Andrew Lawler, Author at Global Trade Magazine

EU ministers are still spooked by Brexit and what it all will mean. Expect them to huff and puff and threaten to blow Britain’s economy down, especially as negotiations continue to stall over the terms they had originally mandated. For its part, Britain will go deep into its playbook to negotiate its own version of what a favorable outcome looks like. And they know how to play the game. Keep in mind that for hundreds of years—right up until the beginning of the last century—England ruled the world’s economy. Trump may have written the book The Art of the Deal, but for the British, it’s in their DNA. The UK must remember it holds more cards than it may think it does. Here’s why: Together with the U.S., they liberated Europe from the Nazis.

In the end, the Germans won’t press them over Brexit because they are still deeply embarrassed by their actions in WWII; and the rest of Europe—including France, Belgium, Italy and the Netherlands—still owe Britain dearly for coming to their rescue. The UK would do well to remind them of that fact. Here in essence is all they need to say: “Look, we tried the EU and it wasn’t for us. We’re fine if you want to keep it going and if so, then enter into a free trade agreement between the EU and the UK. But don’t try to penalize us in any way because you owe your very existence to us, and we’re calling in that card. End of story. What the UK needs is a strong, Churchill or Thatcher-like leader to stand up and say it.

Never mind concerns over the TPP, NAFTA, or Brexit. The world economy is picking up steam, and it’s only the beginning. We are heading into a 10-year—or longer—cycle of global growth the likes of which the world has never seen. Exports are going to accelerate as 2018 unfolds and will continue to grow well into the 20s, as in the 2020s. Sometime before next June, the U.S. economy will break into four-percent annual growth. As for the stock market, earnings will catch up to PE multiples, which will continue the rally well into the next few years. If you’re a manufacturer, now is the time to be expanding your global footprint. That means exploratory trips to attend more international trade shows and sign more international distributors. And if you’re a 3PL or carrier, you need to step up your efforts to win more market share. There are fortunes to be made and they will be, either by you or your competitors. Get cracking.

It’s no surprise to global traders that components for flat screens are made in Asian countries, shipped to the ports of Los Angeles and Long Beach and then trucked to Mexico for assembly duty free and then re-exported back to the U.S. duty free. It’s been said that the U.S. can’t compete with low cost Mexican labor. Au contraire. We have plenty of cheap, readily available skilled and unskilled labor available right now in the form of 2 million inmates that populate U.S. prisons. That’s a gigantic, untapped labor pool. The Department of Labor should be leading the cause to have private industries open up secured assembly plants adjacent to prisons and allow inmates the ability to learn a skill and earn some money on the side that they can either send to their dependents or keep in a trust account to build a nest egg for when they are released. As the saying goes, “Idle hands are the Devil’s workshop.” Why not rehabilitate prisoners by giving them work to occupy their days? Giving them a job to do and allowing them to produce products with their hands can only help ease their transition back into society upon their release. It would even make social and economic sense to allow tax credits for companies that build manufacturing or assembly facilities adjacent to prisons. Obama would have thought of 20 reasons why this couldn’t be done, chief among them pressure from worker unions who may view prison labor as competition or from bleeding heart libs who somehow would mistake this as exploiting the inmates. Preposterous. Let’s give them jobs and teach them skill sets they can take with them when they are released. And give them an opportunity to earn “good conduct and/or product” awards to make them even more marketable. As for pay? Don’t regulate it. Let the market determine wages, which will vary state to state. Whatever wages are paid will go a long way for them buying shoes, clothes or school supplies for their family back home and give U.S. industry a competitive advantage over foreign wages.

So, the dinner conversation went something like this …

SAYS HIM: I think it’s plain wrong that the Chinese can copy intellectual property or re-engineer a product and violate patents.

SAYS THE OTHER GUY: Yes, but they don’t see it that way. To the Chinese or the Japanese for that matter, once you put a product out on the market for everyone to see and use, then it becomes fair game to copy. That’s their business culture. It’s not our business culture but those are their playground rules.

SAYS HIM: But that’s not right. Don’t they have any moral compass?

SAYS THE OTHER GUY: Look, when we were at war with Japan and we came across some great new product that they created, do you think we would have any compunction about copying and manufacturing it ourselves?

SAYS HIM: Well, that’s different. Under your example, we were at war. Different rules apply.

SAYS THE OTHER GUY: Exactly. But make no mistake, we are at war right now with China and with many other countries throughout the world. Sure, no one is shooting at each other and we can visit each other’s country in a friendly way, but nonetheless, we are at economic war with them so they don’t see it as “copying.” They see it as fair game, just as we did when the bullets were flying.

So, I ask you … who’s right and who’s wrong, and why?

When negotiating, when do you know if someone is bluffing or not? Do their facial expressions give it away? The tone of their voice? How about in the measured use of their words? I am referring to the startling announcement by Treasury Secretary Steven Mnuchin, who said, “I have an executive order prepared, that’s ready to go to the president that will authorize to stop doing trade and put sanctions on anybody that does trade with North Korea.” When asked if that includes China, he replied, “Stopping trade with anybody. Nobody would be off the table.”

I watched the interview and I have to say that Secretary Mnuchin’s delivery was believable. If you were playing hearts with him, you would have no idea if he was shooting the moon until he picked up the Queen of Spades. The man has a natural poker face. But really? Stopping trade with China? Think for a moment what that would do to U.S. manufacturing, where China has become so integral to our global supply chain. There are thousands of U.S. manufactured products where at least some components are made in China. Shut that down and don’t you also shut down U.S. manufacturing? At the very least it would be a major interruption where U.S. manufacturers would have to scramble to find other suppliers for those parts either at home or abroad. And then they would no doubt need to make modifications to accommodate the slight variances in the replacement parts from other suppliers, which could take months or longer.

Shutting down trade with China would almost be unthinkable. Almost. And that’s where China blinked. Well, sort of. China’s Central Bank told Chinese banks to wind down existing loans and to not make new loans to new North Korea customers. But what does that really mean? And more importantly, how transparent will any of that really be considering you are dealing with two Communist regimes?

That the U.S. would say it would consider stopping trade with China is drama enough, but the other side to that coin, of course, is that you have North Korea now saying that a strike against the U.S. is inevitable—and the country is threatening to test a hydrogen bomb. Never have the stakes seemingly been higher in the geopolitical trade arena than they are right now. We will be reading about this moment in history books as it has all the drama of the Cuban Missile Crisis. Yet, I defer to my original commentary a few issues back, which is: North Korea is misbehaving with China’s consent so that China can appear to reel them back in—in exchange for trade concessions from the U.S. As payment for their part in the charade, North Korea gets food and other essential trade items from China.

British PM Theresa May gets high marks for navigating her Brexit strategy thus far, albeit it is a work in progress. She is saying all the right things like, “No deal is better than a bad deal” and favoring a gradual implementation rather than “the cliff’s edge.” All of this, of course, is to calm markets. But the Scots, Irish and British have always found ways to thrive in uncertainty. In fact, they view it as … well, sporting, old boy. So don’t expect any fall off in Britain’s economy, despite threats and tantrums by EU ministers who are still fit to be tied that this is all happening. In fact, look for Britain’s economy to pick up steam as it sheds EU regulatory burdens.

And we now turn the rest of Soundings over to an excerpt from U.S. Secretary of Commerce Wilbur Ross’ column “These NAFTA Rules Are Killing Our Jobs,” which appears in full on www.globaltrademag.com.

As the North American Free Trade Agreement negotiations unfold, there is a lot of loose talk being exchanged about automobile parts going back and forth among the United States, Canada and Mexico. NAFTA supporters assert that the U.S. content in cars assembled in Canada and Mexico is particularly high and that therefore our $70 billion-plus trade deficits with our NAFTA partners are not worrisome.

[But] we cannot forget that the point of a free-trade agreement is to advantage those within the agreement—not to help outsiders. Instead, NAFTA has provided entry into a bigger market for outside countries, and the United States is paying the price. While NAFTA has achieved its goal of increasing three-way trade in absolute terms, American workers and businesses are not benefiting in a way that is fair and reciprocal.

What does this mean for U.S. jobs?

Hundreds of thousands of Americans go to work every day in the automobile manufacturing industry. The declining U.S. share of content in imports from Canada and Mexico puts those jobs at risk. The United States accounts for an overwhelming share of the total NAFTA auto market today—83 percent, in fact—yet American workers are not reaping the benefits of that purchasing power.

So, why is this happening?

NAFTA included “rules of origin” provisions that were intended to restrict the non-NAFTA content in final goods. Yet the numbers above show that the opposite has, in fact, happened.

Unfortunately, NAFTA rules of origin on automobiles listed the exact parts to which the rules of origin applied, and many of those parts are no longer used. Another reason is that the rules include a concept called substantial transformation, which means that if further processing of a non-NAFTA item is done by a NAFTA partner, the non-NAFTA items are “transformed” and are deemed to have been produced in the United States, Canada or Mexico.

These facts are why U.S. Trade Representative Robert E. Lighthizer announced that two major objectives for NAFTA are raising the total NAFTA content requirement and raising the U.S. share of that requirement, especially in autos and auto parts.

Autos and auto parts are particularly important because our combined trade deficit in autos and auto parts from Canada and Mexico is $84.6 billion annually, which is the vast majority of our total trade in goods deficit with our neighbors. Only $14.6 billion of that deficit is offset by surpluses in other product categories. That is why we have a NAFTA net trade deficit in goods of $70 billion.

If we don’t fix the rules of origin, negotiations on the rest of the agreement will fail to meaningfully shift the trade imbalance. Our nation’s ballooning trade deficit has gutted American manufacturing, killed jobs and sapped our wealth. That is going to change under President Trump, and rules of origin are just the beginning.

UK: Stand Up to EU On Brexit

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