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 (firstname.lastname@example.org) 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.
With help of a course specific editorial board, each student in FYS write a draft editorial during the semester, and made it a final public editorial and delivered a 4-minute presentation on the November 29th session of the course. During the session, students showed their innovation and great presentation skills. The editorial board members gave their insightful opinions and suggestions on the topics. Professor Czinkota also prepared a sweet Certificate of Appreciation to all the editorial board members for their generous contribution to the course.
Students in FYS develop an editorial which tackles an institutional trade issue relevant to them. These editorials can take any form of dissemination ranging from print instruments, social media, or Youtube films. The work can include an assessment of government and taxpayer expenditure on a trade related measures. Or it can represent the impact of government actions on corporate trade conditions. The first editorial draft is handed in for comment by and discussion with the instructor and the editorial team on Oct. 11. Subsequently, after discussion, the goal is to produce one cohesive, brief and insightful commentary which is postable or publishable for mail-out. Each student collaborated with the editorial board, the coaches and professor.
Editorial Board Members: Thank you very much for taking time sharing your unique insights and experience to the students. Your advice has greatly inspired them to take a deeper view in the subject matter and beyond. Your kind talk would always be remembered by the students.
Thank you again for the 5 amazing editorialists: (from left to right)
Assistant Director of Communications
Georgetown University McDonough School of Business
The McCormick Group
Business Information Consultant
CEO & Founder
We were visited by Mr. Barry Rhoads, Chairman of Cassidy and Associates. He presented his insights on the role of private sector influence on government, establishing and disrupting relationships and the achievement of thought for legislation.
Mr. Rhoads arrived in Washington as an officer in the U.S. Army, became a tax prosecutor for the U.S. Department of Justice. He is now the head of one of the largest lobbying firms in Washington D.C where he represents interests both foreign and domestic, such as Airbus Industries.