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Ratifying USMCA the Only Responsible Option at this Point

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Ratifying USMCA the Only Responsible Option at this Point

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The fate of free trade in North America is hanging in the balance.

That sentiment would have been true 18 months ago when negotiations of NAFTA began. It would have been true six months later when the parties failed to meet their self-imposed first deadline. It would have been true last October when it appeared the U.S. was prepared to sign a bilateral deal with Mexico and exclude Canada. And it’s still true today as the agreement gets lost in the fracas of politicking in Washington.

The impending release of the U.S. International Trade Commission (ITC) report, which provides members of Congress with in-depth analysis of the potential economic impact of the proposed United States-Canada-Mexico Agreement (USMCA), may very well have minimal impact in swaying Congressional opponents of the deal.

According to a recent report in Politico, the ITC’s analysis is likely to suggest the USMCA will have a negligible impact to U.S. GDP, which won’t serve as a bulwark against complaints by House Democrats that the agreement is short on enforcement mechanisms for its labor provisions. If that weren’t threatening enough, Ottawa has now suggested it may not ratify the USMCA unless Washington removes the Section 232 tariffs on aluminum and steel imports.

Yet, regardless of the ongoing warfare on Capitol Hill and the potentially uninspiring data in the ITC report, the reality is that at this point in time the ratification of the USMCA is the best possible option. The handful of alternatives available will only serve to further destabilize confidence in and certainty around the future of trade within North America.

Renegotiation

Democrats have been demanding stronger enforcement of the USMCA’s labor provisions. These demands are in keeping with the party’s longstanding complaint that NAFTA offered Mexico’s low-wage, low-regulation economy a leg up on attracting manufacturers. While the USMCA’s new labor provisions are intended to address this, Democrats argue the agreement lacks teeth in ensuring Mexico holds up to its end of the agreement.

However, creating an enforcement mechanism means going back to the negotiating table, something none of the parties are interested in doing, particularly since it took a great deal of intense negotiation over more than a year to come up with the agreement that’s currently on the table. It’s quite likely Canada and Mexico will demand significant concessions in exchange for a stronger enforcement mechanism, which may negate some of the agreement’s other benefits.

The Trump card

Whether or not the agreement is negotiated is, in some ways, irrelevant. U.S. President Donald Trump has already threatened that if Democrats attempt to quash the USMCA – either before or after a renegotiation of its enforcement provisions – Washington will simply pull the U.S. out of NAFTA, pitting the administration against Congress in a legal battle over trade-agreement decision making that is certain to become a wedge issue in the 2020 presidential campaign. The president recently reiterated his threat to withdraw from NAFTA during a recent interview on the Fox Business Network.

The result would be a return to a trade environment of uncertainty that would surely result in reduced cross-border investment that would adversely impact the economies of all three USMCA countries and potentially stymie Washington’s efforts to negotiate bilateral trade deals with Japan, the European Union and the United Kingdom – all important trade partners.

Forget the whole thing

If the threat to withdraw from NAFTA is simply bluster on the part of the President and ratification of the USMCA ends up locked in a Congressional stalemate, the other alternative is to simply do away with the renegotiated agreement and revert back to the original NAFTA deal. While that would certainly be a viable – and minimally disruptive alternative – the truth is that the USMCA made substantial gains in modernizing free trade in North America, addressing critical issues such as regulatory harmonization, the digital economy and intellectual property protection and host of other aspects that are not addressed in NAFTA. Whether these updates result in tangible gains to GDP and/or employment only time will tell. But at the very least they serve to incentivize those engaged in cross-border trade to continue doing so and perhaps even broaden the scope of their activity. Given that North American trade represents more than a trillion dollars annually, it’s critical to – at the very least – maintain the gains already made over the past 25 years. The USMCA does exactly that and more.

It took very seasoned negotiators and trade experts more than a year of intense talks to arrive at the agreement that’s currently on the table, including the chapters that serve to bring free trade into the 21st century in a fair and equitable manner. It would be irresponsible to do away with these gainful additions in the name of partisanship, and voters would presumably hold their elected representatives to account should they choose to do so.

The best course of action

The responsible and most advantageous thing for Congress to do at this point would be to ratify the USMCA. That’s the opinion of approximately 400 businesses and business associations that are now part of the USMCA Coalition, a collective of like-minded enterprises that believe in the importance of free trade to the U.S. economy and to U.S. jobs, and of which Livingston International is a member.

Given the impressive gains made by the USMCA in fostering an environment of fair and free trade across the continent, and the risks associated with returning to the negotiating table and/or drawing out the ratification of the agreement into the political fray of the 2020 election campaign, it is critical that lawmakers on Capitol Hill make ratification of the new deal a key priority in the coming months.

Failing to do so would put into peril the advantages of free trade on which so many jobs rely, and would serve to reinforce the perception that lawmakers are all too eager to put partisanship ahead of effective representation. 

Candace Sider is vice president of Government and Regulatory Affairs North America at trade-services firm Livingston International. She is a frequent speaker and lecturer at industry and academic events and is an active member of numerous industry groups and associations.

Archives, Global Trade Daily, International Trade

Tariffs Raise Concerns Among Business Leaders

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In response to the U.S. – China trade deal meeting delay,  American business leaders continue expressing concerns, stating that the end of the tariff impact is far from over and continues to negatively impact business operations. Freedom Partners Executive Vice President Nathan Nascimento commented on the current situation, adding that damages brought on by the tariffs situation affects growth, job creation, and more.

“From lost sales to increased costs, higher tariffs give America’s job creators big headaches and endanger our prosperity. We urge the administration to work with other nations to drop the tariffs and eliminate all barriers to trade. The time is now because, the longer this standoff drags on, the markets and suppliers that closed overnight to U.S. producers may take years to re-open. Tariffs are destructive taxes that sow only fear and confusion, where free trade fosters job creation and gives American consumers more choices at affordable prices to stretch paychecks further.”

Additionally, Freedom Partners reported on information released by the Census Bureau back in February that stated an additional $2.7 billion was spent in tariffs by business in November compared to the $375 million spent in November 2017.

“Tariffs Hurt the Heartland, a nationwide campaign against recent tariffs on American businesses, farmers and consumers, today released new data that shows American businesses paid an additional $2.7 billion in tariffs in November 2018 — the most recent month data is available from the U.S. Census Bureau due to the government shutdown. This figure reflects the additional tariffs levied because of the administration’s actions and represents a $2.7 billion tax increase and a massive year-over-year increase from $375 million in tariffs on the same products in November 2017.” (Press Release, “New Data Shows Trump Administration Tariffs Cost U.S. Businesses $2.7 Billion In A Single Month, Exports of American Products Targeted For Retaliation Plummet 37 Percent,” Tariffs Hurt The Heartland, 2/14/19).

Other executives, such as Brown-Forman Corporation CEO, Lawson Whiting add that international sales are feeling the impacts from tariffs from the EU’s retaliation:

“Brown-Forman owns Jack Daniel’s, Woodford Reserve and numerous other spirits brands. While most of its products are made in the U.S., most of its sales (about 60 percent) are made in international markets. And the cost of tariffs on American whiskey implemented by the European Union in retaliation for new U.S. tariffs were a drag on earnings. A key part of Brown-Forman’s global strategy is to focus on building a market for its super-premium brands, such as Gentleman Jack and Woodford Reserve,” (David Mann, “Brown-Forman Shares Sink After Earnings Release,” Louisville Business First, 3/6/19).

Source: Freedom Partners

Archives, Global Trade Daily, International Trade

Five reasons the USMCA won’t be passed easily by Congress

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In his recent State of the Union address, U.S. President Donald Trump described the North American Free Trade Agreement (NAFTA) as a “historic trade blunder” and a “catastrophe”. He recounted recent meetings with unemployed Rust Belt workers who have been on the front lines of America’s deindustrialization, imploring Congress to rid America of the NAFTA burden by passing the recently signed United States-Mexico-Canada agreement into law.

Ratification of the agreement, however, is far from certain, and not just because the government is divided along party lines. While it’s true Democrats are leveraging their newfound House majority power to insist on enhancements to the USCMA, there are other factors at play that could stymie the President’s efforts to ratify the trade deal, not least of which is the ongoing row over funding of a border wall, which forced the longest government shutdown in history.

Labor provisions

Perhaps one of the most controversial aspects of the USMCA are the labor provisions outlined in Chapter 23 of the new agreement. The USMA demands that all imports, but particularly automobiles, be manufactured using laborers that have the right to collective bargaining and representation by independent unions. Those labor provisions are critical as much of the impetus behind renegotiating NAFTA was the establishment of a more balanced labor environment between the U.S. and Mexico to minimize the flight of U.S. manufacturers to Mexico where labor wages are only a fraction of those in the U.S. Democrats have noted the Chapter 23 provisions lack enforceability and are unlikely to result in tangible reforms.

The challenge is that putting in place more robust enforcement provisions would require reopening negotiations with Mexico. The governing party in Mexico today is not the same as the one that had negotiated and signed the USMCA. In fact, the conclusion of the negotiations was hastened specifically to ensure the agreement could be signed by then Mexican Prime Minister Enrique Peña Nieto as incoming President Andrés Manuel López Obrador was less inclined to expend his political capital on the new trade deal. Since then, López Obrador’s administration has signalled its support for the USMCA but also that it has no desire to reopen negotiations.

Automotive Content Requirements

Democrats’ demands for stronger labor provision aren’t the only objection to the changes imposed on automotive trade. Republicans have also taken issue with the changes, noting the content requirements are too onerous and against the spirit of open trade.

The content provisions, which require automobiles to have 75% North American content and which prescribe minimums for the use of U.S. steel and aluminum, were the most hotly contested changes in the agreement. While both Canada and Mexico were keen to keep automotive content requirements fairly low and may be receptive to seeing some the changes clawed back, there’s likely little political appetite to reopen negotiations over an issue that was so divisive and which complicated the negotiations from beginning to end.

Section 232 Tariffs on Steel & Aluminum

One of the issues the USMCA agreement failed to address was that of the ongoing steel and aluminum tariffs the Trump administration has imposed on Canada and Mexico, and the associated countermeasures with which each of those countries reciprocated.

Now, Republicans such as Senator Patrick Toomey and Ron Johnson, who chairs the Senate Homeland Security and Governmental Affairs Committee, are echoing the concerns of many U.S. businesses about the impact of the tariffs and stressing their support for the USMCA will be contingent on the tariffs’ repeal. The President, however, has dug in his heels and refused to do away with the tariffs, suggesting instead that he will simply withdraw the U.S. from NAFTA if Congress refuses to ratify the USMCA.

Pharma

Politco Pro recently reported that a group of House Democrats have suggested they cannot support the USMCA if it maintains its current provisions over pharmaceutical intellectual property.

The USMCA increased the period for which drug makers can maintain a patent on high-cost biologics from eight years to 10 years. Democrats fear this will prolong what they see as a period of monopoly for drug makers, enabling them to keep costs high for life-saving drugs.

Environment

The USMCA was an improvement over the 1993 NAFTA agreement in terms of environmental protections. There is specific language about the protection of marine environment and reduction of marine litter and ship pollution, as well as recognition of fishing issues, air quality and the ozone layer. Furthermore, the removal of NAFTA Chapter 11 eliminated the ability for private corporations to sue governments and seek damages for the implementation of environmental laws and regulations that impeded their profits.

But environmental groups and many House Democrats aren’t happy the USMCA excludes mention of climate change and say that – much like the automotive labor provisions – the environment rules lack enforceability and they want to see more definitive language to ensure profit won’t supersede protection.

ITC Report

The aforementioned concerns are only those that have emerged from the text of the agreement itself. Congress has not yet seen the International Trade Commission’s report (the due date for which has been extended to April 19 due to the government shutdown), which will outline the economic impact of the agreement and which could conceivably raise a number of other unforeseen apprehensions.

Only time will tell precisely what sorts of volleys the parties will exchange over the course of the USMCA’s ratification process. What’s certain, however, is that the passing of the USMCA legislation won’t be easy and bi-partisan support may require concessions on the part of an administration that has hitherto been able to govern unimpeded on the trade file.

 

David Rish is president of Global Trade Management at customs brokerage, freight forwarding and trade consulting firm Livingston International. He can be reached at gtmleader@livingstonintl.com.

 

Tariffs
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Auto Tariffs Continue Triggering Concerns

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In response to the recent proposed 25 percent auto tariffs on imports in the name of national security, LIBRE Initiative President Daniel Garza released a lengthy statement highlighting his concern for domestic manufacturers and consumers paying the ultimate price if imposed.

“Tariffs are taxes that hurt consumers. Tariffs on imported cars will increase the cost of those autos, but that would be followed by domestic manufacturers increasing their prices as well – a process we recently saw happen after tariffs were imposed on imported washing machines.”

“These tariffs could also hurt domestic car makers by increasing the costs of parts they use in manufacturing. In the end, families will not be able to avoid paying higher prices for these products, and many people will feel the impact of higher costs.”

“Tariffs like these hurt consumers, and they hurt our economy. We encourage the White House to work to eliminate all tariffs, across the board. Imposing these new taxes now would only hurt the economy and hurt Americans.”

The LIBRE Initiative, established in 2011, is a Texas-based non-partisan, non-profit grassroots organization with a vision to support and educate the Hispanic community with tools for success.

Source: LIBRE Initiative 

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Commerce Secretary Wilbur Ross Steps in It

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On Jan. 24, when the government shutdown was on its 34th day with no end in sight, U.S. Secretary of Commerce Wilbur Ross said on CNBC’s Squawk Box that he didn’t “quite understand why” federal workers needed to rely on homeless shelters and food banks after missing a paycheck. He added that government employees should be able to get a federally guaranteed loan against paychecks they would receive retroactively.
 That brought swift condemnations from several corners, including the one darkened by Restore Public Trust, a Washington, D.C.-based “non-partisan public interest group focused on exposing corruption and malfeasance at the highest levels of government.” Executive Director Caroline Ciccone said, “It’s no wonder that Commerce Secretary Wilbur Ross doesn’t understand the plight of the 800,000 federal workers who have missed a paycheck due to Trump’s government shutdown. Ross has spent his career closing factories, laying off thousands of workers, and being unconcerned about the devastation of the people and communities he left behind. He is completely out of touch with the sacrifices hard working Americans have to make to support their families, and even led a company that perpetrated fraud and foreclosure.”
The following day, Restore Public Trust launched a new website: JobLossRoss.com. An interactive map shows places in 11 states where Ross-controlled companies laid off 11,000 workers.

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Auto Tariffs Take Priority in Latest Statement from AFP

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In an effort to prevent and possibly delay the forecasted 25 percent tariff on imported cars, Americans for Prosperity’s President Tim Phillips stresses the negative impacts such actions will impose on the American people.
“Increasing the cost of foreign cars doesn’t make American companies more competitive, it just forces American consumers to pay more. More expensive cars mean more barriers to opportunity for the average family and worker who relies on an affordable car to support a small business, commute to work, visit loved ones, and shuttle kids to school and soccer practice.
In addition to putting a spotlight on the families and citizens that will potentially pay for the impact of the tariffs, Phillips warns of the steep economic factors at hand, including the risk of compromising the current state of the American economy.
“The impact of new auto tariffs would be borne by communities otherwise thriving from tax reform and this administration’s regulatory relief efforts. Piling on more tariffs puts America’s strong economy at risk and further jeopardizes the most vulnerable in our society by inviting retaliation from our trading partners. We urge the administration to abandon the auto tariffs and re-negotiate with the European Union to eliminate all car tariffs.”
Source: Americans for Prosperity

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Trump Executive Order on Infrastructure Spending Gets Blowback

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President Trump signed an executive order on Jan. 31 that will push for federal dollars spent on infrastructure projects to be put toward American companies. Before the event was captured for media cameras gathered at the White House, Trump trade adviser and former Global Trade cover boy Peter Navarro gave reporters a description of the order whose stated aim is to bolster workers who are “blue-collar Trump people” the administration is focused on helping.
Navarro and Labor Secretary Alexander Acosta stood by as Trump told the press that the reasoning behind the order was that “we don’t get treated great by many countries in terms of our trade deals,” adding that he wants infrastructure projects to be built with “American steel,” “American iron” and “American hands.”
But the order drew a swift rebuke from Nathan Nascimento, executive vice president of Freedom Partners, an Arlington, Virginia-based non-profit that promotes “the benefits of free markets and a free society.”
“With this action, the government is stepping in and dictating winners and losers at the expense of taxpayers who will foot the bill for projects that are needlessly more expensive, take far longer to build, and create a nightmare of bureaucratic red-tape,” said Nascimento. “A better approach is to lower barriers to entry to increase competition and get taxpayers the best value on the dollar. We urge the administration to reject protectionist measures like this that hurt America.”
Nascimento had a busy week in Trump trade land. The day before Trump signed the order, the Freedom Partners executive VP issued this statement with Americans for Prosperity President Tim Phillips: “For months, our economy, farmers, American workers, and businesses have been hampered by uncertainty in the wake of tariff escalation. The bipartisan Bicameral Congressional Trade Authority Act is imperative to reinstate Congress’s authority to approve tariffs and provide a much-needed check on what is just another tax on Americans. The Constitution gives the legislative branch responsibility to impose tariffs. It is essential that those powers over tariffs are restored.”
And the day before that, Freedom Partners chimed in with this: “U.S. and Chinese representatives are scheduled to meet in Washington, D.C., this week to discuss how to resolve the trade war. There is a solution that would enable both sides to win—taking down barriers to trade.
“Across the country, Americans are being harmed by tariffs and the retaliation they’ve invited from abroad. Farmers who can’t sell their products overseas are forced to let them spoil or take deep cuts in their profits to move them. Consumers are paying higher prices to cover the costs of these tariffs. What’s more, businesses that purchase many of the component parts for their products from other countries are feeling the sting from these taxes. After all, that is what tariffs are—taxes paid by American consumers and businesses. And they come with a steep cost.
“We hope a swift resolution to the trade war will be found, starting with these talks. Dropping tariffs and other trade barriers is in the interest of both nations and will promote greater prosperity.”

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FOLLOW THE BOUNCING FOXCONN DEAL

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My, how things can change drastically within two months before they snap back to what they were in the first place. Sorta. We think. First, you must travel back in time to Global Trade’s January-February issue, where our Dispatches column noted that Foxconn Technology Group’s $10 billion manufacturing campus project in Wisconsin has been named the 2018 Economic Impact Deal of the Year by the Mid-America Economic Development Council.
But Taiwan-based Foxconn, which is Apple’s largest iPhone assembler, announced within days of publication that it would not build the factory in Mount Pleasant, Wisconsin, because “the global market environment that existed when the project was first announced has changed.”
This was distressing, because not only had 13,000 jobs been promised at the factory where screens for LCD television displays were to be built, but Foxconn had received $4 billion in tax breaks and incentives.
Then, President Donald Trump intervened, and on Feb. 1 Foxconn distributed another statement, this time indicating its project is back on. Here is the statement:
“After productive discussions between the White House and the company, and after a personal conversation between President Donald J. Trump and Chairman Terry Gou, Foxconn is moving forward with our planned construction of a Gen 6 fab facility, which will be at the heart of the Wisconn Valley Science and Technology Park. This campus will serve both as an advanced manufacturing facility as well as a hub of high technology innovation for the region.
“Our decision is also based on a recent comprehensive and systematic evaluation to help determine the best fit for our Wisconsin project among TFT technologies. We have undertaken the evaluation while simultaneously seeking to broaden our investment across Wisconsin far beyond our original plans to ensure the company, our workforce, the local community, and the state of Wisconsin will be positioned for long-term success.
“We look forward to continuing to expand our investment in American talent in Wisconsin and the US.”
All is well that ends well, right? Um … actually, some critical eyes are being cast at Foxconn because it remains unclear what level of work will be hosted at the plant. The company says the plant will now create smaller mobile displays as well, such as for tablets and cell phones. And it is unclear whether Trump promised Foxconn further incentives. Which means you have no choice but to pick up our May-July 2019 issue, because who knows what will happen in the next two months.

Archives, Global Trade Daily, International Trade

How U.S. Manufacturers Can Mitigate the Impact of Steel & Aluminum Tariffs

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President Trump’s imposition of additional tariffs on imports of steel and aluminum dominated global trade news headlines for most of 2018 and caught many manufacturers off guard. Prior to the first announcement in March, many in the industry believed that the President’s tariff threats were merely a negotiating tactic and would likely never materialize.  By June 2018, the Trump administration left no doubts that it would follow through.

On the basis of protecting U.S. national security, the U.S. imposed additional tariffs of 25 percent and 10 percent on steel and aluminum imports for almost all countries under Section 232 of the Trade Expansion Act of 1962.  Specifically, the Section 232 action affects steel articles classified under HTSUS subheadings 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90, and aluminum articles described as follows: (a) unwrought aluminum (heading 7601); (b) aluminum bars, rods, and profiles (heading 7604); (c) aluminum wire (heading 7605); (d) aluminum plate, sheet, strip, and foil (flat rolled products) (headings 7606 and 7607); (e) aluminum tubes and pipes and tube and pipe fitting (headings 7608 and 7609); and (f) aluminum castings and forgings (HTSUS 7616.99.5160 and 7616.99.5170).

Since the administration’s initial announcement, the U.S. and its major trading partners, including the EU, South Korea, and China have traded a series of exemptions, extensions, and retaliatory tariffs.  Talks to deescalate trade tensions have had varying degrees of success. After imposing retaliatory duties on American-made goods, the European Union and the U.S. entered into talks to draw down to zero-tariff levels, but they haven’t yet reached a permanent agreement. Other countries, like South Korea, immediately sought and secured permanent exemptions from certain U.S.’ tariffs.

The U.S.’ trade relationship with China has been significantly more volatile. In the months following President Trump’s proclamations, the U.S. and China placed multiple rounds of tariffs on each other’s imports.  In 2018, the U.S. imposed tariffs on over $250 billion worth of imports from China under Section 301 of the Trade Act of 1974.  To date, nearly half of all Chinese goods brought into the U.S. are subject to additional tariffs, many at 10 percent and a significant portion at 25 percent if ongoing bilateral negotiations fail.

U.S. manufacturers have long relied on China as a source of affordable manufactured materials.  They had no need to explore alternative sources for decades.  Now, manufacturers are reexamining old assumptions.  At least for the duration of the current administration, tariffs will always be on the table—if not always in effect.  And there is no guarantee that future administrations will entirely remove existing tariffs or refrain from implementing new tariffs.

Tariffs are already disrupting manufacturers’ supply chains—increasing costs and eroding margins. Continued trade uncertainty is generally bad news for manufacturers, complicating business planning and hindering growth.

How, then, can manufacturers mitigate the impact of tariffs, and position their businesses for sustainable, long-term growth?

Submit Product Exclusion Requests

To avoid making major adjustments to supply chain—which may not be an option for manufacturers of specialty items or those that lack the significant time and capex allocations required—manufacturers affected by Section 301 tariffs submitted product exclusion requests to the Office of the U.S. Trade Representative (USTR) for goods described under Lists 1 and 2 (USTR is no longer accepting product exclusion requests for List 1 and 2 items and has yet to open a docket for List 3 requests).  Manufacturers affected by Section 232 tariffs may continue to submit product exclusion requests to the Department of Commerce.

In late December 2018, USTR announced the first set of products, all under List 1, that it approved for exclusion from its Section 301 action.  The exclusions are retroactive as of July 6, 2018.  Anyone that imports goods approved for exclusion under the Section 301 stand to benefit because approvals are not limited to specific requestors.  Manufacturers and importers should examine the Section 301 list of excluded products to see whether their imports qualify for relief.  Approved exclusions will remain in effect for one year.  USTR indicated it is still reviewing other Section 301 product exclusion requests and decisions will be forthcoming.

According to a recent Wall Street Journal report, the Department of Commerce granted about 75% of the 19,000 requests it received to exclude products subject to Section 232 tariffs on foreign steel in 2018.  The Steel Manufacturers Association received approvals for exclusion on 66 of 132 requested tariff lines—a significantly higher success percentage than other industries, The Wall Street Journal reported in October 2018. For comparison, the National Retail Federation and National Restaurant Association were granted less than 5 percent of their requested exclusions.

Successful requests involve significant investments of time and resources.  The Steel Manufacturers Association’s success was the result of a strategic, coordinated effort: a combination of data-driven exclusion requests and government relations efforts.  Manufacturers should keep track of their direct and indirect costs resulting from the tariff actions and model impacts on growth plans as part of internal strategy data analytics.  When preparing exclusion requests, manufacturers should seek to establish that there are either no feasible alternative suppliers of items in the U.S. or abroad and/or tariffs will have serious adverse economic impacts on their business’ operations, their downstream and upstream partners’ operations, as well as their industry as a whole.  To understand the full scope of tariffs’ impact on their business, manufacturers need to have open channels of communication with upstream and downstream business partners whose respective supply chains may also be impacted.  Additionally, manufacturers should maintain coordinated government relations efforts to ensure elected representatives are aware of how tariff actions are impacting their constituents’ bottom lines and job prospects.

Rethink the Supply Chain

Nevertheless, many requests for product exclusion are denied. As such, business owners should not assume that pending applications will receive a favorable outcome.  If a manufacturer is unable to secure an approval for exclusion, they may need to consider alternative sources for imports. If alternative sources exist, then businesses need to evaluate cost and quality across those options.

If no alternative sources exist, for example, for highly specialized and customized goods, manufacturers may need to redesign products in a manner that allows them to change countries of origin.  This endeavor may entail building entirely new supply sources. Rebuilding supply chains has inspired déjà vu among many manufacturers, who haven’t had to make these kinds of ground—up sourcing decisions since inception years ago.

Under the current administration, trade imbalances and national security are used as justification for additional tariffs. When evaluating alternative sources, manufacturers should consider whether the new source country’s overall trade posture and geopolitical sensitivities are likely to threaten the United States.  If so, the new source country may be a potential target for future tariffs.

Plan for the long term: Revaluate the Core Business

The safest route for long-term planning is to act as if tariffs are here to stay. Tariffs will likely always be on the table under the current administration, and there are no guarantees that a future administration will shift course if tariffs yield favorable geopolitical results.

As manufacturers assess their options, they may discover that locating or creating an entirely new supply source for certain may not be financially feasible. Business owners may need to reevaluate whether it makes fiscal sense to continue producing certain products at all, and whether they need to refocus or shift production to products less impacted by trade barriers.

 

About Johny Chaklader 

Johny Chaklader is Export Controls and International Trade Practice Lead within BDO’s Industry Specialty Services – Government Contracts Group.  He can be reached at jchaklader@bdo.com.

 

 

Archives, Global Trade Daily, International Trade

TARIFFS AND TWEETS

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Keeping a promise that he made during the 2016 presidential campaign, President Donald Trump continues to pick trade fights around the globe by imposing billions of dollars in tariffs on particular imports from Europe, Canada, Mexico and China. Trump says the tariffs intend to encourage investment and drive purchasing back to domestic suppliers, noting that necessities such as food and clothing—along with certain smartphones—have been exempted to spare consumers.

It remains unclear whether the president’s long-term goals are realistic (or even attainable), particularly with China, which in September responded to $200 billion in U.S. tariffs with $60 billion of its own.

And while larger international manufacturers such as Ford and Volvo carry enough muscle, positioning and flexibility to adapt, smaller manufacturers—still in recovery from the Great Recession—find themselves in the crosshairs of an economic showdown between the U.S. and China. As economist Monica de Bolle of the Peterson Institute for International Economics noted in The New York Times, “If you want to spare the consumer so you don’t get this massive backlash against your tariffs, then there goes manufacturing—because that’s what’s left. The irony is, you cannot spare manufacturing from anything because manufacturing is globally integrated. The sector sources its parts and components from all over the world.”

In light of this, what do smaller manufacturers need to prioritize—and brace themselves for—in the coming months and years in order to survive a global trade war? And, assuming a trade war happens, will the U.S. get what the Trump administration wants for it?

Taking Counterintuitive Measures

Some lobbies for small businesses—such as makers of steel wheels and safes—suggest more tariffs because duties for steel and aluminum raised costs in the U.S. but didn’t affect finished goods made in China and sold here. They’re pressing the Trump administration for additional tariffs that cancel out other tariffs because they assume the president won’t relent on waging a trade war. And if the tariffs stay in place or grow, which countries would be subject to them? Only China? South Korea, Japan and the European Union continue to lobby for exemptions of their own. The administration has everyone begging.

Isolating the U.S. by slapping tariffs on everything is precisely the wrong way to go. Challenging China on some of its unfair trade practices, like that which ruined the polysilicon industry, is essential. But in the bigger picture, the government’s role should be to assist in creating successful companies and industries and to foster best practices through training, education and innovation.

Playing fair, leading in ethics and investing domestically to encourage long-term growth and sustainability is really hard work. The opposite of that—sending nasty tweets, wasting leverage with irrational behavior, getting everyone angry and acting cavalier about it—creates chaos, not opportunity.

Most of the top Fortune 500 companies—places such as Walmart, General Electric, Apple, Microsoft and Google—receive at least 51 percent of their revenue internationally, with a good portion coming from Asia. It is absurd to expect that the most successful large U.S. companies could withstand a trade war with China. It is no wonder, as the Wall Street Journal reports, that big companies are teaming with smaller businesses to help lobby Congress. Only healthcare and taxes engender more lobbying than these tariffs. This affects everybody.

The National Retail Federation’s top lobbyist David French said it well: A trade war upsets “every sector” of the U.S. economy—not just retail. We all stand to lose.

Signs of Encouragement

No matter what happens with trade in North America, will the administration be able to replicate any successes in a trade deal with China? Do we have that kind of luck? Does the U.S. even have the leverage Trump seems to think we do?

In the meantime, what should smaller businesses do? It is safer to assume the worst.

-Develop a strategic plan that assumes current tariff policies will be in place.

-Consider what the consequences would be if tariffs remain at this level for an extended period or if they are increased, as many fear.

-Be ready to pivot if Trump fails to get approval from Congress next year, and/or if the administration is replaced in 2020, and the tariffs are canceled.

-Continue with your pre-Trump strategy on China anyway in order to remain competitive, no matter what happens.

The renegotiation of North American Free Trade Agreement into the United States-Mexico-Canada Agreement offers some encouraging signs that, for all of Trump’s bluster, he really is able to negotiate deals in which all sides find elements they like. Smaller businesses should be thankful for that. But it also seems that the USMCA might have happened in spite of Trump’s insults and threats, which still could have a long-term negative impact on future negotiations. And who knows what the next tweet will bring?

 Martin Stein is the founder and managing director of Blackford Capital, focused on dramatically transforming lower middle-market industrial enterprises through exponentially profitable growth. Since receiving his Bachelor of Arts from University of Chicago and his MBA from Harvard Business School, he has had almost two decades of private equity experience. Among other awards, Martin has been honored as the nation’s Private Equity Professional of the Year by M&A Advisor.