Offsets: One answer to International Trade Imbalances

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 (czinkotm@georgetown.edu) 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.

Free Trade Zones and Counterfeit Goods

The European Union Intellectual Property Office (EUIPO) and the Organization for Economic Co-opertaion and Development (OECD)’s recent report claims that free trade zones may be facilitating illegal activities, such as trade in counterfeit and pirated products, by providing good infrastructure with little oversight over its use.

Free Trade Zones (FTZs) encompass a broad range of activities, from tourism to retail sales. They typically represent duty-free customs areas, or offer benefits based on location, in a geographically limited space. Today, there are over 3,500 zones in 130 economies, collectively employing 66 million workers worldwide.

A number of benefits drive countries to embrace FTZs. In general, these areas increase a nation’s foreign exchange reserves and improve the balance of payments. On a local level, new supply chains increase business for domestic producers that sell inputs by zone-based firms. Finally, these areas provide jobs that bolster employment and, at least in developing countries, can lead to higher wages over time.

Apart from FTZ’s benefits to their host country at both a local and national level, there may also be economic exposure to criminal activities as a result of insufficient regulation. Research shows that the number of FTZs in an economy appears correlated with the value of exports of counterfeit and pirated products.

With less oversight, rogue actors are attracted to FTZs to engage in illegal and criminal trade. The OECD’s findings indicate that one additional FTZ within an economy increases counterfeiting by 5.9 percent on average. It also appears that FTZs tend to be overly permissive by letting companies get away with poor safety and health conditions. This limited oversight is particularly troubling when one considers the potential for exploitation in areas such as human trafficking.

The OECD and EUIPO both stress the need for future action to curb the misuse of FTZs. They recommend developing clear guidelines for countries to increase transparency and promote clean and fair trade in FTZs, based on the involvement of industry members and key stakeholder of the trade supply chain.

The organizations identify three areas for future analysis. The first is the measurement the role of FTZs in the trade of illicit and counterfeit goods. The next step requires a fuller quantitative analysis of counterfeit goods. Finally, further research needs to explore why counterfeit profiles differ from similar economies.

FTZs provide a number of advantages to economies, but without further regulation and research, they may induce heightened criminal activity. Both public and private actors must devise and apply strong deterrents to the establishment of criminal networks.

Michael Czinkota teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent. His key book (with Ilkka Ronkainen) is “International Marketing” (10th ed., CENGAGE).

Lisa Burgoa of the Georgetown University School of Foreign Service contributed to this comment.

Sometimes even rankings can be Christmas presents

GoogleRankingCongratulations to Professor Dr. Michael R. Czinkota on being recognized as one of the world’s leading authors on international business and marketing for publications during the period 1980-2015! Throughout the 35 years, Professor Czinkota has always stayed in the top 20 of the prolific authors list from different sources.

“An analysis of significant contributions to the international business literature” in the Journal of International Business Studies rated Professor Czinkota among the top 3 most prolific authors worldwide, 1980-1989.

An analysis in the Asian Pacific Journal of Management ranked Professor Czinkota as #4 in the Journal of World Business, #7 in the Journal of International Marketing and #14 in all 6 leading business journals in the world for the time period 1996-2006.

More recently, Professor Czinkota was recognized among the top 8 pioneering researchers in international marketing around the world. He was also ranked among the top 20 most prolific international marketing authors during the period 1995-2015 in an anthology by Leonidou, Katsikeas, Samiee and Aykol. (2018)

In December 2017 – right before Christmas, Professor Czinkota occupied the first place of Global Google citations for export promotion and export management. He also ranked in second place for trade policy and place 8 for International Marketing, which is an exciting present for Christmas.

Professor Czinkota teaches at the McDonough School of Business of Georgetown University and at the Kent Business School, University of Kent. He was awarded the Significant Contribution to Global Marketing award by the American Marketing Association in 2007. Professor Czinkota is the co-author of International Marketing, 10th Edition, Cengage (with I. Ronkainen); International Business, 8th Edition, Wiley (with I. Ronkainen and M. Moffett) and Fundamentals of International Business, 6th Edition, (with I. Ronkainen and M. Moffett), Wessex. His blog also was named the third most successful international business blog.

Global Business: The Financial Side of Trade

When were talking about trade, you’ll probably hear the words “investments”, “portfolios”, “capital”, “debit and credit”, and BOP (thats balance of payments). These words to global trade advisors and financial aficionados are like second nature, but to those just breaking into the world of International Business, they can be daunting words. Let’s use an example  that will give you a visual picture of just how everything comes together to understand how countries measure international business activity, balance payments, and look at exchange rates and altered trade prices.

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New President, New NAFTA

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The Trump Administration will seek modest changes to the North American Free Trade Agreement renegotiation process. According to a draft of a letter sent to Congress last week, the Administration is seeking a more conventional approach to trade negotiation.

NAFTA, which was established in 1994 between Canada, the U.S., and Mexico, aims to reduce trading costs, increase multilateral investment, while helping North America become more competitive.However, during the 2016 presidential campaign, President Trump made the debate over free trade one of the central topics of his campaign.

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