Here is my televised discussion with China Global Television Network’s Elaine Reyes on the possible outcomes for the US-China trade deal, following the agreement on Saturday. Enjoy!
Offsets: One answer to International Trade Imbalances
Michael R. Czinkota
When foreign governments shop for defense supplies, they are not solely motivated by price and quality. In light of the trade balance effects of major acquisitions such as aircraft or defense products, international customers often require U.S. vendors to purchase goods from them in order to “offset” the trade balance effects large purchases have on their trade flows. In light of enormous U.S. trade deficits, it is time for the United States to reciprocate with offset demands of our trading partners. Frequently we find ourselves in conditions where foreign sales to us are major and our sales to importers and their nations are minor. This leads to trade relations which are out of kilter. U.S. firms have accommodated foreign offset demands for decades. Now is the time when some give-back by our trading partners is the right medicine to improve world trade imbalances.
Offsets are industrial compensation arrangements demanded (so far only) by foreign governments as a condition for making major purchases, such as military hardware. Sometimes, these arrangements are directly related to the goods being traded. For instance, the Spanish air force’s planes – American-made McDonnell Douglass F/A-18 Hornets – use rudders, fuselage components, and speed brakes made by Spanish companies. U.S. sellers of the planes have provided the relevant technology information so that Spanish firms are now successful new producers in the industry. Under offset conditions, U.S. companies also often help export a client country’s goods go international, or even support the performance of tourism services. For example, the ‘Cleopatra Scheme’ allowed foreign suppliers to Egypt to meet their agreed upon offset obligations through package tours for international tourists.
In 2015, U.S. firms entered into 38 new offset agreements where they agreed to cause purchases with 15 countries valued at $3.1 billion. In 2017, the total U.S. trade deficit was $566 billion after it imported $2.895 trillion of goods and services while exporting $2.329 trillion. No country has a bigger trade surplus with the United States than China. In 2017, the U.S. deficit with China climbed to its highest level on record, amounting to a gap of $375 billion.
Eliminating imbalances is a core component of the Trump administration’s international economic policy. One policy approach has been the threat of tariffs against China,. One effective supplemental strategy could be the instigation of offset agreements with major trade surplus nations.
For instance, many American imports that contribute to the trade deficit are capital goods, such as computers and telecom equipment. An offset agreement between China and the United States could require China to use American-made components, perhaps even from Chinese owned plants. An example could be the export of Smithfield ham from the U.S. to be served in company cafeterias in China. Then there are excellent opportunities for Chinese tourists, particularly if equipped with high-spend budgets.
The American trade deficit is not easily resolved. Government would be well served to explore non-traditional options in order to develop more than one fulcrum for leverage. New use of offset agreements – which have provided our trading partners with past success at our expense – could help revitalize American industries and bring a new sense of balance to trade relationships. Our government should encourage offset commitments by foreign firms and countries who sell a lot to us. America deserves to reap the benefits!
Michael Czinkota (email@example.com) teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent, U.K. His key book (with Ilkka Ronkainen) is “International Marketing” (10th ed., CENGAGE). Lisa Burgoa contributed to this commentary.
A pleasant surprise: An unexpected visit from Svala Guðmundsdóttir, head of the University Programs in Reykjavik, Iceland. She is visiting to prepare for an upcoming visit in November by two former Presidents of Iceland to discuss trade and economic policies. Thank you Svala!
Future Research and Preparation
(Final in a series of six)
Valbona Zeneli, Marshall Center, Germany
Michael R. Czinkota, Georgetown University USA and University of Kent, UK
Gary Knight, Willamette University, USA
Concluding this series of our research findings, here are future directions for investigating terrorism and international marketing. Like the legs of a sturdy stool, three priority areas; the firm’s value chains, its rapidity of recognizing threats, and its preparedness with responses to terrorist events.
Marketing in emerging economies searches for the most effective operations to reduce the impact of terrorism, to decrease the response time to terrorism and to avoid market failures.
It is important to create business models that minimize interference and disruption. For example, hamburgers do not have to be distributed through burger palaces but can reach customers through outside vacuum tubes. Suppliers don’t all have to come from only a few nations but can be sourced from a wide diversity of countries.
Financial efficiency must now be traded off with robustness and a cushion against disruption. The balance of benefits and costs needs to be understood: just how much does it cost to increase protection by one percent. What risks are worth taking? What are heuristic spinoff effects of traditional models, and do they need to be revisited? The new aim must be the monetization of alternative terror responsive strategies which improve performance under risky conditions. Real options theory can focus on risk uncertainty and emphasize creating and then exercising the now appropriately understood options.
Research must conceptualize and communicate the exposures of proposed investment projects. Apart from the investment benefits one should also rate an investment for its tie-down effects expressed by the viability and cost to withdraw an investment once it has been made and the restrictive effect on strategic directions. For example, when a certain climatic investment locale has been chosen, it may affect future choices of locale or innovations of car paint. Also worth examining is exogenous uncertainty in international markets that lies beyond managerial control. International marketers need flexibility for unexpected market developments. Financial options theory can help measure and quantify the effect of such management versatility.
Systems theory lets managers examine the threat and vulnerability exposures of the firm. The interdependence of networks of firms, affiliates, and agents within larger systems require examination together with how individuals relate to and interface with other actors in the socio-political sphere of interest. A systems perspective reduces the risk for management to under-specify marketing parameters. It becomes easier to understand and respond to the geopolitical environment, terrorism networks, and newly recognized sources of risk in business systems themselves, with a focus on the vulnerability of specific network nodes.
Future research should differentiate the effects of terrorism on services industries. Some aspects of services, particularly for international markets, may vary substantially from those of traditional goods. We investigated the effects of terrorism on the international operations of manufacturing firms. By comparison, firms in the services sector are often more vulnerable to terrorism. Substantially affected industries include airlines, transportation, and hospitality, as well as banks, insurance firms, and other financial actors. Most service-providing firms enter foreign markets via Foreign Direct Investment (FDI). Services are growing in importance. They represent the fastest growing sector in international business and usually constitute the largest proportion of economic activity in advanced economies and emerging markets.
Assuring service resilience by both an industry as well as an individual person is therefore crucial and imperative for the viability of business under the threat of terrorism.
Michael Czinkota teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent. He is a trade policy analyst and frequent public speaker. His key book (with Ilkka Ronkainen) is “International Marketing” (10th ed., CENGAGE).
The three Czinkotas congratulate Dean Charles Deacon to 46 years of admission service leadership! Daughter Margaret is quite happy with the Georgetown option!