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America Alone

Free trade agreements promote more shipments of export cargo and import cargo in international trade.

America Alone

When US President Donald Trump took the podium at the World Economic Forum in Davos, Switzerland in January, he brought with him a clear and unambiguous message: “America first does not mean America alone.” The president used the forum – a gathering of the world’s elite business and state leaders – to declare unequivocally that America is “open for business” and that there is no better time to invest.

That message and its timing wasn’t a coincidence. It was a response to an organic and gradual shift in US-global relations that finds the US increasingly isolated. It isn’t so much that there’s a growing anti-American sentiment. Rather, specific nations and trading blocs are simply hedging their bets in response to what appears to be a growing desire by Washington to recreate the trade landscape.

To understand this, we have to consider that at the outset of 2017, things were looking rather tumultuous for the world of trade and trade agreements. Protectionism appeared to be spreading rapidly across the industrialized world in the form of the UK’s Brexit from the European Union, anti-trade rhetoric from a soon-to-be inaugurated US president and strong prospects for free-trade detractors to win upcoming elections in France and Germany. In short, trade protectionism seemed to be a rapidly growing global phenomenon; not an American one.

As it turned out, many of the protectionist movements taking place around the world were primarily restricted to a disenfranchised subset of the population. The idea of tossing internationalism into the waste bin to retreat into isolation quickly fell out of vogue with the majority of voters. In the end, a pro-trade and centrist president took the helm of France’s Elysée Palace and Angela Merkel’s Christian Democratic Union maintained its hold on power in the Bundestag, albeit with a slightly less secure grip.

Europe’s anti-trade movement was quickly suppressed and things essentially went back to normal. Not so in Washington. In his third day in office, the president signed an executive order withdrawing the US as an anticipated signatory of the Trans-Pacific Partnership (he has more recently expressed a willingness to participate in a now-revamped TPP if the US could secure substantially better terms). In the spring, the Office of the United States Trade Representative made formal its intent to renegotiate the North American Free Trade Agreement, the negotiations for which have been going far from smoothly.

If there was any doubt of Washington’s intent to play hardball on the trade front, it was all but obliterated after the International Trade Commission (ITC) chose to impose countervailing and anti-dumping duties on Canadian lumber and the US Commerce Department’s ruling in favor of a complaint by Boeing that Canadian rival Bombardier had unfairly priced-down its C-Series jets via government subsidies (the ruling was eventually rejected by the US International Trade Commission).

More recently, the administration in Washington took the counsel of the ITC to place limits on the number of washing machines Korean companies can import into the US to compete with American washing machine makers. The recommendation comes against a backdrop of now initiated talks to modify the Korea-US trade agreement (KORUS) to open up Korea’s auto market to more American-made vehicles. And to kick off 2018, Washington has imposed tariffs on Korean washing machines, Canadian newsprint and Chinese solar panels.

In the interim, the remaining members of the TPP have succeeded (in principle) in resurrecting the beleaguered trade deal; Canada and the EU ratified their own free trade agreement (CETA); Brexit discussions are looking increasingly positive, and – though it didn’t meet its deadline of sealing the deal by the end of 2017 – China has inched closer to concluding the Regional Comprehensive Economic Partnership (RCEP) with 15 other countries.

In short, while the rest of the world has moved toward opening trade channels, the United States has chosen to make access to its market increasingly difficult.

This is not to suggest the various trade-related grievances identified by Washington are unjust or lack foundation. There may very well be cases to be made for unfair trade practices. That’s for the ITC and WTO to decide. But taken together, a disconcerting picture is beginning to emerge in which highly protectionist trade practices begin to define American trade policy even as the rest of the developed and developing world move toward trade liberalization that excludes America.

Washington’s oft-stated goal in altering trade policy is to shrink trade deficits where they exist and establish trade relationships in which US exports to a particular market exceed imports from that same market. This is an ambitious endeavor to say the least.

As of December 2017, The United States maintained a $375 billion deficit with China, a $71.1 billion deficit with Mexico and a $68.8 billion deficit with Japan. Neutralizing or even severely reducing these trade deficits would be near impossible, and frankly shouldn’t be a focus at all. Imports are not evil and many American jobs rely on the import of low-cost intermediate goods to make finished products in America so that US consumers can enjoy lower prices.

Moreover, the financial markets – which the president noted in his State of the Union address have been performing quite well under his leadership – are not fond of disruptive trade policies. Many analysts predict a US withdrawal from NAFTA will have a negative impact on GDP, key stocks and the value of the greenback.

Actions speak louder than words and with the imposition of myriad tariffs against Canadian, Korean and Chinese goods, and the threat of disbanding NAFTA while already following through with a withdrawal from TPP, America’s trading partners are likely skeptical when the president says “American is open for business.”

The onus is now on Washington to prove them wrong.

David Rish is president of Global Trade Management at customs brokerage, freight forwarding and trade consulting firm Livingston International.

CPTPP would govern shipments of export cargo and import cargo in international trade of eleven natitons.

Recent Setbacks for Canada in Asia Could Affect NAFTA Bargaining Power

In the game of trade negotiation, timing is critical and perception is reality.

These tenets of gamesmanship have become evident over the past couple of weeks as Canada moved to secure closer trade ties to the Asia-Pacific region, but stopped short of solidifying agreements in principle.

The troubles began a few weeks ago at the meeting of the Asia-Pacific Economic Conference where key members of what many were hoping would be a revitalized Trans-Pacific Partnership (now dubbed as the Comprehensive and Progressive Trans-Pacific Partnership or CPTPP) brought the finalization of a trade deal in principle to a standstill after Canadian Prime Minister Justin Trudeau refused to agree to the CPTPP’s terms.

The Canadian delegation was vague about the reasons, citing concerns over automotive industry competition, intellectual property rights, and cultural exemptions. It would be unfair to say Canada stood alone in expressing concerns over the proposed terms of the CPTPP, but the remaining 10 parties were reportedly prepared to sign an agreement in principle before the Canadian delegation chose to hold off.

The difficulties continued last week when Mr. Trudeau visited China with the expectation that exploratory talks around a free trade deal would progress into formal negotiations. Instead, the Canadian delegation left without any commitment from Beijing on trade talks. The stalemate was driven predominantly by Canada’s insistence on the inclusion of progressive provisions around labor, the environment, and gender.

To be fair, Mr. Trudeau was left with little choice but to include such progressive elements. According to the Globe & Mail, a recent “listening tour” by Canada’s federal government on the potential for a trade deal with China revealed widespread concerns from Canadian industry players over the possibility of Canada compromising its values and hurting its competitiveness via free trade with China. The exclusion of the liberal provisions would have confirmed the worst fears of Canadian business leaders who are struggling with core aspects of doing business in China.

To be sure, the lack of progress made at the APEC meeting and in Beijing do not in any way suggest Canada won’t be moving forward with the CPTPP or a Sino-Canadian trade deal at some point in time (although the latter is looking much less likely in the short term). It may, however, put Canada’s NAFTA negotiating team at a slight disadvantage moving into the January 2018 sixth round of negotiations to be hosted in Montreal.

It’s not unreasonable to assume at least part of the impetus behind Canada’s trade talks with the CPTPP group and Beijing was to demonstrate that it was moving toward trade diversification and away from its traditional dependence on trade with the US It is difficult to dismiss as coincidence that the exploratory talks with China coincided with the inauguration of President Donald Trump who had been quite transparent about his desire to renegotiate or otherwise terminate NAFTA. Similarly, the push to resurrect what was previously thought to be a defunct TPP occurred at a time when the NAFTA negotiations had turned sour for the Canadian delegation.

Presumably, the move to secure trade deals with key Asian allies – if only in principle – would serve to signal to the US that Canada has alternatives to NAFTA, augmenting its negotiating power. Even if the trade talks in Asia did little to improve Canada’s NAFTA position, at the very least they would have left Canada in a more advantageous position in terms of alternative trade partners in a post-NAFTA world.

Today, neither of these scenarios seem plausible to achieve, at least not in the immediate future.

However, it is worth noting that the participating members of the CPTPP have reportedly already found the means to accommodate some of Canada’s demands. Perhaps Mr. Trudeau’s decision to walk away from signing an agreement in principle had precisely the effect for which he had hoped. Should the reported changes to CPTPP meet Canada’s needs, it could serve as an indication to US negotiators that Canada is prepared to walk away from the NAFTA negotiating table if the terms of the agreement aren’t right.

If perception is reality in the game of trade negotiation, the outcome of the APEC summit with respect to the progress of the CPTPP, will be critical, regardless of whether or not it is Canada’s intent to use this as a means of improving its bargaining position with Washington. The perception on Capitol Hill will be either that Canada is a strong negotiator with viable international market alternatives to the US, or a nation with continued dependence on US trade and, in turn, limited negotiating power.

Given the number of international trade agreements and arrangements being negotiated or severed concurrently – NAFTA, CPTPP, Brexit, RCEP and more – the process has become a kind of game of chess. Each nation’s success will rest at least partially on its ability to establish the perception of strength in alliances at just the right time, and the clock is ticking.

David Rish is president of Global Trade Management at trade services firm Livingston International.

New NAFTA would govern North American shipments of export cargo and import cargo in international trade.

NAFTA – An Uncertain Sunset?

As noted by recent media reports, United States trade negotiators have chosen to introduce a five-year sunset provision to NAFTA as part of the fourth round of negotiations that took place last week in the US capital.

The idea, first suggested last month by US Secretary of Commerce Wilbur Ross and US Trade Representative Robert Lighthizer, would allow for NAFTA to be terminated at the end of each five-year period unless the signatories review the status of the trade deal and formally agree to continue.

Secretary Ross believes a “systematic re-examination” of NAFTA is necessary. He says the 1994 economic forecast impact to the US when NAFTA entered into force was unduly optimistic. Ross believes that although such a sunset (i.e., termination) would likely never occur, the clause is necessary to force discussion and avoid stagnation. In the new NAFTA, there would be an ongoing mechanism in place to get things fixed or adjusted to current conditions.

Meanwhile, Canada and Mexico have been quick to state their strong opposition to the sunset proposal. They say that the degree of uncertainty that this brings to manufacturing decision makers is very harmful. It could discourage investment away from the NAFTA region.

Canadian US Ambassador David MacNaughton has publicly stated the clause is likely to be met with strong resistance by US industry while Mexico’s US Ambassador Gerónimo Gutiérrez Fernández stated the proposal “would have very detrimental consequences to the business sector of the United States, Mexico and Canada.”

Companies that have capitalized on the benefits of NAFTA have done so by making large investments in sophisticated North American supply chains involving the strategic placement of manufacturing facilities, warehouses, distribution centers, and a range of other supply chain elements. Such infrastructure takes years to plan and develop and involve individual corporate investments ranging into the hundreds of millions (if not billions) of dollars. Therefore, any risk to the success of an investment over the planning horizon becomes inherently discouraging.

According to a recent Center for Automotive Research study, total US foreign direct investment (FDI) in 2015 across all industries in Canada was $353 billion and total US FDI in Mexico was $93 billion. Meanwhile Canadian FDI in the US totaled $269 billion and Mexican FDI in the US totaled $17 billion. Much of this FDI comes from the establishment of the aforementioned supply chain elements and return on those investments usually takes nearly a generation to fully recover.

The auto industry — a key focus of the NAFTA renegotiation — is an obvious example of investment at stake if a sunset clause were to be introduced. As it stands today, the components of the average vehicle manufactured in North America could cross national borders within the continent as much as seven times before a finished vehicle is produced. That is because automakers leverage the cost efficiencies associated with having various components manufactured in different geographies and transported to other geographies for partial or complete assembly.

Not much in the way of substantive agreement has been revealed thus far in the renegotiations. With elections coming up in Mexico and the US in 2018, there is a sense of urgency to complete the talks by the end of 2017 or early 2018 to ensure the renegotiation doesn’t become overly politicized.

This is a ambitious timeline considering the original NAFTA negotiation took five years and 20 negotiating rounds. The introduction of a sunset clause is likely to add to the list of contentious issues, including more stringent content requirements, labour and environment standards, and duty reduction schemes for non-NAFTA goods, which were only introduced in the latest round of negotiations.

Notwithstanding the five-year sunset provision, the immediate threat is that the sunset happens now. If the current talks fail, the US could initiate a six-month notice for a full NAFTA withdrawal by next year. That sunset is the far more imminent and threatening one.

David Rish is the president of Global Trade Management at trade-services firm Livingston International.

Macron's victory in France could mean more shipments of export cargo and import cargo in international trade.

Why the Centrist Victory in France is Good for America

The victory of Emmanuel Macron, the centrist candidate who defeated populist, far-right contender Marine Le Pen in the recent French elections, is being touted by pundits as a victory for moderation in French politics.

By all accounts, Macron was indeed the most moderate candidate among the original 11 whose names appeared on ballots in the first round of France’s elections in late April. He was also the only candidate in favor of political and economic multilateralism, which was purported to have fallen out of vogue among Europe’s, and specifically France’s, increasingly disenfranchised masses.

Granted, the new president’s economic policies may raise eyebrows among free-market purists. He has called Europe’s approach to globalization imperfect and suggested a stronger stand must be taken with respect to the implementation of antidumping policies targeting Asian nations that compete unfairly within Europe. He has also favored a Buy European approach that would limit EU procurement to companies that maintain at least half their production within the EU.

But he has also been openly opposed to the blanket protectionism proposed by his main opponent, Marine Le Pen, whose platform included a three percent tax on all imports and favored French companies for any public procurement projects. Macron, conversely, is in favor of CETA, the contentious free-trade deal signed between Brussels and Ottawa, and has expressed a general openness toward trade that may not just be all talk. According to the Japan Times, the first bilateral summit between Macron and Japanese Prime Minister Shinzo Abe on May 27 was heavily focused on fighting protectionism and finding a path toward free trade between Europe and Japan.

The prevalence of moderation in the outcome of the French election is not only a win for France, but also one for the United States and a number of other G7 nations. France is the kind of country whose economic impact on this side of the Atlantic often falls under the radar of economic observers, but is actually quite substantial. Last year, France was our eighth largest trading partner, accountable for some $77 billion in goods trade, according to the US Census Bureau, representing a 44 percent increase since 2000.

Perhaps most noteworthy is French industry’s willingness to inject much needed foreign investment into the US economy. Foreign direct investment from France into the U.S. reached $234 billion in 2015 (on a historical-cost basis), making the US one of France’s top destinations for FDI. That investment generates an estimated 500,000 high-wage jobs in the US. In fact, according to the US. Bureau of Economic Analysis, investment from French-owned companies produced the second-highest number of FDI-related jobs in the U.S. in 2015 (after Canada). Similarly, the US invests heavily in France with America representing the fourth-highest inflows of FDI into France.

With that kind of economic reciprocity, there’s good cause to keep relations with France (and many other European nations) friendly and trade activity relatively unfettered. Such close economic ties between the U.S. and European nations served as the basis for the ongoing negotiations for T-TIP (the Transatlantic Trade & Investment Partnership). That free trade deal between the two entities has been on hold since last year when protectionist and populist movements in Europe began to call into question the value of pursuing trade talks.

But things are beginning to look up for trade and multilateralism. When Republican House Speaker Paul Ryan visited London in late April, there was much chatter about the potential for a US-UK trade deal and similar possibilities around trade talks with Europe, though there was strong emphasis around fair trade and smart trade agreements. Similar sentiments were expressed by US Commerce Secretary Wilbur Ross, though he emphasized that the immediate focus would be on revisiting NAFTA.

Such comments are encouraging from a US administration that had previously expressed a rigid desire to negotiate bilateral agreements with individual European states, and bodes well for transatlantic relations.

Together, the victory of centrist forces in France on the heels of a similar anti-populist vote in the Netherlands last month, and the newfound willingness of Washington to talk trade with Europe, offers a dramatic shift in sentiment toward trade policy relative to what was prevalent just a few months ago. Even within North America, talk of NAFTA being scrapped has been shelved and replaced with a tripartite desire for a renegotiated agreement.

The fact that cooler heads are prevailing among key players in the industrialized world is an indication that the historic value of trade and its positive impact on industrialization, employment and innovation is being recognized by policymakers, even in those constituencies with strong populist movements.

However, to really win over hearts and minds, it will be incumbent upon policymakers to craft trade agreements that take into account the concerns raised by populist voices, so that they are able to benefit from trade and foreign investment, rather than feel alienated by it.

Such a feat is neither simple nor impossible, but it will require a new approach to trade negotiation than what had been employed in the past. Failing to do so will simply result in a vicious cycle of trade advancement, followed by anti-trade populism and anti-trade politics, the last of which is detrimental to economic growth, business investment and gainful employment.

David Rish is the president of Global Trade Management at trade-services firm Livingston International.