Sometimes we are asked what keeps us up at night. Being a trade specialist, and not counting my three-year old and one-year old, it is the future of our international trade system that keeps me up. The United States and its allies established this system at the end of World War II, and the U.S. GDP has grown over this time period and the economy has created millions of jobs; in fact, the U.S. unemployment rate has decreased over the past 30 years.
The General Agreement on Tariffs and Trade, known as GATT, eventually became the World Trade Organization, or WTO. That has guided international commerce for all nations, including China and the United States. We are in transitional times right now. The Trump Administration’s policies are still in the making on 1) trade, 2) trade agreements, 3) tariffs, 4) taxes and 5) investment.
Business is not keen on the unknown. There may be some direction when it comes to oil and gas exploration, healthcare reforms, and defense investments, whether good or bad, but that is not the case in the trade area. For this reason, some companies are waiting with their plans for market entry or expansion to get a clearer idea about what will happen.
- Will it be more difficult to export and import? What happens to the supply chain?
- Will the Trans-Pacific Partnership go unsigned or will it be renegotiated? What will happen to NAFTA and the WTO?
- Will the new Administration be willing to impose tariffs under the Trading with the Enemy Act or International Emergency Powers Act?
- What will be the consequences of using aggressively anti-dumping and countervailing duty legislation? Will other countries retaliate in any way?
- Can the new Administration make good on imposing a 35% tax on U.S. firms that move manufacturing overseas? How will U.S. and international firms react to this?
- What kind of investment environment will develop because of any trade changes?
There is a wide range of opinions on what will take place as well as different thoughts on what will be the result of any actions. Trade may experience a shock or two, but it will nonetheless continue no matter what happens because the world economy is extensively integrated and globalized. Not even continental markets such as those of China and the United States can be self-reliant.
Trump could invoke the “Trading with the Enemy Act of 1917” to hit Mexico and China with tariffs as high as he wants. Under the law, the president can restrict all types of trade “during time of war.” That definition is very loose though. America doesn’t have to be at war with China or Mexico — it just has to be “at war” somewhere in the world in order to apply tariffs against China or Mexico. Experts believe U.S. special forces in Syria and Libya would suffice to meet that requirement for Trump to hit China and Mexico with tariffs.
Trump could also use the International Emergency Powers Act of 1977. That allows the government to raise tariffs on another country in case of an emergency. Losing manufacturing jobs could be considered an emergency. This Act has been used against Nicaragua, Panama, Sierra Leone and Somalia in the past. The difference with the previous Act is that assets cannot be seized.
Trump can also impose tariffs on everything under another law — the Trade Act of 1974, Section 122. It gives him authority to impose across-the-board tariffs. Trump just needs to find “an adverse impact on national security from imports.” Lost jobs could be an adverse impact. The caveat: The tariff can only be up to 15% on all goods and it’s only good for 150 days. Then Congress needs to approve it.
Trump would undoubtedly face resistance within his administration, from members of Congress, U.S. companies and countries. But time is on his side. Court appeals would take months, even years, to work their way through. Trump could raise tariffs as much as 35% on Mexico and 45% on China. It’s easier for him to go after China first because he would need to dismantle NAFTA before he could set tariffs on Mexico. If Trump hits these countries with tariffs, it shouldn’t be a surprise if they retaliate with trade barriers of their own against the United States.
What can companies do in such turbulent times? Supply chain reliability and risk management is important. A company needs to improve its end to end visibility with suppliers to know when a chain may snap. It may need to begin to identify and develop relations with alternative suppliers in other markets to hedge any kind of crisis. It may need to store emergency supplies, equipment and documents to ride out a shorter-term storm. There is also insurance available for supply chain surprises.
Technology vs. Trade
International trade has had a positive impact on overall U.S. jobs growth. However, it has led to job losses for some, particularly lower-wage manufacturing workers. U.S. manufacturing represents about 12 percent of U.S. GDP and approximately 8 percent of employment. Manufacturing employment has been declining since the 1950s, well before the WTO, NAFTA, or China’s entry into the world economy. Moreover, employment in manufacturing has been declining at a similar rate in other OECD countries, including in Germany and Japan, which run trade surpluses.
“America has lost nearly 1/3 of its manufacturing jobs since NAFTA and 50,000 factories since China joined the WTO” states Trump’s official website, citing Economic Policy Institute. The United States has lost 5.6 million manufacturing jobs between 2000 and 2010, but according to the Center for Business and Economic Research at Ball State University, 85% of these losses were attributable to technological changes, largely automation, rather than international trade.
America is producing more with fewer people because robots are replacing people. United Technologies promised Trump to keep almost 1,000 jobs at the Carrier plant in the United States, but the CEO has also mentioned that it will continue to bring automation to its U.S. plant in order to keep it competitive. Thus, trade and technology, as well as retraining, need to be understood in order to address job losses.
China is mostly blamed for many of these job losses. An artificially low renminbi (RMB) makes Chinese imports into the U.S. cheaper and U.S. exports to China more expensive. Trump is on record that he will direct the Treasury department to label China a currency manipulator. China may have kept its currency artificially low during the 2000s, however, the current focus by Trump on China as a currency manipulator is ill-timed. China’s trade surplus has declined from over 10 percent of GDP in 2007 to under 3 percent today (in comparison, Germany’s is 8.5 percent). Instead, China is shoring up its currency rather than artificially keeping it low. At the 2016 US-China Strategic and Economic Dialogue, China committed to continue market-oriented exchange rate reform.
A day after Trump accused China of currency manipulation, China allowed its currency to float more in accordance with international markets. The result was a significant drop in the value of the yuan to the dollar, about a 1/8 drop. This does not bode well for Trump if he designates China as a currency manipulator.
Take note that China is a major investor in the United States and buyer of U.S. treasuries. The fairly stable U.S. economy and the strong dollar make America a preferred destination for investors. On the one hand, the strong dollar makes it harder for the United States to export but on the other hand attracts international investors seeking safe investments and good returns. Increased interest rates would indicate a strong economy and may boost the U.S. dollar because foreign investors could earn more in the United States compared to elsewhere in the world.
If Trump is able to create a $1 trillion infrastructure plan, many companies will slow down on their exports and focus on the U.S. market. Moreover, foreign companies will enter the market with their investments and products. The question is of course, how will the U.S. Government pay for such a program. Public – Private partnerships are being looked at in a serious way to make this happen.
Something that politicians and the media don’t discuss very much is the service sector. Services are the most significant drivers of the U.S. economy and are an increasing component of international trade. Yet there is little mention in current trade debates of the gains to the U.S. from expanding services trade. Services comprise over 80% of U.S. GDP. In 2014, the U.S. exported $710.6 billion in services and imported $477.4 billion in services, producing a $233.2 billion surplus. The services trade surplus is also growing, up from $84.8 billion in 2004.
International trade has become a proxy for a broader set of economic challenges, in particular growing income inequality, wage stagnation, and reduced economic mobility. Following through on campaign threats to restrict international trade would shrink the economic pie, making these underlying challenges more difficult to solve. For instance, failure to pass the Trans-Pacific Partnership will mean the United States will miss out on annual gains between $57 billion and $131 billion a year, according to the U.S. International Trade Commission. Take note that the TPP has particularly addressed the so-called green (environmental) and blue (labor) issues that some say have led to unfair trade. The Trump Administration may want to renegotiate the TPP instead of walking away from it.
The U.S. Government does have a retraining program for those affected by international trade. The Trade Adjustment Assistance program is under the Labor Department and is administered by the states and is designed to provide services and benefits to workers who become unemployed or are threatened with job loss due to the impact of international trade. The TAA has had a minimal impact. The sentiment against trade is reflected in how weak this program is. The government needs to do more for those negatively affected by international trade; this could include expanding the Earned Income Tax Credit, establishing wage insurance, and supporting more funding for retraining that will confer the skills needed to be employed in this increasingly post-industrial economy.
Companies need to address international competition also. Those that stay on top have committed themselves to entrepreneurship and innovation. They have recognized that power in the marketplace has shifted from seller to buyer. These firms have seen that “better, cheaper, faster, smaller, more convenient, and more personalized” is the new norm, and the ability to innovate with committed employees is critical. These firms aim to generate an entrepreneurial spirit throughout the entire organization.
Finally, U.S. firms should seek professional assistance from trade consultants and state and federal trade agencies. They can help companies identify appropriate markets for their exports, select international tenders to bid on, find potential buyers or partners, help with trade shows and trade missions, and promote and advocate for companies overseas. This will save companies time and resources and bring profits more quickly from international sales.