New Articles

DRIVING CONGRESS TO ACT ON NATIONAL SECURITY TARIFFS

congress

DRIVING CONGRESS TO ACT ON NATIONAL SECURITY TARIFFS

Volkswagen GTI is turbocharged with room for…tariffs?

The Volkswagen Golf GTI is a perennial winner of Car and Driver’s 10Best award. The German-built sport hatchback combines “speed, handling, build quality, an attractive interior, and room for the family,” all for under $30,000. Car and Driver raves about the GTI’s turbocharged engine and notes it’s a formidable challenger to competing “hot hatches.”

Apparently, the U.S. Department of Commerce believes that the GTI poses another challenge — maybe a turbocharged threat to America’s national security.

In a still-confidential 2019 report, the Department reportedly found that imported autos like the GTI “threaten to impair the national security” and recommended that the president impose tariffs as high as 25 percent.

All revved up

The president would enact these tariffs under Section 232 of the Trade Expansion Act of 1962. As TradeVistas’ Andrea Durkin has detailed, Section 232 is a little-used Cold War-era law under which Congress delegated broad authority to the president to restrict imports for national security reasons. The law is also the basis for current controversial duties on steel and aluminum.

The proposed tariffs have generated opposition from vehicle manufacturers, suppliers, economic analysts and members of Congress. The Alliance of Automotive Manufacturers notes that a 25 percent tariff on autos and parts would raise the price of an average imported car by an estimated $6,000 (and add $2,000 to a U.S.-built car) while potentially leading to the loss of over 600,000 American jobs. The Association of Global Automakers (now merged with the Auto Alliance to form the Alliance for Automotive Innovation) questions how passenger cars and light trucks are relevant to national security, suggesting that “America does not go to war in a Ford Fiesta.” Statements from Administration officials suggest that the “national security” justification for auto tariffs may be a pretext to gain negotiating leverage in other contexts.

Sourcing of US Light Vehicle Sales 2017

Congress may put the brakes on Presidential tariffs

With the possible exception of avid inventor Ben Franklin, America’s founders would be astounded by the GTI. They might be equally astonished, however, by the Trump Administration’s assertion of broad authority to impose tariffs. After fighting a revolution against “taxation without representation,” the founders believed it was vital to entrust the power to impose tariffs and other taxes to the people’s representatives. Specifically, Article I, Section 8 of the Constitution vests Congress with the “power to lay and collect taxes [and] duties.”

Since 1934, after its disastrous experience with the Smoot-Hawley tariffs, Congress has increasingly delegated specific trade and tariff powers to the president, subject to a variety of limitations. Presidents have generally used these powers judiciously and to reduce tariffs to expand trade. For example, when President Kennedy signed the 1962 Trade Expansion Act (which enacted Section 232), he emphasized the importance of opening trade and reducing trade barriers and warned against “stagnating behind tariff walls.”

President Trump has taken a maximalist approach to his delegated powers to impose tariffs, particularly for “national security” reasons. In response, Congressional critics from both parties point out that under the Constitution, Congress should be the ultimate driver of tariffs, not the president.

Other concerns with the Administration’s application of national security tariffs include a lack of transparency in determining tariffs and administering tariff exclusions, its use of an overly broad definition of national security, and the cascading impacts on U.S. producers from higher metal prices. Legal experts are also concerned that the Administration did not follow the law when it imposed new tariffs on derivative steel products (including nails and bumpers) and when it extended its review of auto tariffs when time limits under Section 232 have likely expired.

Cost of Autos 232 Tariffs

Time for a trade law tune-up?

Congress could rein in presidential national security tariffs by simply repealing Section 232. However, even critics of current tariffs recognize that there are circumstances where the president might need authority to adjust trade in response to national security threats. Accordingly, Congress has focused instead on bipartisan proposals to place additional limits on the president’s ability to employ Section 232.

The Trade Security Act of 2019, introduced by Senator Rob Portman (R-OH) and Representative Ron Kind (D-WI), would bifurcate the Section 232 process. The Department of Defense (DoD) would first investigate whether there is a national security basis for restricting imports of an article. If DoD finds that an article poses a security threat and the president decides to act, the Commerce Department would then recommend tariffs or other measures to address the threat. The Portman-Kind bill would also enable Congress to disapprove any Section 232 trade restriction imposed by the president through a resolution of disapproval that would itself be subject to a veto by the president. This legislation would not impact current Section 232 tariffs on steel and aluminum.

The Bicameral Congressional Trade Authority Act of 2019introduced by Senator Pat Toomey (R-PA) and Representative Mike Gallagher (R-WI) would also require DoD to take the lead in investigating whether an article poses a national security threat, while also adopting a tighter definition of national security. Notably, under this legislation, no proposed Section 232 action by the president could take effect unless Congress first passes a resolution of approval. The Toomey-Gallagher bill would also (i) repeal current steel and aluminum duties unless Congress passes an expedited resolution of approval, (ii) direct the independent U.S. International Trade Commission to report to Congress on the economic impacts of Section 232 actions, and (iii) require that the USITC administer the tariff exclusion process for future Section 232 actions.

Two bills in Congress to brake 232

Getting out of neutral

For the past year, Senate Finance Committee Chairman Chuck Grassley (R-IA) has been attempting to meld the Portman and Toomey bills into a compromise measure that would attract veto-proof majorities in Congress. Despite considerable bipartisan support, Grassley notes that this effort has faced two challenges. First, there’s opposition from Republicans who see the legislation as a rebuke of President Trump. Second — as any student of U.S. trade history could have predicted —interests that benefit from new national security tariffs are now lobbying intensely to retain these tariffs. Despite this opposition, Grassley has vowed to continue efforts to enact Section 232 reform in 2020.

More potholes ahead?

Meanwhile, Volkswagen’s GTI and other imported autos will continue to face the threat of national security tariffs. And that threat won’t necessarily subside if a Democratic president takes office next year. Some Democrats have already proposed using the Trump Administration’s expansive reading of Section 232 to advance their own policy goals — particularly to address the climate crisis. Carbon-emitting autos like the GTI would be a prime target for new tariffs.

The GTI was designed for Germany’s smooth, high-speed autobahns. When it comes to U.S. national security tariffs, however, the GTI’s road ahead may continue to be full of potholes.

_________________________________________________________________

Ed Gerwin

Ed Gerwin is a lawyer, trade consultant, and President of Trade Guru LLC.

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

trump

Trump Signs USMCA Into Law But Not Everyone is Cheering

President Donald Trump signed the United States-Mexico-Canada Agreement (USMCA) into law at a Jan. 29 White House ceremony, officially canceling the North America Free Trade Agreement (NAFTA). “The USMCA is the largest, most significant, modern, and balanced trade agreement in history,” Trump told admirers and the press. “All of our countries will benefit greatly.”

“Thanks to the unyielding dedication of President Trump, the United States will now have a fair and reciprocal trade agreement with Mexico and Canada,” reacted U.S. Secretary of Labor Eugene Scalia. “USMCA will bring jobs, increased trade and stronger economic growth to our already record-setting economy, growing GDP by as much as $235 billion and adding as many as 500,000 new jobs.

“President Trump has delivered on a promise,” Scalia continued. “This historic agreement will level the playing field for American workers, preparing American businesses for the demands of a 21st Century economy. The Department of Labor stands ready to fully implement USMCA to the benefit of American workers.”

An independent report by trade credit insurer Atradius found the USMCA “has reduced trade policy uncertainty in North America, shielding Mexico and Canada from any global tariffs on cars the U.S. might impose on national security grounds.”

But not everyone was cheering. “USMCA is only marginally better than previous trade deals and doesn’t do nearly enough to create American jobs, increase workers’ wages, or protect workers and the environment,” states Groundwork Collaborative, an initiative dedicated to advancing a coherent, persuasive progressive economic worldview and narrative. “Trade is like every other economic issue: It is only really working when it is working for ALL people, not just the wealthy and well-connected. USMCA doesn’t meet that standard and is a major missed opportunity.

china

China Seeks to Redraw the Global Trade Map

Don’t Forget About Belt and Road

It’s a busy time for trade news. Headlines report every twist in the U.S.-China trade war, Brexit nears another deadline, and the U.S.-Mexico-Canada Agreement (USMCA) only just passed in Congress after a year of domestic debate. In Asia, countries are negotiating “mega” trade deals like the Regional Comprehensive Economic Partnership (RCEP) and the China-Japan-South Korea deal, while the United States is favoring “mini” or partial deals like the initial U.S.-Japan Free Trade Agreement. The WTO’s dispute settlement mechanism is stalling out without a functioning appellate body. The list of negotiations goes on.

All the while, China moves forward with its ambitious hard infrastructure plan to connect continents through its Belt and Road Initiative. The results will have a serious long-term impact on global trade. Policymakers are working to get their arms around its implications. Here are the basics everyone should know.

What is the Belt and Road Initiative?

Announced by Chinese President Xi Jinping in 2013, China’s Belt and Road Initiative is made up of two parts: The Silk Road Economic Belt (a “belt” by land) and the 21st Century Maritime Silk Road (a “road” by sea). Inspired by the historic trade routes forged between Asia and Europe and that once bustled with traders swapping silk, spices, tea, paper, and gunpowder, China is driving a state-planned version around its own vision of China-centered global trade.

The project has gone by many names: Launched as “One Belt, One Road” (OBOR), it’s now referred to as the “Belt and Road Initiative” (BRI). The plan redraws and expands China’s modern land and sea routes through new roads, railways, ports, bridges, power plants and more.

BRI spans some 138 countries, collectively home to 4.6 billion people and $29 trillion in combined GDP, an area the Chinese have loosely divided into six corridors. The biggest is the China-Pakistan Economic Corridor (CPEC), where China has spent an estimated $68 billion to date.

According to the American Enterprise Institute, Pakistan has received the most Chinese construction funds ($31.9 billion) along the BRI so far, followed by Nigeria and Bangladesh, but China is also investing heavily in more developed economies like Singapore ($24.3 billion), Malaysia and Russia. Construction projects have focused mostly on the power, transport and property sectors.

BRI Spending FN

$1 Trillion Price Tag

The World Bank estimates investment in BRI totals $575 billion so far. Firms like PWC and Morgan Stanley estimate the final cost at around $1 trillion over the next 10 years. To put that number in perspective, the U.S. spent just $13.2 billion ($135 billion in today’s dollars) to help rebuild western Europe after World War II under the 1948 Marshall Plan.

The $1 trillion price tag is just a drop in the bucket compared to the overall infrastructure needs of the region. The Asian Development Bank estimates that Developing Asia will need to invest $1.7 trillion a year in infrastructure to maintain its growth, respond to climate change and eradicate poverty. This adds up to over $26 trillion in total investment needed by 2030.

$26 trillion needed in infrastructure

Many participating BRI economies are in desperate need of infrastructure to expand trade. Trade in BRI corridor economies is 30 percent below its potential, and FDI is 70 percent below potential, according to a recent World Bank report. The BRI has the potential to increase trade, encourage foreign investment and reduce poverty by lowering trade costs. If fully implemented, the World Bank says it could end up increasing global trade between 1.7 and 6.2 percent. But improvements need to be implemented to make this a reality.

Opportunity Costs

For BRI to live up to its potential, the World Bank says China and participating countries must work to deepen policy reforms like increasing transparency, improving debt sustainability, and mitigating environmental, social and corruption risks along the belt and road.

Large infrastructure projects are notoriously difficult to execute. But risks are heightened along the BRI, where limited transparency along with weak economic fundamentals and governance make debt sustainability a real concern. The World Bank estimates 12 of the 43 BRI corridor economies are at risk for deterioration in their debt sustainability outlooks.

China has been criticized for using “debt-trap diplomacy” along the BRI to take advantage of developing countries unable to repay large debts. One frequently cited example is Sri Lanka’s Hambantota Port, which was handed over to a Chinese state-owned company in 2017 after the Sri Lankan government was unable to pay its bill for the Chinese-built port. China now holds a 99-year lease on the strategic port.

Some countries have been able to successfully renegotiate their BRI debt with Chinese banks. Malaysia recently refinanced its East Coast Rail Link project from over $15 billion to $10.7 billion after Malaysian Prime Minister Mahathir Mohamad initially cancelled $22 billion worth of BRI projects. Myanmar scaled back a major port project from $7.3 billion to $1.3 billion in 2018.

In a study of 40 cases of China’s external debt renegotiations with 28 different countries, research firm Rhodium Group found that asset seizures were rare and debt renegotiations in the form of write-offs, deferral and refinancing were far more common.

Rebranding the Belt and Road

Facing growing criticism abroad, BRI leaders announced at the second major BRI forum held in Beijing in April 2019 that the project would be getting a facelift. The joint statement says BRI investments would focus on “high-quality” cooperation, green development, and debt sustainability moving forward.

China’s Ministry of Finance also released a debt sustainability framework (DSF) for the BRI. The Chinese DSF closely mirrors the World Bank-IMF DSF, which has been used for over 20 years as a framework to guide countries and investors on how best to finance development needs while avoiding potential build up of excessive debt. The World Bank-IMF DSF requires regular debt sustainability analyses (DSAs) measuring a country’s projected debt burden, vulnerability to economic and policy shocks, and assessing the risk of debt distress.

While the introduction of the Chinese DSF is a welcome step toward improving debt sustainability along the BRI, there are still outstanding questions about how China will actually implement it. For example, Chinese officials have not yet indicated whether the DSF will be binding, or how transparent the DSF process will be.

All Roads Lead Back to Beijing

There’s plenty of trade news to vying for our attention nowadays. But China’s Belt and Road Initiative should not get lost in the shuffle. Beyond building roads and bridges in developing countries, the BRI also has serious implications for trade in areas like 5G technology, arctic trade and even space travel.

The U.S. response to the BRI has varied. The Obama administration followed a “Pivot to Asia” approach, negotiating the Trans-Pacific Partnership (TPP), a mega-trade deal excluding China. President Trump scrapped the TPP days after coming to office. His administration has since passed the BUILD Act which authorizes the U.S. government to invest up to $60 billion in developing countries across Asia and Africa.

But the United States’ muted response may be too little too late. With every new BRI project, China is physically laying the groundwork for new trade routes across the region. If successful, BRI means all roads will lead back to Beijing.

_________________________________________________________________

Lauren Kyger

Lauren Kyger served as Associate Editor for TradeVistas. A former Research Associate at the Hinrich Foundation, Lauren is also a Hinrich Foundation Global Trade Leader Scholar alumna. She recently joined the National Committee on U.S.-China Relations as digital content manager.

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

Smoked Salmon Market in the EU Reached $4.2B and Is Set To Expand Further

IndexBox has just published a new report: ‘EU – Smoked Pacific, Atlantic And Danube Salmon – Market Analysis, Forecast, Size, Trends And Insights’. Here is a summary of the report’s key findings.

The revenue of the smoked salmon market in the European Union amounted to $4.2B in 2018, remaining relatively unchanged 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 +2.0% from 2007 to 2018; the trend pattern remained relatively stable, with somewhat noticeable fluctuations being recorded in certain years. Over the period under review, the smoked salmon market reached its maximum level in 2018 and is likely to continue its growth in the near future.

Consumption By Country in the EU

The countries with the highest volumes of smoked salmon consumption in 2018 were Germany (40K tonnes), the UK (22K tonnes) and France (18K tonnes), together comprising 39% of total consumption.

From 2007 to 2018, the most notable rate of growth in terms of smoked salmon consumption, amongst the main consuming countries, was attained by the UK, while smoked salmon consumption for the other leaders experienced more modest paces of growth.

In value terms, France ($694M), Germany ($661M) and the UK ($637M) were the countries with the highest levels of market value in 2018, with a combined 48% share of the total market.

The countries with the highest levels of smoked salmon per capita consumption in 2018 were Denmark (1,303 kg per 1000 persons), Belgium (745 kg per 1000 persons) and the Netherlands (594 kg per 1000 persons).

Market Forecast 2019-2025 in the EU

Driven by rising demand for smoked salmon in the European Union, the market is expected to continue an upward consumption trend over the next seven-year period. The performance of the market is forecast to increase moderately, with an anticipated CAGR of +1.5% for the period from 2018 to 2025, which is projected to bring the market volume to 232K tonnes by the end of 2025.

Production in the EU

In 2018, approx. 223K tonnes of smoked pacific, atlantic and danube salmon were produced in the European Union; approximately mirroring the previous year. Overall, smoked salmon production continues to indicate a relatively flat trend pattern. The most prominent rate of growth was recorded in 2013 with an increase of 7% y-o-y.

Production By Country in the EU

Poland (57K tonnes) constituted the country with the largest volume of smoked salmon production, comprising approx. 26% of total volume. Moreover, smoked salmon production in Poland exceeded the figures recorded by the second-largest producer, the UK (23K tonnes), twofold. The third position in this ranking was occupied by Lithuania (19K tonnes), with a 8.4% share.

In Poland, smoked salmon production expanded at an average annual rate of +1.5% over the period from 2007-2018. In the other countries, the average annual rates were as follows: the UK (+5.9% per year) and Lithuania (+8.7% per year).

Exports in the EU

In 2018, approx. 110K tonnes of smoked pacific, atlantic and danube salmon were exported in the European Union; surging by 6.2% against the previous year. The total exports indicated resilient growth from 2007 to 2018: its volume increased at an average annual rate of +5.7% over the last eleven-year period. The trend pattern, however, indicated some noticeable fluctuations being recorded throughout the analyzed period. Over the period under review, smoked salmon exports reached their peak figure at 111K tonnes in 2016; however, from 2017 to 2018, exports failed to regain their momentum. In value terms, smoked salmon exports amounted to $2B (IndexBox estimates) in 2018.

Exports by Country

Poland was the major exporter of smoked pacific, atlantic and danube salmon exported in the European Union, with the volume of exports accounting for 46K tonnes, which was approx. 42% of total exports in 2018. Lithuania (17,147 tonnes) held a 16% share (based on tonnes) of total exports, which put it in second place, followed by Germany (12%), Denmark (7%), the Netherlands (4.8%) and the UK (4.6%). France (4,161 tonnes) followed a long way behind the leaders.

From 2007 to 2018, average annual rates of growth with regard to smoked salmon exports from Poland stood at +6.5%. At the same time, Lithuania (+10.2%), the Netherlands (+9.0%), Germany (+6.0%), the UK (+1.6%) and France (+1.4%) displayed positive paces of growth. Moreover, Lithuania emerged as the fastest-growing exporter exported in the European Union, with a CAGR of +10.2% from 2007-2018. Denmark experienced a relatively flat trend pattern.

In value terms, Poland ($800M) remains the largest smoked salmon supplier in the European Union, comprising 41% of total smoked salmon exports. The second position in the ranking was occupied by Lithuania ($297M), with a 15% share of total exports. It was followed by Germany, with a 13% share.

Export Prices by Country

In 2018, the smoked salmon export price in the European Union amounted to $17,657 per tonne, standing approx. at the previous year. Over the period from 2007 to 2018, it increased at an average annual rate of +1.5%. The growth pace was the most rapid in 2017 when the export price increased by 18% year-to-year. In that year, the export prices for smoked pacific, atlantic and danube salmon attained their peak level of $17,917 per tonne, and then declined slightly in the following year.

Average prices varied somewhat amongst the major exporting countries. In 2018, major exporting countries recorded the following prices: in the Netherlands ($19,500 per tonne) and Denmark ($18,414 per tonne), while the UK ($13,242 per tonne) and Lithuania ($17,300 per tonne) were amongst the lowest.

From 2007 to 2018, the most notable rate of growth in terms of prices was attained by the Netherlands, while the other leaders experienced more modest paces of growth.

Imports in the EU

In 2018, approx. 96K tonnes of smoked pacific, atlantic and danube salmon were imported in the European Union; remaining constant against the previous year. The total imports indicated a remarkable increase from 2007 to 2018: its volume increased at an average annual rate of +7.3% over the last eleven years. The volume of imports peaked at 100K tonnes in 2016; however, from 2017 to 2018, imports remained at a lower figure. In value terms, smoked salmon imports stood at $1.6B (IndexBox estimates) in 2018.

Imports by Country

Germany was the largest importer of smoked pacific, atlantic and danube salmon imported in the European Union, with the volume of imports resulting at 38K tonnes, which was near 40% of total imports in 2018. It was distantly followed by Italy (17K tonnes), France (9.5K tonnes) and Belgium (6.9K tonnes), together creating a 35% share of total imports. The following importers – the UK (4,228 tonnes), Spain (3,752 tonnes), the Netherlands (3,362 tonnes), Austria (2,826 tonnes), Denmark (2,183 tonnes), Sweden (1,724 tonnes) and Poland (1,646 tonnes) – together made up 21% of total imports.

From 2007 to 2018, average annual rates of growth with regard to smoked salmon imports into Germany stood at +7.0%. At the same time, Poland (+20.4%), the UK (+19.8%), Spain (+13.8%), Sweden (+8.8%), France (+7.9%), Italy (+7.5%), the Netherlands (+7.0%), Denmark (+4.9%), Belgium (+3.5%) and Austria (+3.5%) displayed positive paces of growth.

In value terms, Germany ($644M) constitutes the largest market for imported smoked pacific, atlantic and danube salmon in the European Union, comprising 39% of total smoked salmon imports. The second position in the ranking was occupied by Italy ($294M), with a 18% share of total imports. It was followed by France, with a 11% share.

Import Prices by Country

In 2018, the smoked salmon import price in the European Union amounted to $17,170 per tonne, rising by 3.3% against the previous year. Over the last eleven years, it increased at an average annual rate of +1.6%.

Prices varied noticeably by the country of destination; the country with the highest price was Austria ($21,395 per tonne), while Spain ($11,716 per tonne) was amongst the lowest.

From 2007 to 2018, the most notable rate of growth in terms of prices was attained by Denmark, while the other leaders experienced more modest paces of growth.

Source: IndexBox AI Platform

trade deals

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

Comprehensive is Out, “Phased” is In

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

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

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

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

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

Something Agreed

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

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

A Way Out or a Way Forward?

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

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

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

Journey of a Thousand Miles

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

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

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

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

Just a Phase?

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

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

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

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

Walking Alone?

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

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

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

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

Construction Phases: Trump’s Real Estate Mindset

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

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

Access the full agreement.

_______________________________________________________________

 

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fourteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

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

Global Trade: 2019 Wrap-Up and 2020 Forecast

Looking back at this year, 2019 saw a multitude of global economic growth disruptors from the escalation of the trade war between the U.S. and China, to Germany’s manufacturing and automotive decline and Brexit.

Consequentially, global trade growth has almost come to a standstill, and while it’s not quite at recession levels, nearly every market and sector, as well as businesses within those sectors, have felt the impact of policies and decision making.

Even with the possibility that trade growth could rebound in 2020 to a modest 1.5%, economic policy uncertainty remains high and if it abates, it is likely only to do so to a limited extent into 2020. What factors are at play? Let’s take a look.

Trade war with China. Despite the recent conclusion of ‘phase one’ of a U.S.-China trade deal, uncertainty remains high. The underlying reason for the trade war is not resolved and is unlikely to be resolved soon either: it regards fundamental issues such as the influence of China on the global economy and theft of intellectual property. Although tensions may temporarily soften, as they seem to do now, we see no end in sight for the trade war with China and with the current administration in the White House for one more year, another rocky year is forecasted. The trade war alone is affecting no more than almost 3% of global trade — currently approximately $550 billion of goods — but it is sending a ripple effect around the globe from business investment to value chains and trade flows. If it expands to other economies in Asia and Europe, which is very possible, we could see an even more pronounced slowing in trade.

Brexit. The self-imposed economic hardship has caused much uncertainty and plummeting fixed investments in the business sector. With Boris Johnson elected to Prime Minister in the December election and Brexit a certainty come January 31, policy uncertainty has been lessened, but some will remain until a new trade relationship with the EU is shaped. While the clout of those favoring a no-deal Brexit has been diminished, a no-deal Brexit is still possible. If this occurs, it would throw chaos into supply chains across Europe.

Business insolvencies and market pressure. The U.S. is expected to lead the number of business insolvencies with a 3.9% increase in 2020, far above the global average of 2.6% expected next year. This is due to the fact that there’s been lower business investment, lower external demand (especially from China), and higher import and labor costs. Those sectors feeling the most pressure include steel, which is dealing with an overcapacity issue, automotive, and businesses dealing in aircraft, which have seen a 20% market share loss. U.S. businesses dealing in vegetable and animal products and agriculture won’t see any relief soon either, and all U.S. businesses that have typically relied on imports from China (as well as businesses in China relying on imports from the U.S.) are now facing higher costs, which are resulting in insolvencies.

Despite all the economic doom and gloom, there are a few bright spots. Indeed, the ‘phase one’ agreement between the U.S. and China provides at least hope. Moreover, the U.S. signed trade agreements with Japan, Canada, and Mexico, and a few countries, like India and China, which are pulling their weight with a 6% GDP growth rate, are providing some positive impact on the global figure as they continue to grow at rapid pace, that is to say above 5% per annum.

Further, the consumer outlook looks positive with household consumption in both North America and Europe ending on a high note, thanks to low unemployment. Unfortunately, this alone cannot support economic growth. Low-interest rates and the amount of money floating around the U.S. as well as Europe could give rise to turmoil in the markets and the economy – both pillars of global growth – and any detriment to consumer confidence could put the economy in a downward spiral, reversing the modest growth expectations set for 2020.

There is much at stake and a low likelihood of that changing for 2020. If economic and political developments continue to sour, economic growth could be hampered even more than it already is.

__________________________________________________________________

John Lorié is Chief Economist at Atradius Credit Insurance, having joined the company in April 2011. He is also affiliated to the University of Amsterdam as a researcher. Previously, he was Senior Vice President at ABN AMRO, where he worked for more than 20 years in a variety of roles. He started his career in the Dutch Ministry of Foreign Affairs. John holds a PHD in international economics, masters’ degrees in economics (honours) and tax economics as well as a bachelor’s degree in marketing.

usmca

Sizing up the USMCA Compromise Package – How Various Industries Will be Impacted

On December 10, Speaker Nancy Pelosi, the Trump administration, along with leaders in Mexico and Canada, announced a compromise to the new North American trade deal, known as the U.S. Mexico and Canada Agreement.  Eleventh-hour concessions by the Administration and Mexico are likely to result in a win for labor, President Trump, and ultimately market stability.

The final deal gives Democrats in Congress a few big wins in the pharmaceutical and labor industries, as well as environmental standards, and gives President Trump the victory of having his new trade deal on the path to ratification by all countries involved. Canada managed to receive much of what they requested, despite the slight opening of the Canadian dairy market to U.S. producers.

One of the biggest changes from the original draft USMCA in the compromise trade agreement is the negotiated labor monitoring and penalties for noncompliance. While the original draft required Mexico to change its laws to make it easier for workers to unionize, the compromise created an interagency committee that will monitor Mexico’s labor reform, established benchmarks and penalties for Mexico’s labor reform process, and established labor attachés in Mexico for on-the-ground reporting about Mexico’s labor practices.

Below is an outline of the changes to the USMCA – the House is expected to vote on the deal next week, though the Senate will likely not address the bill until the impeachment process has concluded:

For workers, language was removed that made it difficult to prove that trading partners are not protecting workers from violence in their respective countries. Now, Mexico has agreed to a “rapid-response labor mechanism” (see ANNEX 31-A) that allows independent, multinational three-person panels to investigate Mexican factories. Mexico, too, can have a panel investigate factories in the U.S. If a violation of union rights is found, a complaint can be filed, and the country making the accusation can determine the period of time that the accused county can have to address the concern. Provisions against Forced Labor also remain strong in the agreement. The deal is expected to also create 176,000 new jobs in the U.S. (See Article 23.3-23.4, ‘Labor Rights.)

For the environment, Democrats have promised that the deal has an added commitment that all the countries will have seven multilateral environment agreements (MEAs), alongside language that will allow the list to grow over time. Provisions include prioritization and monitoring of MEA commitments, and maintain and strengthen the protection of endangered species, the Montreal Protocol, prevention of pollution from ships, regulation of whaling, protection of the Ozone Layer and more (Article 1.3 Amendment and Article 24.9 Amendment)

For the pharmaceutical industry, the deal’s former provision that gave biologics a 10-year exclusivity period on the market is now entirely taken out. Democrats argued against the exclusivity period, concerned it could increase the cost of drugs, and succeeded in eliminating language that allows patent evergreening – when brand-name drug manufactures extend patents an additional to maintain power in the market when a new or related drug is created. (See the deletion of Article 20.49 ‘Biologics’)

For the internet, a Democratic concession led to maintained protections in the USMCA for technology companies, giving legal immunity for content posted by their users, as well as legal protections when these companies seek to moderate platforms. These provisions remain the same from Section 230 of the Communications Decency Act of the USMCA.

For the steel industry, while the deal already exempted the Canada and Mexico from steel and aluminum tariffs, the revised agreement has strict rules of origin in the automotive industry. The deal states that seven years after entry into the USMCA, all steel manufacturing must occur in one or more of the countries involved, except for the refinement of steel additives. Ten years after the agreement, the countries will consider appropriate requirements in the interest of all parties for aluminum to also be considered. (See Chapter 4, ‘Rules of Origin’)

For Canada and dairy, the U.S. will be able to export 3.6% of Canada’s dairy market, currently at 1%. Dairy companies in the U.S. can sell their products into Mexico duty-free, with access to common-named cheeses, while Canada is opening its market with more duty-free quotas for U.S. dairy products. The deal eliminates Canada’s 6/7 milk pricing system, and holds Canadian export of dairy to the standards of international trade rules.

And for the auto industry, in order to avoid tariffs, a car or truck must have 75% of its components made in the U.S., Mexico or Canada, up from 62.5% today.  Also, workers making the cars or trucks, at least 30% of the work, must be earning at least $16 an hour. By 2023, that number is 40% of the work done on cars.

With the United States positioning itself to negotiate several more trade deals, labor hopes that these last-minute changes set a benchmark for labor standards and enforcement moving forward and, likewise, the President hopes it demonstrates he can close a major trade deal.

___________________________________________________________

Note: Ryan Bernstein, formerly chief of staff to Senator John Hoeven (R-ND) is a senior vice president with McGuireWoods Consulting federal public affairs group.Mariam Eatedali is a research associate at McGuireWoods Consulting; she previously consulted with former representatives and senators to address foreign economic and diplomatic concerns while she was a fellow for the U.S. Association of Former Members of Congress

trade

Trade and the Impact on Imports and Exports in 2020

Significant and sustained increases in the world trade index (an index measuring the number of times the word uncertainty or its variants are mentioned in Economist Intelligence Unit (EIU) reports at a country level) should be a worry for many as “the increase in trade uncertainty observed in the first quarter could be enough to reduce global growth by up to 0.75 percentage points in 2019”[1]

In August, the US Institute for supply management[2] latest report shows a contraction in production, purchasing, and employment indices.

Ahir, H, N Bloom, and D Furceri (2019), “The global economy hit by higher uncertainty”, VoxEU.org. https://voxeu.org/article/trade-uncertainty-rising-and-can-harm-global-economy

 

Uncertainty generated from Brexit, the US-China trade war, Japan – South Korea trade wars, and general discontentment with global trend towards widening income inequality is creating a toxic mix for politicians to deal with. The irony is the conventional approach of blaming your trading partners for your problems is only likely to exacerbate a general lack of confidence and increase further uncertainty.

The current round of the G7 summit in Biarritz concluded with support “to overhaul the WTO to improve effectiveness with regard to intellectual property protection, to settle disputes more swiftly and to eliminate unfair trade practices.” In essence, it’s signaling a need to strengthen the capabilities of the WTO to act faster and more decisively in resolving disputes that are even more political than structural in nature, requiring a more multi-faceted engagement approach. Whilst this may help in the long-run, in reality, companies will have to contend with uncertainty in global trade for some time to come as well as the impacts on the real economy from these disputes.

And all of this is happening as IMO 2020 approaches, the January 1, 2020, date by which the International Maritime Organization mandates a switch to lower sulfur fuels in order to achieve an 80% reduction in sulfur emissions leading to significant cost increases in the shipping goods via ocean freight (initial estimates between 180USD – 420 USD per TEU dependent on routing, base fuel costs, carrier).

So given the significant uncertainty around global trade agreements, the increasing use of trade as a political football, the increasing costs to trade and the shortening of product lifecycles as customers want faster, newer more differentiated offerings. Is it still worth it?

Of course this is very much dependent on what industry you are in. Whether you’re a global manufacturer or a wholesaler sourcing goods, your perspectives may be different based on investments made, sensitivity to current trade/tariff measures, customer demands, your markets, and the degree to which you are exposed to political debate and targeting.

However, I would offer that the benefits of specialization, economies of scale and unique factors of production that have underpinned global trade still exist as Adam Smith put it in 1776:

“By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”[1]

Today this simple analogy still holds true in skills, competences, capabilities, and access to markets and insights so that over time the expectation is that trade will prevail.

While the recent outlook has been gloomy, opportunities for 2020 include a resolution to a number of ongoing disputes and a final settlement on Brexit (we hope). Additionally, the maturation in technologies such as blockchain, process automation, forecasting and demand management solutions can also offset costs associated with IMO and support greater agility in the uncertain supply-chain world that we currently live in.

Indeed, if 2019 was the year of trade uncertainty, 2020 could be a restorative year in our ability to execute global trade.

Partnering with an experienced supply chain leader will be essential to minimizing cost increases while ensuring the efficient flow of your company’s goods and services.

_____________________________________________________

[1] World Economic Forum:https://www.weforum.org/agenda/2019/07/how-trade-uncertainty-is-impacting-the-global-economy/

[2]https://www.instituteforsupplymanagement.org/ismreport/mfgrob.cfm?SSO=1

[3]Adam Smith: Wealth of nations 1776

Neil Wheeldon is the Vice Presidents Solutions, BDP International.

USMCA

A Vote on USMCA is a Vote for Predictability

For all their legal nuance, trade agreements are written to make commerce more predictable. The rules are meant to increase business confidence, boost investment and spur job creation. It’s time for Congress to show bipartisan support for a more predictable North American market, and pass the United States-Mexico-Canada Agreement (USMCA).

USMCA is a much-needed upgrade of the North American Free Trade Agreement (NAFTA), a text that was largely copied over from the US-Canada bilateral trade agreement signed in 1988. To say that NAFTA is outdated is an understatement. Canada and Mexico have concluded trade deals with other countries that do things NAFTA could have never anticipated 25 years ago. USMCA is needed just to keep up.

Three chapters of USMCA deserve far more attention than they’ve received.

First, the chapter on health and safety standards is a must for US agriculture. The biggest threat to our ranchers and farmers is a lack of science-based import regimes abroad, not tariffs.

Tariffs are a tax on trade, whereas health and safety standards, applied in a non-scientific or in a discriminatory way, can act as a ban trade. US agricultural exporters have long demanded more science-based approaches to what are called sanitary and phytosanitary standards, and USMCA delivers on this. USMCA also puts forward a number of consultative mechanisms that will help prevent certain market access problems from arising in the first place.

US agriculture needs Chapter 9 of the USMCA.

Second, the chapter on technical barriers to trade is essential for US manufacturers. It covers the regulatory measures that impact over 90 percent of goods exports from the United States. This is fertile ground for protectionism. Governments can easily use regulatory measures, or ways of assessing conformity with them, that shield domestic producers from import competition. In fact, they can completely shut down trade with a few strokes of the legislative pen.

In USMCA, American manufacturers have more of a voice in the regulatory process in Canada and Mexico concerning their exports. Importantly, USMCA also calls on the three countries to recognize that, in setting technical specifications, performance, and not the provenance of the regulation, is what should matter. This is a longstanding US demand, and USMCA represents a tangible win for US exporters in this regard.

American manufacturing needs Chapter 10 of USMCA.

Third, the chapter on intellectual property is upgraded to reflect the needs of a building a creative economy. The list of international agreements that inform USMCA is striking; many didn’t exist in 1994, never mind in 1988. Copyright protections are modernized, as are those for biologics, a type of drug that could not have been imagined when NAFTA was negotiated. Whereas patents, alone, could help stimulate investment in small molecule drugs, they aren’t enough for the living systems that define biologics. USMCA brings Canada and Mexico closer to the US standard, and in this regard increases protection of American IP abroad.

Other IP provisions will assist a variety of America’s creative industries, from film to fashion to iPhones. These modernized rules, along with consultative mechanisms to ensure a level playing field, will provide the kind of protections that inventors need to bring their ideas to market. This is a win.

America’s creative industries need Chapter 20 of USMCA.

Still, there are some who, while recognizing the benefits of USMCA, worry that the deal cannot effectively enforce labor and environmental standards. They shouldn’t be. The provisions are as good as anything in the EU-Mexico trade agreement, for example, and Europe is renowned for having high expectations on both fronts, both domestically and internationally.

Polls show that, regardless of party, American voters are more supportive of free trade now than ever before. Democrats, Independents and Republicans converge around 80 percent in favor. Polls also show that USMCA has bipartisan backing.

The United States is part of a North American market that thrives on predictability. It’s time for Congress to unite behind USMCA and deliver predictability.

_________________________________________________________

Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at Georgetown University’s School of Foreign Service.

USMCA

Has Move to Impeach President Trump Pushed Aside the USMCA?

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.