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.

Migration from less developed economies and its effect on corporate and individual international business performance

Our Special Initiative: Immigration and Immigrant Integration Through Trade

Migration from less developed economies and its effect on corporate and individual international business performance

Michael R. Czinkota

Gary Knight

Zaheer Khan

 

Project Abstract:

Professors Czinkota of Georgetown University, Knight of Williamette University and Khan of the University of Kent have initiated theories on entry strategies into international markets. Czinkota co-developed the ‘stage theory of internationalization’ where firms typically enter markets abroad over two years. Knight co-developed the ‘born global’ theory, where improved communication enhances access to international markets right from firm foundation. Khan specializes in trade from emerging economies towards wealthy nations. We intend to marry our theories with analyses of immigrants and immigration to clarify immigrant contribution to international trade.

Globalization has been associated with widespread migration of people moving from less developed to developed economies for political, economic, or social reasons. Business survival is a major factor that predicts the success of immigrant entrepreneurs and of immigrants generally, in the U.S. Recent statistics indicated that more than 12 percent of residents in the U.S. are immigrants. Remittances sent home by migrants are substantial, and often represent a significant proportion of home country gross national product. In general, migrants play important roles in their host countries. For example, migrants in the U.S. operate as entrepreneurs, investors in capital markets, tourists, volunteers, and advocates. They bring various assets, resources, international experience, social networks, a sense of patriotism and social cohesion, bridges to foreign investors, and entrepreneurial knowledge and experience. Many such migrants draw on resources from their home and host countries to economically adapt to the U.S., and launch new businesses by becoming entrepreneurs. These transnational entrepreneurs often launch businesses that involve trade and investment between the United States and the migrants’ home countries

For more detail please go to the URL listed below:

https://www.dropbox.com/s/f50af8icq2qr8ug/Migration%20from%20less%20developed%20economies%20and%20its%20effect%20on%20corporate%20and.docx?dl=0

Good Corporate Citizenry, No Longer a Choice But a Necessity

By Victoria Galeano & Jerry Haar

When queried at a 1909 business meeting about the choice of colors available for his automobiles, Henry Ford replied that customers could have any color they wanted as long as it is black. Fast forward to the late 20th and early 21st centuries and consumers today are now in the driver’s seat (no pun intended). Publications such as Consumer Reports, CNET, and a myriad of other independent professional and consumer reviews of goods and services empower buyers, dictating to producers the style, features, and price ranges that consumers seek.

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US-China Dialogue: A Good Start to Solve Trade Imbalances

maxresdefaultThe first round of the US-China Comprehensive Economic Dialogue was held in Washington DC. The U.S. Treasury Secretary Steve Mnuchin, Commerce Secretary Wilbur Ross and China’s Vice Premier Wang Yang co-hosted the dialogue.

This new dialogue was established by Presidents Xi Jinping and Donald Trump at the Mar-a-Lago April meeting in Palm Beach. Since then, the 100-day economic plan for cooperation between the world’s two largest economies has achieved results. The low-hanging fruit harvest addressed agricultural products, agricultural cooperation, financial cooperation, and infrastructure investment cooperation. In addition, China abolished restrictions on imports of American beef. The U.S. delegation in turn attended the international cooperation forum held in May in Beijing, as a signal of support for China’s “Belt and Road” initiative. (The Belt and Road Initiative is a development strategy proposed by China’s president Xi Jinping that focuses on connectivity and cooperation between Eurasian countries, including the land-based Silk Belt and the Maritime Silk Road.)

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