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BLACKLISTING DEPLOYED IN THE BATTLE OVER TECH TRADE

blacklisting

BLACKLISTING DEPLOYED IN THE BATTLE OVER TECH TRADE

National Security an Overriding Consideration

If there is one defining feature of current U.S. trade policy, it is that national security has become an overriding consideration in how the United States engages China. It is also a focal point of U.S. engagement with its main allied trading partners.

The Trump administration has added many tools to its arsenal in combatting what it refers to as “vectors of economic aggression” by China. Tariffs are only the most visible. The United States – and other countries – are increasingly turning to the practice of “blacklisting” persons and companies that pose a national security risk.

Through controls on exports of particular technologies, governments can either prohibit their sale to foreign entities, governments or individuals, or require the technologies be sold only upon issuance of a government license.

Not New, But Expanded

Controlling the export of commercial technologies that have “dual use” or military applications is a longstanding practice. The General Agreement on Tariffs and Trade 1994 includes a general prohibition on quantitative restrictions on both imports and exports, but contains built-in exceptions that allow for export control regimes.

In the United States, the Export Control Act requires the Secretary of Commerce to establish and maintain a list of controlled items, foreign persons, and end-uses determined to be a threat to U.S. national security and foreign policy for the purpose of regulating the export, reexport and in-country transfer of those technologies and to those entities.

countries turning to blacklisting

Futureproofing

At today’s blistering pace of tech innovation, the lines between technologies that are used commercially in the products we buy as private sector businesses and consumers are increasingly blurred with their potential applications in a military setting.

Under the 2018 Export Control Reform Act, Congress authorized the Commerce Department to review its list of controlled technologies to consider “emerging and foundational technologies” that should be added to its control list.

The technologies contemplated include a hit parade of Sci-Fi innovations such as neural networks and deep learning, swarming technology, self-assembling robots and smart dust (whatever that is), in addition to more recognizable technologies such as quantum computing, additive manufacturing and propulsion technologies.

Special Designations

In addition to technologies that may be controlled for export, the Commerce Department also maintains a Restricted Entity List. Entities designated are subject to a policy of presumed denial for all products, whether on the controlled technologies list or not. American companies may not export to entities on this list except through waivers and specific licenses.

Huawei Technologies, the Chinese telecommunications giant that is chasing global market share in 5G mobile technology, finds itself on the Restricted Entity List, along with all of its overseas affiliates. Other Chinese companies on the list include FiberHome Technologies Group, another 5G network equipment provider, as well as China’s leading artificial intelligence startups Megvii, SenseTime and Yitu Technologies.

The U.S. government is concerned with entities that could engage in industrial and electronic espionage and infiltrate critical U.S. military systems. But the Commerce Department also took the novel step recently of adding companies to its Restricted Entity List that furnish the Chinese state and its security bureaus with technologies used to surveil and repress civil society.

In October 2019, the United States blacklisted 28 Chinese governmental and commercial organizations, citing human rights violations and abuses in China’s campaign targeting Uighurs and other predominantly Muslim ethnic minorities in the Xinjiang Uighur Autonomous Region. The companies included Hangzhou Hikvision Digital Technology Co. and Zhejiang Dahua Technology Co. which are two of the world’s largest producers of surveillance products as well as several of China’s leading companies in facial and voice recognition.

A Chinese Finger Trap

Last month, as U.S.-China relations continued to deteriorate in very public ways, the U.S. government added two dozen more Chinese governmental and commercial organizations to the Restricted Entity List. The Department of Commerce said they have ties to weapons of mass destruction and military activities.

As with a Chinese finger trap, American companies are now ensnared at both ends. They must comply with U.S. export restrictions but doing so may land them on China’s newly created “Unreliable Entity List”. China created the list as a countermeasure and says it will go after American companies for causing “material damage to the legitimate interests of Chinese companies and relevant industrial sectors” and creating a potential threat to China’s national security.

American cos caught in trap

More Can Play at That Game

The global landscape is actively shifting as countries work to shore up and modernize their export control regimes.

In 2009, the European Union (EU) set up a community-wide regime for the control of exports, transfers, brokering and transit of dual-use items to ensure a common EU list of dual-use items, common criteria for assessments and authorizations throughout the EU.

Last year, Japan and Korea got into a major trade spat when the Japanese government removed South Korea from its so-called “white list” of preferred trading partners for strategic technologies, subjecting some Japanese exports to South Korea to new screening.

Japan’s placement of three chemicals used to make computer chips on the control list resulted in delayed shipments that affected the entire global semiconductor industry since South Korean companies account for nearly two-thirds of the world’s memory chips. South Korea retaliated by dropping Japan from its white list.

One Good Turn Deserves Another

For its part, China deemed its own “Unreliable Entity List” to be unreliable. In January this year (on the same date the U.S.-China Phase One deal was signed in Washington) the National People’s Congress in Beijing published a draft of China’s first comprehensive national Export Control Law, providing China with increased leverage to apply and counteract U.S. export control measures. Safe to say we’ll be reading a lot more about blacklisting in the coming years.

An interesting report to dive deeper:

2018 Report on Foreign Policy-Based Export Controls, U.S. Department of Commerce Bureau of Industry and Security

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fifteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

TOWARD A GLOBAL CASHLESS ECONOMY

Going Cashless During COVID-19

When we originally published this article in November 2018 during holiday shopping season, we could not have foreseen that a global health crisis would accelerate cashless payments worldwide. But new precautions in place due to COVID-19 have propelled us faster in the direction of contactless transactions everywhere.

Transmission of the disease from handling banknotes has consumers concerned, but the risk is reported to be low compared with touching credit card terminals and PIN pads. Yet the plexiglass that divides customer from cashier urges less reliance on bills and coins in favor of using point of sale machines to swipe your credit card.

Central banks around the world are taking steps to quarantine and sterilize banknotes to promote retained trust and universal acceptance of cash. Even so, many financial industry analysts are predicting that truly contactless payments through mobile e-wallets may be upon us sooner than previously forecast as consumers and retailers become more accustomed to eschewing cash.

Mobile Payments are the Future

According to Statista, 259 million Americans routinely bought products online in 2018.

That wasn’t the case just a few years ago when many of us were hesitant to punch in our credit card numbers to a website. But as ever more business is transacted online, financial services and “fintech” companies have built and continue to improve a secure payments ecosystem that consumers and businesses can be confident will protect their most vital assets: their private information and money.

Pretty soon we might not need to pull out a physical card as our credit card information gets linked with mobile payment systems. All you need is your finger, your phone, or a watch – items you probably already have on hand, literally. As more consumers adopt this convenience, “e-wallets” will eventually replace cash altogether.

The United States and Emerging Markets Lead

Mobile payments in the United States, China, Russia and India are driving the global trend – the United States by sheer volume of cashless transactions and the big emerging markets by virtue of how fast they are growing. In 2017, non-cash transactions grew 34.6 percent in China, 38.5 percent in Russia, and 38.5 percent in India.

Russia’s surge owes to the Central Bank of Russia’s implementation of a National Payment Card System that boosted growth of cashless transactions by 36.5 percent after it was introduced in 2015-2016. AliPay and WeChat Pay are keeping China on a sustained upward trajectory. Mobile payments in China climbed from $2 trillion in 2015 to $15.4 trillion in 2017, an amount greater than the combined total of the global transactions processed by Visa and Mastercard. India has improved its regulatory environment for digital payments as smartphone penetration expands.

TradeVistas | growth of global cashless transactions, World Payments Report 2019

Growth of global cashless transactions

Leapfrogging in Developing Countries

According to the 2019 World Payments Report, developing markets as a group contributed 35 percent of all non-cash transactions in 2017 and are close to reaching half of all non-cash transactions if they maintain the current rate.

Financial inclusion initiatives in developing countries that are designed to pull citizens into the formal banking system combined with an increase of mobile phone ownership means developing countries are leapfrogging over credit card use, going from cash to mobile payments.

Remittances, which comprise a high percentage of GDP in many developing countries, are being facilitated increasingly through person-to-person mobile money transfers. In one example, Western Union and Safaricom, a mobile provider in Kenya, have teamed to enable 28 million mobile wallet holders to send money to family and others over Western Union’s global network.

The Global Mobile Industry Association predicts the number of smartphones in use in sub-Saharan Africa will nearly double by 2025, enabling previously “unbanked” individuals to send and receive money by phone. For merchants in developing countries, scanning a QR code on a phone is faster and cheaper than installing point-of-service terminals that require a continuous electrical supply for reliability.

TradeVistas | cashless transaction volumes grew 12% during 2016 and 2017

Developing countries will account for half of cashless transactions soon.

Mobile People with Mobile Phones

Chinese tourists are also driving global proliferation of mobile payments as vendors work to accommodate Chinese travelers in airports, restaurants, hotels, and stores. China’s Alipay advertised popular “outbound destinations without wallets” for Golden Week, when millions of Chinese go on vacation. Last year, prior to travel restrictions, there was a boom in Chinese tourists to Japan, with over 9.5 million visitors in 2019. China’s WeChat Pay teamed with Line, Japan’s popular messaging app service to offer mobile payments to Japanese retailers seeking to accommodate the influx of Chinese tourists. WeChat’s rival, Alipay, is also partnering to extend services in Japan.

Global Standards and Interoperability are Needed

Through national financial inclusion programs, a steep increase in the accessibility of mobile phones, and with trade driving more global business transactions online, a cashless global economy could be in our future.

What’s standing in the way of faster integration globally of mobile payments, however, is a lack of international standards and common approaches to security, data privacy, and prevention of cybercrimes.

Companies in this space are continually evolving layers of protections such as the chips on your credit cards, encryption, tokens, and biometrics to stay ahead of cybercriminals, but it’s a constant battle against fraud and hacking of personal account information. For example, tokenization is a technology that safeguards bank details in mobile payment apps. That’s how Apple Pay works – rather than directly using your credit card details, your bank or credit card network generates random numbers that Apple programs into your phone, masking valuable information from hackers.

Differing national regulatory approaches to data authorization and distributed ledger technology (like blockchain) could fragment markets and inhibit adoption of the underlying technologies that permit mobile payments. Industry groups say international standards should be modernized to reflect technological innovations, but also harmonized to avoid developing different payments systems for different markets.

Interoperability is then the cornerstone of expanding trade through global digital payments. Groups like the PCI Security Standards Council advocate for international cooperation not only to set standards for ease of consumer use but because no single private company or government can stay continually ahead of hackers. They say that sharing information and best practices can raise everyone’s game, prevent attacks, and disseminate alerts quickly to stop the spread of damage when an attack occurs.

Mobile Payments Slim My Wallet in More Ways Than One

By 2023, there will be three times as many connected devices in the world as there are people on Earth. (And that prediction was made pre-pandemic.) Young people with new spending power are favorably disposed to cashless transactions and shopping through their devices. Mobile payments help connect poorer and rural citizens to the formal economy just through SMS texts. Even tourism is spreading a culture of mobile payments. And many brick and mortar retailers say online browsing can drive in-store sales and help the bottom line.

Small businesses are making great use of mobile payment readers to take payments anywhere on the go, from selling jam at farmers markets to selling band t-shirts at small music venues. Business executives surveyed in the World Payments Report also cite increasing use of such rapid transfer payments to speed the settlement of business-to-business invoices and for supply chain financing, particularly across borders.

Experts are realistic, however, that cash isn’t dead yet. In most countries, cash payments as a share of total payment volume is declining, but cash in circulation is stable or rising – and that seems to be holding true despite the pandemic.

For a little while anyway, I conserved both cash and mobile spending during the pandemic. I’m back to routinely overspending at Starbucks where my thumb is all it takes to reload the card on the app using a preloaded credit card. If my behavior is any indication, the ease of mobile payments will probably cause many of us to spend more as the cash doesn’t have to physically leave the grip of our hands. The increase in availability and accessibility of cashless, mobile payments will be good for economic recovery and good for global trade.

Editor’s Note: This post was originally published in November 2018 and has been updated for accuracy and comprehensiveness.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fifteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

WITH ZOOM, WE ARE ALL TRADING IN SERVICES

New Modes of Living and Working

As we struggle to maintain continuity in our work and school lives during the pandemic, technology has come to our aid.

Those of us who work on teams spread throughout the country or the world have already unlocked the secrets of online collaboration platforms like Slack and Quip. (We use Quip at TradeVistas for project management.) Others are quickly moving to them or discovering functionality they previously overlooked in Microsoft Teams or similar business software.

“Zoom” has become a verb for online video conferencing the way Skype had been for years for international communication. The class I teach at Georgetown is completely online. (We were already extensively using the learning management system called Canvas). The university reported last week they reached a high of 1,459,100 minutes of instruction on Zoom in just one day.

Biggest Week Ever in Business App Downloads

Video conferencing apps Google Hangouts, Houseparty, Microsoft Teams and ZOOM Cloud Meetings saw major jumps in use in the United States and Europe. According to App Annie, during the week of March 15-21 alone, business apps surpassed 62 million downloads worldwide across iOS and Google Play, apparently the biggest week ever.

With the exception of middle and high schoolers hanging out on Houseparty, many of us working online are exchanging professional, technical, business and other commercial services. If your client or customer is overseas, you are likely delivering what’s called a cross-border service. No better time to appreciate this major component of global trade.

The WTO Modes of Services

In the World Trade Organization (WTO), negotiators divided up services trade into four “modes of delivery” related to where the supplier and consumer are located at the time of the transaction. In Mode 1, known as cross-border trade, the parties are in separate countries and the service is most likely provided digitally via email or through an online platform. One example is consulting services – perhaps a report delivered over email.

In Mode 2, known as consumption abroad, the consumer travels to another territory to receive the service. Examples include hospitality services associated with tourism, medical treatment, or a “semester abroad” at a foreign university. Mode 3 involves putting out a shingle to provide services in another country, known as commercial presence. Finally, in Mode 4, the service provider travels to the customer such as a software engineer working on a project overseas on a temporary visa.

Ascendant Modes of Trade in Services

Every day we engage in or benefit from some form of globally traded services, though we rarely think of it. Among the biggest traditional components of global trade in services are transport and travel – including the trains and ships that move cargo, and the planes that move people across international borders for work and tourism. We’ve written before about how important the tourism is to the global economy – global travel exports were worth $1.7 trillion in 2018.

But other less obvious components of globally traded services have grown larger in recent years. According to the WTO’s 2019 World Trade Statistical Review, the “use of intellectual property” as a service exceeded $3.1 trillion in 2018. The most dynamic services sector continues to be telecommunications, computer and information services (or ICTs), which grew more than 15 percent in 2018.

The Multiplier Effect of Digital Technologies

Telecommunications, computer and information services offer multiplier effects – they create efficiencies and infrastructure that enable new products and new services. Financial technologies bring about cashless payment systems, online platforms like Spotify enable music streaming, technologies embedded in your thermostat promote smart energy use through an app on your phone, sensors on machines inform computers when repairs may be needed. Micro-entrepreneurs sell their products globally through Etsy, eBay or Amazon Web Services.

Enterprise software, cloud computing, data processing and analytics services can help make any business more productive and profitable. They are the backbone of production, distribution and marketing of many physically traded goods while facilitating trade with customers anywhere in the world digitally.

Eighty percent of all U.S. jobs are in services-providing industries. The definition of a “tradable service” is constantly changing and expanding. In 2018, U.S. exports of ICT services alone were valued at $71.4 billion while service exports enabled by ICTs added another $451.9 billion. The U.S. Bureau of Economic Analysis estimates that services potentially enabled by ICTs accounted for 55 percent of total U.S. services exports. Yet the United States is fourth in globally exported ICT services, narrowly behind China, India and far behind the European Union.

Growth in ICT enabled services

The Doctor Will “See” You Now

The scourge of the COVID-19 pandemic, with its prolonged and widespread “stay at home” restrictions, is forcing all of us to shift or accelerate our digital habits. We have no choice but to buy non-essentials online. Our kids are e-learning. Doctors are seeing patients online when not critical. Graduating students will have virtual commencements. And most of us are forced into video conferencing all…the…time.

And while many people will be binge watching or gaming (WarnerMedia, Disney Plus, Netflix and Hulu all reported 65 and 70 percent jumps in number of streaming hours), some of us are trying to continue working online, despite these bandwidth hogs. Some businesses have no choice but to cope by providing virtual services – tax advisors are using secure document portals and phone consultations while fitness instructors check your form by webcam. These are stopgap measures now that might augment their businesses when things go back to “normal”.

LinkedIn With One Another

Recently, I decided to join a LinkedIn Live presentation by one of my favorite business gurus. I was astounded at the scrolling list of locations from where viewers were joining: United Kingdom, South Africa, Romania, Tunisia, Qatar, Poland, Pakistan, Jamaica, India, Colombia, Sudan, Turkey, Lebanon, Yemen and Afghanistan. On and on it went – I stopped writing them down. Nearly the entire world is experiencing the effects of the pandemic in some way, but through modern telecommunications and information technologies, we stay connected.

Those of us who can provide our global services online are the lucky ones. Our appreciation goes out to those workers who are keeping factories running to make essentials, who drive trucks and who staff pharmacies and grocery stores to ease our ability to work and learn from home, out of harm’s way.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fifteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

trade deals

Is It Just a Phase? Redesigning Trade Deals in the Age of Trump.

Comprehensive is Out, “Phased” is In

Within the first few months of the Trump Administration in 2017, the U.S. Trade Representative issued a report identifying intellectual property theft and forced technology transfer as crucial sources of China’s growing technological advantage at the expense of U.S. innovation. Tariffs would be applied until a trade deal to address these practices could be reached.

But expectations had to be reset early in the negotiations – China’s offenses cannot be pinpointed to one set of laws, regulations or practices, and so the complex wiring of China’s national approach cannot be untangled or rewired in one pass, in one agreement, even if China shared that goal. An agreement this ambitious would have to be built in phases.

In presenting the “Phase One” agreement signed between the United States and China on January 15, U.S. Trade Representative Robert Lighthizer said the deal represents “a big step forward in writing the rules we need” to address the anti-competitive aspects of China’s state-run economy. And it is a serious document.

Beyond its detailed provisions, the strategic and commercial impact of the deal will take more time to evaluate. What is clear in the meanwhile, is that this administration has departed from the standard free trade agreement template.

Comprehensive agreements are out. Partial or phased agreements are in.

Something Agreed

It’s common in trade negotiations to whittle down differences, leaving the hardest issues to the end. Early wins keep parties at the table, building a set of outcomes in which the parties become invested and more willing to forge compromises around the remaining difficult issues. One way to avoid settling for deals that leave aside the most meaningful – and often hardest – concessions is to stipulate that “nothing is agreed until everything is agreed.”

For this administration, however, the art of the deal is – quite simply – closing the elements of the deal available. With China, that may be the best and only way for the United States to achieve a deal. And it may very well represent significant progress. At turns, a larger deal looked as if it would collapse under its own political weight in China. Some things agreed is probably a better outcome than nothing agreed.

A Way Out or a Way Forward?

The deal lays down tracks for more detailed intellectual property rights and newer prohibitions on forced technology transfer. Among other commitments, the deal also breaks ground on previously intractable regulatory barriers to selling more U.S. agricultural and food products in China including dairy, poultry, meat, fish, and grains. But it does not address subsidies provided to China’s state-owned enterprises, a complaint shared by all of China’s major trading partners, Having dodged the issue for now, China may have created an advantage by stringing out its commitments over phases.

The Trump administration brought China to the table with billions in tariffs on imported goods. While compelling, it is not a durable approach. The U.S. macroeconomy is withstanding the self-inflicted pain, but tariffs have real and negative effects on U.S. farmers and business owners who will vote in November. Even a temporary tariff détente is a welcome respite, but uncertainty remains. And while we wait to see if the provisions on intellectual property and technology transfer prove fruitful, what of the lost agricultural sales for U.S. farmers and sunk costs for U.S. businesses?

As part of the deal (a part that gets phased out), China committed to shop for $200 billion in American goods and services over the next two years, including more than $77 billion in manufactured goods, $52 billion in energy products, $32 billion in agricultural goods and $40 billion in services. If fulfilled, the purchases in Phase One would appear to solve the problem of waning U.S. exports to China, but that was a problem of our own making so the administration might only merit partial credit for this part of the deal.

Journey of a Thousand Miles

Of course, the Trump administration’s phased and partial approach to reaching trade deals may simply stem from impatience or a focus on the transactional – comprehensive deals take too long to complete. But the approach may also make sense if these deals are stepping-stones in a bigger, longer game.

In a June 2018 report, the White House offered a taxonomy of 30 different ways the Chinese government acquires American technologies and intellectual property, including through U.S. exports of dual-use technologies, Chinese investments in the United States, and the extraction of competitive information through research arms of universities and companies in the United States.

Ambitious as it is, the administration is not limiting itself to the new Economic and Trade Agreement to solve all the problems it identified. The Department of Justice has initiated intellectual property theft cases, the Department of Commerce is expanding controls over the export of dual-use technologies, and the Treasury Department oversees a process to tighten reviews of proposed inward investments.

A Chinese proverb says that “a journey of a thousand miles begins with a single step.” Concerns the administration will not limit or end its quest with Phase One were evident in the letter from President Xi read aloud at the signing which urged continued engagement to avoid further “discriminatory restrictions” on China’s economic activity in the United States.

Just a Phase?

Beyond engagement with China, the administration has nearly consistently favored partial deals, with the U.S.-Mexico-Canada agreement (USMCA) the exception. NAFTA needed to be modernized. Our economies have changed too much for the deal to keep pace without some upgrades. Could the modifications have been achieved without replacing the deal? Probably, but perhaps not politically, or it might have been done years sooner. NAFTA’s facelift as USMCA offered a chance for the administration to fashion provisions it intends for broader application, such as those on currency and state-owned enterprises. Though it replaced NAFTA, USMCA changes constitute a partial re-negotiation.

With Japan, the administration set much narrower parameters, hiving off-market access and digital trade as an initial set of deliverables. Last September, President Trump finalized a partial trade deal with Prime Minister Abe that went into effect on January 1. Limited in scope, it encompasses two separate agreements that only cover market access for certain agriculture and industrial goods and digital trade.

The White House characterized the partial deal as a set of “early achievements,” with follow-on negotiations on trade in services, investment and other issues to commerce around April this year. But crucially, the partial deal enabled the United States to avoid addressing its own tariffs on autos and auto parts, which comprise nearly 40 percent of Japan’s merchandise exports to the United States, while securing access to Japan’s market for U.S. agricultural exports.

The United States also restarted talks in 2018 on a partial trade agreement with the European Union that is stalemated over whether to include agriculture.

Walking Alone?

Preferential market access deals are an exception to WTO commitments. WTO members have agreed that free trade agreements outside the WTO should cover “substantially all trade” among the parties and that staging of tariff reductions are part of interim arrangements, not an end state. But with comprehensive negotiations stalled in the WTO itself, members are trying new negotiating approaches such as focusing on single sectors, like information technologies.

Although there was little mention of state-owned enterprises and subsidies in the U.S.-China Phase One deal, something important happened on the margins of that ceremony that received little attention: The trade ministers of Japan, the United States and European Union released a joint statement proposing ways to strengthen the WTO’s provisions on industrial subsides, which they called “insufficient to tackle market and trade distorting subsidization existing in certain jurisdictions,” a reference to China. The statement proposed elements of new core disciplines – a first phase if you will in launching more formal negotiations among WTO members.

The deal signed with China this week envisions reforms to China’s laws, regulations and policies as they apply to any foreign company operating in China, not just the American ones. Perhaps our trading partners see it (only partially) as a go-it-alone strategy and partially as a way to create a corps of provisions that can be migrated to the WTO.

Phase One trade deal - foundation for future US-China trade relations?

Construction Phases: Trump’s Real Estate Mindset

How is the real estate business like trade policy? It isn’t, except in the mind of Donald Trump. Buildings can be demolished or imploded in seconds. A giant hole is dug before its replacement is built. The builder then pours the concrete foundation constructs the frame long before wiring the interior and installing the finishes.

Maybe a phased trade deal represents the opportunity to reset the footing and frame out a solid structure for the future of US-China trade relations – and the finishing touches will come later.

Access the full agreement.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

Soybean Prices are a Proxy for How the Trade War is Going

Soybeans are in your cereal, candles, crayons and car seats

Soybeans have more far uses than most of us realize. After harvesting, soybeans are dehulled and rolled into flakes as its oil is extracted. Soybean oil has become an ingredient ubiquitous in dressings, cooking oils and many foods, but is also sold for biodiesel production and other industrial uses.

Soy flours feature prominently in commercial baking. Soy hulls are part of fiber bran cereals, breads and snacks. Soybeans are even part of building materials, replacing wood in furniture, flooring and countertops. They are in carpets, auto upholstery and paints. Soybean candles are popular because they burn longer with less smoke. Soy crayons are non-toxic for children. And – because soybeans are high in protein – they are a major ingredient in livestock feed, which provides much of the impetus for globally traded soybeans.

Bean counting

Given this panoply of applications, it should be no surprise that global demand for soybeans is growing, but it’s mostly animal mouths we are feeding. Demand for soybean meal for livestock feed drives two-thirds of the export value of traded soybeans.

According to the Agricultural Market Information System, three countries produce 80 percent of the world’s soybeans to fill this demand: the United States, Brazil and Argentina.

At 123.7 million metric tons produced in 2018, U.S. farmers accounted for 34 percent of world production. Brazil’s farmers yielded 117 million metric tons, accounting for 32 percent of world production, but Brazil exported larger volumes than the United States.

Rounding out the top three, Argentina accounts for 15 percent of world production but exported just 6.3 million metric tons in 2018. China is fourth, producing 15.9 million metric tons in 2018 – just four percent of world production.

America’s second largest crop

Grown on more than 303,000 farms across the United States, soybeans are the second largest cash crop for American farmers. Conventional soybeans are grown in 45 U.S. states while high oleic soybeans are grown in 10 states. Though output varies each year, at 4.54 billion bushels in 2018, U.S. growers are so productive they can now yield twice as many bushels of soybeans as two decades ago. (At SoyConnection.com, you can click on this map to see the number of farms, acres, and bushels produced in each state.)

Three countries produce 80 percent of the world's soybean

China’s insatiable appetite

China cannot get enough soybeans. When China entered the WTO in 2001, the country was already consuming 15 percent of the world’s soybeans, driving 19 percent of global trade in soybeans. By 2018, China’s appetite had grown 815 percent according to the U.S. Farm Bureau, which says China’s demand now supports 62 percent of world trade in soybeans.

According to the Farm Bureau’s calculations, China consumes one-third of every acre harvested in the world – an amount equivalent to or more than total U.S. soybean acreage. Around 60 percent of U.S. yields were sold to China in 2017, which means there was a lot at risk for U.S. farmers caught in the crosshairs of the trade war that unfolded in 2018.

A pawn in the trade war

In July 2018, the United States fired the first tariff shot in its efforts to seek redress for the intellectual property theft cited in its Section 301 investigation into China’s practices, by imposing tariffs on $34 billion worth of China’s imports. China responded with 25 percent tariffs on an equivalent amount, including on soybeans from the United States. The tariff has remained in place as leverage in the trade war – a proxy for whether China perceives progress is being made or not in the negotiations.

In intermittent gestures of goodwill, China agrees to make purchases but has often not fulfilled orders for the promised amounts. When President Trump angrily tweeted on August 23 this year that China was not negotiating in good faith and that U.S. tariffs would cover more imports from China, China responded in part by adding five percent to its tariffs on soybeans.

A factor in price fluctuations

The Food and Agricultural Policy Research Institute at the University of Missouri recently offered a gloomy forecast for lower prices for soybeans: $8.43 per bushel for 2019-20, dropping further to $7.94 per bushel for the 2020-21 marketing years. They say lower prices are resulting from a combination of adverse weather, African swine fever disease that is decimating herd inventories throughout Asia and therefore weakening demand for feed – and the ongoing trade dispute.

On May 13 this year, coincident with some fiery presidential tweets expressing frustration with China, soybean prices reached a 10-year low. USDA estimates that, at 4.54 billion bushels produced last year, a drop in average price per bushel from $9.33 in 2017 to $8.60 in 2018 translates to losses for U.S. soybean farmers of $3.3 billion.

Soybean Prices react to China trade war

Bait and switching

Adding to the strain of lower prices, China has drastically pared back its soybean orders from the United States. In 2016, the United States shipped 36.1 million metric tons of soybeans to China. In 2018, sales dropped to just 8.2 million metric tons.

The Chinese government is able to avoid its own tariffs by directly purchasing U.S. soybeans which it then sells to private users in China. The government has also granted tariff exemptions to Chinese soybean crushers. Just this week, the government granted an exemption to state-owned, private and international companies to import 10 million metric tons of U.S. soybeans tariff-free. Overall, the quantities purchased through these mechanisms is not nearly enough to make up for the vast shortfall in supply from the United States.

So, China is buying more from Paraguay, Uruguay, Argentina, Canada and in particular from Brazil, which has moved in to supply 75 percent of China’s total imports. For U.S. soybean exporters, lower prices per bushel have attracted new buyers from Europe, Mexico and elsewhere, but those sales are not enough to replace lost sales in China.

Plummeting U.S. Soybean Exports to China

Homegrown

China is hedging its bets by rejiggering the incentives it provides to its own farmers. Upon releasing a new white paper, the head of the National Food and Strategic Reserves Administration said that even though China’s food production and reserves are strong, “We must hold the rice bowl firmly in our hands, and fill it with even more Chinese food.”

In addition to directly investing in agricultural infrastructure in Brazil, neighboring Russia, and other suppliers, the Chinese government has set a goal to increase domestic soybean production in five years from 16 million to 24 million metric tons, according to the U.S. Soybean Export Council.

News China reported in January that Chinese farmers in Heilongjiang, China’s main grain producing province, are being provided incentives to switch from wheat and corn to planting more soybeans. For years, the Chinese government has offered price supports for corn. Under new policies, crop rotation can earn Chinese farmers $322 per hectare in subsidies in addition to subsidies of between $373 and $430 per hectare offered by provincial authorities.

The Ministry of Science and Technology is also supporting trials of hybrid soybean seeds that are more weather-resistant and could more than triple the average yield for soybeans grown in China.

China's Soybean Journey

Long term disruptions

It’s possible the United States and China will ink a partial deal in the coming weeks that provides relief for American soybean farmers.

The American Soybean Association says it is “hopeful this ‘Phase 1’ agreement will signal a de-escalation in the ongoing U.S.-China trade war… rescinding the tariffs and helping restore certainty and stability to the soy industry.”

China has reportedly promised to purchase $40 billion to $50 billion in U.S. agricultural goods, which would be scaled up annually. That would be double the $24 billion China spent on American farm goods in 2017.

When seeds are in the ground, the acreage is committed, but as American farmers wait and watch the trade war, they are surely thinking about how to plant around these disruptions in outer growing years.

Over the last year, some reliable overseas customers are buying up stocks of U.S. soybeans that would otherwise have gone to China and some new customer relationships are being forged in emerging markets such as Egypt, Bangladesh, Pakistan and Southeast Asia.

When the tariffs are permanently removed, it will remain to be seen whether trading patterns will also have permanently shifted.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

arms trade

GLOBAL ARMS TRADE HIGHEST SINCE END OF COLD WAR

Hotter Since the Cold War

For obvious reasons, trade in arms is not governed by the same global trade rules as selling a doggy snood on Etsy. The rules of engagement are different and global flows of arms tell stories not of lighthearted fashion trends but of the enduring reality of global conflicts, the escalating and diffusing of tensions – the arming and disarming that reflects the current and projected state of international security.

Governments, formal military alliances and international organizations procure and sell arms for defense, for peacekeeping operations, and to engage in conflict. Conflicts today routinely intertwine regular military forces, militias and armed civilians. After a decade of steady increase, the volume of arms trade by 2012 had reached levels not seen since the end of the Cold War.

Up in Arms

2018 saw the continuation of armed conflicts throughout the Middle East and North Africa in Egypt, Iraq, Libya, Syria and Yemen. In sub-Saharan Africa, armed conflict raged in eleven countries including Nigeria, Somalia, South Sudan, the Central African Republic and the Democratic Republic of Congo. Afghanistan remains among the world’s most lethal states after decades of fighting.

India and Pakistan, Myanmar and other countries in Southeast Asia experienced armed conflict throughout the year and Russia’s annexation of Crimea from Ukraine remains unresolved. Colombia’s peace process hit rough patches, armed gangs threaten security in Central America, and Venezuela remains turbulent. This list is long, incomplete, and in flux, fueling demand for arms in conflict areas. At the same time, some sixty multilateral peace operations were active in 2018.

For fifty years, the Stockholm International Peace Research Institute (SIPRI) has gathered original data on world military expenditure and international arms transfers, analyzing trends in conflict, arms production and arms controls. In all, SIPRI estimates global military expenditure at $1.8 trillion and puts the total value of the global arms trade in 2017 at some $95 billion with weapons exports valued around $27.6 billion.

Arms transfers between 2009 and 2013 were 23 percent higher than in the period between 2004 and 2008. In the period 2014-2018, arms transfers reached the highest level since the end of the Cold War.

Global Weapons Exports

Who Sells and Who Buys in the War Economy

Official reporting is scant. Government to government transfers occur through varying types of complex and opaque arrangements. Pinning down numbers is also complicated by the existence of covert trade in arms. Within the realm of what SIPRI can track, the market is dominated jointly by the United States and Russia. According to SIPRI’s numbers, 202 states, 48 non-state armed groups, and five international organizations received arms shipments sometime in the last five years.

The United States, Russia, France, Germany and China are the five largest exporters of major arms, accounting for 75 percent of all arms exports, but SIPRI has identified as many as 67 countries that exported major arms in the last five years. The United States and Russia together comprise 57 percent of the total. The five largest importers were Saudi Arabia, India, Egypt, Australia and Algeria, together accounting for 35 percent of total arms imports between 2014 and 2018. The political alignments can be seen by matching the buyers and sellers.

Buyers and Sellers of Arms

Notably, advanced combat aircraft accounted for more than half of all U.S. major arms exports over the last five years and will remain the main driver with nearly 900 orders in the pipeline. Guided missiles accounted for 19 percent of U.S. major arms exports and the United States is the primary exporter of ballistic missile defense systems.

Russia’s exports declined over the last five years as sales to India and Venezuela dropped by 42 percent and 96 percent respectively. Over the same period, Russia’s sales to the Middle East increased 19 percent, mainly to Egypt and Iraq. SIPRI reports that China supplies relatively small volumes of major arms spread across 53 countries, up from 41 five years ago. At the same time, China is the world’s sixth largest importer of arms. Russia supplied 70 percent of China’s arms imports over the last five years.

Under Control

Seven of the world’s largest defense companies by arms sales are American. They include Lockheed Martin with international arms sales worth $40.8 billion in 2016, and Boeing at a distant second with $29.5 billion in sales. Raytheon, Northrop Grumman and General Dynamics come in the next tier with sales between $19 and $23 billion. Among the top 100 firms, U.S. companies accounted for 58 percent of total global arms sales in 2016.

When it comes to production and trade in military supplies, the WTO steps out of the way. Article XXI of the General Agreement on Tariffs and Trade provides a national security exemption:

“…nothing in this Agreement shall be construed…to prevent any contracting party from taking any action which it considers necessary for the protection of essential national security interests…relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment.”

Trade in conventional arms and dual-use goods and technologies (those with both military and commercial applications) is regulated through other policies that include government defense procurement regulations, national export control licensing regimes and embargoes. In the United States, under the Arms Export Control Act and the International Traffic in Arms Regulations, exports of defense materials and services by U.S. firms are tightly controlled through licensing approvals.

Wassenaar Arrangement

Forty-two member countries maintain national export controls in conformance with items included on the 1996 Wassenaar Arrangement’s two control lists. As part of the Arrangement, members also agree to voluntarily and confidentially exchange information about transfers to non-Wassenaar countries of conventional weapons and dual-use goods and technologies on these lists. Weapon categories to be reported include armored combat vehicles, large-caliber artillery, military aircraft, missile systems, small arms and light weapons.

Wassenaar members are encouraged to use non-binding criteria to help determine whether potential arms exports could lead to “destabilizing accumulations,” and to guide their disposal of surplus military equipment. Wassenaar and other efforts to restrain arms transfers through international treaties and multilateral embargoes suffer, however, from low levels of national government engagement by important producers and importers of weapons.

Military-Industrial Complex-ity

Governments seek to procure technologically advanced weaponry for their own national security. At the same time, they must prevent the sale of such weapons to others who would use them against the state or who would deploy them to fuel conflicts that run counter to national security interests.

In balancing these objectives, national export control regimes have struggled against the pace of technological innovation and the proliferation of technologies that have dual commercial and military applications. The defense industry itself is defined by this paradox – it is propelled forward by government protected from competition but also shaped by market forces that induce innovation, specialization and consolidation.

As the costs and complexity of developing and manufacturing advanced weapons increase, firms specialize in facets of production. Interdependence among firms has deepened as global supply chains tend to be anchored by a handful of large tier-one firms. The industry has consolidated, including by merging across borders. In circular fashion, these developments make it harder for governments to regulate foreign investment and maintain appropriate controls on arms transfers.

Adding the complexity of this unique industry, firms that enjoy a special status under trade rules for military production also have commercial products and sales for which the normal rules apply. It’s a heavy invisible hand in the market for arms. Global trade rules need not apply.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

chip

THIS TINY CHIP IS PLAYING A BIG ROLE IN THE TRADE WAR

Small and mighty

In one of the most successful branding campaigns, “Intel Inside” helped us all become aware that semiconductors are the brains behind modern consumer electronics in our computers, in our mobile phones, in our televisions and in our cars. It’s wondrous such power begins life as grains of sand (and other pure elements). The silicon in sand is purified and melted into solid cylinders that get sliced into one-millimeter thick wafer discs. The discs are polished, printed with circuit designs, and cut into the tiny individual semiconductor chips that get embedded into our devices.

The next generation of smarter and more powerful machines will rely on even more sophisticated semiconductors to achieve new capabilities. The pace of change is dizzying. Pressure is on to “win” in the global chip race, which is why efforts to protect innovations in chipmaking are front and center in the current trade war – for better and for worse.

Strength in numbers

The American semiconductor industry dominates the field with close to half of the global market share. Some industry leaders thrive by maintaining a high degree of vertical integration, but most have achieved a competitive edge by developing reliable value chains that leverage industry clusters located in different regions, while also tapping into the expertise of thousands of small, niche firms inside and outside the United States.

Some firms focus on supplying raw materials or manufacturing equipment, others create “intellectual property cores” or the building blocks for chips, or cultivate skilled engineers who lay out the circuitry of chips. Closer to the end users are companies that have achieved efficiencies in manufacturing, assembling, testing, packaging and distributing semiconductors.

According to the Semiconductor Industry Association (SIA), Canada, European countries and the United States are leaders in semiconductor design and high-end manufacturing. Japan, the United States and some European countries are main sources for equipment and raw materials. China, Taiwan, Malaysia and others in the Asia-Pacific tend to concentrate in the manufacturing, assembling, testing and packaging segment of the industry. R&D hubs are spread across the world.

One American company might have over 7,000 suppliers across almost every state and also have another 8,500 suppliers outside the United States. In creating strategic value chains, American companies can invest in R&D to advance the science while keeping production costs down.

Top traders in semiconductors

China’s growing chip army

The Trump administration approaches trade with China through the lens of national security as well as economic preeminence. As the Economist rightly points out, in this clash of economic titans, “the chip industry is where America’s industrial leadership and China’s superpower ambitions clash most directly.”

China currently spends as much on imported semiconductors every year as it does imports of crude oil. Importing semiconductors was crucial to China’s ascendance as an assembler of telecommunications equipment, computers, displays, monitors and a variety of electronic components that China exports around the world.

But it’s high-end semiconductor development and manufacturing that China has its eye on now as the foundation for sustained economic growth and military might. Under its “Made in China 2025” strategy, the Chinese government set a goal to supply 40 percent of its own semiconductor needs by 2020, increasing to 70 percent by 2025.

China purchases of semiconductors

Enlisting the big guns

U.S. firms spend twice as much on R&D as their Chinese counterparts – 17.4 percent of sales versus 8.4 percent. How to counter? Pull out some big funding guns. China’s Ministry of Science & Technology orchestrated the $800 million Hou An Innovation Fund to acquire technologies to help its industry semiconductor industry leapfrog. The fund purchased a controlling stake in the world’s leading developer of semiconductor IP blocks. The Ministry of Industry and Information Technology also built a $31.7 billion war chest, even opening its China Integrated Circuit Industry Investment Fund to foreign investors.

According to Price Waterhouse Coopers, China has gone from 16 integrated circuit design firms in 1990 to 664 in 2014. Chinese wafer production firms tripled over a similar span, and the number of testing and packaging firms has increased by 50 percent. E-commerce giant, Alibaba, acquired in-house capacity to design semiconductors tailored for artificial intelligence in a bid to compete with Microsoft and Google. Baidu, Huawei and other major Chinese firms are also enlisted soldiers in the fight.

Secret Weapons

Powerful chips are critical for any industry that relies on collecting, managing and computing with data – and that includes the defense industry. Our most sophisticated defense weapons depend on them. The U.S. Department of Defense has a strategy for “Microelectronics Innovation for National Security and Economic Competitiveness.” The U.S. government has imposed billions in tariffs on imports from China to generate leverage in negotiating an agreement to crackdown on forced technology transfers and theft of intellectual property. But it is also deploying other tools to control U.S. exports of critical technologies, another avenue for China to access U.S. innovation.

The U.S. government has proposed expanding its list of “emerging and foundational technologies” (microprocessors for example) deemed essential to national security that would be subject to licensing under the Export Administration Regulations before U.S. companies could export them. Also under review is the Commerce Control List (CCL) to assess any changes that should be made to controls on items to embargoed destinations, which may include China.

The Commerce and Justice Departments have visibly stepped up enforcement and applied existing authorities in novel ways against Chinese companies that might steal technology. In November last year, the Department of Justice announced it would proactively investigate and prosecute Chinese companies for alleged trade secret theft and economic espionage. The announcement was swiftly followed by an indictment of Fujian Jinhua Integrated Circuit Company, Ltd., a state-owned Chinese semiconductor manufacturer, for alleged crimes related to a conspiracy to possess and convey the stolen trade secrets of Micron Technology, Inc., an American semiconductor company. The Commerce Department added Fujian Jinhua to the list of entities to which U.S. companies cannot sell without obtaining a license.

The United States is not alone in applying policies designed to prevent technology transfer to Chinese companies either through export or acquisition. Taiwan and South Korea have done the same. Foreign firms are also wary of violating U.S. laws. According to Reuters, Japan’s Tokyo Electron, the world’s third-largest supplier of semiconductor manufacturing equipment, announced in June it would not supply to Chinese firms on a U.S. list.

Global Semi Market Share

On the front lines

The Administration’s tariff war is leaving almost no industry or product untouched, affecting semiconductors, semiconductor manufacturing equipment, raw materials, printed circuit boards, and a variety of other products in the industry’s supply chain. American semiconductors often criss-cross the globe during production, so U.S. firms might end up paying this import tax on its own product — not to mention the higher costs of tariffs on the consumer products that run on semiconductors.

While supportive of the administration’s goals, the U.S. semiconductor industry has urged a balanced approach that will protect its intellectual assets from theft and preserve U.S. national security while not unduly hamstringing innovation and growth that is in part derived from international collaboration.

Current technologies and methods of fabrication proprietary to incumbent firms keep them in the lead, for now. But in the near future, chips will run on light rather than electricity. Artificial intelligence and quantum computing will be applied to gain computing speed. Breakthroughs like these will determine who are the future industry leaders, and China has an opportunity to gain entry on the ground floor of those frontiers.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

 

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

COMING AND GOING, THE U.S. WINS FROM FOREIGN DIRECT INVESTMENT

Think of it as strength through diversification

Foreign direct investment (FDI) is a vehicle for gaining entry into growth markets. Companies might decide the best approach is to acquire products and technologies already in the target market, or to secure distribution and retail channels for their existing products, or they might decide to launch greenfield production to serve the local or regional markets, or some combination. Whatever their approach, their goal is to generate additional sales. Investors reward companies that diversify their sales and income. Multinational companies typically look to grow global market share, not just shift market presence.

For the host economy, FDI often brings new well-paying jobs, an expanded tax base (if they don’t offset with too generous a tax holiday), stronger productive capacity, transfer of technological expertise, improvements in infrastructure, and stronger economic growth. In theory and in general, it’s a win-win. In practice and locally, it will depend on each deal.

Companies are not multinational, they are “multi-local”

A.T. Kearney produces an annual Foreign Direct Investment Confidence Index that surveys investor intentions. More than 75 percent of companies say they invest to be close to market, putting them in a better position to cater to local culture and customs, navigate the idiosyncrasies of the local business environment, and embed themselves in the community as a local partner with deeper roots beyond their core business.

Large cities and megacities are the most popular destinations for FDI – nearly two-thirds of the companies surveyed have more than half their FDI in cities, attracted by the concentration of talent, clusters of R&D or related activities, and availability of infrastructure. Fifty-nine percent of respondents said their companies begin their FDI assessments at the regional or city level, rather than take into account national considerations.

Many large cities have built their economic reputations on particular sectors. For example, an information technology investor looking at Asia would identify Hyderabad or Bangalore in India as among their top targets. Companies looking to locate an overseas headquarters in cities with strength in business services might look to Singapore, Hong Kong or Dubai first.

States and cities compete for foreign direct investment – why?

Countries, states and localities compete for capital by offering streamlined administrative procedures, incentives like tax breaks and grants, and by establishing special economic and free trade zones. Many U.S. states have permanent investment promotion offices overseas. South Carolina has offices in Shanghai, Tokyo and Munich. Florida maintains offices in 13 countries.

U.S. states and cities work hard to attract foreign investors because of the benefits they bring to local economies. The U.S. affiliates of majority-foreign owned firms employed more than seven million American workers in 2016, invested $60.1 billion in U.S.-based research and development, and contributed $370 billion to U.S. exports.

According to OFII, the trade association that represents foreign investors in the United States, international companies employ 20 percent of America’s manufacturing workforce and 62 percent of the manufacturing jobs created in the past five years can be attributed to international companies investing in the United States.

foreign direct investment FDI employment revenue

What goes out also comes in – how the U.S. wins with overseas FDI

There are two sides to the FDI coin, and the U.S. economy is positioned to win whether the FDI is coming or going.

A common perception exists that American companies who invest overseas are sell-outs, moving jobs in search of lower wages, and that the host country is the only beneficiary.

Politicians stoke this fear. The rhetoric will only heat up in the run up to the 2020 presidential election, but the data tell a surprising and different story.

In fact, economists Oldenski and Moran, who are leaders in studying FDI, have found that increased offshoring of manufacturing by U.S. multinationals is actually associated with increases in the size and strength of the manufacturing sector in the United States.

More specifically, they found that when a U.S. firm increases employment at its foreign affiliate by 10 percent, employment by that same firm in the United States goes up by an average of four percent, capital expenditures and exports from the United States by that firm also increase by about four percent, and R&D spending increases by 5.4 percent.

The idea that outward FDI is associated with expansion of economic activity at home feels counterintuitive, and critics would rightly point out that the overall result for the U.S. economy doesn’t mean there isn’t labor dislocation of some kind.

Demand for certain types of production occupations might increase (e.g., engineering or sales) at the expense of workers with skills that are less or no longer in demand. Or, some local labor markets might be adversely affected despite overall gains, or some manufacturing subsectors may wane as others rise.

But on balance, across the U.S. economy, Oldenski and Moran conclude that the foreign operations of multinational firms tend to be complements, not substitutes for domestic U.S. operations.

Myth busting on foreign direct investment

Global FDI flows are waning

Globally, companies are engaging in less FDI. For the third year in a row, global FDI flows have fallen. In 2018, FDI flows dropped 19 percent from to $1.47 trillion to $1.2 trillion.

Developed country recipients saw the biggest hit with a 37 percent decline. Part of the explanation is fewer megadeals and corporate restructurings – the large value of those in previous years inflated the overall value of FDI flows.

Tax reform in the United States has also set in motion a shift in FDI flows. Most outward FDI from U.S. companies is in the form of more than $3.2 trillion in retained earnings held overseas. Changes to the U.S. corporate tax regime prompted a 78 percent increase at the end of 2017 in companies reinvesting overseas earnings in the United States. The inward investment took the biggest bite from FDI into the European Union.

Another major factor was China’s FDI outflows which reversed for the first time since 2003, declining 36 percent largely in response to the government’s restrictions on capital outflows directed to investments in assets such as real estate, hotels and entertainment facilities.

Wait and see?

According to A.T. Kearney’s annual Foreign Direct Investment Confidence Index, 77 percent of responding companies said FDI will be more important for corporate profitability in coming years and 79 percent said they intend to increase FDI over the next three years, pending their assessments of the availability of quality targets, the macroeconomic environment, and their availability of funds.

But in reality, multinationals may be taking a wait and watch stance as trade tensions between the United States and China escalate. At the same time, a number of countries have implemented tighter screening of proposed investments, citing national security concerns associated with foreign ownership of strategic technologies and other assets. Overall, the investment policy climate is becoming less, not more, favorable with greater restrictions and regulations than liberalization.

Investor confidence in the United States is still strong

On A.T. Kearney’s index, developed markets dominate 22 of the top 25 spots on the list of countries considered the top targets by corporate investors. Despite trade tensions and risks of economic downturn, these economies offer relatively stable regulatory environments, legal protections, skilled workers and the availability of technological and innovation capabilities, all qualities multinational companies seek in FDI targets. Size and market potential matter too. China, India and Mexico are emerging markets where multinationals must be players to be globally competitive.

For the seventh year running, the United States tops the index as the most attractive target for FDI. FDI inflows to the United States fell 18 percent in 2018, part of a broader decline in FDI flows to developed markets and fewer large mergers and acquisitions, but the United States still receives more FDI than any other country.

China, which held the top spot from 2002 to 2012, dropped to seventh. European countries hold 14 of the top 25 spots. The only emerging markets on this year’s list were China, India, Taiwan and Mexico. Singapore holds the 10th position and South Korea the 17th spot. Notably, the United Kingdom is holding steady in fourth place, despite the uncertainties surrounding Brexit.

The transition from physical to digital

FDI accounts for 39 percent of capital flows for developing countries as a group and around one-quarter for the least developed countries. FDI is less volatile than liquid financial assets and more resilient during global economic and financial downturns.

Unfortunately for developing countries particularly outside Asia, there’s not only less foreign direct investment to go around, the type of FDI is slowing changing too. As digital technologies become more diffuse, companies are shifting to “asset light” forms of international production. In more cases, companies no longer need the same level of physical production assets or employees overseas to achieve growth. The drop in the value of announced greenfield investments may be a sign that growth in global value chains is stagnating.

A more nuanced conversation in U.S. politics

Global FDI flows are critical for growth in developing and developed markets alike, including the United States. Multinationals are stronger in their home economies when they diversify, and we should seek to have a more nuanced conversation about the role of FDI in the U.S. economy – including its impact on job creation and job shifting – rather than simply demagoguing the companies who invest overseas or the foreign companies who invest here. An evidence-based and comprehensive policy dialogue would better serve American workers in the long run.

line

Key resources:

  • To keep track of global FDI flows, consult UNCTAD’s annual reports which include statistics and analysis of investment policy trends. Access the 2018 Global Investment Report here.
  • Economists Theodore Moran and Lindsay Oldenski debunk some prevailing myths about the strength of the U.S. manufacturing base and the role of FDI in an excellent policy brief found here.

 

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

TOURISM IS THE QUIET HERO OF TRADE

International travelers drop big bucks in the United States

International travelers check in to their accommodations, they ride local transportation, they sightsee, they eat, and they shop. All that wonderful cross-border spending counts as an export in international trade.

Although the United States doesn’t hold the top spot in global tourism (France was most visited in 2018), its popularity still drives some 80 million visitors each year who spend more here than in any other country. In 2018, tourism brought in $256.1 billion in international travel receipts, driving 2.8 percent of U.S. GDP and supporting 7.8 million jobs in the United States.

The top five spenders on visits to the United States were China ($34.6 billion in U.S. travel spending), Canada ($27.2 billion), Mexico ($20.9 billion), followed by Japan and the United Kingdom.

Travel delivers 10% US exports

1.4 billion people are on the move

For the United States, tourism is a really important component of our trade portfolio, accounting for 31 percent of total services exports and 10 percent of all U.S. exports.

We are not alone. Globally, tourism is growing faster than global economic growth overall and is the third-largest sector in international trade. Some 1.4 billion people are on the move in the world as travel continues to grow year on year.

Is the U.S. losing global tourism market share?

Global travel exports were worth $1.7 trillion in 2018. The United States captured 15.7 percent of the total. But even as global travel is expanding, U.S. tourism growth is showing signs of slowing. France, the United Kingdom and Italy are traditional rivals, but the United Arab Emirates, Turkey, Egypt, Thailand and China are also garnering significant market share.

Aside from spending, another measure of competitiveness is the number of international visits annually. Total visits to the United States remained strong due to travel within North America, but the United States’ share of long-haul visits dropped from 13.7 percent in 2015 to 11.7 percent in 2018. Notably, visitors from Japan, South Korea, and China all fell in 2018.

While visits to the United States between 2015 and 2017 rose just 0.5 percent, the United Arab Emirates saw 20.1 percent growth, Canada experienced 19 percent growth, Australia 21.5 percent, India 24 percent, Thailand 14.1 percent and China 13.6 percent.

Travel is #2 export

Tourism and travel is so important to the economies of many countries that the OECD is working to develop a set of indicators to measure the competitiveness of destinations – how they optimize accessibility and attractiveness, deliver quality services, and gain market share while promoting efficient and sustainable use of tourism resources.

Road warriors are helping to grow trade

The tourism and travel sector isn’t strictly about the visitors who come to stroll through Istanbul’s bustling Grand Bazaar, New York’s Central Park or Beijing’s Forbidden City.

The World Travel & Tourism Council (WTTC) says business travel has a notable impact on wider trade flows. The road warriors who hop the long-haul flights to land a sale, keep existing customers, develop business partnerships, and enter into research and development deals generate travel revenue but also generate incremental trade over subsequent years through their business dealings, which in turn spur more business travel.

WTTC cites analysis by Oxford Economics estimating that business travel supported around a quarter of the growth in international trade within the Asia-Pacific region in the heady decade between 2003 and 2013.

travel global exports

Trade in global goodwill

Brand USA will not grow out of style anytime soon. The United States will remain a top destination for tourists and business travelers alike. The National Trade and Tourism Office projects annual international visits to the United States for personal and business reasons will grow to 95.5 million by 2023.

For the United States and the global economy, tourism and travel are the unsung heroes of the international trade story and not only for the billions in goods and services travelers buy directly and support indirectly. When we think about all the many forms of voluntary exchange, tourism and travel are at the top of the list for those that promote trade in international understanding and global goodwill.

 

 

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

EXPORTING THE ALL-AMERICAN ROAD TRIP

Freedom and Community at the Same Time

Pull into a KOA (Kampgrounds of America) and you’ll find tremendous variety among recreational vehicles (RVs) parked there. Some are full on motor homes with big screen TVs and leather sofas. Others are utilitarian pop-up trailers for sleeping and tossing some cooking necessities into a small fridge. The ability to right-size and customize your temporary home makes RVs appealing and accessible to a wide range of customers on different budgets, whether they be renters for summer camping or retirees touring the country at a leisurely pace.

Generation X (the under 55 crowd) is taking over as the largest group of RV buyers among the 9 million or so Americans who own an RV. We don’t own an RV, but on our first RV family road trip this summer, we found bustling sites with bingo and kids on hover boards, sites with quiet s’more-makers and star-gazers, to downright serene sites on mountain tops where retirees gathered to train their miniature dogs on obstacle courses. The one thing they all had in common was respect for personal space combined with a sense of community. Hand waves are obligatory and people offered such genuine smiles that I thought I was supposed to know them already from somewhere.

RV Capital of the World

Elkhart County, Indiana is home to more RV production than anywhere else in the country – a full 80 percent of American-made RVs come out of Northern Indiana. The Recreational Vehicle Industry Association (RVIA) is bullish about the industry’s growth prospects. RV sales and rentals benefit not only the vehicle manufacturers and dealers, but also the hundreds of specialty component suppliers throughout the United States. The RV boom supports the tourism industry more generally (another competitive “export” of the United States) with positive indirect impacts on the more than 45,000 Americans working on campgrounds and elsewhere in the travel and tourism services sector. Overall, the RV industry estimates it has makes a $50 billion contribution through direct, indirect, and induced economic impact on the U.S. economy.

A New Frontier

Today, less than 10 percent of U.S. RV production is exported. Historically, and for the near term, 90 percent of those exports go north across the land border to Canada. But the U.S. International Trade Administration (ITA) thinks the camping grounds are fertile in some surprising new markets including China, the United Arab Emirates where demand is strong for high-end RVs, and Korea and Thailand, where camping is already very popular and being used to attract tourism from neighboring Asian countries.

Middle class incomes are rising in these and other emerging markets, and tourists are increasingly attracted to the American “RV lifestyle,” which in many of these countries is seen as a symbol of luxury and status. The ITA forecasts 2018 exports of $1.4 billion with a five percent annual growth rate.

RV exports updates

Paving the Road for Export Success

To pave the way for more exports of American-made RVs, the ITA is working to ensure other governments adopt favorable vehicle standards and road use and licensing regulations. Removal or reduction of import duties and reduction of high consumption taxes would make pricing of U.S. RVs more competitive in new markets. Redundant testing and certification requirements can also pose a barrier to U.S. exports if not addressed in trade policy discussions.

ITA brings foreign buyers to national RV trade shows to introduce them to U.S. vehicle manufacturers and component suppliers. Finding buyers, however, isn’t enough to grow potential exports. The industry and U.S. government are also working to stimulate investments at national parks and private resorts in new markets to build out campsite infrastructure including power, water, and sanitation hook-ups and expand rural roadways and parking to accommodate RVs.

China’s Market Might Get Cooking

China’s current Five-Year Plan for economic growth sets a goal of creating 1,000 RV campgrounds by 2020 to both “promote consumer spending on tourism and leisure activities” (and to support American competitors in the Chinese automotive industry).

Shanghai opened its first campground for RVs in October 2014 on Chongming Island and ITA reports that new campgrounds are springing up on a near monthly basis all throughout China. China’s city dwellers are catching on. RV camping is a great way to escape the congestion and smog of China’s cities while embracing the American coolness factor.

Chinese campers

RVs Support American Travel and Tourism Exports Too

According to the US Travel Association, international travelers spent $153.7 billion in the United States in 2016, directly supporting nearly 8.6 million U.S. jobs. On average, every $1 million in sales of travel goods and services directly generates nine jobs for the industry, which is adding new jobs at a faster rate (16.6 percent) than the rest of the economy (10.3 percent).

While RV manufacturers are chasing sales in China, the U.S. RV rental market is busy attracting Chinese tourists who want to see as much of the United States as possible on their holidays and do it American-style.

The opportunity is not lost on El Monte RV in Los Angeles, a company that caters to its growing Chinese clientele by offering instructional videos in Chinese, vehicles outfitted with rice cookers, and directions to conveniences like Chinese supermarket chains.

Overall, China is the #1 market for U.S. tourism exports (tourism sales in the United States are counted as a services export). The National Travel and Tourism Office calculates that Chinese visitors inject more than $95 million a day into the U.S. economy and that travel and tourism exports account for 65 percent of all U.S. services exports to China. Seems that great American road trip is increasingly a two-way road.

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Exporting the all-American road trip- RV

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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