Perfect Timing for Corrections in International Trade

By John F. Di Leo

November 30, 2018 A.D.

Reflections on the latest summit in the southern hemisphere…

The heads of state of the USA, Mexico and Canada signed the new NAFTA 2.0 – the USMCA – early Friday morning in Buenos Aires, as they prepared to meet with more world leaders for the latest G-20 summit.   But despite that happy signing ceremony, it’s the rougher aspects of the trade wars of 2018 that weigh heavily on everyone’s mind.

Some would assume that these trade wars are all of Donald Trump’s making, but they would be mistaken.

  • Great Britain’s challenges in extricating itself from the European Union are of Brussels’ making.
  • The American loss of much of our manufacturing, especially of steel but not remotely entirely of steel, is of the making of 50 years of union-and-statist American burdens.
  • The flaws in existing free trade agreements are of their original negotiators’ making.
  • And our special challenges with Mainland China today, as we lead the effort to try to reclaim the world’s manufacturing from a single country bound and determined to dominate the world economy, have too many causes to list (though that list must begin with American capitulations in the 1970s).

Two quiet issues – barely addressed in the news media on this side of the Pond – are the questions of whether the USA and Great Britain will manage to negotiate a Free Trade Agreement, and whether the USA and the European Union will do so as well.

This isn’t an exciting story.  Free Trade Agreements involve complex Rules of Origin, mathematical calculations and Harmonized Tariff Codes, and tons of statistics that make the reader’s eyes cross.  So the press would probably rather focus on the personalities of the summit’s participants, do feature stories about the beauty of Buenos Aires, and pose the question: how will the summit help with Angela Merkel’s surrender of control of her party, or with Justin Trudeau’s uncomfortable relationship with Donald Trump, or with Emanuel Macron’s clear loss of the respect of the French voter?

But these summits should be about the big global picture – about trade and security, the areas where these countries can work together, or should, in order to make their respective nations, and the world, a better place.

And this is where BREXIT and the current trade war just happen to mesh perfectly.

Great Britain has long chafed under the massive surrender of national sovereignty that full EU membership demanded.  They didn’t realize what they were getting into when they joined; they were told that imports and exports would be duty-free, travel across Europe would be easier because the borders would “go away,” and other charming, pie-in-the-sky things like that.  They weren’t told that Brussels would end up dictating everything from their immigration policy to their food preparation rules.  So they decided, in a national referendum, to give it up, and be their own nation again, and the horrified EU is fighting their departure tooth and nail.

On a completely unrelated note, in 2016, Donald Trump was elected President of the United States, and he promised to straighten out our trade problems.  For 50 years, the USA has been bleeding manufacturing jobs, as more and more factories, and even whole industries, moved overseas, many to China.  We still manufacture things here, but often the things we make are heavily dependent on imported parts.  The Trump administration wants to correct that error, and has begun instituting high punitive duty rates, amending existing Free Trade Agreements (FTAs), and seeking out new FTAs, all in the service of this target.

 

This is where the timing comes in.  The USA has always desired an FTA with the European Union, but the EU hasn’t been interested.   Like many in the USA, Canada, and other one-time manufacturing powerhouses, the EU thought they were doing fine as they gradually lost their manufacturing, bit by bit, to Mainland China. And they were too haughty to negotiate a “duty free deal” with the uncouth USA, however major a partner we may be.  (The USA is actually the biggest customer of both Great Britain and the rest of the EU in imported goods).

Today, the lion’s share of imports into all these countries is inbound goods from China.  Cheap stuff, expensive stuff, and everything in between – by outsourcing so much to that one single country, we have all cooperated in empowering a nation with huge regional ambitions (it’s always been known that China wants to dominate Asia), and even arguably global ambitions (their recent growth and particularly their recent saber-rattling have convinced many in the intelligence community to consider China the world’s number one strategic threat).

Now, today, with the Trump Administration’s targeting of China’s often improper trade practices raising the veil on their forced joint ventures, intellectual property theft, currency manipulation and outright “dumping” style subsidies, even the Europeans and Britons are beginning to notice that they’ve lost a lot to the Chinese as well. The biggest trade lane in global transportation is between China and Europe, with ships arriving in Europe very full and going back emptier and emptier (just as we Americans have long experienced with our own US-China shipping lanes).

With Great Britain and the EU parting ways, in a manner that looks ever more hostile by the day, it’s a wonderful opportunity for them to each enhance their trade portfolios.  What could be better than to do so by signing FTAs with the United States?

FTAs are best known for the carrot they provide, but the stick is largely unknown.  The carrot is that an FTA rewards deserving products shipped within the member countries with duty-free status.  The stick is that they are only defined as “deserving products” if they are manufactured within the region, with a substantial amount of local labor and local parts.  If manufactured with too high a percentage of foreign materials and labor, they don’t qualify, and remain dutiable.  Quite an incentive to reconsider one’s material-sourcing approach!

So today, a British or Italian factory might manufacture a product – say, a pump or file cabinet or desk – primarily out of Chinese components.  As long as there is no FTA between us, there may be no great desire for them to change their purchasing practices.   But if there’s a US-UK FTA, or a US-EU FTA, then there’s this sudden recognizable potential benefit – duty free status! – if the goods qualify for the deal by being made with a sufficient percentage of domestic parts and local labor and profit.  Such an FTA, if written right, is a springboard to massive new domestic manufacturing.

And so it is that we enter this summit with a whole new opportunity.   The USA couldn’t manage to get an FTA with Europe in the past, but today, both the newly-separate UK and the remaining body of the EU are interested in negotiating one with us.    If written right, it will be a boon to all of us, because it will help create more manufacturing – both of finished goods and their component parts – both here in the USA and over on the “Old World” side of the Pond as well.

We need to work together to recapture our manufacturing dominance from China.  Both Europe and North America share a common interest in this goal, and the timing of BREXIT just might provide the perfect motivation to make it happen at last.

Copyright 2018 John F. Di Leo

John F. Di Leo is an actor, writer, and international trade compliance trainer at DTTS Trade Compliance Seminars.  His columns have been regularly found in Illinois Review for almost ten years now.

This column first appeared in Illinois Review, here.

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