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How Has the Trade War Affected China?

trade war

How Has the Trade War Affected China?

In the last two weeks the stakes in the ongoing trade conflict between the United States and China have increased significantly. After negotiations stalled in July, President Trump expanded his tariff targets to cover nearly all imports from China. But the weapons in this conflict have become increasingly more sophisticated. Beijing retaliated by suspending purchases of U.S. agricultural products and by lowering the value of its currency to make Chinese goods less expensive abroad. In response, the U.S. Treasury named China a currency manipulator and vowed to take actions to eliminate the alleged unfair competitive advantage. In addition, President Trump announced that the United States is not going to do any business with China’s tech giant Huawei. 

While these escalations have recently uneased investors and rattled the markets, they have yet to make an obvious impact on the U.S. economy, albeit U.S. farmers have begun to experience the negative effects of lost sales to China. But how have these actions resonated in China? There are some indicators that the trade war has had an impact on the Chinese economy, as well as public perception in that country. 

At the moment, the U.S. can claim a short term victory, although China appears to be playing the long game. Official reports indicate that Chinese economic growth has decelerated to its slowest pace since 1992, as businesses have held back on investment in light of the ongoing trade tensions with the United States. Also, Chinese exports to the U.S. declined by $5.6 billion in June, versus a $1.8 billion decrease in U.S. exports to China. 

The Trump administration has claimed that its trade policy seeks to remedy problems which have been neglected for too long, and to defend America’s economic interests against perceived abuses by its trade partners. The administration has introduced tariffs as a means to address alleged intellectual property violations by China and a growing trade deficit. Its trade policy takes into account that some pain will need to be absorbed by the United States. However, it is not evident that the U.S. consumer has suffered yet. U.S. importers have to pay the tariffs, and so far many have sough ways to absorb them in whole or in part to minimize any price increases for the consumer. They have also begun to shift sourcing to third countries, including bringing some production to the United States. 

Concurrently, Beijing has implemented a robust domestic stimulus by encouraging banks to relax controls on borrowing and by cutting 2 trillion yuan ($291 billion) in taxes. Furthermore, investment in infrastructure has increased in the first half of the year and Chinese factory output rose 6.3% in June from a year earlier, compared with 5.3% in May. Also, by letting the value of the yuan fall and making Chinese goods cheaper, China has in effect offset some of the impact of the U.S. tariffs – essentially giving the U.S. consumer a tax cut.

The efforts by the Chinese government to lower domestic taxes and support an easier fiscal policy appear to have been, at least temporarily, beneficial to economic growth. If these actions are to be expanded, they may continue to serve as a further stimulus in the second half of this year in areas such as consumption and investment. Although Chinese shipments to the United States have declined, they comprise only about a fifth of its overall exports. By allowing the yuan to fall, China can boost its sales to other countries to offset declines to the United States. 

The trade conflict also does not appear to have had a negative impact on the mindset of the Chinese population at large. Skilled workers and professionals have expressed an open mind to the ongoing trade negotiations, some even welcoming them with a sentiment that “Trump is good for Chinese people” because he has opened up the dialogue between the two countries on trade which in turn has fostered certain welcome reforms in China, as well as tax cuts. Indeed, if Beijing had already planned to institute such measures, then U.S. policy may have provided ample cover for them.

The trade war has also led China to reevaluate existing global alliances, such as those with Japan and Russia. Mending fences with Russia, for instance, is key to the continuation of China’s ambitious “Belt and Road Initiative” of investment and infrastructure projects to connect Asia with Africa and Europe via land and maritime networks. 

With further entrenchment by both sides, and a trade deal increasingly unlikely before next year’s U.S. presidential elections, China appears to be bracing itself for a protracted conflict and may have reason to believe it can “win” if President Trump faces increased political pressures entering the election. As the President recently announced, China may be counting on a Democrat to win the White House to strike a new trade deal. On the other hand, a continuing conflict between two of the world’s greatest economies which has evolved from measures to address intellectual property protection and trade imbalances to currency manipulation, may in the long run lead to recession and hurt growth globally. 

Mark Ludwikowski is the leader of the International Trade practice of Clark Hill, PLC and is resident in the firm’s Washington D.C. office. He can be reached at 202-640-6680 and mludwikowski@ClarkHill.com

AI

Report: U.S. Companies Led AI-Tech Acquisitions 2014-18

.Leading data and analytics company, GlobalData, released a report this week highlighting companies that dominated the artificial intelligence-tech space from 2014-2018. In the report, four out of five top acquirers were U.S. based: Facebook, Microsoft, Apple and Splunk. These companies represent a combined total of 30 acquisitions during the time period studied. Accenture made the list as the only non-U.S. based company, representing six acquisitions total.

“Technology companies have been the dominant deal makers in the AI space. However, with artificial intelligence making inroads into diverse sectors, the buyer universe in expanding and the space is also attracting investments from non-technology companies,” said Aurojyoti Bose, Financial Deals Analyst at GlobalData.

Top Deal Makers-Payment Tech_V2

“The high number of American firms attracting investments in the AI space is a testimony to the country’s dominance in AI technology. The recent launch of American AI Initiative program also augurs well for the development of the sector or start-ups operating in this space,” added Bose.

Additional insights in the report confirm the U.S. as a leading region for targeted acquisitions, representing 70 percent of those acquired by the top five in the list. Regions closely following include the UK, China, India, Canada and Israel due to the talent pool and innovative technology offerings.

Top Deal Makers-Payment Tech_V1 Table

“With increasing adoption of AI across sectors, this space is bound to witness growth in an already burgeoning M&A activity. Corporates are extensively evaluating options to integrate AI in their business operations and automation initiatives. Going forward, AI solutions will be an integral part of their strategies,” Bose concludes.

Source: GlobalData

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

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

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

Labor provisions

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

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

Automotive Content Requirements

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

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

Section 232 Tariffs on Steel & Aluminum

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

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

Pharma

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

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

Environment

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

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

ITC Report

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

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

 

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

 

NAFTA 2.0

After more than a year of negotiations and minutes before the midnight deadline, the United States, México, and Canada reached a new free trade, tri-national agreement. The US-México-Canada Agreement (USMCA) will ultimately replace the North American Free Trade Agreement (NAFTA). USMCA or NAFTA 2.0, contains 34 Chapters and 12 side letters covering agriculture, dispute resolution, e-commerce, and labor relations.

1. Background on NAFTA 1.0

Before we can understand the USMCA, it is important to understand the history behind NAFTA. NAFTA, or as it is known in Spanish: Tratado de Libre Comercio de América del Norte (TLCAN), was executed by the United States of America, México, and Canada on January 1, 1994.

The goal of NAFTA was to create a free trade zone between the U.S., Canada, and México. In addition to the core agreement, incorporated in NAFTA are the North American Agreement on Labor Cooperation (NAALC) and the North American Agreement on Environmental Cooperation (NAAEC). The NAALC and NAAEC were added with the goal of protecting workers and the environment.

The NAALC is typically referred to as the “Labor Side of the Agreement,” and within the agreement each country agreed to enforce its own labor standards and to strive to improve labor standards within its respective countries. The NAAEC is the “Environmental Side of the Agreement,” within which each of the three countries agreed on principles and objectives for the conservation and the protection of the environment.

NAFTA created the largest free trade area in the world, helping drive down consumer good prices, and boosting economic growth, profits and employment in all three countries.

II. The Impact Of NAFTA to Employers in the Region

Many economic experts note that NAFTA was quite beneficial to the United States.  This benefit came in the form of lowered tariffs and import prices, as well as a narrowed risk of inflation.  Some argued that it also had a positive impact on interest rates in the United States.

From 1993 to 2017, the United States increased its exports of goods to México and Canada from $142 billion to $525 billion, which equates to a third of its total exports. It is estimated that NAFTA helped create at least 5 million direct and indirect jobs in the United States associated with the export of goods.

In México, NAFTA facilitated the growth of the maquiladora industry. A maquiladora is essentially a subcontractor manufacturing operation, where factories import material and equipment on a duty-free basis for assembly and manufacturing. The assembled product may then be returned to the raw materials’ country of origin.  NAFTA had a direct result in the growth and expansion of this industry.

The interdependence of the three economies is seen not only through the growth in the maquiladora industry, but also in the automobile manufacturing industry. For example, by 2020, México will manufacture 25% of all North American cars. Additionally, approximately 75% of Mexican exports are sold to United States consumers, a number which in large part is a direct result of NAFTA.

On September 30, 2018, the United States, México, and Canada completed negotiations of an updated trade agreement now known as United States-México-Canada Agreement—“USMCA,” or as we like to refer to it, NAFTA 2.0.  While the deal was agreed upon by the three countries, it must ultimately be ratified by each country’s legislature and, as such, will likely not go into effect before 2019.

III. USMCA-What it means to Employers

Chapter 23 of the NAFTA 2.0 is dedicated to the issue of labor.  This chapter establishes that all the parties should recognize, adopt, and follow the following rights:

-Freedom of association and the effective recognition of the right to collective bargaining;

-The elimination of all forms of forced or compulsory labor;

-The effective abolition of child labor and, for the purposes of this Agreement, a prohibition on the worst forms of child labor; and

-The elimination of discrimination with respect to employment and occupation.

The USMCA contains specific provisions impacting each of the countries that is a party to the agreement. For example, within the USMCA, there is a provision requiring México to create adequate legislation to ensure freedom of association as well as requirements relating to collective bargaining and labor relations. Additionally, the car manufacturing industry will be impacted by the updated agreement as it provides that a significant percentage of work performed on car manufacturing must be completed by workers earning at least $16 an hour, or about three times what the typical Mexican autoworker currently makes.

Canada’s dairy industry will also be impacted by the USMCA. Under NAFTA, United States farmers had limited access to the Canadian market as a result of tariffs and set quotas on dairy products exported to Canada. These restrictions are eased under the new agreement, thus opening up opportunities in the Canadian market for the United States dairy industry.

While the agreement was officially reached on September 30, 2018, the USMCA will not become effective until ratified by the legislatures of the United States, México, and Canada.  The anticipated date for each country’s respective legislature to pass the agreement is sometime in the middle of 2019.  One important difference between NAFTA and the USMCA is that the USMCA expires in 2034; NAFTA was a perpetual agreement.

IV. Forecast and Conclusion

While it is early to make concrete predictions on the true impact of the USMCA, there will no doubt be some impact to employers across the three countries. For example, those in the automotive industry will need to grapple with increased salary requirements for their employees in México, which may ultimately impact consumer cost. Some analysts predict that the automotive industry will shift manufacturing to Asia in order to reduce costs. This, along with other provisions regarding collective bargaining and labor relations, may be a generating force for labor-related issues for employers, particularly in México. Additionally, the United States dairy industry may see an uptick in labor demands as a result of the new market opportunities in Canada. While these changes may be gradual, growth and updated labor dynamics as a result of the USMCA should be addressed with the guidance and counsel of legal professionals.

 

 

About the authors:

Mishell Parreno Taylor is a shareholder in Littler’s San Diego office.

 

David Leal González is an associate in Littler’s Monterrey, Mexico office.

 

 

 

 

 

 

U.S. – China Trade, Investment Meeting Scheduled

Washington, D.C. – The US and China are scheduled to hold their annual round of discussions on commerce and trade next week in Chicago.

The 25th Session of the China-U.S. Joint Commission on Commerce and Trade (JCCT), slated for December 16-18, will include a roundtable discussion on bilateral investment; a cooperative travel and tourism program; and a discussion on “developing a shared vision of economic leadership.”

According to the Office of the U.S. Trade Representative, for the first time, the JCCT schedule includes a full day of events designed to facilitate private sector engagement with officials from the U.S. and Chinese governments with the goal of “expanding the scope of the JCCT with engagement between businesses from both countries.”

U.S. Secretary of Commerce Penny Pritzker, U.S. Trade Representative Michael Froman, and Chinese Vice Premier Wang Yang will co-chair the high-level plenary talks. U.S. Secretary of Agriculture Tom Vilsack will also participate.

Sixteen JCCT Working Groups meet throughout the year to address topics such as intellectual property rights, agriculture, pharmaceuticals and medical devices, information technology, and travel and tourism.

Established in 1983, the JCCT is the primary forum for addressing bilateral trade and investment issues and promoting commercial opportunities between the United States and China.

Private sector groups involved in the event include the U.S. Chamber of Commerce; The Paulson Institute; World Business Chicago; the U.S. Travel Association; and the Chicago Council on Global Affairs.

12/10/2014