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How You Can Avoid Problems When Manufacturing to China

manufacturing

How You Can Avoid Problems When Manufacturing to China

If you haven’t worked with a Chinese manufacturer before but are intending to start now, this article is for you. From the onset, we must inform you that you are in for a lot of positive gains, but you need to be ready for occasional production problems. One day you are panicking after a factory delays your products, the other day you are petitioning a manufacturer for refusing to rework substandard goods and another time you are running after a supplier who walked out on you without prior warning. Don’t get us wrong: There are many good manufacturers in China, but there is no harm in being cautious.

To set up a company in China, you must know and avoid the pitfalls that rogue manufacturers have led many foreign companies into. Remember that when it gets to product development, you have your own customers waiting for your deliveries, so you need a manufacturer who delivers quality products and in a timely manner. That being said, which mistakes must you avoid when manufacturing in China? How do you avoid them?

1. Entrusting manufacturers with your business interests

Trust is vital in business, but you must not trust anyone with your business interests. Do not forget that learning some words and phrases is crucial at the point so that you could do some basic communication. For more complex communication, a company that provides Chinese translation services needs to be hired so that no misunderstanding happens. When working with a Chinese manufacturer, avoid the mistake of allowing the manufacturer to control the quality of your products or the delivery time. Many entrepreneurs have made the mistake of sticking around even after realizing that a manufacturer or supplier is incompetent, probably because they are afraid to lose their pre-paid deposits. Tell you what; you would rather walk away and lose a small deposit than stick around and end up with substandard goods that will ruin your existing reputation.

Also, a small deposit may not be worth the frustrations that you will cause your customers by keeping them out of supply for long.

Another way of protecting your interests when dealing with a Chinese manufacturer is to always have an inspector or an agent on-site, constantly updating you on every stage of your product development process. A Chinese recruitment agency can help you find and recruit a reputable agent for that role. If the manufacturer tries any underhand strategies, you can easily stop them in their tracks. You will always be a step ahead of them.

2. Prioritizing fast delivery over quality

For what it is worth, quality must always come before delivery speed for as far as product development is concerned. Product development requires tons of time and effort to be successful. And because your customers want top-quality products, you must not compromise quality for anything. The challenge that is unique to China, however, is that when you pressurize the manufacturer too much, they may not tell you outright. Instead, they will lower the manufacturing standards so as to avoid possible delays.

On the other hand, there are reported cases of Chinese manufacturers’ hiking production costs upon realizing how much value you’ve attached to the quality of your product.

How, then, do you find a workable balance? Again, sending a local agent to supervise the manufacturing process would be a great option for you. Because the agent understands the Chinese business culture and language perfectly, he/she will know how to send your message across without scaring away good manufacturers and/or falling into the trap of quack manufacturers who hike production costs for no apparent reasons.

3. Relying too much on a manufacturer’s past reputation

Previous success can be used to gauge the performance of a manufacturer in the west, but not necessarily in the east. Chinese companies with reasonably good reputations have in the past frustrated many foreign investors, sometimes to the point of collapsing entire investments. Don’t make the mistake of trusting a manufacturer based on your past experiences with them; always be on high alert knowing that they can disappoint you at any moment.

The fact that a Chinese manufacturer hasn’t failed you yet isn’t a guarantee that they will not unexpectedly drop their manufacturing quality and damage your reputation.

There are many manufacturers in China today who are holding onto projects such as yours as their only means of survival. If you allow them the chance to rebuild using your money, they will fancy their chances without looking back. There are also manufacturers who are protected by government bureaucrats, so they don’t care too much about their reputation with foreign businesses. They will mess you up and continue with their daily operations as if nothing happened. You must, therefore, never drop your guard: Always be hands-on and control the behavior of your Chinese manufacturer.

coronavirus

Coronavirus Disrupts Maritime Industry, Supply Chains

With reports that the U.S. military is preparing for a global coronavirus pandemic, companies dependent on China-based production are highly vulnerable to the adverse impacts on the modes of the supply chain, namely in commercial aviation, maritime shipping and overland transport, according to an industry analysis.

“The outbreak has already disrupted some commercial maritime operations and is set to have a much greater impact as international concerns over the virus intensifies,” states Hong Kong-based A2 Global Risk, which supplies its client businesses with a complete picture of global politics, security and trade.

“As large sections of China’s economy grinds to a halt and regional supply-chain mobility becomes tightly restricted, the macro-economic outlook becomes increasingly dire,” A2 Global Risk adds. “More factory closures are a near certainty as the Chinese government tries to control the spread of the disease. Foreign companies heavily reliant on China’s manufacturing sector will be forced to either weather the storm or shift their supply chains to less risky markets.”

TT Club, a UK-based insurance provider, is warning freight forwarders, logistics service providers and other intermediaries of potential unforeseen exposures that may also accrue. “Restrictions due to labor shortages at ports and cancellations of inland transport links within China, constraints in the supply of goods due to factory closures and reduced schedules of air, ocean and rail carriers may expose forwarders to claims arising from delivery delays and cargo deterioration,” states a TT Club briefing that was compiled with the assistance of specialist international lawyers.

“Up-to-date status reports on their cargo’s progress, or lack of it, are vital to shippers,” emphasizes TT Club’s Risk Management Director Peregrine Storrs-Fox. “Forwarders and logistics operators will certainly prove their mettle if they can consistently make customers aware of the ongoing attempts to problem-solve. Careful recording of communication trails detailing such actions will also help in any disputes in the future.”

Global e-retailer Alibaba Group has responded to the coronavirus threat by continuously sending medical supplies, including masks and protective suits, to medical personnel in Wuhan, Wenzhou and Hangzhou, which are at the center of the outbreak and in the most need.

“We are grateful. And we need more help,” states Alibaba, which launched a global sourcing platform for suppliers and distributors of medical goods across the world to join in the campaign.

U.S.-China trade

Are You Prepared for the Outcome of the U.S.-China Trade War?

For exporters, importers, manufacturers and investors who are heavily involved in U.S.- China trade, the recent agreement provides potentially immense benefits – but still doesn’t end their uncertainty or anxieties about what the future may bring.

Every participant in U.S.-China trade should now be reassessing his or her own expectations and strategic plans for not only surviving the trade war but, as importantly, for maximizing business success.

Clearly, preparation is essential for businesses to thrive and avoid suffering substantial harm at a time when critical political, economic and legal factors beyond a company’s control are constantly changing.

To help business owners and senior executives shape business and legal strategies tailored to their company operations, I’ll first clarify what the U.S. and China have decided and what is still in play. I’ll then lay out possible scenarios and the strategic approaches that executives should consider taking to protect themselves and position their businesses for future success.

The New Phase 1 Agreement

Under the signed agreement China will:

-Buy at least $200 billion of additional US exports in goods and services over the next two years, on top of amounts it imported in 2017, in the following areas:

-$78 billion of manufactured goods including vehicles and industrial machinery

-$52 billion of energy products, including crude oil and LNG

-$32 billion of agricultural and food products

-$38 billion of financial and business services

-Open its financial sector by abolishing limitations on foreign ownership of Chinese securities by April 1, 2020 and ensure market access on a non-discriminatory basis for US securities, insurance and fund management companies.

-End its longstanding practice of requiring US companies to transfer technology to Chinese companies as a condition for obtaining market access.

In exchange, the U.S.:

-Suspended a planned tariff scheduled to go into force on December 15th covering $156 billion of apparel products (Tranche 4B) and lowered the tariff rate from 15 percent to 7.5 percent on another group of apparel products (Tranche 4a)

The signed Phase 1 deal also requires China to:

-Adopt an action plan to make major structural changes for protecting US intellectual property

-Implement a dispute resolution mechanism that puts in place “strong procedures” for the US and Chinese parties to resolve disputes fairly and expeditiously

Under the Phase 1 agreement, the U.S. will maintain its current tariffs of 25 percent on $250 billion in Chinese products and 10 percent on an additional $300 billion of Chinese consumer goods.

FUTURE SCENARIO #1:

The U.S. and China Reach a  Phase 2 Deal & Comprehensive Settlement

Without question, the Phase 1 agreement signed on January 15th is a game-changer for U.S.-China trade relations – the likely beginning of the end of the trade war.

Phase 1 represents the first time since the opening shots of the trade conflict, approximately 20 months ago, that the parties have found common ground and enshrined it in a binding legal agreement. With public expectations for a complete settlement raised by both President Trump and President Xi, negotiators are now incentivized to reach agreement on the remaining U.S. and Chinese demands.

Even though most previously existing tariffs still remain in place, it is now realistic to anticipate a broad negotiated settlement in a Phase 2 deal that includes a sharp reduction in tariffs, Chinese implementation of necessary reforms, and a far more balanced U.S.-China trade relationship. A settlement of this kind would significantly expand business opportunities for American companies to export more products to China and to import more Chinese products to the United States.

Consequently, both exporters and importers can and should now formulate and implement plans as part of their business strategies for improved trade relations with China that seemed highly unlikely and unrealistic only a few weeks ago.

U.S. Importers

To prepare for the possible elimination of high tariffs imposed by the U.S. and China during the trade war as well as other beneficial reforms, key  executives of U.S. importers should  ask the following questions:

-How can we expand the quality and quantity of Chinese products we import?

-To what extent will a sharp reduction of tariffs improve the competitiveness of the products we import in various S. market sectors?

-If Chinese companies curtail their practice of forcing transfer of U.S. intellectual property, how will this help us expand our China-based supply chain?

-If the Chinese government significantly reduces its subsidies for competitive Chinese companies, what kind of openings for increased imports will this create?

-In what ways can and should we encourage our Chinese business partners to invest in the U.S. by building factories here for which our company could handle marketing and distribution?

U.S. Exporters

To  take advantage of China’s Phase 1 agreement to buy $200 billion in U.S. export products during the next two years on top of amounts it imported in 2017 as well as to prepare for the elimination of high tariffs in Phase 2, key  executives of U.S. exporters should ask  the following questions:

-How can we expand the quality and quantity of products we export to China?

-In what sectors of the Chinese market will the products we export become more competitive?

-How will the potential reduction of government subsidies to our Chinese competitors allow us to penetrate the China market more effectively?

-In what areas should we explore new relationships with Chinese companies for producing finished products that include the American intermediary goods we export?

-To what extent will a full Phase 2 settlement of the trade war and the reforms accompanying it enable the U.S. government to modify the controls it currently imposes on specific exports?

FUTURE SCENARIO #2:

The U.S. and China continue their negotiations for a Phase 2 deal but find it difficult to reach agreement

Despite agreement on a Phase 1 deal, the tensions and uncertainty of U.S.-China negotiations mean the U.S. and China may face complications and delays reaching a meaningful Phase 2 deal requiring new Chinese commitments and an end to high U.S. tariffs.

Factors that could slow down the process of reaching a Phase 2 agreement include various threats by the Trump administration:

-Delisting Chinese companies from S. stock exchanges

-Blocking a range of public and private pension funds and university  endowments  from making certain investments in China

-Putting other capital controls on U.S. private sector investment in China to protect against opaque Chinese company accounting and business practices

-Broadening scrutiny of potential Chinese investments in the United States on national security grounds

-Expanding checks by the Securities and Exchange Commission (SEC) of Chinese companies that do business in the S.

-Disrupting the flow of capital between Hong Kong and mainland China if China does not adequately respect the autonomy of Hong Kong

Each of the U.S. measures described above would likely cause China to take reciprocal retaliatory actions – just as China has responded to U.S. tariffs with reciprocal tariffs of its own on American products.

At stake in the Phase 2 negotiation are issues that will determine whether the Trump administration achieves its core objectives in the trade war, including:

-Stricter rules to strengthen information security for cross-border data flows of American companies that do business in China

-Limiting the subsidies by China’s government to state-owned companies which facilitate unfair competition

The issue for Phase 2 that is likely of greatest importance to American importers is whether an agreement removes U.S. tariffs on more than $500 billion in Chinese products that threaten the well-being of their businesses.

Given the uncertainty of reaching a follow-on Phase 2 agreement, key executives of U.S. importers and exporters should ask the following questions:

U.S. Importers

-If a Phase 2 agreement with China does not materialize, how should we plan to modify the sourcing of products we currently import from China to avoid high tariffs?

-What kind of exploratory discussions with suppliers outside China should we initiate as a hedge against uncertainty and continuing tension in S.-China trade relations?

-To prepare for a possible shift in import strategy, should we participate in the Customs Trade Partnership Against Terrorism (CTPAT) program that reduces the number of Customs examinations, accelerates Customs processing times and expedites border crossing privileges?

-What measures can we take to lower cost and raise efficiency to improve the competitiveness of Chinese-origin products in the S. market?

-Does our supply chain include middlemen who resell products to us at a marked-up price? If so, can we utilize the established “first sale rule” under U.S. law that allows us to avoid paying any duty on the amount of the mark-up?

U.S. Exporters

In light of continuing uncertainty about the Phase 2 negotiations, exporters should ask themselves:

-How can we modify the quantity and type of our exports to China in light of unfair competition from state-owned companies receiving government subsidies?

-If existing Chinese tariffs remain in place for the foreseeable future, how will that affect sales of our products in the Chinese market?

-How will increased U.S. controls on exports of American products to China affect our business strategy?

-If the U.S. imposes new tariffs on China and China retaliates, how can we manage and mitigate the likely negative impact on our sales in China?

-In light of the trade obstacles we now face and may continue to face, how should we modify our export strategy for China?

FUTURE SCENARIO #3:

The U.S. and China break off discussions on a final Phase 2 settlement of the trade war after negotiations fail and they pursue hostile trade policies toward each other

If the U.S. and China cannot reach a meaningful trade agreement in 2020, it is likely they will break off negotiations and pursue hostile trade policies toward each other. In this case, some or all of the following economic and political developments are likely to occur:

-The trade war will evolve into a major, multifaceted dispute – the equivalent of a cold war – that involves geopolitical and security disputes as well as trade issues

-Both the U.S. and China will find it difficult to stop a vicious cycle of retaliation and counter-retaliation on trade and other issues

-China and the S. will strive to consolidate their own trade blocs that exclude the other country – potentially decoupling the U.S. and Chinese economies/financial sectors

-China will enhance the role of its state-owned businesses using increased subsidies

-The U.S. will significantly expand its restrictions on trade with China by delisting Chinese companies from U.S. exchanges, blocking public and private U.S. investments in China, enacting much more restrictive export controls, ending most Chinese investment in the United States, exercising greater scrutiny by the SEC of Chinese companies and taking other restrictive measures

Outlook for Importers and Exporters

While future events could potentially reignite the trade war and eventually lead to a breakdown in U.S.-China relations, this dire prospect should not be the immediate focus of planning and preparation by importers, exporters, manufacturers and investors. The collapse of normal economic and trade relations represented by Scenario #3 is only likely to occur after China and the U.S. go through an extended period of uncertainty, tension,  and deterioration in trade relations described in Scenario #2.

Companies involved in U.S.-China trade should therefore base their business and legal planning on the high probability that the trade war will likely evolve either toward a settlement of most outstanding issues or toward continuing uncertainty characterized by the inability of negotiators to resolve remaining differences.

It would be a major mistake at this time to take a “wait and see” approach or bet exclusively on either Scenario #2 or Scenario #3 coming to pass.

For this reason, importers, exporters, manufacturers and investors should focus on modifying their business/legal strategies to take advantage of the potentially immense benefits of the Phase 1 agreement and preparing contingency plans for either a Phase 2 agreement or the occurrence of Scenario #2 in trade negotiations with China – the two scenarios that are most likely to materialize between now and the end of 2020.

______________________________________________________________

Donald Gross  is  founding  partner  of  Donald  Gross  Law,  an international trade law and strategy advisory firm in Washington, D.C. (https://www.donaldgrosslaw.com). He participated in U.S. negotiations with China as a Senior Adviser for International Security Affairs at the State Department from 1997 to 2000, and as Counselor of the U.S. Arms Control and Disarmament Agency from 1994 to 1997. He is the author of The China Fallacy: How the U.S. Can Benefit from China’s Rise and Avoid Another Cold War(Bloomsbury, 2013). He can be reached at don@donaldgrosslaw.com.

countervailing duty

Commerce Modifies Countervailing Duty Regulations to Address Currency Undervaluation

The Commerce Department issued its final rule amending the countervailing duty regulations to address potential currency undervaluation. This revision to Commerce’s regulations will take effect in 60 days and will apply to all new investigations and administrative reviews that begin on or after April 6, 2020. The new rules would effectively clear the way for the U.S. to start applying punitive tariffs on goods from countries accused of having undervalued currencies.

Under the revised regulations, Commerce in the conduct of its countervailing duty proceedings will now have the authority to take into consideration the real effective exchange rates to determine the extent to which a currency is undervalued. They will also be able to seek the Treasury Department’s formal, non-binding evaluation on whether the foreign government’s actions were responsible for the undervaluation. If Commerce determines that there is undervaluation of the currency and that the undervaluation resulted from government action, Commerce will then potentially consider currency exchanges by the exporters and/or traders to be a subsidy given that the exporter or trader would effectively receive more domestic currency in return for their exchanges of U.S. dollars than they otherwise would have been able to receive under the old rules.

In the conduct of its countervailing duty investigations and reviews, Commerce will now look at each individual exporter’s currency exchanges, and specifically, the amount of additional domestic currency received in exchanges due to undervaluation. It will then potentially add the currency subsidy amount to the exporter’s overall countervailing duty rate. The move would give new muscle to U.S. complaints about currency manipulation that have in the past targeted economies like China and Japan and thus turn the more than $6 trillion-a-day global currency market into a new battlefield in the Trump administration’s trade wars. The new rule was opposed by the Treasury Department when it was first proposed in May 2019 as it would allow U.S. companies to file trade complaints with the Commerce Department over specific imported products by treating undervalued currencies as a form of an unfair subsidy.

The new regulations have far-reaching effects as it would allow the U.S. to impose countervailing duties on goods from countries accused of manipulating their currencies, even in cases where they were not officially found to be a currency manipulator by the U.S. Department of Treasury. Previous administrations have examined this issue but have delayed or resisted efforts to take such actions as it could potentially lead to currency wars amongst trading partners.

Commerce’s announcement is the result of campaign promises from the 2016 election. “This Currency Rule is an important step in ensuring that unfair trade practices are properly remedied,” said Secretary of Commerce Wilbur Ross in a statement. “While successive administrations have balked at countervailing foreign currency subsidies, the Trump Administration is taking action to level the playing field for American businesses and workers.”

In a question and answer section attached to Monday’s announcement, the Commerce Department said it would preserve the final power to make any determination about whether a currency’s value presented an unfair subsidy for that country’s exporters. The statutes governing Treasury’s mandate to monitor currencies and Commerce’s power to impose anti-subsidy duties had different criteria, Commerce said.

“Hence, the two processes may result in different outcomes as to a particular country, theoretically including the possibility of applying countervailing duties to a country that does not meet the criteria for designation under the laws Treasury administers,” the statement said.

Commerce also said the new rule would allow it to specifically impose currency-related tariffs against China even if the Treasury did not label it a currency manipulator. The Treasury last month lifted a designation of China as a manipulator just days before Trump signed a “Phase One” trade deal with China that included language on currencies, though the new rule appears to give the U.S. powers to act that go beyond what was included in last month’s deal.

The Commerce Department put some purported caveats on its powers, saying it would “not normally include monetary and related credit policy of an independent central bank or monetary authority” in determining whether foreign governments had acted inappropriately to weaken currencies. “Commerce will seek and generally defer to Treasury’s expertise in currency matters,” it said.  This statement, however, leaves a lot of room open for potential unilateral action by Commerce, as Commerce has reserved for itself the authority to find that undervaluation exists, even if Treasury in its bi-annual report makes a determination that a particular currency is artificially weak but not undervalued. This type of broad authority is similar to Commerce’s authority to conduct Particular Market Situation (“PMS”) investigations resulting in contested decisions and appeals to the Court of International Trade.

trade deals

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

Comprehensive is Out, “Phased” is In

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

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

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

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

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

Something Agreed

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

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

A Way Out or a Way Forward?

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

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

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

Journey of a Thousand Miles

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

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

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

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

Just a Phase?

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

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

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

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

Walking Alone?

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

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

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

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

Construction Phases: Trump’s Real Estate Mindset

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

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

Access the full agreement.

_______________________________________________________________

 

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.
silk road

Can the New Silk Road Compete with the Maritime Silk Road?

China’s president Xi Jinping refers the Belt and Road Initiative, aka the New Silk Road, as the “Project of the Century” and according to a recent Bloomberg article, Morgan Stanley anticipates Chinese investments will total 1.3 trillion US dollars by 2027. In addition, more than 150 countries and international organizations have committed to invest in the project as well with infrastructure enhancements, such as roadways and power plants. But will this New Silk Road ever really compete with the firmly established Maritime Silk Road?

Following is a comprehensive analysis by Bernhard Simon, CEO of Dachser, an international logistics solutions provider, Mr. Simon outlines the benefits and challenges associated with the New Silk Road as well as its position as a potential competitor to the Maritime Silk Road.

Over the last few years, the more I hear and read about the New Silk Road, the more grand the expectations.  Politically speaking, the trade corridors between China and Europe, as well as Africa, seem to be China’s key to becoming a leading global power in the 21st century. Logistically speaking, it would seem that infrastructures and networks are emerging on an entirely new scale, taking a gigantic economic area—often described as representing 60 percent of the world’s population and 35 percent of the global economy—to the next level. The New Silk Road could be a kind of high-speed internet for the transport of physical goods.

As with most narratives, it is worth taking a critical look at the facts. I would like to do this now for certain logistical aspects of the Belt and Road Initiative (BRI), as the New Silk Road is officially known.

First, let’s consider the overland connection between China and Europe: the possibility of bringing Chinese consumer goods to us on the east-west route via rail. This transcontinental route was not the brainchild of China’s President Xi Jinping, who made the BRI a national doctrine in 2013.

In fact, goods have been rolling along the Trans-Siberian route from China to Europe since 1973 (with some interruptions due to the Cold War). Today, there are two routes out of northern China, which head via Mongolia, Kazakhstan and Russia to terminal stations such as Duisburg’s Inner Harbor or Hamburg. China’s western region, home to the megacity of Chongqing and its 30 million people, is also connected to the northern routes. This route allows cargo from the west to no longer need to be transported the many miles to China’s coasts.

 High Costs of Rail Freight vs. Ocean Freight

How significant are these rail links for logistics between Asia and Europe? In 2017, 2,400 trains moved about 145,000 standard containers between China and Central Europe. This corresponds roughly to the cargo of seven large container ships. The International Union of Railways (UIC) expects this to grow to 670,000 standard containers—equivalent to 33 container ships—in ten years’ time. Despite this forecast growth, the existing rail links between China and Europe are likely to remain logistical mini-niches. Steve Saxon, a logistics expert from McKinsey in Shanghai, summarizes it nicely: “Compared to sea freight, the volume of goods transported to Europe overland will always remain small.”

This is primarily a matter of cost. Transporting a standard container between Shanghai and Duisburg by rail costs between $4,500 USD and $6,700 USD; compare that to the cost of sending a similar container from Shanghai to Hamburg by ship: currently around $1,700 USD. This difference is simply too great for railway transport to be truly competitive against ocean transport, even though they move the cargo at about twice the speed. Efficiency improvements will not have a big enough impact to shift from ocean transport to rail.

Another factor is that at the moment, China heavily subsidizes these international rail connections. Once that support ends in 2021, competitiveness will erode further. It is not clear whether rail transport will be self-sustaining without subsidies.

Also, in most cases, anyone needing a shipment quickly and flexibly typically sends it via air freight, even if this option costs around 80 percent more than via railway. Thus, freight transport by rail is (and will remain) caught between economic (by ocean) and fast (by air).

Would adding more train routes change the situation?

China is planning an additional railway line in its southern region, which will move cargo to Europe via Central Asian countries, as well as Iran, and Turkey, bypassing Russia entirely. Indeed, a railway line has connected China with Iran since 2018. This route is, geographically speaking, very similar to the “old” Silk Road, a trade route for camel caravans that crossed Central Asia on its way to the eastern Mediterranean. If this railway line is completed one day, it will raise a number of questions from a European perspective: How can safety, punctuality, and reliability be guaranteed? How can delays caused by customs clearance be minimized? What effect will international sanctions have, for example, on transit through Iran? How can the misuse of containers for smuggling immigrants be avoided? In other words, many issues need to be addressed before a railway corridor south of Russia can be established.

There are two more routes in China’s BRI strategy. One is in Southeast Asia: a 2,400-mile railway line from Kunming to Singapore plus a branch to Calcutta. The other is a rail line that starts in China’s far west, then runs through Pakistan to the port of Gwadar on the Arabian Sea. Crossing over various passes in Central Asia, this technically challenging project is expected to cost $62 billion USD. However, both routes have only a very indirect connection to freight traffic between China and Europe.

So the situation will remain much the same into the future–some 90 percent of world trade will go by ship. Rail transport via the New Silk Road will not change this. If all this freight suddenly started rolling along the Silk Road, the route would be like an endless conveyor belt loop—the idea is completely absurd.

And what about the Maritime Silk Road?

More important than Eurasian railway routes is the so-called Maritime Silk Road, i.e., the transport of cargo from China to Europe by sea. As soon as Portuguese sailors opened up China for trade by sea in 1514, the old Silk Road began to fade from memory.

Today, more than 50 percent of global trade takes place on the Maritime Silk Road between China/East Asia and Europe. The world’s largest container ports are on this route: Shanghai, Singapore, Shenzhen, Ningbo-Zhoushan, Busan, and Hong Kong. The development of the Maritime Silk Road needed no Chinese master plan; logistics infrastructure arises wherever corresponding investments pay off.

China has numerous plans for these established shipping routes, including port expansions. Its shareholdings in around 80 port companies—including Piraeus and more recently Genoa and Trieste—support its plans and ensure investments. Why should we take issue with China for pursuing these goals leveraging its position as a leading global economic power? It is not the first country to promote its economic interests with direct investments and financing. Europe, too, should pursue a strategy of developing an enhanced infrastructure to transport freight to and from China/Southeast Asia in order to ensure a reciprocal exchange.

And China’s plan to step up the use of the maritime corridor through the Suez Canal, which shortens transport between China and Central Europe by at least four days compared to the route around Africa, is reasonable and less complicated. The Frenchman Ferdinand de Lesseps completed the Suez Canal in 1869 with precisely this goal in mind.

Conclusion

Nobody denies that the diverse projects of the New Silk Road hold great economic potential; that they would improve the network of connections between Asia and Europe; and that Beijing has a geopolitical interest in pursuing them. China is creating an enhanced infrastructure that will benefit all participants in the global economy. Nevertheless, it would be advisable to evaluate the logistical opportunities with the necessary dose of reality. I would caution against being dazzled by the beautiful visions and the fascinating narrative as it could cloud your vision and lead to using poor judgment and making risky investments.

 

Bernhard Simon is the CEO of Dachser Logistics