Trending Now

Building a Resilient Supply Chain with Advanced Predictive…

New Articles

THE U.S., CHINA, AND THE FUTURE OF THE WORLD TRADING SYSTEM

trading
Archives, Global Trade Daily, International Trade

THE U.S., CHINA, AND THE FUTURE OF THE WORLD TRADING SYSTEM

Leave a comment

Victorious after World War II and the Cold War, the United States and its allies largely wrote the rules for international trade and investment. Critically, the United States and European Union drove the creation of the World Trade Organization (WTO) in 1995 with the aim of opening trade in goods and services for their products, ramping up protection for their intellectual property, and transforming national trade-related law and institutions within countries around the world to look more like American and European law and institutions. Developing countries joined the WTO, but often complained that its rules were skewed. As a result, it was argued, the U.S. and European Union could rule the global economy through rules. They were incredibly successful, as WTO norms transformed laws and institutions within emerging economies.

Yet by 2020, 25 years after the WTO’s creation, it was the U.S. that has become the great disrupter—disenchanted with the rules’ constraints, including on its ability to create new rules. It was the U.S. that flouted WTO rules in the name of “national security” and the national interest—even to protect American producers of aluminum siding, and to pressure countries to block migration from Mexico and Central America. It was the U.S. that neutered trade dispute settlement and threatened to withdraw from the organization. Meanwhile, the United Kingdom— the EU’s second largest economy—voted by referendum to leave the European Union. As nationalist parties rose in prominence throughout Europe, the EU was pressed to turn inward to protect its very existence, curtailing its role on the global stage. It continues to defend multilateralism, but it is in a much weaker position following the euro crisis, internal divisions over migration, Brexit and the ravages of the COVID-19 virus, than it was in the 1990s. 

Paradoxically, China and other emerging economies became stakeholders and (at times) defenders of economic globalization and the rules regulating it, even while they too have taken nationalist turns. Before the World Economic Forum in Davos, that paragon of global institutions, China’s President Xi declared in his 2016 keynote address, “We must remain committed to developing global free trade and investment, promote trade and investment liberalization and facilitation through opening up and say no to protectionism.” 

How did this come to be? How did the emerging powers invest in trade law to defend their interests? What has this meant for their own internal economic governance? And what does it mean for the future of the trade legal order in light of intensified rivalry between the U.S. and China, triggering a new economic cold war? 

Many economists write of China’s rise in terms of efficiency—a combination of Western know-how and Chinese wages that triggered a “manufacturing miracle” where China became producer for the world. In his book The Great Convergence, Richard Baldwin explains how the revolution in information and communications technology in the 1990s led Western firms to outsource production of goods and services to countries such as China and India, creating a new unbundling of production through global supply chains. This unbundling “created a new style of industrial competitiveness—one that combined G7 know-how with developing-nation labor.” China became the manufacturer for the world. Its share of world manufacturing surged from 3% percent in 1990 to 19% in 2015. Western firms outsourced services to India, whose services exports increased more than 22-fold from US$8.9 billion in 1997 to US$204 billion in 2018, while its manufacturing grew in parallel. Such growth triggered a commodity boom for Brazil’s highly competitive agribusiness and mining sectors. 

These economic shifts catalyzed dramatic changes in shares of global gross domestic product. In just 29 years, the share of the G7 (U.S., Japan, Germany, U.K., France, Canada and Italy) plummeted 18 percentage points, from 64% (in 1990) to 46% (in 2019) in nominal terms, and to 30% measured by purchasing power parity. In contrast, China’s and India’s share soared. At the start of 2020, the share of global GDP of China, India and Brazil approached that of the U.S. in nominal terms (21% compared to 24%) and almost doubled it in terms of purchasing power (29% to 15%). Within a decade, China should become—once more—the world’s largest economy.

These changes in the share of global GDP gave rise to shifts in power, as political scientists stress. While the U.S. and Europe turned inwards, emerging powers like China gained confidence and became central players in the global economy. The creation of the G20 for global economic governance first reflected this transition. 

The growing U.S-China rivalry now dramatizes it. China, India and Brazil each play a leadership role in regional economic governance, and they aim to play a growing role globally. Although the U.S. wishes to halt China’s rise, the reality is that two-thirds of countries trade more goods with China than the U.S., compared to just one-fifth in 2001, the year China joined the WTO. Simply put, the economies and market size of China and other emerging powers matter, providing the country with negotiating leverage, constituting a form of power. 

So, what about law? Stated simply, it is not just structural and material power that govern the world, but also law, legal institutions and their practices. They are complementary, and they affect each other. Law and legal institutions provide normative resources that actors harness to advance their interests. They simultaneously affect the normative environment in which actors operate, which shapes their understanding and pursuit of interests. The story of emerging powers’ rise and the implications for global trade governance requires a complementary story about law and their deployment of it. My book, Emerging Powers and the World Trading System, provides that story. It tells the past story of trade law’s impact within large, emerging powers and their response to trade law, which, in turn, helps us understand the current context and responses to this context that will shape international trade and economic law’s future. The book shows how emerging powers changed internally to engage better externally.

These countries’ institutional changes and investments in legal capacity shaped the international trade legal order. They learned how to play the legal game to thwart U.S. and European dominance of the trade regime, both in negotiations and in litigation over the meaning of legal texts. This dynamic, in turn, constrained U.S. and E.U.EU policymaking, ranging from agricultural subsidies to industrial protection through import relief law. When the U.S. and European Union turned away from the WTO to create new rules through bilateral and regional trade and investment agreements, China and other emerging powers developed their own initiatives and models as well. 

The challenges for the future of the multilateral legal order for trade are clearly material, structural and ideological, as well as legal. On the one hand, they reflect the growing economic power of China, and the impact of trade from China and other emerging economies within the United States. On the other hand, traditional narratives of the benefits of free trade that ignore the impact on the economically vulnerable, have been destabilized, especially in the United States. 

The development of legal capacity to use, make, shape and apply law are is a critical part of this story, and they will continue to shape the evolving ecology of the trading system. By defining the trade order in terms of rules and judicialized dispute settlement, the WTO system created an opening for emerging economies to invest in trade law capacity and take on the U.S. and Europe at their own legal game. As a system of law purportedly in service of fairness and equal treatment, weaker players could also win. Law’s ideology of rationality and fairness could constrain the powerful, shape the interpretation of norms, and affect their strategies. The legal order for trade, although slanted in favor of the powerful, offered opportunities to weaker parties who could compete through building legal capacity. China’s, Brazil’s and India’s investments in legal capacity help explain the paradox of the U.S. abandoning the legal order that it created.

The U.S. challenge to the legitimacy and efficacy of the international trade regime that it created, and emerging powers’ defense of that regime, is a paradox that cuts across international relations theories.

John Ikenberry, in his book After Victory, published a decade after the end of the Cold War and five years after the WTO’s creation, asked this central political question: “What do states that have just won major wars do with their newly acquired powers.” His answer was a legal one: They create the rules of the game. In this situation, he wrote, states “have sought to hold onto that power and make it last” through institutionalizing it. He called the order that the U.S. created a “liberal hegemonic order” because other states consented to it in the context of American unipolar power, while the U.S. agreed to constrain itself under the rules to “make it acceptable.”

Michael Zurn, in his theory of global governance, argues that such regimes create resistance because they are “embedded in a normative and institutional structure that contains hierarchies and power inequalities.” He thus contends that “counter-institutionalization is the preferred strategy by rising powers.”

And the realist Graham Allison, in his book Destined for War, writes, “Americans urge other powers to accept a ‘rule-based international order.’ But through Chinese eyes, this appears to be an order in which Americans make the rules, and others obey the orders.” The paradox with the trade legal order is that China and other emerging powers became its defenders, while the U.S., under the Trump administration, attacked it as illegitimate and neutered its dispute settlement system. The U.S. became the revisionist power. So far, the Biden administration has continued these policies, although with a more constrained rhetoric and without the 3 a.m. tweets.

Political fault lines over trade are not just between states, but also within them. Such politics shape legal ordering internationally. Developments in China implicate companies and workers in the U.S.; the rise of U.S. economic nationalism implicates companies and workers in China. International law and institutions such as the WTO can provide an interface that helps to shape those interactions, but international law and institutions are also reciprocally shaped by them. International law and institutions are both medium and outcome.

For trade liberals, this has the arc of a tragedy. International trade law rose in prominence and trade law norms permeated deeply within emerging powers’ laws, institutions and professions. Yet, the very success of such legal ordering triggered unintended consequences. As these countries rose in economic importance and built legal capacity to wield WTO law to defend and advance their positions, the U.S. became disenchanted with the legal order it had created. It elected an economic nationalist who became “a wrecking ball,” unsettling the international legal order for trade and broader economic governance.

Effective international legal orders must be grounded in common perceptions of problems that law can address. If perceptions of underlying problems shift in radically divergent ways within the U.S., E.U.EU and these emerging powers, then the WTO as a multilateral institution based on common rules that permeate domestic laws and institutions becomes unsettled. There is no end of history, no unidirectional force toward a particular manifestation, breadth or depth of international legal ordering. Norms settle and unsettle, internationally and domestically, often in parallel. Now the centralized WTO legal order for trade is declining, giving rise to fragmenting, overlapping and competing regional and bilateral legal ordering.

The challenge for states will be how to maintain and adapt the international trade legal order to changing political and economic contexts. To maintain the international trading system to foster economic order, sustainable and inclusive growth, and the pacific settlement of disputes through law, the U.S., E.U.EU, China, India and Brazil will need to collaborate to define rules governing the interface of their economies. International trade law and institutions are no nirvana, but the alternative to them could be dire. We are in the history and make the history with the choices we make today. 

The Trump administration may have neutered the WTO’s dispute settlement system and brazenly ignored WTO rules. So far, the Biden administration has done little to nothing to change this. Its legacy for the multilateral trading system will depend on the decisions it makes in the months to come.

____________________________________________________________________

Gregory Shaffer is Chancellor’s Professor at the University of California, Irvine School of Law and President-Elect of the American Society of International Law. This essay is taken from his book Emerging Powers and the World Trading System (2021, Cambridge University Press).

biden
Archives, Global Trade Daily, International Trade, News

President Biden’s Targeted Exclusion Process

Leave a comment

The United States Trade Representative (USTR) is considering reinstating previously granted and extended exclusions on a case-by-case basis. Similar to the previous exclusion process, USTR has three considerations:

1. Whether the particular product remains available only from China

2. Whether reinstating the exclusion, or not reinstating the exclusion, will impact or result in severe economic harm to the commenter or other U.S. interests, including the impact on small businesses, employment, manufacturing output, and critical supply chains in the United States

3. The overall impact of the exclusions on the goal of obtaining the elimination of China’s acts, policies and practices covered in the Section 301 investigation.

In accordance with a USTR statement made on October 5, 2021, companies may submit comments either in support or opposition of the restatement of a particular exclusion. A list of the over 500 exclusions covered by the notice is posted separately on the USTR website here. The reinstated exclusions will be retroactive to October 12, 2021. The commenting period opens on October 12, 2021 and closes December 1, 2021.


Biden Administration’s New Approach to the U.S.-China Trade Relationship

The reopening of the Section 301 tariff exclusion process is the first action in the Biden Administration’s New Approach to the U.S.-China Trade Relationship. Ambassador Katherine Tai, the USTR, outlined the Biden Administration’s New Approach in remarks at the Center for Strategic and International Studies (CSIS) on October 4, 2021. Ambassador Tai identified four items as the starting point of this new approach:

-Enforcement of the Phase One Agreement;

-A new targeted Section 301 tariff exclusion process;

-Addressing concerns with China’s state-centered and non-market trade practices; and

-Working with allies to shape the rules for fair trade in the 21st century.

Following up on the second item, USTR issued its request for comments on the reinstatement of certain Section 3011 exclusions on October 5, 2021. Baker Donelson’s trade professionals expect additional actions as a result of the Biden Administration’s new approach to China and will continue to keep clients informed.

Background on the Section 301 Tariffs

In August 2017, the Trump Administration initiated a Section 301 investigation into China’s unfair policies and practices related to technology transfer, intellectual property, and innovation.2 In March 2018, USTR issued its Section 301 Report3 and determined that China’s actions related to intellectual property were unreasonable or discriminatory and burdened or restricted U.S. commerce. After unproductive engagement with China, USTR imposed tariffs on China’s imports as a response to China’s unfair trade practices related to the forced transfer of American technology and intellectual property. USTR, however, established a process where companies could seek an exclusion from these tariffs and granted numerous exclusions for one year. USTR allowed companies to extend certain exclusions by written request. On December 31, 2020, all exclusions expired, except COVID pandemic-related exclusions.

____________________________________________________________

Lee Smith is an attorney and leader of Baker Donelson’s International Trade and National Security practice. He advises clients on matters involving export controls, customs compliance, trade remedy investigations, trade policy, market access, and free trade agreement interpretation. Smith can be reached at leesmith@bakerdonelson.com.

Robert J. Gardner is a public policy advisor in Baker Donelson’s Washington, D.C. office. He provides legislative and government relations guidance to clients on a variety of subjects, including tax, trade, appropriations, budget, infrastructure, and sanctions issues. Gardner may be reach at rgardner@bakerdonelson.com.

1 19 U.S.C. §§ 2411-2417; “Section 301” refers generally to Chapter 1 of Title III of the Trade Act of 1974.

2 Initiation of Section 301 Investigation; Hearing; and Request for Public Comments: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, 82 Fed. Reg. 40, 213 (Aug. 24, 2017).

3 USTR, Findings Of The Investigation Into China’s Acts, Policies, And Practices Related To Technology Transfer, Intellectual Property, And Innovation Under Section 301 Of The Trade Act Of 1974 (Mar. 22, 2018) (Section 301 IP Report).

strategic sourcing
Archives, Foreign Trade Zones, Global Logistics, Global Trade Daily

Strategic Sourcing and Supply Chain Management in a post-COVID World

Leave a comment

While it might seem premature to discuss the post-COVID world as we are nearing what is hopefully the peak of the pandemic this winter, it is also clear that the crisis will pass as better treatment and vaccines become available and immunity spreads in the population.

Remaining however will be key macro trends that were sparked or drastically accelerated by the pandemic:

Forced adoption of e-commerce: E-commerce penetration into late adopter segments was drastically accelerated during COVID and the lockdowns that followed. Consumers who did not shop online were forced to do so and now prefer it. By some estimates, this steep change compressed five years of projected online shopping adoption into about three months.

Location irrelevance of knowledge labor: During the lockdowns, all non-essential service labor that could be performed remotely was done so, and it largely worked quite well. Fast network access speeds, low-cost video conferencing options, and sheer necessity finally made video conferencing common and socially acceptable; far easier, quicker, and cheaper via Zoom than actual physical meetings.

Real estate “Zoom Doom”:  I estimate that only 50% of the office space utilized prior to the pandemic will be re-occupied, as both employers and employees prefer remote work for many jobs. Employers save and employees can live wherever they want. While driving through rural parts of the US over the summer, I saw several housing developments with billboards advertising nothing but their high internet access speeds.

While obviously net positive for the economy, this transition will be quite jarring, as the $3.7 trillion of commercial mortgages will lose significant and possibly permanent value, severely damaging banks’ balance sheets. This may trigger a financial crisis similar to 2008, but if the Federal Reserve Bank and the Federal Government apply the lessons learned in 2008 proactively, the worst might be avoided.

Focus on supply chain diversity: Prior to the pandemic, many companies paid lip service to true supply chain diversity and instead focused on lowest-cost sourcing, depending heavily on China. President Trump’s China tariffs were the first test and many companies responded by diversifying to other Asian countries as best they could. When the pandemic hit, China initially shut down and prioritized their domestic needs, but came back surprisingly quickly. Companies are now scrambling to enhance diversity and increase non-China and US domestic sources.

Smart companies should use this crisis as an opportunity – To strategically re-source core supply chains for both better long-term pricing and more diversity and robustness.

2021 is the time to do this. Suppliers are highly motivated and seek long-term partnerships. A proper strategic sourcing approach is grounded in microeconomic principles and designed to reduce costs for both parties in the long-term.

Here are the key steps:

Envision target supply chain: A desired end state vision is a useful planning device, but companies should remain flexible and include suppliers they may not have used in the past and consider them for development. It’s important not to restrict the solution before all the facts and data have been gathered and terms have been fully negotiated. Restricting the degree of freedom by presupposing an answer can be very costly and highly counter-productive.

Design the correct pricing model: The method of pricing is the most powerful lever in strategic sourcing. The way one asks for a price determines how suppliers respond, how much of the spend is covered, what we learn about the supplier economics, it enables long-term relationships and most importantly, aligns incentives to reduce cost and innovate long-term pricing contracts. Unlike cost-plus approaches, pricing models are industry-based, competitive, and centered around buyers’ requirements.

Perform disaggregated analysis on bidding data: A bidding process or request for proposal is the main source of data and can be quite complex. Strategic sourcing analysis is usually about uncovering many small improvements that add up to meaningful savings, blocking and tackling, tedious iteration, and outworking the suppliers, rather than big, brilliant insights. The availability of big data methods enables sophisticated analysis.

Negotiate for optimal supplier configuration: Negotiation is the iterative process of leveraging the fact that the buyer is now in possession of more information than the suppliers. Based on the highly disaggregated analysis, one can find each supplier’s ‘sweet spots’ and configure a preferred supplier base, where each purchase is routed to the most competitive source. It is critical that all bidders remain convinced that they can gain a lot or lose a lot of business and that there is no preference for anyone outside cold, hard economics and math.

Implement for ongoing competition: Even the most sophisticated and thoughtful pricing arrangements cannot account for unknowable innovation, temporary excess capacities, new entrants, etc.  Therefore, it is critical to maintain ongoing competition while balancing the commitment to the preferred supplier base. This can be accomplished by allowing purchase level competition subject to an agreed-upon pricing umbrella with minimum / maximum market shares within the preferred supplier set.

Strategic buyers should not go back to business as usual, but instead create a competitively differentiating supply chain for the long-term. The COVID supply chain experience provides the organizational urgency to act and the likely ongoing weakness in the world economy provides the motivation to suppliers to cooperate.

Most strategic sourcing initiatives take about six to nine months and return three to five times their investment within the first year of implementation, but require a high level of expertise and analytical sophistication. If such resources are not available internally, senior management should build or bring in the talent and capabilities required before this opportunity passes.

_______________________________________________________________

Hans Dau is the CEO of the Mitchell Madison Group (https://www.mmgmc.com/), hosting deep experience consulting across many industries, including banking, insurance, manufacturing, technology, entertainment, and retail, with a focus on short-term earnings improvement through strategic sourcing, pricing optimization and marketing analytics. The views expressed are his own.

traded
Archives, Global Trade Daily, International Trade, News

LATE-STAGE TRUMP ADMINISTRATION ACTION BANS TRANSACTIONS IN PUBLICLY TRADED SECURITIES OF CHINESE MILITARY COMPANIES

Leave a comment

On November 12, 2020, President Trump issued an executive order (Order) that effectively prohibits US persons from transacting in publicly traded securities of Chinese firms determined by the US government to be owned or controlled by the Chinese military. The ban goes into effect January 11, 2021.

This action, which may foreshadow further tough measures against China in the waning days of the Trump Administration, is one of the first cases where Chinese access to capital markets has been limited for policy reasons. At this writing, the potential impact of this action on capital markets or US investors remains uncertain.

Authority and Rationale. The President issued the Order pursuant to his authority under the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act. Under IEEPA, upon the declaration of an international economic emergency, the President has the authority to regulate or prohibit a broad range of transactions subject to US jurisdiction.

The Order follows from a number of recent Trump Administration actions taken to effectively disengage from Chinese firms that support the Chinese military, including additional export control restrictions on Chinese end uses and end-users as well as Chinese firms assisting the Chinese military in its incursion into, and development and militarization of, artificial islands within the South China Sea. Notably, of direct relevance here, the Department of Defense, pursuant to Section 1237 of the National Defense Authorization Act for Fiscal Year 1999, recently designated 31 Chinese companies “engaged in providing commercial services, manufacturing, producing, or exporting” as “owned or controlled by, or affiliated with” the People’s Liberation Army (PLA) (DoD List). These companies are each considered to be a “Communist Chinese military company” according to the Order.

Building on these actions, the Order states that China is “increasingly exploiting United States capital to resource and to enable the development and modernization of its military, intelligence, and security apparatuses, which continues to allow the [China] to directly threaten the United States…” As Robert C. O’Brien, the national security adviser to President Trump, said, the action “serves to protect American investors from unintentionally providing capital that goes to enhancing the capabilities of the People’s Liberation Army and People’s Republic of China intelligence services.”

The Prohibition. Specifically, beginning on January 11, 2021, US persons are prohibited from transacting in the publically traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Chinese military company designated on the DoD List now or in the future. Through November 11, 2021, trades that only divest in such securities that a US person held as of January 11, 2021 are permitted.

The prohibition also extends to subsidiaries of an entity already designated on the DoD List if the subsidiaries have also been so designated. US persons would be prohibited from such investment transactions 60 days after additional Chinese companies are designated and would have 365 days to divest of shares held on that date.

By its terms, the Order, which is broad in scope, appears to apply not only to direct purchases of publicly traded securities but purchases by US persons of shares in investment funds that hold public securities in such companies. In this regard, there is no exemption for such indirect purchases in the Order and it applies to purchases designed to “provide investment exposure to such securities” – the purchase of shares in a diversified fund which hold shares in such Chinese military companies might be considered to “provide investment exposure” to those securities. This conclusion also is supported by the anti-circumvention provision in the Order, which bars US persons from actions that evade or avoid the effect of the Order.

Similarly, the Order also appears to apply to transactions by US persons involving public securities in such Chinese military firms traded on foreign as well as US exchanges. Whether Treasury, which is charged with implementing the Order, later exempts or limits transactions through investment funds or held on foreign exchanges from the scope of the Order remains to be seen.

The Order does permit US persons to engage in transactions to divest from such securities by certain deadlines. Moreover, the Order also prohibits any transaction by a US person or within the United States that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate the Order.

What Chinese Firms Securities are the Subject of the Rule? As noted above, the Order is directly applicable to transactions in publicly traded securities of Chinese companies on the DOD List. As such, if a company on the DOD List is not publically traded, it would apparently not be affected. During the summer of 2020, the DOD designated a total of 31 Chinese companies for the DOD List, including China Telecommunication Corp. and China Mobil Communications, both of which are listed on the New York Stock Exchange (NYSE), and China North Industries Group Corporation (Norinco Group), among others.

Why was this Order issued now? On one level, this Order is a continuation of and consistent with recent Administration actions with respect to Chinese military companies. Beyond that, with a change in administrations around the corner, it is possible the Trump Administration is trying to lock in a strong policy stance against China in this area. Of course, since the Order is administrative in nature, President-elect Biden, upon taking office, could rescind it or limit its scope. However, the Trump Administration may be taking the view that the incoming Administration would be reluctant to do that in the context of recent US-China relations and domestic politics.

This article originally appeared on the Eversheds Sutherland blog. 

lobsters
Archives, Global Trade Daily, International Trade

LOBSTERS ARE A PRAWN IN THE TRADE WARS

Leave a comment

Lobster Trap

TradeVistas has named the lobster the “2020 person of the year” in international trade. It’s a well-deserved honor. The lobster is at the center of a trade war that will go down as one of the most compelling cases of the futility of tariff politics.

American lobster and lobster fishers got caught in a trade war being fought on multiple fronts. The United States is battling China on one major front and the European Union (EU) on another, but – as is typical in trade wars – it’s lobster production in another country that’s winning the war. In this case, Canada.

If that weren’t enough, tariffs are the root cause of the trade war, but not in the way you might think. China’s tariffs on U.S. lobsters are in retaliation for President Trump’s China tariffs over intellectual property. The EU didn’t raise its tariffs on U.S. lobster, but rather lowered them on Canadian ones as part of their free trade agreement. In other words, U.S. lobsters were never meant to be the target of either Chinese or EU protectionism.

Trade Person of the Year

Just a Prawn in the Trade Game

How the lobster trade war started isn’t nearly as interesting as the efforts to stop it. The Trump administration has tried to restore market access for American lobster but were outmaneuvered in part through a trade liberalizing measure by China.

Start with China, which hit American lobsters with a 25 percent tariff when President Trump rolled out his China tariffs under Section 301. This tariff hike hurt, but then China moved to lower its lobster tariff at the World Trade Organization (WTO), and this hurt even more. In particular, China slashed its most-favored-nation (MFN) tariff to 7 percent while imposing retaliatory tariffs on U.S. lobster of as much as 40 percent. American lobsters were effectively priced out of the market.

President Trump responded with an Executive order instructing the United States Trade Representative to monitor Chinese imports of lobsters. China’s Phase 1 purchase commitments in the US-China trade deal were to be tracked and “appropriate action” to be taken if China fell short. But these purchase commitments are hard for China to deliver on given the extra import duties on American lobsters. The data speak for themselves: since 2018, U.S. lobster exports to China have fallen by nearly two-thirds.

The irony is that things would be worse were it not for China’s rising trade tensions with Australia, another key supplier of lobsters. Australian lobsters have enjoyed the benefits of zero tariffs under the China-Australia free trade agreement since 2015.

Lobster X to China

Shellfish Trade Liberalization

Then there’s Europe. This front of the lobster trade war is especially interesting because it defies convention. The EU didn’t wage a protectionist campaign against the United States. Instead, since 2017, it has had free trade with Canada. The Comprehensive Economic and Trade Agreement (CETA) zeroed out tariffs on Canadian lobsters, leaving their American seafood brethren 8 percent more costly, since U.S. exporters must pay Europe’s MFN rate. In other words, the penalty in the marketplace isn’t because Europe is cheating, but because the United States is falling behind in the race to sign preferential trade agreements.

Back in 2019, Washington had asked Brussels for a deal to offset Canada’s advantage in lobster tariffs. The EU said no, insisting this would violate MFN. Then, this past summer, the EU agreed to zero out it’s lobster tariffs on an MFN basis, retroactive to August 1, in exchange for the United States reducing its tariffs on certain items by 50 percent. This ad hoc approach to trade liberalization, touted as the first tariff cuts in US-EU trade in 20 years, looked like it had plugged the hole. But then came decisions in a longstanding WTO dispute between Boeing and Airbus.

Out of the Blue Sky into the Sea

After more than a decade of WTO litigation, the United States and Europe were both authorized to retaliate. The United States struck first, imposing 15-25 percent tariffs on European food and drink, among other items, up to a maximum of $US7.5 billion. Europe’s authorization was postponed due to COVID-19, but came through this fall, up to a maximum of $US4 billion.

The EU’s original hit list, drawn up to $US25 billion, had included six tariff lines covering frozen and live lobsters. But this week, to the surprise of many, Europe’s revised hit list, redrawn to $US4 billion, spared lobsters entirely. Other seafood was hit, including salmon. But the August deal to walk back the tariff differential caused by CETA had ironically shielded American exporters from WTO-authorized retaliation on civil aircraft. If that doesn’t say it all.

Lobster X to EU

Clawing Back to Normal?

Things may change. A failure to negotiate a US-EU deal on Boeing-Airbus could see Europe yet impose tariffs on American lobsters. But even if that doesn’t happen, the impact of the original 8 percent tariff differential, CETA versus MFN, has been shocking enough.

In 2016, a year before the debut of CETA, U.S. exports of lobsters to Europe were valued at US$152.2 million. In 2019, they stood at US$57.8 million. Through the first nine months of 2020, U.S. exports were valued at US$14.3 million. With these figures in mind, imagine what a 15-25 percent retaliatory tariff would do.

U.S. trade policy has punished the lobster industry for years. Lobster fishermen should be included in the agricultural relief programs enacted by Congress. The takeaway for politicians is that no one set out to wage the lobster trade wars and no one can solve them with more tariffs.

The lobster, as the “person of the year” for 2020, reminds us that freer trade always puts the lie to tariff politics.

_______________________________________________________________

marc busch

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, a nonresident Senior Fellow at the Atlantic Council, and host of the podcast TradeCraft.

trade
3pls, Archives, Global Logistics, Global Trade Daily

A Tipping Point in the Trade War? 4 Tips to Consider Now.

Leave a comment

While reassured by a recommitment to the U.S.-China trade agreement, companies still need to be vigilant in protecting their supply chains from pandemic aftershocks – and election-year unpredictability.

Think back – way back – to January 2020. The U.S. and China signed the Phase 1 trade accord, agreeing to roll back tariffs, expand trade purchases and renew pledges on intellectual property.

Many global shippers felt encouraged by the prospect of improved trading days ahead. And various American businesses welcomed the chance to equalize their trade footing and to counteract China’s intellectual property practices.

While many companies continue to manage through the hefty impact of the various trade remedy measures of Sections 201, 232, and 301 of the Trade Act, there was hope that Phase 2 of the trade deal between the U.S. and China would signal even better prospects.

But then the coronavirus claimed center stage. Its supply-chain side effects dominated the global marketplace, turning it into a de facto PPE-and-sanitizer delivery system – presenting shippers and manufacturers with an entirely different set of obstacles.

Many global manufacturers and suppliers pivoted to face mask production. French winemakers turned fine wine into the finest hand sanitizer. And American companies in search of these supplies turned to new sources globally, navigating the choppy waters of U.S. Food and Drug Administration (FDA) importing requirements and those of other government agencies in the process.

The administration’s 90-day deferral of import tax payments offered temporary relief to some companies. But for nearly eight months, manufacturers and shippers remained in a state of suspended apprehension when it came to the future of trans-Pacific trading.

Finally, on August 24, U.S. and China trade representatives officially recommitted to carrying out Phase 1 of the trade accord.

The chessboard today
Now, as the U.S. presidential election comes into view, the spotlight is once again on the global chessboard of tit-for-tat tariff moves, amplified by the Trump administration’s desire to counter the practices of U.S. trade partners and address the U.S. trade deficit.

As part of a longstanding dispute over aircraft subsidies, the Office of the U.S. Trade Representative (USTR) initially imposed 10% tariffs on Airbus aircraft – but increased that to 15% in March. Also announced this August, the USTR decided to maintain 15% tariffs on Airbus aircraft and threatened 25% tariffs on other European goods, such as food, wine, and spirits, including a tariff on imported French makeup and handbags, in retaliation against France’s Digital Service Tax (DST). However, no tariffs have been imposed yet as France has not implemented DST.

Trade winds have been equally tempestuous on both sides of the U.S. border. After the U.S. imposed tariffs on aluminum from Canada, Canada retaliated with its own trade penalties.

And the new U.S.-Mexico-Canada Agreement, which took effect this past July, was reassuring for many companies that even dubbed it the new NAFTA. While some North America cross-border shippers are still grappling with compliance and weighing potential trade gains, its changes to cross-border trade overall have been well received by many businesses.

Now, businesses are speculating on the potential supply chain effects in the months to come. Will U.S. tariffs on a long list of Chinese goods be rolled back during the next round of negotiations? That has become the $350 billion question.

Many answers, and potential changes, hinge on the upcoming presidential election.

Be ready for new rollouts
You may recall that the USTR announced – and imposed – some section 301 tariffs quickly after their announcement. While tariffs were suspended on $160 billion in Chinese goods (List 4B) – pending the success of Phase 1 of the agreement – it’s not known if they are suspended indefinitely or if these tariffs could again come into play, further spiking import costs.

Although most believe a swift post-election reversal is unlikely, it’s easy to see the two main party presidential nominees have different strategies on how they would carry out international trade and tariffs post-November. For that reason, the safest course is to be prepared for any outcome. Here’s what you should consider in the coming months to help your company prepare:

1. Speak up about exclusions
So far, the USTR has granted about 2,000 exclusions related to section 301 tariffs, and over 75 exclusions from other section tariffs – many in response to importers’ petitions. In fact, the USTR has announced exclusions to multiple product lists. And while comment periods are over for now, it’s important for companies to voice their opinion for or against tariffs as they’re proposed.

The refunds are retroactive, so some importers stand to gain millions in refunds for previously paid duties.

Since an early exclusion request can produce earlier duty exclusions, vigilance in monitoring and applying for exclusions is vital. But the submission process can be lengthy and complex, requiring businesses to record and report all import product categories that relate to each applicable tariff number or specific product. This is an instance where having a knowledgeable customs broker and trusted advisor, who you can rely on to help and provide expertise, can come in handy.

2. Reconsider drawback and deferment programs
The trade programs you ruled out in the past could be a financial boon now. For example, it may be worth revisiting duty drawback programs, which provide a refund on previously imported goods that are subsequently exported, so consider your current import/export balance. Also, consider if 301 tariffs were to subside, would continuing the program still be practical for your supply chain?

Because formal application to this program can be quite rigorous, consider handing this task off to a 3rd party expert.

You may also want to reconsider bonded warehousing or using a foreign trade zone. Companies that produce major equipment or large machinery, for example, often experience significant lag times between production and sale – incurring duty payments of $200,000 or more per machine.

If you’re not planning on selling major equipment over the next 6 months, it might make sense to import the product into a foreign trade zone and deploy duty deferment tools.

3. If you haven’t already, explore alternative sourcing or production options
The pandemic has reminded companies that diversification is key to business resilience. In practice, that may mean onboarding alternative suppliers or preparing to change production venues in the event of a coronavirus outbreak.

To protect margins as the price of Chinese goods, materials and tariffs climb, many U.S. businesses are turning to lower-priced suppliers in Vietnam and Malaysia. Not only do imports from these countries allow for the avoidance or reduction of tariffs, they can also provide the assurance of a ready workforce and steady material supply.

4. Above all, stay informed
Like most business processes, proficient supply chain management hinges on your ability to manage countless moving parts, and plan and anticipate likely change.

During a global pandemic, amid an economic downturn, and in an election year, change may be the only thing we can predict. Efficiency and preparedness have never mattered more.

Stay current on policy changes and new trade regulations. Consult the USTR website often. Sign up for automated logistics updates and trade advisories. Stay close to your trade association, like the National Association of Manufacturers (NAM) and other industry-specific groups. And turn to a proven 3PL before your internal logistics department becomes overwhelmed.

And then, fasten your seatbelt as we navigate the many changes on the horizon.

wechat
Archives, Global Trade Daily, News

U.S. Scheduled Bans on TikTok and WeChat Apps Delayed

Leave a comment

China-based smartphone apps, TikTok and WeChat, have each received a reprieve from the respective bans, which were originally ordered by President Trump on August 6, 2020, against both parties and were scheduled to take effect on September 21, 2020. Please see our previous post covering the Executive Orders. Pursuant to the Executive Orders banning the apps on national security grounds, the U.S. Department of Commerce (“Commerce”) published final rules for implementing the bans on September 19, 2020, which were subsequently withdrawn. Commerce then delayed the order to withdraw TikTok from U.S. app stores until September 27, 2020, at 11:59 pm. Meanwhile, Commerce’s order to withdraw WeChat has been suspended temporarily due to an injunction granted by the U.S. District Court for the Northern District of California.

In an effort to come into compliance with the Executive Order and avoid the ban, TikTok’s parent, ByteDance Ltd. (“ByteDance”), negotiated a deal with Oracle and Walmart to keep TikTok operating in the United States. Under the terms of the agreement, based on media reports, TikTok will be spun off into a U.S.-based company majority-owned by its Chinese parent ByteDance, while Oracle and Walmart will take up to a twenty (20) percent stake of the new U.S. company. ByteDance will maintain control over the app’s algorithm, while user data will be stored in the U.S.  It is possible that the ban on TikTok may be formally lifted once the deal is finalized since President Trump has given his personal approval of the agreement, though that is unclear at this time.

A judge from the U.S. District Court for the Northern District of California granted a nationwide injunction on September 19, 2020, temporarily suspending Commerce’s order for Apple and Google to remove WeChat from their app stores. Plaintiffs U.S. WeChat Users Alliance, et al. allege that the ban violates First Amendment rights, especially for Chinese Americans. Judge Beeler stated that the plaintiffs “have shown serious questions going to the merits of the First Amendment claim” and that “the balance of hardships tips in the plaintiffs’ favor”.

______________________________________________________________

Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Grant Leach is an Omaha-based partner with the law firm Husch Blackwell LLP focusing on international trade, export controls, trade sanctions and anti-corruption compliance.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

tariffs
Archives, Global Trade Daily, International Trade, News

Court of International Trade Receives its First Complaint Against Section 301 China Tariffs

Leave a comment

On September 10, 2020, HMTX Industries LLC, along with Halstead New England Corporation, and Metroflor Corporation (importers of vinyl tile) filed a complaint (Ct. No. 20-00177) at the Court of International Trade (CIT) challenging both the substantive and procedural processes followed by the United States Trade Representative (USTR) when instituting Section 301 Tariffs on imports from China under List 3.

The List 3 tariffs went into effect on September 24, 2018. This is the first challenge of its kind filed against the administration’s use of Section 301 Tariffs in the ongoing trade war between the United States and China.

The complaint alleges that USTR’s institution of List 3 tariffs violated the Trade Act of 1974 on the grounds that USTR failed to make a determination or finding that there was an unfair trade practice that required a remedy and moreover, that List 3 tariffs were instituted beyond the 12-month time limit provided for in the governing statute (19 U.S.C. § 2414). The complaint also argues that the manner in which in the List 3 tariff action was implemented violated the Administrative Procedures Act (APA).

According to the complainants, USTR failed to provide adequate opportunity for comments, failed to consider relevant factors when making its decision (e.g. no analysis of increased burden on U.S. commerce from unfair trade practices), and failed to connect the record facts to the choices it made by not explaining how the comments received by USTR came to shape the final implementation of List 3.

______________________________________________________________________

Nithya Nagarajan is a Washington-based partner with the law firm Husch Blackwell LLP. She practices in the International Trade & Supply Chain group of the firm’s Technology, Manufacturing & Transportation industry team.

Julia Banegas is an attorney in Husch Blackwell LLP’s Washington, D.C. office.

Turner Kim is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington, D.C. office.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

the wto
Free Trade Agreements, Global Trade Daily, International Trade

DO AMERICANS WANT THE U.S. TO LEAVE THE WTO?

Leave a comment

TradeVistas’ inaugural survey of Americans’ attitudes toward trade shows a plurality support the idea, but most Americans seem unsure of the WTO’s role

Earlier this spring, the U.S. Congress faced the possibility of a vote – the first since 2005 – on whether the United States should withdraw from the World Trade Organization (WTO), a body it helped create.

Leading the effort was Missouri Republican Sen. Josh Hawley, a vocal WTO critic who has called to “abolish” the organization, accusing it of unfairness to U.S. interests and favoritism toward China. Although a procedural issue ultimately scuttled a vote, Hawley’s legislation amplified growing criticism of the WTO, including by the Trump Administration.

But what do ordinary Americans think?

A new poll by TradeVistas, conducted by Lincoln Park Strategies, finds that while a plurality of Americans support leaving the WTO, most Americans either oppose the idea or are unsure what to think. Our poll also finds that while Americans overwhelmingly want the United States to be “the leader of the global economy,” most Americans don’t see membership in the WTO as critical to that goal. These responses imply that most Americans are relatively unaware of the WTO’s role, and that the benefits of U.S. participation are far from obvious to the general public. The results also imply that any momentum for U.S. withdrawal largely reflects the work of a motivated minority, versus a groundswell of public will.

A plurality of Americans support leaving the WTO – but almost as many are “unsure” or “indifferent.”

TradeVistas’ July 2020 survey of 1,000 adults found that 36 percent of Americans support leaving the WTO, including 19 percent who “strongly support” U.S. withdrawal and 17 percent who “somewhat support” the idea. In contrast, 35 percent of Americans say they are “indifferent” or “unsure,” while 28 percent oppose withdrawal, including 18 percent who “strongly” object to the idea.

Q1

Our survey found that 45 percent of men (versus 29 percent of women) approve of leaving the WTO, including 48 percent of white men and 37 percent of men of color. Fully 25 percent of all men “strongly” support the idea, versus only 14 percent of women who feel the same. We also found that 51 percent of men under age 45 support the idea, as do 66 percent of Republican men.

These results, however, reflect broader generational and partisan splits. Overall, 41 percent of Americans under age 45 want the U.S. to leave the WTO as do 57 percent of Republicans. In contrast, the respondents most likely to oppose withdrawal are those over age 65 (42 percent) and Democrats (49 percent). Responses did not differ significantly by education level or by income.

When voters understand the role of the WTO, they are more likely to be supportive of it.

Despite Americans’ seeming indifference or, in some cases, hostility toward U.S. participation in the WTO, many Americans also see how the organization can benefit U.S. companies – once they receive some basic information about the WTO’s role.

After being told that “the job of the WTO is to enforce a set of rules for international trade that the members negotiated, and 164 countries agreed to follow,” 49 percent of survey respondents said it was “definitely true” or “probably true” that “WTO rules help U.S. companies compete on fair terms,” while 48 percent agreed it was definitely or probably true that “WTO rules stop foreign governments from applying unfair requirements to U.S. companies.”

Those most likely to say these statements are true were also those most opposed to the United States’ leaving the WTO. In fact, a whopping 74 percent of those who “strongly” oppose withdrawal say that WTO rules help U.S. compete, while 67 percent say the WTO stops foreign governments from discriminating against U.S. companies.

Interestingly, however, a majority of the respondents who support WTO withdrawal also believe these statements to be true. For instance, 53 percent of those who “strongly” support leaving say the WTO helps companies compete, while 55 percent say the WTO blocks unfair trade rules. This response suggests that for some Americans, opposition to WTO participation could be a “gut-level” response potentially open to tempering.

Q2

Americans want the U.S. to lead the global economy – but don’t see how the WTO can help.

By overwhelming margins – regardless of gender, age, party or race – Americans want to see their country “be the leader of the global economy.” Fully 79 percent of those surveyed rated this goal to be important, including 39 percent who called it “very important.”

Most Americans, however, don’t see WTO membership as instrumental to America’s economic success. When asked if WTO withdrawal “would help or hurt the United States standing as a global leader,” 33 percent of Americans said it would “definitely help” or “probably help,” while 18 percent said “it wouldn’t make a difference” and 13 percent were unsure. Just 36 percent said it would “definitely hurt” or “probably hurt” the United States’ global economic standing to leave the WTO.

Q3

Not surprisingly, those most likely to say that withdrawal would help the U.S. are among the minority who also strongly support leaving the organization. Of those who “strongly” support withdrawal, 58 percent also say this would “definitely help.” In contrast, among those who strongly oppose withdrawal, 70 percent say it would “definitely hurt.” It’s worth remembering, however, that both of these groups are relatively small subsets, substantially outnumbered by those who are indifferent, unsure, or have malleable views.

Q4

Conclusions

The TradeVistas poll findings suggest that the majority of Americans have formed no real opinion on the WTO and that strong support for withdrawal is limited to a minority of – albeit potentially vocal – voters. Even among these Americans, however, it’s possible that their support for withdrawal is based less on deep knowledge of the WTO than on partisan leanings or a general distrust toward institutions. Importantly, more than 40 percent of adults under the age of 45 support withdrawal from the WTO, with an equal amount simply indifferent or unsure.

Without question, our survey is limited in its scope and offers only the briefest of snapshots on American attitudes toward a global institution of long standing and enormous impact. What is clear, however, is that the vacuum of general public knowledge on the WTO could easily be filled by its detractors, if the organization’s defenders allow it.

Methodology: 1000 interviews among adults age 18+ were conducted from July 10-13, 2020 by Lincoln Park Strategies using an online survey. The results were weighted to ensure proportional responses. The Bayesian confidence interval for 1,000 interviews is 3.5, which is roughly equivalent to a margin of error of ±3.1 at the 95% confidence level.

Download the infographic:

TradeVistas | July 2020 WTO Poll America Trade Survey Infographic

Lincoln Park Strategies National Voter Poll Results

_________________________________________________________________

Anne Kim is a contributing editor to Washington Monthly and the author of Abandoned: America’s Lost Youth and the Crisis of Disconnection, forthcoming in 2020 from the New Press. Her writings on economic opportunity, social policy, and higher education have appeared in numerous national outlets, including the Washington Monthly, the Washington Post, Governing and Atlantic.com, among others. She is a veteran of the think tanks the Progressive Policy Institute and Third Way as well as of Capitol Hill, where she worked for Rep. Jim Cooper (D-TN). Anne has a law degree from Duke University and a bachelor’s in journalism from the University of Missouri-Columbia.

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

list 1
Archives, Global Trade Daily, News

USTR to Consider Extending List 1 Exclusions Past October 2nd Expiration Date

Leave a comment

On August 3, 2020, the Office of the U.S. Trade Representative (USTR) issued a notice requesting comments on whether to extend specific exclusions on Chinese imports from the Section 301 List 1 that are set to expire on October 2, 2020. Companies whose List 1 Exclusions products were granted exclusions in notices published on October 2, 2019, December 17, 2019, and February 11, 2020 are eligible to submit comments.

The due date for companies to submit their comments is August 30, 2020. USTR has stated that it will focus its evaluation on whether, despite the first imposition of these additional duties, the particular product remains available only from China. Additionally, USTR encourages companies to specifically address the following in their submission:

-Whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.

-Any changes in the global supply chain since July 2018 with respect to the particular product or any other relevant industry developments.

-The efforts, if any, the importers or U.S. purchasers have undertaken since July 2018 to source the product from the United States or third countries.

-Whether the imposition of additional duties on the products will result in severe economic harm to the commenter.

___________________________________________________________

Turner Kim is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.