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

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.

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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.

Download and share the full graphic.

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.
expert logistics

U.S. BUSINESS PREPARES FOR NEXT WAVE OF TARIFFS ON 100% OF GOODS FROM CHINA

Over several days in late June, trade policymakers in Washington listened to the testimony of hundreds of businesses and industries from sports fishing to booksellers, bakers and bicycle makers, logistics companies, and inventors of healthcare and high tech products. Most wish to avoid the next wave of tariffs that would apply to nearly 100 percent of the goods we import from China.

Meanwhile, more microeconomic effects can be understood by examining the thousands of requests that companies and associations have made to the administration, each asking that specific products be excluded from tariffs already in effect. To achieve an exclusion, applicants must explain how the product needed might be too costly or not widely available for purchase outside China.

They must also analyze whether the product is strategically important or relevant to China’s Made in China 2025 industrial ambitions.

Economists Christine McDaniel and Danielle Parks break down the status of how the administration is responding to these product exclusion requests. TradeVistas offers this graphic to summarize their detailed investigation, and to help you keep track of “tranches” or waves of tariffs announced or implemented by the administration over the last year or so.

Feel free to use and share our graphics.

Wave of China Tariffs TradeVistas

Want to dive deep into the product exclusion process and outcomes to date? Read McDaniel’s full paperInvestigating Product Exclusion Requests for Section 301 Tariffs with links to full data sets.

 

 

 

 

 

 

 

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.

Trump has imposed tariffs on steel and aluminum shipments of export cargo and import cargo in international trade.

The Sobering Reality of a Tariff War

Running out the clock on a temporary exemption, the Trump administration moved ahead on June 1 with a 25-percent tariff on steel and a 10-percent tariff on aluminum on imports from Canada, Mexico, and the European Union among other significant producers.

Tariff wars take on the dynamic of an arms race. Countries build up an arsenal by amassing lists of products where additional tariffs would make a serious dent in the other country’s exports and often include products that are manufactured in the districts of key politicians to get their attention. Fully armed on both sides, countries most often back down or repeal the new tariffs quickly, given the possibility of mutually assured destruction (no need for a bunker on the trade front but there will be direct costs to producers and consumers).

There is plenty of collateral damage in a tariff war because the one-upmanship spills over beyond the sectors named in the original complaint (steel, aluminum, solar panels, washing machines, autos), sweeping in producers like farmers for maximum political effect. The other dirty little secret in tariff wars is that they provide cover for governments to protect the producers of products facing normal market competition. That’s what might just be motivating our closest trading partners to put American whiskey on their lists for tariff retaliation.

I’ll Take (a) Manhattan

Last year, American makers exported $1.6 billion worth of distilled spirits – 69 percent of those sales were of American whiskies. American spirits are sold in some 130 countries. Canada, the UK, Australia, Germany, and Spain buy the most. Is it possible that Canadian, Scottish, and Irish distillers or the black corn-based Mexican whiskey producers see an opportunity to leverage this tariff war to slow down the explosive growth of American whiskies around the world?

The industry’s top objective for NAFTA re-negotiations was a defensive one: preserve duty-free treatment for US distilled spirits exports. But now, in response to new US tariffs on steel and aluminum imports from Canada and Mexico, both governments have released a list of US products against which they intend to apply tariffs. Mexico’s list is comprised of $3 billion in tariffs and includes US pork products, apples, cranberries, cheese, potatoes—and whiskey.

Canada has said it will raise tariffs to 25 percent on nearly $13 billion worth of US exports. Its list includes yogurt, coffee, candy, maple syrup, jams, nuts, ketchup—and whiskey. Europe was not exempt from the steel and aluminum tariffs either. In response, Europe’s list of around 200 American goods that might face a 25 percent tariff includes orange juice, corn, tobacco, rice, beans, peanut butter—and whiskey. China is of course at the center of US complaints on steel and aluminum. China’s list of tariffs on US goods includes soybeans, corn, cotton, sorghum, wheat, beef, dried cranberries, orange juice—and whiskey.

That’s the spirit

Putting together retaliatory tariff lists is an arcane art form in the trade policy world. It’s two parts economic analysis and one part just “hit ‘em where it hurts.” Once you start a tariff war, you cannot contain which of your prized industries will get caught in the crosshairs. This time, it’s sure to be American whiskies.

American author Bernard DeVoto wrote in The Hour, “In the heroic age our forefathers invented self-government, the Constitution, and bourbon…Our political institutions were shaped by our whiskeys…and share their nature. They are distilled not only from our native grains but from our native vigor, suavity, generosity, peacefulness, and love of accord.”

We will need to draw on these values and characteristics to get us—and our whiskies—through this tariff war as quickly as possible.

Andrea Durkin is the editor-in-chief of TradeVistas and Founder of Sparkplug, LLC. She is an adjunct fellow with CSIS and a non-resident senior fellow at the Chicago Council on Global Affairs.

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

Proposed tax bill has implpications for companies with shipments of export cargo and import cargo in international trade.

Trade Agreements Take Back Seat In The Great International Tax Race

The US Congress is set to consider the first major reform of the US tax code in decades. The proposed Tax Cuts and Jobs Act released on November 2 by House Speaker Paul Ryan (R-WI) and House Ways and Means Committee Republican members features significant changes to the way US corporations are taxed and carries implications for how they compete around the world.

Retail stores are constantly offering some percentage off your purchase, or incentives like free shipping to close the deal with you. American consumers almost never pay “full price” because they are conditioned to look for the best offer and save money. Companies are no different. If they can improve their bottom line by saving money to reinvest, hire more workers, or provide a better return to shareholders, they’ll do it. Governments around the world—competitors of the US Government—offer “discounts” in the form of better tax policies to entice companies to earn money in their countries, build offices or plants, perform R&D, or otherwise invest in assets in their countries.

The US Government behaves as if it is not in a competition for business. Not only does the United States have the highest statutory corporate tax rate, we are one of the last major economies that still taxes worldwide corporate earnings. Nearly all industrial economies have shifted to a territorial tax system that largely exempts corporate earnings already taxed in the country where they are generated. Foreign-headquartered firms often enjoy a major tax advantage over US-headquartered firms, especially when they compete outside their home markets.

Taxing Decisions

American multinationals make products for, and offer their services to, customers all over the world. With every sale, they seek to earn profit for their employees, owners, and shareholders. How they are taxed drives major decisions on where to put up factories, which corporate entities will sell to their own affiliates, where R&D will take place, and how much profit earned overseas will return to a US-headquartered company’s business in the United States.

Some American firms, many of which have a more than 100-year history, have made the tough, tax-driven choice to “invert” by moving their headquarters to a low-tax country. When these companies move, they may leave substantial operations in the United States, but they abandon their American legacy plus many well-paying, high-level corporate jobs. Corporate tax reform could reduce or eliminate the incentives for inversion. The current proposal would go a step further to penalize American companies that move their headquarters with a new tax.

Two Big Negatives if You’re Bargain Hunting

A big price tag: At 38.9 percent, the United States has the highest combined (federal and state) corporate tax rate of any major economy. The majority of our competitors are below 30 percent. In recent years, Japan reduced its corporate rate by 8.5 points and the United Kingdom dropped its rate by 10 points.

The big statutory price tag is why American multinationals develop tax strategies to reduce their tax burden through credits and exemptions. They do so well finding ways to avoid the 38.9 percent, the average “effective” tax rate paid by US multinationals to the Federal Government is around 19-20 percent.

The fine print: 29 out of 35 OECD countries (advanced developed economies) have a territorial tax system under which companies pay corporate taxes once in the country in which their profits are earned. Their home country generally exempts those profits from being taxed again. The US system taxes corporate profits earned everywhere. So, if a US multinational earns money taxed at a lower rate overseas, they’ll be asked to pay the difference to the US Government.

Let’s say you are Ohio-headquartered Procter & Gamble (P&G) competing against Dutch company Unilever for sales of consumer products in Canada. Unilever will pay tax at Canada’s rate of 26.7 percent. P&G will pay the Canadian rate and then be taxed another 12.2 percent by the US Government to reach the US rate of 38.9 percent (average state tax included) — if and when they return the profits earned in Canada back to the United States.

Boatloads of Cash

One of the most prevalent ways to minimize this problem is to defer taxes, sometimes indefinitely. Taxes on profits earned by US multinationals overseas don’t have to be paid until they are repatriated or brought back to the United States. While deferral (including treatment of capital gains or individual retirement plans) has been a part of the tax code since its inception, the scale of deferral can distort decision-making.

American companies are holding an estimated $2.6 trillion overseas (equivalent to nearly 14 percent of US GDP). Apple holds more than 93 percent of its cash abroad. Microsoft and Alphabet are sitting on $126 billion and $92.4 billion in cash outside the United States, respectively. The opportunity to avoid the 38.9 percent corporate tax incentivizes not just to earn more money overseas, but to leave it or invest it there. They are likely to invest more than they would choose to in those countries absent the tax differences.

Would Corporate Tax Reform Be a Windfall – and For Whom?

Surrounding the debate over corporate tax reform is the criticism that corporate tax reform only benefits the one-percent of American firms that are multinational. But consider that the one-percent of US multinationals generates more than 19 percent of American jobs and accounts for nearly three-quarters of R&D spending. They also generate the lion’s share of US merchandise exports.

Even if the corporate tax rate is significantly reduced (the Tax Cuts and Jobs Act would lower it to 20 percent) and the system shifted to a territorial one, multinational companies could still game the system by, for example, lending money from a low-tax subsidiary to the US parent or by ensuring that highly-mobile assets such as royalties are taxed in lower rate tax jurisdictions, both of which reduce US tax revenues. Other countries with territorial systems have closed these loopholes by taxing “passive” income such as interest or royalties while exempting “active” income from manufacturing, an approach the US tech giants wouldn’t favor.

Tax Policy is at the Core of Competitiveness

Corporate tax reform is being considered seriously in Washington because there appears to be general agreement our current system is uncompetitive. Even though corporate income tax is not as large a source of federal revenue as individual income taxes and payroll taxes, our high corporate tax dampens investment in the United States — investments in technologies and people – that could boost our productivity and secure higher returns on innovation. Improved tax policies would attract companies to locate their multinational headquarters in the United States and not leave for greener tax pastures.

Corporate tax reform is therefore seen as a way to increase economic growth without suffering a significant loss in federal revenue. But, it’s complicated and there are politics at play so the timing, scope, and nature of corporate tax reform is yet uncertain. The one thing that is certain: no matter the kind of improvements to the business environment they may offer, trade agreements will take a back seat to tax policies in the global race to attract business.

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. She is an Adjunct Fellow with CSIS and a non-resident senior fellow at the Chicago Council on Global Affairs. 

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

chuna is refusing to accept scrap shipments of export cargo and import cargo in international trade.

China No Longer Treasures the World’s Garbage

The average American generates 4.4 pounds of solid waste every day. The garbage and recycling trucks come faithfully each week, but we don’t pay much attention to where it all goes. According to the Institute of Scrap Recycling (ISRI), approximately one-third of the scrap recycled in the United States is exported. China is our largest customer.

Recycling is a global industry. 179.6 metric tons of scrap commodities worth $86.5 billion were exported globally in 2015. Ferrous, non-ferrous (copper and aluminum), and precious metals are among the most valuable and highly traded waste. Shipping these non-hazardous scraps for recovery in another country can extend the life of scarce natural resources that might otherwise end up in local landfills.

Why do other countries buy it?

ISRI calls scrap recycling “the first link in the global manufacturing supply chain.” Take the case of China, the world’s largest importer of scrap commodities. For years, cities such as Foshan in southern China have enabled 24-hour a day scrap operations where workers sift, sort, break down, and process metals to feed China’s extended construction boom. The recycled metals find their way into new rail systems, gleaming skyscrapers, automobiles, industrial machines, and other infrastructure needed to support a modernizing country and satisfy the appetite of a newly affluent and growing middle class. China does not have enough of natural resources to meet demand and secondary raw materials recycled in China are often cheaper than virgin materials.

Adam Minter is a journalist based in Shanghai who has spent over a decade studying China’s recycling industry up close. He gives this example in his book, Junkyard Planet:

“In 2012, China produced 5.6 million tons of copper, of which 2.75 million tons was made from scrap. Of that scrap copper, 70 percent was imported with most coming from the United States. That’s not a trivial matter: Copper, more than any other metal, is essential to modern life. It is the means by which we transmit power and information.”

Scrapping plans for “foreign garbage”

In July, China notified WTO members of a change in policy. As of the end of this year, China will ban the importation of 24 categories of solid waste including tires, textiles, plastic, and glass, and it will limit the importation of other waste such as steel, copper and aluminum scrap.

The US scrap industry shipped more than 37 million tons worth $16.5 billion to customers worldwide in 2016. One third of that went to China. ISRI says that more than 155,000 Americans are employed in the US recycling industry, which depends heavily on exports to China. Recyclers in the European Union, Canada, Korea, and Australia are worried about the ban as well. Their representatives to the WTO raised questions about China’s policy at the most recent meeting of the WTO’s Committee on Import Licensing.

Recycling good trade practices

As China implements procedures to monitor and control the importation of waste, it will need to be mindful of its commitments under the WTO Agreement on Import Licensing. The obligations in the agreement are designed to ensure that any procedures used to administer import licenses are “simple, neutral, equitable and transparent.”

The agreement’s disciplines require members to publish and notify new or changed import licensing procedures to other WTO members, to apply simplified procedures without discrimination, and to process import applications within reasonable time limits. The agreement also specifies best practices such as streamlining the number of agencies whose approval is required, and not refusing applications if minor documentation errors are made by exporters without fraudulent intent or gross negligence. These are nitty gritty operational matters that can significantly disrupt exporters’ businesses if not handling transparently and fairly.

Trash talk can be beautiful

The WTO’s import licensing committee meets about twice a year. Members can ask questions and seek clarification about draft laws and import procedures. Why is the measure needed? How will it operate? In this case, China did provide notice and several WTO members queried the representatives from China about the scope and application of its ban. At the same meeting, members asked Indonesia about its dairy import licensing regime; Vietnam said it was taking measures to respond to concerns about discriminatory aspects of its import licensing for distilled spirits. Mauritius, Moldova, and Botswana filed their first notifications.

Publication and transparency are good administrative habits, reinforced by the WTO’s rules. It helps to avoid trade disruption and strengthen domestic processes that promote inclusion in public rulemaking. The committee discussions shine a light on poor procedures, putting peer pressure on countries to apply better practices while offering training and good examples for countries with burgeoning regulation to follow. Importantly, however, the process is only as good as members’ compliance with the requirement to provide timely notification of measures to their trading counterparts, which has been something of a problem in this and other WTO committees. But those flaws should not overshadow the overall opportunity the WTO provides for countries to have regular, ongoing discussions about their trade regimes in a peaceful and civil environment.

What will happen to the garbage?

After December, China may no longer accept waste paper or plastic. Today, China buys over half of the plastic thrown away by the rest of the world and has become the world’s largest paper recycler. The China Paper Association says one quarter of the paper produced in China is made from imported waste paper. The ban will have implications for companies like Amazon and Alibaba that fill millions of orders comprised of products made from recycled materials and packaged in recycled materials. There will certainly be ripple effects that cause price and supply uncertainty.

When economists look at the negative externalities generated by trade in waste, they might cite differences between countries’ pollution policies as driving trade flows. To address environmental externalities the “first-best policy” in economic circles would be to establish appropriate domestic regulation or tax policies. Alternatively, a country might restrict the importation of waste. The Chinese Government cited health environment and health concerns but most of the waste feeding China’s massive and inadequately regulated recycling industry comes from domestic sources.

Where will the world’s exported waste go if not to China? Trade barriers often have the same effect as squeezing one part of a balloon. Trade flows clamped off in one area causes them to swell in another. If there’s demand, high-quality waste will be redirected to other countries. If not, it goes to the landfill.

Andrea Durkin is an adjunct fellow with the Center for Strategic and International Studies and a non-resident senior fellow at the Chicago Council on Global Affairs. 

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