Blazing Trails: The Politics of Global Trade Routes
Data: U.S. Census Bureau; Map: Candor Visuals
Alexander Hamilton, the nation’s first Secretary of the Treasury, instituted an 8% protective tariff, aimed at Atlantic-dominant European powers, Harry Truman signed off on the Marshall Plan to oppose the spread of communism while building unity with post-World War II European Allies, and Richard Nixon played ping pong politics and high stakes poker with China, the Soviet Union, and the Middle East to further U.S. influence in those defining theaters of his presidential diplomatic legacy.
Throughout American history, nationalism and partisan foreign policy have been synchronous goals, and Donald Trump, perhaps a more expedient reflection of Otto Von Bismarck, has championed “America First” policies that have rattled stock markets, product highways, and traditional diplomats for nearly four years. Ludwig von Rochau, a German writer and politician in the 1800s, coined the concept of Realpolitik, that in today’s diplomatic culture most likely translates to: “get what you can during negotiations, declare ‘victory,’ and then see how it truly affects your nation’s economy (and the longevity of the politicians who sanctioned the deal).” Many believe the 2020 election results call for a pivot away from 800-pound isolationist gorilla tactics to a more measured approach to foreign policy, will that approach bear better results?.
One constant is that few politicians have challenged the necessity to approach China’s economic rise with a hard edge, calling out acts of malfeasance, and pressuring democratic nations to demonstrate a desire to contest China’s intellectual property theft, currency manipulation, and economic imperialism in multiple continents, all while reclaiming western technological preeminence. Should the U.S. reconsider the TTP agreement to counter the China-led, Asian-Pacific dominant, RCEP pact? In other regional conflicts, will the USMCA prove beneficial to midwestern farmers and auto part suppliers? Will Boeing profit from WTO verdicts in its perpetual litigious battles and EU trade agreements with regard to Airbus?
President-Elect Joe Biden will face these questions, along with many others, including his ability to accomplish numerous tasks concurrently: checking the spread of Covid-19 and reviving the economy, while simultaneously tackling infrastructure, climate change, and social justice issues, to name a few – many of these goals seemingly taking the U.S. in divergent directions.
What impact might Biden administration policies generate for Wichita Metro area trade? How should area businesses prepare for existing and future trade agreements? Three regional subject matter experts weighed in on these issues and suggest ways to improve international business opportunities for the entire United States economy.
Ray Garvey, International Business Manager, Grasshopper Mowers, Moundridge
What will be the impact of the change from NAFTA to the USMCA?
At the end of the day, the volume of international sales orders is what matters. Trade policy is but one factor, and it’s not a factor we think about on a daily basis, maybe because it is more static than other factors which can change monthly, if not weekly.
The “upgrade” to USMCA from NAFTA meant for us a significant amount of paperwork upgrade to create conforming Certificates of Origin for about 1000 SKU’s. The onus for complying with USMCA is on the importer, but we undertook the compliance project so that our importers in Canada and Mexico wouldn’t need to duplicate efforts. Apart from the new formalities, it has been business as usual, nothing gained nor lost. Any change in demand has not been affected by USMCA.
As someone who grew up in the Midwest, my impression is the bulk of Midwest exports are related to aviation, machinery, commodities, services related to livestock and value added processes to commodities. The biggest factors related to increased sales/exports will be export market demand, currency exchange valuation, long term weather patterns, and competition. Consumer preferences, product quality, and perception of value are important drivers.
The retaliatory tariffs enacted by Canada in response to US tariffs had more effect on our export sales than the changeover from NAFTA to USMCA. The tariffs increased the price of our products by 25% and decreased demand.
As far as we know, at ground level, USMCA will have no new effect on our industry exports. Increasing Midwest exports will still require Midwestern companies joining the ranks of exporters, seeing the benefits, knowing how to deal with risk, curiosity and willingness to understand the foreign culture they wish to sell in, and being able to provide competitive value through innovation, pricing, and marketing. USMCA just creates the rules for getting product across the borders, it doesn’t dictate who wants the product, who will buy it, or how competitive it will be.
How will Grasshopper mowers be impacted by U.S.-China trade policies?
As a Kansas manufacturing firm, realizing labor and some components are much cheaper from China, we must also realize China will never stop IP theft or currency manipulation. They have all but said so in their drive to become the world’s greatest economic power. It might be insightful to examine the differences in tactics, goals and values of a Communist-controlled economy versus however one would describe our system of governing commerce. I don’t believe our rule books are the same. We’re fierce competitors in markets around the world. While we’ve made the choice not to build a supply chain from China, we love our Chinese customers and don’t benefit from any policies making our product more expensive or more difficult for Chinese customers to obtain.
The Biden administration will likely continue down a path of developing rules that discourage US companies from sharing proprietary information with their Chinese manufacturing partners.
Data: Cornerstone Data; Chart: Candor Visuals
It seems Covid-19 may have had a substantial impact on Chinese supply chains and it appears the trend continues to diversify supply chain origins and even bring some capacity and jobs to the US.
To what extent are current WTO decisions and EU tariffs changing your business?
We’ll need to have much more detail on EU tariffs to know who they’ll affect and by how much. Boeing and Airbus have been going at it since the 80s, if not earlier, with dubious trade deals and negotiations and putting the FCPA to the test. We know that European governments contribute greatly to Airbus’ success. So, will the latest WTO be just another volley?
Beau Jackson, Partner, Husch Blackwell, Kansas City, MO
As a lawyer who focuses on international trade practices, what might change under the Biden administration with regard to China?
The last two years have been a reset in trade policy, as an “America First” (rather than a traditional globalist) attitude has dominated. For decades, China has been eating America’s lunch, and U.S. manufacturers have given away more than they should have in terms of proprietary processes and technology. China controls a much larger portion of the U.S. economy than a decade ago, which is disconcerting, and from the standpoint of U.S. companies investing in China, the Communist Party or its provincial representatives often promote their long-term aims by, for example, requiring majority local ownership for brick and mortar U.S. businesses which operate in China. Whether they admit it or not, all businesses located in China are to some extent under the control of the Chinese government. It’s been painful for my clients who are having to pay higher costs due to the tariff wars, but the Biden Administration will be in a tough situation, they won’t want to appear too soft on China, so high tariffs under the law known as “Section 301” may remain in place. Relatedly, it may have been a geopolitical mistake to pull out of the TPP, as it would provide good, viable alternatives to China for American manufacturers sourcing from, or doing business in, the Asian-Pacific region. In terms of legal challenges, I think any Presidential Administration should pick its trade battles; for example, Huawei is more of a national security and economic threat than TikTok.
What are your thoughts about the USMCA versus NAFTA?
Some people argue that the USMCA is NAFTA-lite, others argue it has righted many of NAFTA’s wrongs, the reality appears to be somewhere in the middle. Auto manufacturers in Mexico must use U.S.- made parts for 75% of the vehicles, and pay for Mexico’s workers must rise to keep the playing field more equal to that of American workers. For us in the Midwest, agriculture, especially dairy, seems to benefit from the treaty, while steel and aluminum tariff results are mixed.
How are WTO decisions impacting U.S.- UK/EU relations?
The WTO is in a position to pick winners and losers by determining what is classified as a subsidy or not. Unfortunately, these decisions often punish those who are not directly part of the Boeing versus Airbus dispute.
Karyn Page, President and CEO of Kansas Global Trade Services, Wichita
Data: U.S. Census Bureau; Chart: Candor Visuals
What do you think will be the immediate impact on U.S. trade when Biden becomes president?
First of all, it will take 9-12 months for the president to address major trade issues because so many others are more pressing. Covid first, national defense . . . it may happen in the first 6-9 months. There will be no changes in U.S. – China tariffs, but Biden might remove the aluminum tariff because there is less competition in that market than for steel, and there is less of a legal foundation for aluminum being an issue of national security.
Per the recent WTO decision that has allowed the EU to impose tariffs worth $4 billion on US goods, which countered the 2019 WTO allowance of $7.5 billion in tariffs on EU goods (both decisions intended to compensate affected countries for illegal Boeing or Airbus subsidies): Where does this litigation head next?
Biden’s administration will have to establish hard and soft boundaries in setting tariff boundaries in terms of which products should be included. This also will take time because several U.S. trade representatives are politically appointed, and they will have to coordinate with professional, career staff who handle international trade and foreign policy.
What are you telling your Kansas Global Trade Services clients to expect during, and after, the transition of a new president?
Number one, Trump is still in office, and the policies his administration put into place still exist. Secondly, pay attention to changes when they occur, there will be new opportunities for companies in many markets. Next, advocate for laws and policies that will help your business. Our Kansas congressional representatives are very responsive when it comes to helping small businesses – be very direct, reach out to them.