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U.S. WINE INDUSTRY IS DROWNING ITS SORROWS OVER TRANSATLANTIC TRADE SPAT

wine

U.S. WINE INDUSTRY IS DROWNING ITS SORROWS OVER TRANSATLANTIC TRADE SPAT

Tipsy trade policy

The United States imported $6.5 billion worth of wine in 2018, equal to 17 percent of total wine imports worldwide. We like our Rioja from Spain, Bordeaux from France, and Italian Vernaccia as much as our California counterparts.

Instead of toasting, American wine importers — and the many businesses that rely on imported wine, from distributors to wine shop owners to restaurateurs — are protesting. Why? Because the administration was seriously considering raising tariffs to 100 percent on a range of imported Euro

pean products, including French, German and Spanish wine.

Imported European wines are already more expensive due to a 25 percent the U.S. Trade Representative (USTR) imposed in October 2019. The wine industry is concerned that raising the tariff to 100 percent will cost thousands of jobs as the higher prices on European wines knock out a large chunk of the industry’s wholesale and consumer sales.

A drunken trade brawl

European wine is but a pawn in a decades old trade dispute. In October, the World Trade Organization (WTO) found that Airbus, a European aerospace corporation and Boeing’s big rival, had illegally received over $22 billion in state-sanctioned subsidies. The WTO authorized the United States to apply retaliatory tariffs on as much as $7.5 billion worth of European exports each year until the subsidies are removed.

Under U.S. law, the USTR must review and possibly revise (maybe increase) or “rotate” the list of products subject to tariffs after 120 days, known as “carousel retaliation,” to ensure the tariffs are causing enough pain to induce a negotiated resolution.

Even if wine were spared a tariff increase in the aircraft case, a new front has opened in this trade brawl. In July last year, France announced its Digital Services Tax, a tax of three percent on revenues generated in France by a digital company, independent of where that company was established. The tax appears targeted at American companies like Google and Facebook and was denounced by President Trump. When it became clear France had no intention of backing down, the U.S. administration threatened tariffs of up to 100 percent on popular European imports — including wine.

Value of US wine imports

Friends don’t let friends retaliate

The U.S. wine industry is getting whiplash from the prospects of cross-retaliation in this trade war. The Europeans are also awaiting a WTO verdict on their case against Boeing subsidies that could authorize tariffs on U.S. imports. One-third of total U.S. wine exports, some $469 million worth, come from California shipping wine to the European Union, making it a prime target for retaliatory tariffs. The European Union could also decide to counter with tariffs in protest of the U.S. response to France’s digital tax.

Wine tariffs will not age well

An attack on wine strikes at the hearts of many. French and Italian wines alone account for one-third of the $70-billion U.S. wine market. The very biggest wine distributors may be able to afford to absorb the cost to remain competitive, but smaller importers and distributors will have a much harder time. The higher costs are passed along to distributors, drivers, specialty retailers, supermarkets and hotels, hitting everyone from the specialist Italian wine store to the French bistro that makes its margin on alcohol sales to the forklift operator in the warehouse. Wine sales also generate local and state tax revenue, particularly in states like Mississippi and Pennsylvania where the Liquor Control Board is the main wine buyer and seller.

In January, House Small Business Committee Chair Nydia M. Velazquez (D-NY) and eight Committee Democrats sent a letter to U.S. Trade Representative Robert Lighthizer voicing their fears about the tariffs’ impact on small businesses in the United States. They project that even the original 25 percent tariff could cost as many as 12,000 American jobs. A 100 percent tariff could risk 78,000 American jobs.

The 106 bipartisan members of the Congressional Wine Caucus also got together in January to send their own letter to Lighthizer, urging him to leave wine out of the sanctions, emphasizing the potentially crippling effects on America’s $220 billion wine economy.

Risk to wine chain of 100% tariff

Reason to celebrate?

Last week, the USTR made a sobering decision not to raise tariffs on imported European wines as part of the carousel review.

The entire industry is breathing a small sigh of relief, even producers in California. They would be unlikely to benefit significantly from the loss of competition from European wines. Due to laws on provenance, it is literally impossible to produce Chablis or Champagne anywhere else but France, for example. And compared to numerous competitors across the world, American producers have higher labor costs and limited supplies that could not fill the giant hole in the U.S. market left by European wines. Instead it seems likely that lower-cost South African and South American wine would be the beneficiaries as the more economical switch. Tariffs are a lose-lose for the U.S. industry.

In Vino Veritas

The tariffs are not an end unto themselves. They are meant to raise the stakes and bring the parties to the negotiating table. European trade officials appear to be contemplating measures to mitigate the trade row. Officials in Washington state appear to be reviewing its tax incentives to Boeing. The United States is seeking an international resolution to the question of digital taxes and French economy minister Bruno LeMaire seems more interested to resolve the digital tax dispute with President Trump.

Meanwhile, the U.S. wine industry cannot raise a glass. They must continue to live with the consequences of the 25 percent tariff, which they say could cost as much as $1.6 billion in lost wages throughout the distribution chain.

As for American wine lovers, another terrible reality sets in. After the 25 percent tariff went into effect in November, U.S. wine imports from Europe fell by half over previous months. Over the same period, China’s imports of French wine rose 26 percent. If European winemakers can shift their export focus, they might avoid the U.S. tariff pain and grow their market share in emerging economies while U.S. wine drinkers are left to abstain or drown their sorrow over higher prices.

Let’s all hope the issue is resolved and tariffs removed long before Beaujolais Nouveau Day in November.

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Alice Calder

Alice Calder received her MA in Applied Economics at GMU. Originally from the UK, where she received her BA in Philosophy and Political Economy from the University of Exeter, living and working internationally sparked her interest in trade issues as well as the intersection of economics and culture.

This article originally appeared on TradeVistas.org. Republished with permission.

trade

Trade in Good Conscience

Trade with a Global Conscience

Never before have we been more conscious of exactly what our products are made from, where they come from, and even where they will go once we’re done with them.

Consumer thirst for sustainably sourced, reusable and ethically designed products seemed to swell in 2019 and shows no signs of diminishing in 2020. According to Nielsen surveys, about half of American consumers in recent years claim they would change their consumption habits to reduce their impact on the environment, but only now they are starting to put big dollars behind those values. Nielsen expects spending on sustainable consumers goods to rise to $150 billion in the United States by 2021.

The growth in demand isn’t generational (though Millennials seek sustainable products out at higher rates) or limited to wealthy consumers. In the Nielsen survey, 81 percent of global respondents feel strongly the companies they buy from should help improve the environment. They worry about convenience and price, but also pollution and resource shortages.

As major companies and industries reshape their supply chain networks to improve sustainability, international trade will be affected. Countries that produce major commodities risk losing business if they don’t adapt to the sustainability demands placed on them, and new opportunities will open up for individuals, companies and nations that can meet them. New trading relationships will be forged and once-booming industries may wane.

On Trend

Savvy entrepreneurs worldwide understand that making products people can use and reuse with a guilt-free conscience, or at least free from the disapproval of others, is a key selling point that differentiates and elevates their brand and product in the competitive consumer goods market. By implementing regulations such as a ban on certain single-use plastics, governments are stoking demand by forcing consumers to seek out alternatives.

It is unsurprising that all this has led to a host of innovative, reusable goods available in the market the last few years. The origins of product materials are as important as the product’s functionality and aesthetics. From metal straws to recycled sofas, they have become accessories to adorn one’s Instagram snaps and project our personal values.

As the origins of the merchandise we buy becomes increasingly important, so too will methods to track and prove them, opening another avenue to capitalize on the shift. One solution is technology like blockchain which can help verify claims made by producers.

To demonstrate this push for more responsible consumption here are a few of the products, movements and trends that have already captured the hearts and minds of consumers.

Three-R Tradable Products

If one product encapsulates the fight against single-use plastics it may well be the reusable straw. Viral video of a sea turtle with a plastic straw wedged in its nose launched a monumental campaign to end their use. Many states and countries have banned them. Available primarily in metal and glass with accompanying cases, these drinking implements have become as much a statement accessory as they have an eco-conscious choice.

In a similar vein, bamboo cutlery has been lauded as an alternative to throwaway plastic utensils most often provided with takeout or at parties. Portugese Hi Fly Airlines has recently made the move to replace all their cutlery with the stuff.

Plastic packaging in grocery stores is a key contributor to non-recyclable waste. To combat this, zero-waste grocery stores allow you to bring your own containers and fill up from bulk bins and dispensers. In capitalist fashion, entrepreneurs are designing and marketing grocery kits with jars, bottles, bags and bins with which to fill all your zero-waste grocery goodies.

Of course, for those unable to go that distance, reusable shopping totes remain a popular staple to cut down on plastic and paper waste (or for those who just want to avoid the bag tax).

lovesac

Sustainably Sourced Global Materials

More brands have begun to use materials in innovative ways or are repurposing used products that would have found their way into landfill.

Several have taken plastic that might have ended up as waste floating in oceans and turned it into covetable and ethical fashion. These include Rothys, who design a range of machine-washable shoes made from plastic bottles, and Girlfriend Collective who market their leggings made from recycled fishing nets with the slogan “don’t make waste, wear it”.

REPREVE, another company that creates fiber from plastic bottles, supplies to a whole host of brands that make everything from clothing to furniture. They have so far recycled over 18 billion of the things and are aiming for 20 billion this year.

Footwear brand All Birds combines globally sourced renewable materials in new ways, blending trees from South Africa, sugar from Brazil and merino from New Zealand, into new textiles. They ensure the materials can be sustainably sourced and replaced with minimal environmental impact.

Trade Giveth and Trade Taketh Away

As more people grow concerned about where their products come from, how they are sourced, and the processes used to make them, demand for sustainable products could begin to reshape global trade.

As with any shift in demand, there will likely be global winners and losers as some producers take advantage of new opportunities and others see interest in their products slip away. One thing is clear, trade will remain central in the coming decade of sustainable demand.

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Alice Calder

Alice Calder received her MA in Applied Economics at GMU. Originally from the UK, where she received her BA in Philosophy and Political Economy from the University of Exeter, living and working internationally sparked her interest in trade issues as well as the intersection of economics and culture.

This article originally appeared on TradeVistas.org. Republished with permission.
corruption

Corruption is a Costly “Hidden” Tariff

Hidden costs

Tariffs, quotas and sanctions are all overt hurdles to free trade that increase the costs of commercial exchanges or even prohibit them. But not all barriers to trade are written down in law or even apparent on the surface. Some lurk in the form of money changing hands under the table.

The Organisation for Economic Co-operation and Development (OECD) in a recent report identified corruption as one of the most costly non-tariff barriers in global trade, particularly for low and low-middle income countries. Acting as a “hidden tariff,” a lack of integrity in trade can be just as damaging to trade relations as any legalized restriction.

Corruption wreaks direct costs such as skimmed revenue and outright theft, but can also create health and safety risks as officials look the other way on dangerous cargo. At the firm level, the OECD estimates informal payments and corruption add a “tax” of anywhere from five to ten percent of the value of company sales in markets where corruption is normalized. Combined, these effects will damage countries’ economic welfare over the long run.

corruption adds tax

Trading in bribes

Burdensome regulations and opaque bureaucracy often go hand in hand. The more complex regulation is, the greater the cost of compliance, and the more attractive bribery becomes as an end run around the bureaucracy and the easier corruption is to hide. When governments maintain quotas and other quantitative restrictions, administrative procedures to allocate them also create opportunities for mischief.

Corruption in trade is damaging to business in a number of ways. The added costs consume resources that could be spent bringing down prices or improving quality. Corruption also distorts private sector competition – firms that do best are the ones that can best work the corrupt system, not necessarily the ones that provide the most value. Companies unwilling or unable to engage in corruption are limited or barred from providing their goods and services in that economy.

High levels of corruption also make international firms unwilling to invest due to the added risks. Local citizens, particularly those in emerging economies, feel this damage through a lack of access to affordable, quality products, reduced job opportunities, and insufficient allocation of government resources to public services due to missing tax revenue.

World Bank lost revenue at customs borders

Greasing wheels at the borders

The World Bank estimates that corruption generates losses of about $2 billion each year in lost revenue collection at customs borders.

Complicated rules, a lack of oversight, and the discretionary power characteristic of many customs administrations provide opportunities for corruption at all levels. Whether it takes the form of slipping an agent money at a customs check to let goods through or fudge some paperwork, or large-scale fraud involving officials all the way to the top, corruption can be widespread and corrosive. As former Secretary General of the World Customs Organization, J. W. Shaver, once put it: “There are few public agencies in which the classic pre-conditions for institutional corruption are so conveniently presented as in a customs administration.

In one high profile example, a 2015 investigation in Guatemala uncovered systemic corruption in their customs authority. In return for bribes, importers were allowed to under-report shipments to avoid import taxes on a large scale, costing the country millions. Mass protests with citizens calling for transparency and accountability led to the vice president’s resignation.

Sometimes corruption is less bold but equally systemic. Superstore giant Walmart has recently come under fire for looking past bribery within its supply chain. In 2019, the U.S. Securities and Exchange Commission (SEC) investigated Walmart under the Foreign Corrupt Practices Act for deliberately ignoring corruption risks and red flags in its dealings in India, China, Brazil and Mexico. In India, many payments were less than $200, but together totaled millions. Walmart is paying $238 million to settle the investigation.

WCO quote about customs

Dangers of turning a blind eye

Beyond lost revenue, when customs officials turn a blind eye to nefarious shippers, human lives are put at risk. In 2015, chemicals that were falsely declared in China’s Tianjin port exploded, resulting in over 150 deaths. Investigations found that bribes were paid to sidestep safety regulations. The incident worsened when firefighters used water on the fire, unaware (due to deliberate mislabelling) that the type of chemicals involved would detonate upon reaction with the water.

Solutions that could pay off

There is an argument that, in some cases, so-called “informal payments” may actually facilitate trade in situations where government regulatory hurdles and inefficiencies are hard to overcome. However, greasing the wheels in this manner fails to remove systemic incentives to engage in corrupt behavior.

The trouble is, there is no one-size-fits-all solution to the problem of corruption in international trade. The most pressing risks must be targeted to ensure safety and integrity while avoiding over-burdensome rules and red tape that hamper trade and economic growth.

The OECD suggests a mix of approaches. Broad, high-level government support is needed to tackle corruption within customs administrations and border control. The penalties for bribery offenses must be stiffened and applied. The private sector must be engaged to monitor practices in their global supply chains. And, the OECD suggests writing transparency and anti-corruption provisions into trade agreements.

Beyond business and borders

Corruption is a quantifiable hidden tariff on individual commercial transactions. What’s harder is to measure the extent to which corruption, perpetrated in drips over the course of years, damages broader economic prosperity.

If open markets and greater trade benefit ordinary people, as we know they do, then tackling corruption to promote legitimate trade would have positive impacts on the well-being of millions around the world.

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Alice Calder

Alice Calder received her MA in Applied Economics at GMU. Originally from the UK, where she received her BA in Philosophy and Political Economy from the University of Exeter, living and working internationally sparked her interest in trade issues as well as the intersection of economics and culture.

This article originally appeared on TradeVistas.org. Republished with permission.

brazil

Comparative Advantage Revealed: What the U.S. Could Gain from an FTA with Brazil

Olá Brasil!

President Trump and Brazilian President Jair Bolsonaro announced their desire to “build a new partnership” after meeting in August, potentially through a bilateral free trade agreement. For the time being, the United States and Brazil are starting with some pragmatic approaches, for example by streamlining customs procedures, agreeing on safety standards for Brazil to import U.S. pork and beef, increased imports of U.S. ethanol, and possible ways to expand energy trade.

But Brazil would be a good target for a full U.S. free trade agreement. It is by far the largest South American economy. With total two-way trade reaching $103.9 billion in 2018, Brazil is our ninth-largest export market. Beyond any political merits or challenges, the potential commercial benefits can be shown through textbook economics.

Two-way trade between the US and brazil totaled 103.9 billion in 2018

“Revealed” Comparative Advantage

In a 1965 paper entitled Trade Liberalisation and “Revealed” Comparative Advantage, economist Bela Balassa developed an index for identifying where the comparative advantage of industrial countries lay in regard to their trade with one another.

Comparative advantage basically means one country can produce a particular good at a lower opportunity cost than another, which doesn’t necessarily mean at a lower absolute cost. The revealed comparative advantage (RCA) index is a useful tool that cuts out the laborious work of trying to assess all the factors that might determine comparative advantage but still captures relative costs and differences in non-price factors. Here’s how it works.

The Power of One

A country’s RCA in a certain class of goods is calculated by dividing the proportion of the country’s exports in that class by the proportion of world exports in that class. If the resulting RCA is greater than one, then a comparative advantage has been discovered. If it is less than one, the country is said to have a comparative disadvantage in that class of good.

The RCA is therefore useful in identifying areas where large gains from trade are possible but currently untapped. If one country’s RCA in a product is below one and another’s is above one this may be a potentially lucrative pairing.

Furthermore, if the country whose RCA is below one has either tariff or non-tariff barriers on that good and is importing from an inefficient source or producing for its own consumption, there is even greater potential for benefit.

The U.S.-Brazil Trade Relationship Revealed

Applying the RCA method to the U.S.-Brazil trading relationship in 20 sectors, the relative strengths and weaknesses of the United States and Brazil are complementary in 11 of them. There are only three categories in which both countries have RCAs higher than one, in which they would compete head to head.

For Brazil, export gains could be made in minerals, animals, food products, hides and skins, metals and raw materials such as alloys and iron ores, all sectors where Brazil has a high revealed comparative advantage compared to the United States. The United States has a revealed comparative advantage in exporting capital goods, chemicals, miscellaneous goods, plastics, rubber and transportation.

US-Brazil revealed competitive advantage RCA

Classic Trade: More Sales and More Savings

When it comes to importing raw materials from Brazil, the United States already has zero or low tariff rates in most categories, but there are some products where demand is high, but tariffs remain, creating opportunities for savings for U.S. consumers. For example, U.S. tariffs on building materials such as cut stone and shaped wood range from 3.2 to 4.9 percent. The United States does not have a comparative advantage in these materials and currently imports 24 percent of its building stone and 30 percent of its shaped wood needs from Brazil.

Tariff savings may also shift consumer purchases in Brazil’s favour. For example, Brazil enjoys a comparative advantage over the United States in coffee (we don’t produce it except some specialty in Hawaii). At present, 50 percent of U.S. imported coffee comes from countries we have an FTA with including Colombia and Guatemala, so Brazil would be well poised to increase its share of U.S. coffee imports under an FTA.

The products the United States has a revealed comparative advantage in compared to Brazil are more diverse, from capital goods to chemicals. Brazil’s lowest weighted average tariff among the good represented on the chart is 6.24 percent for chemicals; the highest is 21.01 percent in transportation. Reducing tariffs on U.S. industrial and agricultural goods would benefit both Brazilian importers and U.S. exporters.

A U.S.-Brazil FTA Could Be Positive

Overall, these numbers suggest a high complementarity in revealed comparative advantages between the United States and Brazil such that removing barriers to cross border trade in goods and services between the United States and Brazil has the potential yield gains for both sides, with increased trade flows both ways.

If only negotiating a trade agreement were as easy as following the numbers. The United States has a number of pension and tax reforms it would like Brazil to enact before getting serious about an FTA, and Brazil is a member of MERCOSUR, a South American trading bloc that precludes members from negotiating tariffs on an individual country basis. And so, the two countries will continue to nibble at the margins of an agreement, achieving “free-er” trade where possible, but when they are ready, the comparative advantages are now revealed.

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Alice Calder

Alice Calder is a program manager at the Mercatus Center at George Mason University. Prior to this she worked as a graduate research assistant while pursuing her MA in Applied Economics at GMU. Originally from the UK, where she received her BA in Philosophy and Political Economy from the University of Exeter, living and working internationally sparked her interest in trade issues as well as the intersection of economics and culture.

This article originally appeared on TradeVistas.org. Republished with permission.

Syria

Civil War in Syria: How Conflict Erodes Trade

Syria has a turbulent history. Numerous nations, factions and leaders have wrestled for control of the country at turns over the last 100 years. The present conflict, a civil war raging for eight years now, has drastically affected Syria’s trade by destroying infrastructure, displacing its productive workforce, and weakening business confidence in the region. The World Bank estimates the current conflict has produced a cumulative loss in Syria’s GDP at $226 billion as of 2017, an amount equal to four times Syria’s GDP in 2010.

Syrian Trade Throughout History

The region now called Syria was home to one of the most ancient civilizations on earth. Evidence of early trade relations dates as far back as 10,000 BC. Many of the greatest human achievements had their origins in the area known as the Cradle of Civilization. Its location on the Silk Road enriched Syria with wealth and strategic importance during the Roman Empire.

Throughout the 20th century, Syria experienced French control, uprisings, nationalization, regional wars, and conflict among rival factions. The economic outlook for Syria seemed to be improving in the 1990s and early 2000s. The World Bank considered it a fast-growing, lower-middle-income country. Syria’s main exports were crude and refined oil and information and communications technologies. Syria also enjoyed a healthy travel and tourism industry.

Impacts of the Civil War

The civil war has either eliminated or drastically reduced all of Syria’s main trading industries, exacerbating the suffering for Syrian civilians. In 2010, exports totaled around $19 billion. By 2016, they had fallen to $555 million. Syria’s ranking as a global exporter fell from 88th in 2011 to 141st in 2015.

Syria trade profile post civil war

Sanctions, Destruction and Displacement

A consequence of the conflict, Syria is subject to numerous sanctions by the United States, Canada, European Union, Arab League and Turkey. These include embargoes on investment, blocks on trade in key industries such as oil, financial services and precious metals, and the freezing of assets. The aim of such sanctions is to pressure Syrian leaders to end the conflict, but average Syrians also suffer the economic fallout.

As in any war, destruction is rampant. Mortar fire and airstrikes have damaged and demolished key infrastructure for trade. Bridges, grain silos, roads and other economically significant assets are strategic targets for both sides. Access to fuel and electricity is limited, denying Syrian businesses the productive factors necessary to produce goods to trade as well as the means to transport them. Schools, food sources and medical buildings have also been targeted. As of 2017, seven percent of housing stock has been destroyed, and 20 percent damaged. Trade necessarily takes a back seat when citizens struggle to have their basic physical needs met.

Given the dire circumstances, over half the country’s pre-war population has been displaced either internally or externally. According to recent estimates, over five million refugees have fled Syria. It’s a human tragedy with immediate and long-term implications. As the workforce collapses, goods are no longer able to be produced, and trade grinds to a halt.

Syria trade exports drop 92%

Distrust, Uncertainty and Disassociation

Businesses are wary to engage in nations experiencing conflict. The Syrian Civil War is complex and associated with a corrupt regime causing suffering for its citizens. International sanctions create a legally uncertain environment. Even if it is possible to engage in trade with Syrian firms, there is no guarantee that in a month or a year it will still be possible — new sanctions may be imposed or the factory producing the goods could be targeted. These risks substantially raise the cost of engaging in trade with Syria.

Adding to Syria’s economic woes is the curtailment of economic development assistance. The World Bank Group ceased all Bank operational activity with Syria at the onset of the war. Previously it provided technical assistance and advisory services on private sector development, human development, social protection and environmental sustainability. Although not directly related to trade, much of this support helps local businesses and the economic health of communities.

Why Trade Matters for Syria

Any kind of conflict can have negative effects on trade, directly by destroying factors of production and dislocating people, and indirectly by causing uncertainty and breaks in connectivity with global supply chains. Reduced trade invariably damages the economy, causing individual suffering which can foment more unrest. Nations become trapped in a vicious cycle.

This seems undoubtedly to be the case in Syria, where the destruction of trade has meant economic suffering that aggravates the humanitarian crisis. The longer conflict persists, the deeper the separation from global society, and the harder it will be to rebuild the economic mechanisms and institutions necessary to increase trade and encourage economic growth.

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Alice Calder

Alice Calder is a graduate research assistant at George Mason University, currently pursuing her MA in Applied Economics. Originally from the UK, where she received her BA in Philosophy and Political Economy from the University of Exeter, living and working internationally sparked her interest in trade issues as well as the intersection of economics and culture.

This article originally appeared on TradeVistas.org. Republished with permission.