Are Quotas Worse Than Tariffs?

Archives, Global Trade Daily, International Trade

Are Quotas Worse Than Tariffs?

October 17th, 2019 Holly Smith Leave a comment

Quotas Return

With all the focus on tariffs these days, it is easy to overlook the return of another tool used to limit imports: quotas.

Over a year ago, the Trump Administration used Section 232 of the Trade Expansion Act of 1962 to impose 25 percent tariffs on specified steel imports and 10 percent tariffs on specified aluminum imports. Three countries – South Korea, Brazil and Argentina – made agreements with the United States to apply quotas to their steel exports in lieu of the Section 232 tariffs. Argentina also agreed to quotas on its aluminum exports.

According to numerous reports, U.S. negotiators were seeking similar agreements with Canada, Mexico, Japan and the European Union (EU). In May 2019, however, the governments of the United States, Canada and Mexico announced that they had reached a deal to lift steel and aluminum tariffs without imposing quotas, choosing instead to adopt a monitoring system with the right to re-impose tariffs on these products if surges are detected in the future. This deal could be a template for agreements with Japan and the EU to address their steel and aluminum tariffs.

In ongoing Section 232 investigations, the administration is keeping quotas on the table in other sectors including autos and auto parts, uranium ore and titanium sponges.

The Difference between Quotas and Tariffs

Quotas and tariffs are both used to protect domestic industries by artificially raising prices in the domestic market. Their administration and effects, however, differ in specific ways. Quotas restrict the quantity of a good imported from another country. Tariffs are a charge levied on the value of goods imported from another country.

While tariffs generate revenue that is paid to the importing country’s treasury, the value of a quota, also called “quota rents,” generally goes to the foreign exporters who are able to sell goods subject to the quota at higher prices and collect higher per unit revenue. In both cases, domestic consumers in the importing country pay the costs of tariffs and quota rents. But with quotas, the government of the importing country receives no revenue.

Quotas can be much more complicated to administer than tariffs. Tariffs are collected by a customs authority as goods enter a country. With quotas, customs authorities must either monitor imports directly to ensure that no goods above the quota amount are imported, or can award licenses to specific companies, giving them the right to import the amount allowed under the quota. Quotas can also take the form of a voluntary export restraint (VER), where the exporting country administers the quota.

The Cost of Quotas

Costs and pricing under a tariff regime are more transparent and predictable compared to quotas. For example, if a good is subject to a 10 percent tariff, then the good should cost about 10 percent more than it did before the tariff was imposed. With a quota, the price of that same good can increase as long as demand for the good continues and the supply remains constrained. This can mean that quota rents are ultimately more costly to domestic consumers than a tariff. In this way, quota regimes may incentivize foreign producers to upgrade the quality of their exports, leading to more direct competition with domestic producers and a higher-price product mix for consumers.

On the other hand, if foreign producers export low-quality goods under a quota regime, prices and profits for both foreign and domestic producers of low-quality goods will rise because of quotas, while domestic consumers were forced to pay more for lower quality goods.

The General Agreement on Tariffs and Trade (GATT) prohibits quotas and other quantitative restrictions under Article XI (with specific exceptions including for “security reasons”) as the GATT parties agreed that quantitative restrictions were overly restrictive and distortive compared to duties or taxes, where are permitted.

Tricky to Administer

In the case of South Korea, Brazil, and Argentina and Section 232 quotas, each country agreed to product-specific absolute quotas on 54 separate steel articles based on each country’s average annual import volumes of steel from 2015 through 2017. Argentina also accepted product specific absolute quotas on two aluminum product categories.

These quotas are administered by the United States to give exporters the least possible flexibility and demonstrate how complicated quota regimes can be. Some of the quotas are absolute – once the quota is reached, no additional amount can enter the United States for any price, unless an exclusion is granted. Some quotas apply to the full calendar year (but in practice may fill the minute the quota takes effect), and others are subject to quarterly limitations. Once a quota is filled in a given quarter, importers must wait until the next quarter until they can bring the product into the United States.

The True Cost in Practice

For South Korea, Brazil, and Argentina, quotas have reduced export volumes and revenue. According to U.S. Department of Commerce data, the overall quantity of steel South Korea, Brazil, and Argentina exported to the United States in 2018 dropped significantly compared to 2017, by 26.2 percent, 14.6 percent, and 20.1 percent, respectively.

In terms of value, South Korea and Argentina’s steel exports subject to quotas dropped by $430 million and $1 million, respectively, from 2017 to 2018, while the value of Brazil’s steel exports under the quota increased by nearly $145 million in 2018. Argentina’s aluminum exports subject to the quota dropped by approximately 86.8 million kilograms from 2017 to 2018, by 32.8 percent, with a decrease in value of approximately $101 million, according to data from the U.S. International Trade Commission.

Although South Korea, Brazil, and Argentina have benefitted from generally higher prices in the United States for steel and aluminum, so far, the quotas are effectively reducing U.S. imports from these countries.

Upsides for U.S. Steel Producers

For U.S. steel and primary aluminum producers, Section 232 tariffs, and to a limited extent, quotas, are accomplishing their goal of bolstering U.S. manufacturing capacity and allowing their firms to become profitable again — at least in the short run.

Though some proponents of the Section 232 protections do not advocate for quotas specifically, and recognize their downsides, others argue that quotas are a necessary component of the Section 232 program. Here’s why.

First, for industries seeking protection, quotas arguably provide greater certainty than tariffs that imports will be limited. Under tariffs, if importers can bear the costs, or exporters can reduce their prices, imports will continue to flow in and competition will remain high. For example, Vietnam’s 2018 exports of flat steel products, which are covered by Section 232 tariffs, increased by 79 percent compared to 2017. If strict quotas were applied instead of tariffs, Vietnam’s 2018 exports likely would have decreased.

Second, steel and aluminum manufacturers argue that without quotas, “countries that have exemptions [to the Section 232 tariffs] would likely redirect their metals exports to the United States to take advantage of higher prices there, undermining the purpose of the tariffs.”

Finally, the Trump Administration perceives that Section 232 quota agreements with U.S. trading partners and security allies, in combination with tariffs, are helping to pressure and incentivize allies to take seriously the problem of global excess capacity. U.S. unilateral tariffs may also have the opposite effect, though, – making allies less willing to work cooperatively with the United States to address fundamental global problems.

Downsides for Downstream Industries

It’s a different story for U.S. downstream manufacturers, who say quotas have entailed “severe supply constraints” and “created even more business uncertainty than tariffs”.

Importers may no longer be able to guarantee that their goods can enter under the quota, or at all. They may encounter unanticipated costs in the form of storage charges and shipping fees if the quota is filled while goods are in transit. They may face unpredictably higher prices for goods subject to a quota. They may have to find new suppliers and bear all the costs of negotiating new contracts, building new relationships, and shipping from a new location. The exclusion process implemented in August 2018 may provide some relief for importers under supply pressure, though its application may also introduce more uncertainty.

More generally, downstream manufacturers argue that Section 232 quotas and tariffs raise prices inhibiting their competitiveness, and have a chilling effect on growth, employment and investment. Although many businesses have been buoyed by the strong U.S. economy, they say that employment and sales in their industries would have increased even more were it not for tariffs and quotas raising prices. Moreover, downstream industries using steel and aluminum products employ more Americans than steel and primary aluminum manufacturers, so many jobs are vulnerable if supply contracts too much.

North America Alternative to Metal Quotas

In order to move forward with passage of the United States-Mexico-Canada Agreement (USMCA), the United States, Canada and Mexico first had to address the steel, aluminum and retaliatory tariffs in place since 2018. Although all parties considered quotas as a possible way forward, in the end, they agreed to lift all steel, aluminum, and related retaliatory tariffs, as well as withdraw pending WTO litigation, without imposing quotas.

The three countries agreed to prevent the importation of aluminum and steel that is unfairly subsidized and/or sold at dumped prices; prevent the transshipment of aluminum and steel made outside of Canada, Mexico, or the United States to the other country; and establish a monitoring process to detect surges of aluminum and steel imports among them.

This agreement is a positive development for two key reasons: the parties removed tariffs while avoiding quotas, and agreed to address the underlying cause of U.S. industry distress – global excess capacity.

Addressing Global Excess Capacity is Key

Though tariffs and quotas may provide short-term relief, solving underlying global excess capacity problems is critical to addressing U.S. industries’ long-term challenges, and any long-term solution will require more than the mere application of protectionist measures. The United States will have to work closely and creatively with its trading partners to address this challenge directly and to persuade the world’s largest producers — including China — to reduce global excess capacity.

__________________________________________________________

This article is a shortened version of an original report published by the Hinrich Foundation.

Feature Image Credit: Jason Welker, from “Protectionist Quotas” video on Youtube.

Holly Smith is a lawyer and consultant based in Hong Kong. From 2009 to 2015, she served in the Office of the United States Trade Representative as a Director for Intellectual Property and Innovation, a Director for China Affairs, and a senior policy advisor to the Deputy U.S. Trade Representative.

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

Archives, Global Trade Daily, Imports/Exports

Global Lard Market to Grow 1.6% a Year through 2025, Fuelled by Rising Demand in China

October 16th, 2019 IndexBox Leave a comment

IndexBox has just published a new report: ‘World – Lard – Market Analysis, Forecast, Size, Trends and Insights’. Here is a summary of the report’s key findings.

The global lard market revenue amounted to $15.7B in 2018, jumping by 2.9% against the previous year. This figure reflects the total revenues of producers and importers (excluding logistics costs, retail marketing costs, and retailers’ margins, which will be included in the final consumer price). The market value increased at an average annual rate of +2.1% from 2012 to 2018; the trend pattern remained relatively stable, with somewhat noticeable fluctuations throughout the analyzed period. The most prominent rate of growth was recorded in 2017 when the market value increased by 6.6% against the previous year. Over the period under review, the global lard market attained its peak figure level in 2018 and is expected to retain its growth in the near future.

Consumption By Country

The country with the largest volume of lard consumption was China (2.6M tonnes), accounting for 40% of total consumption. Moreover, lard consumption in China exceeded the figures recorded by the world’s second-largest consumer, Germany (615K tonnes), fourfold. Brazil (478K tonnes) ranked third in terms of total consumption with a 7.3% share.

From 2012 to 2018, the average annual growth rate of volume in China totaled +2.2%. In the other countries, the average annual rates were as follows: Germany (+0.7% per year) and Brazil (+1.3% per year).

In value terms, China ($11.1B) led the market, alone. The second position in the ranking was occupied by Russia ($1B). It was followed by Brazil.

The countries with the highest levels of lard per capita consumption in 2018 were Belgium (12,397 kg per 1000 persons), Germany (7,481 kg per 1000 persons) and Canada (4,662 kg per 1000 persons).

From 2012 to 2018, the most notable rate of growth in terms of lard per capita consumption, amongst the main consuming countries, was attained by Russia, while the other global leaders experienced more modest paces of growth.

Market Forecast 2019-2025

Driven by increasing demand for lard in China, the world market is expected to continue an upward consumption trend over the next seven-year period. Market performance is forecast to retain its current trend pattern, expanding with an anticipated CAGR of +1.6% for the seven-year period from 2018 to 2025, which is projected to bring the market volume to 7.3M tonnes by the end of 2025.

Production 2007-2018

Global lard production totaled 6.5M tonnes in 2018, increasing by 2% against the previous year. The total output volume increased at an average annual rate of +1.6% over the period from 2012 to 2018; the trend pattern remained relatively stable, with somewhat noticeable fluctuations being observed throughout the analyzed period. The most prominent rate of growth was recorded in 2017 with an increase of 2.5% against the previous year. The global lard production peaked in 2018 and is expected to retain its growth in the immediate term.

In value terms, lard production stood at $15.6B in 2018 estimated in export prices. The total output value increased at an average annual rate of +2.0% over the period from 2012 to 2018; the trend pattern remained relatively stable, with only minor fluctuations throughout the analyzed period. The most prominent rate of growth was recorded in 2017 with an increase of 11% against the previous year. The global lard production peaked in 2018 and is likely to continue its growth in the near future.

Production By Country

The country with the largest volume of lard production was China (2.6M tonnes), accounting for 39% of total production. Moreover, lard production in China exceeded the figures recorded by the world’s second-largest producer, Germany (653K tonnes), fourfold. The third position in this ranking was occupied by Brazil (481K tonnes), with a 7.4% share.

In China, lard production expanded at an average annual rate of +2.3% over the period from 2012-2018. In the other countries, the average annual rates were as follows: Germany (+0.6% per year) and Brazil (+1.3% per year).

Exports 2007-2018

In 2018, approx. 243K tonnes of lard were exported worldwide; jumping by 9.2% against the previous year. Over the period under review, lard exports continue to indicate a relatively flat trend pattern. The most prominent rate of growth was recorded in 2015 with an increase of 11% y-o-y. The global exports peaked in 2018 and are likely to continue its growth in the near future.

In value terms, lard exports amounted to $220M (IndexBox estimates) in 2018. In general, lard exports continue to indicate a slight setback. The most prominent rate of growth was recorded in 2017 when exports increased by 26% y-o-y. The global exports peaked at $241M in 2012; however, from 2013 to 2018, exports failed to regain their momentum.

Exports by Country

Germany (46K tonnes), Spain (45K tonnes) and Belgium (35K tonnes) represented roughly 52% of total exports of lard in 2018. The U.S. (17K tonnes) ranks next in terms of the total exports with a 6.9% share, followed by the Netherlands (5.7%), Italy (5.3%) and Austria (5%). France (10,645 tonnes), Canada (9,206 tonnes), Denmark (7,849 tonnes), Poland (7,002 tonnes) and Portugal (4,028 tonnes) took a minor share of total exports.

From 2012 to 2018, the most notable rate of growth in terms of exports, amongst the main exporting countries, was attained by Portugal, while the other global leaders experienced more modest paces of growth.

In value terms, Spain ($57M), Germany ($31M) and Belgium ($23M) appeared to be the countries with the highest levels of exports in 2018, together comprising 50% of global exports. The U.S., Italy, the Netherlands, Canada, Poland, France, Austria, Denmark and Portugal lagged somewhat behind, together accounting for a further 41%.

In terms of the main exporting countries, Portugal experienced the highest rates of growth with regard to exports, over the last six years, while the other global leaders experienced more modest paces of growth.

Export Prices by Country

In 2018, the average lard export price amounted to $902 per tonne, falling by -4.1% against the previous year. Over the period under review, the lard export price continues to indicate a temperate slump. The most prominent rate of growth was recorded in 2017 when the average export price increased by 15% against the previous year. The global export price peaked at $1,027 per tonne in 2012; however, from 2013 to 2018, export prices failed to regain their momentum.

Prices varied noticeably by the country of origin; the country with the highest price was Poland ($1,359 per tonne), while Austria ($452 per tonne) was amongst the lowest.

From 2012 to 2018, the most notable rate of growth in terms of prices was attained by the U.S., while the other global leaders experienced mixed trends in the export price figures.

Imports 2007-2018

Global imports stood at 223K tonnes in 2018, increasing by 8.2% against the previous year. The total import volume increased at an average annual rate of +1.3% from 2012 to 2018; the trend pattern remained relatively stable, with somewhat noticeable fluctuations being recorded in certain years. The growth pace was the most rapid in 2015 with an increase of 11% y-o-y. In that year, global lard imports attained their peak of 236K tonnes. From 2016 to 2018, the growth of global lard imports remained at a somewhat lower figure.

In value terms, lard imports totaled $194M (IndexBox estimates) in 2018. In general, lard imports continue to indicate a moderate drop. The pace of growth appeared the most rapid in 2017 with an increase of 11% y-o-y. Over the period under review, global lard imports attained their peak figure at $227M in 2012; however, from 2013 to 2018, imports remained at a lower figure.

Imports by Country

In 2018, Spain (50K tonnes), distantly followed by the Netherlands (26K tonnes), Mexico (20K tonnes), Slovakia (18K tonnes), Denmark (16K tonnes) and France (11K tonnes) were the key importers of lard, together achieving 63% of total imports. Belgium (9,105 tonnes), the UK (7,294 tonnes), Germany (7,042 tonnes), the U.S. (6,910 tonnes), Portugal (6,763 tonnes) and the Philippines (5,311 tonnes) followed a long way behind the leaders.

From 2012 to 2018, the most notable rate of growth in terms of imports, amongst the main importing countries, was attained by the Philippines, while the other global leaders experienced more modest paces of growth.

In value terms, Spain ($41M), Mexico ($22M) and the Netherlands ($18M) were the countries with the highest levels of imports in 2018, with a combined 42% share of global imports. Denmark, Belgium, France, the U.S., the UK, Germany, Slovakia, Portugal and the Philippines lagged somewhat behind, together accounting for a further 35%.

Slovakia experienced the highest growth rate of imports, in terms of the main importing countries over the last six-year period, while the other global leaders experienced more modest paces of growth.

Import Prices by Country

In 2018, the average lard import price amounted to $870 per tonne, standing approx. at the previous year. In general, the lard import price continues to indicate a perceptible reduction. The pace of growth appeared the most rapid in 2017 when the average import price increased by 13% y-o-y. Over the period under review, the average import prices for lard attained their peak figure at $1,100 per tonne in 2012; however, from 2013 to 2018, import prices failed to regain their momentum.

Prices varied noticeably by the country of destination; the country with the highest price was the U.S. ($1,157 per tonne), while the Philippines ($131 per tonne) was amongst the lowest.

From 2012 to 2018, the most notable rate of growth in terms of prices was attained by Denmark, while the other global leaders experienced mixed trends in the import price figures.

Source: IndexBox AI Platform

Archives, Global Trade Daily, International Trade

CAROUSEL RETALIATION: TARIFF UNCERTAINTY ON ANOTHER RIDE

October 14th, 2019 Leslie Griffin Leave a comment

The Ride Music Starts

On October 2, a World Trade Organization (WTO) arbitrator rendered a decision that authorizes the United States to apply retaliatory tariffs on as much as $7.5 billion worth of European exports each year until WTO-illegal European subsidies to its aircraft industry are removed.

In a press release issued that day, the U.S. Trade Representative (USTR) announced that beginning October 18, the United States would apply WTO-approved tariffs on a list of EU products. The list includes 10 percent duties on civil aircraft, but also 25 percent duties on goods we consume directly including butter, various cheeses, clementines, clams, green olives and single-malt Irish and Scotch Whiskies.

Before their next cocktail party, U.S. shoppers might stock up to beat the tariffs, but they may not want to go overboard buying Parmigiano Reggiano. That’s because the Administration is reportedly considering what is known as “carousel” retaliation – a regular rotation of goods targeted for tariffs, designed to impose maximum pain. The United States and Europe have been on this ride before.

Theme Park Rules

In a trade dispute, the parties first enter into consultations. If they are unable to come to an agreement, the complainant may request a WTO panel to review the dispute. Once the panel issues a report, the WTO Dispute Settlement Body (DSB) will adopt it, unless a party appeals it or all DSB members vote against adoption.

If there is an appeal, the Appellate Body reviews the case and delivers its findings, together with the panel report as modified by the appeal, to the DSB. If the complaining party wins, the losing party is given a “reasonable” period of time to implement the decision. The original panel may be called upon to determine if the losing party implemented the ruling in the agreed timeframe. If not, there are two alternatives for the party bringing the case: seek compensation or retaliate. In the latter case, the complainant estimates its loss, the losing party can seek arbitration on the level, and the DSB authorizes the final amount.

Such countermeasures should be “equivalent” to the injury caused and “related to” the economic sector of the illegal measure, with the goal to induce the removal of the offending measure. Often the offending party will, in fact, withdraw the measure before the imposition of authorized retaliatory measures.

Beef and Bananas – How Carousel Started

In some cases, applying tariffs on imports isn’t enough to induce compliance. When the United States, Ecuador, Honduras, Guatemala and Mexico won their case in the WTO challenging the legality of Europe’s banana import policy, the European Union (EU) failed to comply with the ruling, even in the face of nearly $200 million in U.S. tariffs.

U.S. banana exporters, increasingly frustrated with the EU’s lack of compliance with the WTO ruling, looked to Congress to enact a new tool to increase the pressure. They found allies in U.S. livestock exporters, who had won a WTO case that a European ban on U.S. imports of meat produced with hormones was inconsistent with the EU’s WTO obligations. As with the banana case, the EU had employed delaying tactics to stall implementation of the panel decision against it.

Riding a New Horse

Two months after USTR imposed retaliatory tariffs in the beef hormone dispute, a group of Senators introduced S.1619, the Carousel Retaliation Act of 1999. Proposed as an amendment to Section 301 of the Trade Act of 1974, its provisions would have required USTR to “carousel” or rotate its product retaliation list when an offending country does not implement a WTO decision. More specifically, USTR was to rotate items 120 days after the first retaliation list and every 180 days thereafter, with the ability to opt not to do so if compliance is imminent or rotation is deemed unnecessary. The bill language ultimately became part of the Trade and Development Act of 2000.

While banana and meat producers were supportive, other industries were not. Some argued that frequently rotating the products subjects to tariffs would be challenging for retailers. The EU contended the method was WTO inconsistent, though the WTO never ruled on the matter.

USTR ultimately did not pull the trigger to rotate its retaliatory tariff list in either the banana or beef cases as the matters got bound up in a separate dispute over U.S. tax benefits for foreign sales corporations (FSC). The EU had previously won a case against FSC and the U.S. amended its law in November 2000 in response. The EU challenged whether that revision brought the measure into WTO compliance. The United States and EU agreed informally that the EU would not pursue sanctions in the FSC case, but if the United States revised its product lists under the carousel provisions, all bets were off. Ultimately, the WTO ruled the revised U.S. law was not compliant, the United States lost its appeal, and the issue was not resolved until five years later.

Others Get on the Ride

The United States develops retaliation lists with an eye to maximizing pain on the trading partner that committed the foul, while trying to minimize the inevitable adverse impact on its own consumers and firms. Mexico has adeptly turned this practice against the United States in response to practices it viewed as inconsistent with WTO or NAFTA obligations.

NAFTA provisions governing retaliation state that an injured party should first “seek to suspend benefits in the same sector” as that covered by the restrictive measure. If it is not practical or effective to suspend benefits in the same sector, the injured party “may suspend benefits in other sectors.”

During the original NAFTA negotiations, the United States and Mexico agreed to phase out restrictions on cross-border passenger and cargo services. In 1995, however, the United States announced it would not lift restrictions on Mexican trucks and, in 2001, a NAFTA dispute panel found the U.S. to be in breach of its obligations. After years of negotiation and a false start with a U.S. pilot program, Mexico retaliated in 2009 on more than $2 billion worth of U.S. goods.

Mexico used a carousel approach, rotating different products on and off the retaliation list. The first list of 89 products went into effect in March 2009. The list was revised in August 2010, by removing 16 of the listed products and adding 26 more, bringing the total number of products on the updated list to 99. Through this method, Mexico was able to target key pain points, leading the U.S. to institute another pilot program in 2011, and Mexico to remove its tariffs.

More recently, when the Trump Administration moved forward with 25 percent tariffs on Mexican steel imports and 10 percent tariffs on Mexican aluminum imports in June 2018, Mexico responded with retaliatory tariffs on $2.7 billion of U.S. goods that included various steel products but also pork legs, apples, cheese and other agricultural products that had seen significant growth in export value and market share in Mexico.

In March 2019, Mexico’s Deputy Economy Minister Luz Maria de la Mora stated that if the United States did not repeal the tariffs, her government would have an updated list in its “carousel” of U.S. targets ready in about two months, noting that Mexico would bring in some new products and remove others. In early May, she announced the revised list was ready and under final review, but the United States agreed in mid-May to remove its tariffs, hoping to boost the chances of ratification of the U.S.-Mexico-Canada (USMCA) agreement.

Round and Round We Go

Perhaps symbolic of the differences that the United States and Europe are trying to bridge, in America carousels turn counterclockwise and in England and much of Europe, they rotate clockwise.

Some observers see the recently announced U.S. retaliation list against the EU as more restrained than expected. Tariff rates of 100 percent had been possible and some of the announced exemptions were not anticipated. We’ll soon know more about the Trump Administration’s thinking on a carousel approach and how the Europeans will respond. There are no height restrictions to get on this tariff retaliation ride, but riders may need to buckle up.

__________________________________________________________________

Leslie Griffin is Principal of Boston-based Allinea LLC. She was previously Senior Vice President for International Public Policy for UPS and is a past president of the Association of Women in International Trade in Washington, D.C.

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

Archives, Features, Global Trade Daily

Why Washington Shouldn’t see Vietnam as the Next China

October 8th, 2019 Cora Di Pietro Leave a comment

In a recent Senate Finance Committee report, U.S. Trade Czar Robert Lighthizer opined that Vietnam must take action to curb its growing trade surplus with the U.S., including removing barriers to market access for U.S. companies.

While it is true that Vietnam’s trade surplus has grown significantly in 2019, much of it is the result of the trade war between the U.S. and China that has prompted importers to source from Vietnam as an alternative to China.

Rather than attempt to stunt Vietnam’s trade surplus through tariffs or other trade actions, Washington should be establishing alliances with countries in Southeast Asia as part of its quest to ensure balanced trade and market stability.

Lighthizer’scomments were in response to queries from the Committee and echoed previous statements made by White House administration officials who have identified Vietnam as one of several countries to watch with respect to trade activity. And while there hasn’t been a direct threat of imposing tariffs on Vietnamese imports, the recent implementation of a 400% duty on Vietnamese steel imports and the recent rhetoric in Washington regarding transshipment has many businesses nervous that their new safe haven may be the President’s next target for trade action.

Troublesome to United State Trade Representative (USTR) is that the surplus thus far in 2019 is already more than 30% higher than it was at this time last year, making Vietnam the leading nation in terms of percentage increase of import value in 2019.

Hastening trade imbalance

Washington has been at least somewhat complicit in hastening Vietnam’s growing trade surplus. Since the U.S. began imposing tariffs on China-origin goods, many U.S. companies (and some Chinese companies) have been looking to shift production to neighboring markets in Asia. A recent poll of U.S. companies by the U.S. Chamber of Commerce in China showed that more than 40% of American companies with production in China were looking to move to a neighboring country if they hadn’t already done so. These include the likes of Dell, HP, Steve Madden, Brooks and others. Even non-U.S. companies, like Japan’s Nintendo and China’s own electronics giant TCL are looking to shift production out of China and into Vietnam.

Vietnam was an obvious choice for many of these manufacturers looking to circumvent Washington’s onerous tariffs. For years, Vietnam has been investing heavily in improving its roadway and port infrastructure, as well as augmenting its pool of high-skilled laborers so that it can attract large hi-tech giants. The advancements were well-timed to coincide with increasing wages and regulatory restrictions in China that were driving up costs and forcing foreign producers to look elsewhere for low-cost manufacturing alternatives. This was taking place well before the current administration in Washington began cracking down on China’s questionable trade practices.

To be fair, Washington does have some cause for complaint. It’s one of Asia’s worst kept secrets that Vietnam, Malaysia and Thailand have become convenient transshipment hubs for Chinese companies looking to circumvent quotas and, more recently, tariffs by making minor tweaks in neighboring countries to products almost wholly manufactured in China and sending them along to the U.S. as “Vietnamese” or “Malaysian” exports. In the end, there is little monetary gain for Vietnam and much opportunity for reputational damage. Hanoi’s incentive for playing along is purely political; it wants to placate China, its much larger neighbor and regional hegemon.

Hanoi has already said it will crackdown on Chinese transshipments labeled as being of Vietnamese origin. Nikkei Asian Review is reporting the Vietnamese government is considering new rules that would require 30% of a good’s price to be comprised of Vietnamese manufacturing for it to be considered as being of Vietnamese origin. Whether or not this will pacify the USTR remains to be seen.

Yet while Chinese transshipments may have been a catalyst to Vietnam’s soaring trade surplus, the ongoing U.S-China trade war has unquestionably accelerated the development of a trend that was only in its infancy a few short years ago.

If Washington is looking to penalize Vietnam for a trade surplus born out of Washington’s trade war with Beijing, where will the cycle of tariffs end?

Options for low-cost sourcing plentiful

Let’s assume Washington succeeds in quelling the growth of Vietnam’s trade surplus by imposing tariffs in the same manner it has with China, the EU and other entities. The likely outcome will be that U.S. companies then look to Thailand, Myanmar, Bangladesh or Cambodia (as many have already) to replace or supplement their production in China.

Let’s assume that Washington then imposes similar tariffs on imports from those countries. The likely outcome will be that U.S. companies then shift their attention to India, Mexico or any other country that offer lower cost labor and limited regulatory burden. And on and on it goes.

Washington wants to see production repatriated back to the United States, but only six percent of American companies moving production out of China are looking at reshoring their manufacturing facilities. One of the key reasons is that the facilities currently in China are intended to support regional exports and reshoring production to the U.S. would result in unnecessary transport costs and time in transit. In other cases, the cost of moving production to the U.S. could be too onerous to allow companies to compete globally.

A battle worth waging – along with friends and allies

This is not to suggest Washington’s war on China’s unsavory trade practices is unjust or futile. On the contrary, China’s history of misappropriating intellectual property through technology transfer, cybersecurity incidents and other trade violations requires America to act. But tariffs only punish American companies that will continue to shift their production as necessary to reduce their landed costs.

Instead of reprimanding and punishing countries like Vietnam with tariffs in response to growing trade surpluses, Washington should be working with them to forge alliances that will ensure China is forced to play by the rules.

If the U.S. truly wants to stave off bad actors such as China from continuing to abuse the global trade’s rule-based system, it will need the support of friends and allies in the eastern and western hemispheres. Acting alone and imposing unilateral restrictions only throws Washington into a battle of wills for which collateral damage is certain, but the outcome remains unknown.

_________________________________________________________________

Cora Di Pietro is vice president of Global Trade Consulting 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. She can be reached at cdipietro@livingstonintl.com.

Archives, Global Trade Daily, In The News

New Foreign Investment Restriction Regulations Cement CFIUS Reform

October 7th, 2019 Joe Whitley, Alan Enslen and Julius Bodie Leave a comment

One of the emerging focal points of the U.S.-China trade war involves the implementation of updated foreign investment restrictions in key U.S. industries.

On September 17, 2019, the Department of the Treasury issued proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), legislation that sought to reform and expand the scope of foreign investment reviews conducted by the Committee on Foreign Investment in the United States (CFIUS). CFIUS, an inter-agency committee chaired by the Treasury Department with the authority to review, modify and potentially reject certain types of foreign investment that could adversely affect U.S. national security, has undergone a significant overhaul during the past year in the wake of FIRRMA becoming law in August 2018. It is now more vital than ever that companies understand how their business can be affected by the updated CFIUS regulations when they are seeking or negotiating a merger, acquisition, real estate investment or even a non-controlling investment from a foreign investor.

Typically, CFIUS reviews are voluntary and are conducted for merger or acquisition transactions where a non-U.S. company or a foreign government-controlled entity obtain a controlling interest in a U.S. company. If CFIUS determines that a covered transaction presents a national security risk, it has the authority to impose certain mitigating conditions before allowing the deal to proceed and can refer the transaction to the President for an ultimate decision.

However, FIRRMA updated and expanded the scope of CFIUS jurisdiction to authorize reviews of additional types of non-controlling foreign investments based on the type of U.S. company involved. The implementing regulations proposed in September 2019 are set to take effect February 13, 2020, and while the CFIUS reform regulations are motivated by concerns directly related to China, the impact of FIRRMA will be felt globally and the new rules will not be tied to or affected by impending trade negotiations. U.S. businesses, particularly those involved in critical technologies, real estate, infrastructure and data collection or maintenance, must take heed of how the updated rules will affect their global business decisions moving forward.

New Regulations for TID Companies Effective February 2020

Effective February 13, 2020, CFIUS will be authorized to review “covered control transactions,” (all foreign acquisitions resulting in direct control in a U.S. business, which CFIUS already had jurisdiction over), as well as non-controlling “covered investments” by a foreign person in a U.S. critical technology, critical infrastructure or sensitive personal data company. The new rules refer to these as “TID U.S. Businesses” (Technology, Infrastructure and Data), or to be more specific, a company that engages in one of the following categories of activity:

-produces, designs, tests, manufactures, fabricates or develops one or more critical technologies;

-owns, operates, manufactures, supplies or services critical infrastructure; or

-maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.

“Critical technologies” include defense articles or defense services under the International Traffic in Arms Regulations, certain nuclear-related products regulated by the Nuclear Regulatory Commission Controls and certain technologies on the Commerce Control List under the Export Administration Regulations. In addition, “critical technologies” will include certain “emerging technologies” that are yet to be defined, and the Commerce Department’s Bureau of Industry and Security is currently reviewing at least 17 technology areas that are anticipated to result in new controls (including bio-tech, artificial intelligence, microprocessors, positional navigation and timing technology, quantum computing and additive manufacturing (3D printing)).

“Critical infrastructure” includes key industry subsectors such as telecommunications, utilities, energy and transportation. “Sensitive personal data” is defined to include ten categories of data maintained or collected by U.S. businesses that (i) target products or services to sensitive populations (including U.S. military members and federal national security employees); (ii) collect or maintain such data on at least one million individuals; or (iii) have a business objective to collect such data on greater than 1 million individuals and such data is an integrated part of the U.S. business’s primary product or service. The categories of data include types of financial, geolocation and health data.

Non-Controlling Covered Investments

Under the new regulations, CFIUS will be authorized to review non-controlling covered investment in TID U.S. Businesses. A “covered investment” includes scenarios where a foreign investor obtains:

-access to material non-public technical information;

-membership or observer rights on the board of directors or an equivalent governing body of the business or the right to nominate an individual to a position on that body; or

-any involvement, other than through voting of shares, in substantive decision making regarding sensitive personal data of U.S. citizens, critical technologies, or critical infrastructure.

Filing a CFIUS declaration for a non-controlling covered investment will remain a largely voluntary process, and parties will be able to file a notice or submit a short-form declaration notifying CFIUS of a covered investment in order to receive a potential “safe harbor” letter (after which CFIUS in most scenarios will not initiate a review of a transaction).

However, if a foreign government holds a “substantial interest” in the foreign investor that obtains a “substantial interest” in a TID U.S. Business, a CFIUS filing will be mandatory. The updated regulations provide that a foreign government is considered to have a substantial interest in the foreign investor if it holds a 49% direct or indirect interest, whereas a foreign person will obtain a substantial interest in a TID U.S. Business if it obtains at least a 25% direct or indirect interest. CFIUS is also authorized to mandate declarations for transactions involving certain types of critical technology companies.

The proposed rules also include a “white list” provision providing CFIUS the authority to designate certain “excepted investors” and “excepted foreign states” that may be eligible for an exclusion in connection with non-controlling covered investments.

Global Impact: How Does This Affect My Business?

The most important practical effect of the updated regulations is the breadth of U.S. companies standing to be impacted or affected by new foreign investment restrictions. U.S. businesses and industries that have previously never had to consider filing a CFIUS declaration, including healthcare companies, tech start-ups, related infrastructure industries, venture capital funds, emerging technology companies and manufacturers, and any company with access to sensitive consumer data, will now have to contemplate the implications of a CFIUS review when considering even passive foreign investment. Robust due diligence on potential investors will be more important than ever to ensure compliance with both mandatory and voluntary CFIUS declaration filings. Cross-border deals will be a costlier and more time-consuming process that will require acute attention to detail when drafting the contractual rights afforded to foreign investors.

If you have any questions about the impact of the updated CFIUS regulations or how they may affect your company, please contact a member of Baker Donelson’s Global Business Team for additional information.

___________________________________________________________________

Joe D. Whitley is a shareholder at Baker Donelson, chair of the Firm’s Government Enforcement and Investigations Group and former General Counsel at the Department of Homeland Security. He can be reached at jwhitley@bakerdonelson.com.

Alan Enslen is a shareholder with Baker Donelson and leads the International Trade and National Security Practice and is a member of the Global Business Team. He can be reached at aenslen@bakerdonelson.com.

Julius Bodie is an associate with Baker Donelson who assists U.S. and foreign companies across multiple industries with international trade regulatory issues. He can be reached at jbodie@bakerdonelson.com.

Archives, Global Trade Daily, News

Has Move to Impeach President Trump Pushed Aside the USMCA?

October 3rd, 2019 GT Staff Leave a comment

The momentum to impeach in Washington, D.C., is not only hurtling Congress and President Donald Trump toward a potential constitutional crisis, but the prospect of reaching a solution to the ongoing trade standoffs has dimmed considerably.

That’s the opinion of leading international trade lawyer Clifford Sosnow, who notes the time frame for passing the U.S.-Mexico-Canada Agreement (USMCA)—and thereby revamping the North America Free Trade Agreement (NAFTA)—is growing shorter by the day, denting plans for global companies that rely heavily on exports.

“With impeachment officially on the table and the hyper-partisan climate in the lead-up to next year’s elections, there is serious concern whether the USMCA is dead in the water,” says Sosnow, an Ottawa-based partner with Canadian law firm Fasken.

“It’s unclear how much of a window is even left for approval of the USMCA. There are also high odds of failure post-election, especially if the Democrats win. The party has not shown any enthusiasm for the USMCA in its current form.”

Sosnow is not shooting from the hip in an easy chair. He has appeared before NAFTA and WTO panels and the Canadian International Trade Tribunal, and he has numerous clients affected by tariffs as well as any decisions on NAFTA, including automobile manufacturers, banks, service companies, IT companies, large retailers, manufacturers, agriculture business, aerospace firms, and transportation companies.

Archives, Global Trade Daily, Ocean Carriers

A Tough Year on the Water Hasn’t Dampened Innovation for these Ocean Carriers

October 1st, 2019 Matt Coker Leave a comment

To say that 2019 has been challenging for ocean carriers would be an understatement. The year began with the National Retail Federation forecasting a decline in year-over-year growth, echoing World Bank chatter of a slowing global economy.

And don’t forget the tariff wars between the U.S. and China (heck, the U.S. and just about anyone). Managing capacity on ships has also been an issue, and then there is the potential biggest bogeyman of all: the International Maritime Organization’s low-sulfur fuel mandate taking effect Jan. 1, 2020.

Sure, we could dwell on the gloom and doom, but that would not be very Global Trade magazine of us, now would it? We here in our silky ivory tower like to spotlight the positive, which we reveal with these ocean shippers we love.

MSC

Mediterranean Shipping Co. this year watched the world’s largest container ship, the MSC Gülsün, complete its maiden voyage from northern China to Europe. With a width of 197 feet and a length of 1,312 feet (!), the Gülsün was built by Samsung Heavy Industries at the Geoje shipyard in South Korea. It can carry up to 23,756 TEUs shipping containers on one haul. That capacity can include 2,000 refrigerated containers for shipping food, beverages, pharmaceuticals or any other chilled and frozen cargoes. That’s a lot of snow cones!

MOL

Mitsui O.S.K. Lines sees MSC Gülsün and raises you the MOL Triumph, which achieved a new world load record this year. Departing Singapore for Northern Europe on THE Alliance’s FE2 service with a cargo of 19,190 TEU. That surpassed the previous load record achieved in August 2018, when Mumbai Maersk sailed from Tanjung Pelepas to Rotterdam with 19,038 TEU onboard. Yes, you are correct, that’s a pretty slim margin of victory, and analysts suspect the MOL Triumph record won’t last long given the 23,000 TEU ships being introduced.

HYUNDAI MERCHANT MARINE

Speaking of THE Alliance, current members Hapag-Lloyd, ONE and Yang Ming will be joined in April 2020 by Hyundai Merchant Marine (HMM). The South Korean carrier recently signed an agreement to join THE Alliance and then passed the pen to the founding members, who extended the duration of their collaboration until 2030. “HMM is a great fit for THE Alliance as it will provide a number of new and modern vessels, which will help us to deliver better quality and be more efficient,” said Rolf Habben Jansen, Hapag-Lloyd’s chief executive.

HAPAG-LLOYD

Oh, speaking of the fifth-largest container shipping company in the world, Hapag-Lloyd is piloting an online insurance product as part of a digital offering to try to overcome the widespread practice of shippers relying on the limited cover provided under the terms of carriers’ bills of lading. While Hapag-Lloyd says it takes the utmost care in transporting cargo, company officials acknowledge things can and have gone wrong. Thus, the introduction of Quick Cargo Insurance, which is underwritten by industrial insurer Chubb in Germany and is limited to containerized exports from that country, France and the Netherlands. However, the carrier says it plans to expand the offer.

MAERSK

To navigate new environmental regulations, A.P. Moller-Maersk A/S is considering going old school. We mean really old school by using a modern version of the old-fashioned sail to help power its ships. Currently being tested on one of Maersk’s giant tankers, the sails look less like the flapping silk you know from Johnny Depp movies and Jerry Seinfeld’s puffy shirt and more like huge marble columns. But they are nothing to laugh at as two 10-story-tall cylinders can harness enough wind to replace 20 percent of the ship’s fossil fuels, according to their maker, Norsepower Oy Ltd.

MOL, THE SEQUEL

While we’re getting all green up in here, it’s worth also pointing out that Mitsui O.S.K. Lines Ltd. This year joined three other Japanese companies— Asahi Tanker Co., Exeno Yamamizu Corp., and Mitsubishi Corp.—in teaming up to build the world’s first zero-emission tanker by mid-2021. Their joint venture e5 Lab Inc. will power the vessel with large-capacity batteries and operate in Tokyo Bay, according to a statement the foursome released on Aug. 6. Thanks to the onslaught of legislation to improve environmental performance, other companies are also looking to battery power. Norway’s Kongsberg Gruppen is developing an electric container vessel, and Rolls-Royce Holdings last year that started offering battery-powered ship engines.

AMAZON

No, this is not a leftover strand from a different story in this magazine about moving packages on the ground. “Quietly and below the radar,” USA Today recently reported, “Amazon has been ramping up its ocean shipping service, sending close to 4.7 million cartons of consumers goods from China to the United States over the past year, records show.” While other ocean carrier leaders prepare for the bald head of Jeff Bezos, his move really should be no surprise given Amazon’s attempt to control as much of its transportation network as possible. (See my September-October issue story “Air War: Fast, Free Shipping has UPS, FedEx and Amazon Scrambling in the Air”). Of Amazon now floating into the sea, Steve Ferreira, CEO of Ocean Audit, a company that utilizes data and machine learning to find ocean freight refunds for the Fortune 500, told USA Today: “This makes them the only e-commerce company that is able to do the whole transaction from end-to-end. Amazon now has a closed ecosystem.”

Archives, Uncategorized

Global Cotton-Seed Oil Market – Production Rose 2.7% to Reach 5.7M tonnes in 2018

September 27th, 2019 IndexBox Leave a comment

IndexBox has just published a new report: ‘World – Cotton-Seed Oil – Market Analysis, Forecast, Size, Trends and Insights’. Here is a summary of the report’s key findings.

The global cotton-seed oil market revenue amounted to $8.2B in 2018, falling by -3.6% against the previous year. This figure reflects the total revenues of producers and importers (excluding logistics costs, retail marketing costs, and retailers’ margins, which will be included in the final consumer price). The market value increased at an average annual rate of +2.3% from 2007 to 2018; the trend pattern indicated some noticeable fluctuations being recorded in certain years. The pace of growth appeared the most rapid in 2011 with an increase of 13% y-o-y. The global cotton-seed oil consumption peaked at $8.9B in 2013; however, from 2014 to 2018, consumption stood at a somewhat lower figure.