost is always less than the value of a product; if the market value of a product were less than its net cost, it would cause loss, and there would be no point in exporting something that doesn't make any profit.

It is for this reason - that the net cost is always less than the actual value of a profitable product - that the net-cost method allows a 45% ratio. It is calculated by subtracting the value of non-originating goods (i.e. the actual price a manufacturer paid to get those) from the net cost of the resulting good and expressing that as a percentage of the net cost. If you don't understand that mumbo jumbo, it is saying that at least 45% of the net cost of building a vehicle must be spent within the TPP countries.

So for that car that is valued at $10,000 but actually costs a net $8,000 to build, the manufacturer would be limited to $4,400 of that cost coming from non-originating material, less than they would be allowed if they used the build-down "value" method.

Of course, there are certain realities of manufacturing a car. 22% the production cost of a car is steel, and China produces 10 times as much steel as we do. So we either suddenly discover and dig 10 times more iron ores, or we buy some steel from China. Or, we lay off everyone in the Steelworkers. Oh, and this is the fact with or without the TPP.

Fearmongering about the Chinese boogyman taking over American cars is just that - fearmongering. TPP doesn't change how cars are made in America, just how openly and where they can be sold. It opens bigger markets for American cars. That is the truth.

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