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.

Interview with CGTV about US New Trade Policies

Prof. Czinkota, Interview with CGTV about US New Trade Policies.

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Prof. Czinkota’s Interview with Gray TV- U.S. Farmers brace for China trade backlash

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Trade and Tariffs: Prof. Czinkota’s TV Interview

Prof. Czinkota’s latest TV interview with Gray TV about Tariffs and Trade.
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Tariffs Can Be Good

Tariffs Can Be Useful

Michael R. Czinkota

President Trump has announced tariffs against steel and aluminum imports to help domestic industries long suffering from import pressure. Pundits have bemoaned these steps as inappropriate and precursors to a trade war. But other dimensions in play make these announcements useful.

Shifts in policy and diplomatic direction are implemented with great difficulty in Washington. Bureaucrats typically far outlast their current team of policy makers. It is therefore quite difficult for a well-intentioned appointee to implement change and witness its result.

Trade is only one of the economic components of government, and just one section of many policy parameters. New policy makers go through all the same motions as those before them, the initial touching of base, the mutual assurances of collaboration, and the plans to develop a joint vision.

But, little if anything happens. Things just chug along without new outcomes. More time brings new issues which take priority over earlier pressing concerns. Existing trade structures may eventually become acceptable to many leaders, which makes changing them even more difficult.

Shifts of global issues are slow in coming. To speed things up and to get results, there has to be a spotlight. Issues have to affect a number of important countries simultaneously, and lie on the surface of the policy cauldron.

For progress to occur different issue trade-offs between countries have to be possible. There has to be some “give” in exchange of some “take”. Governments have to decide whether their greatest preoccupation lies with economies that “grow”, that “make”, that “create” or that “coordinate”, and then place their negotiating chips accordingly. There has to be timing immediacy to move things along and to have government leaders and their bureaucracies address, analyze, understand and endorse changes. For all this, there needs to be an anvil focus.

The tariffs open the world outlook onto a new direction: they command attention from all trading partners; they require a specific response instead of the typical speechwriter niceties. New thoughts on the purpose and capability of trade can lead to an active re-analysis of policy steps and agreements.

Much of today’s trade understanding has been in place since the international institutions of Bretton Woods were formed in 1944. Surely, after 74 years, policy makers, firms, their long range planners, and academics should be able to come up with some helpful innovations.

All this is likely to precipitate shifts, adjustments, and new conditions. There will be new global actions and perhaps even entirely new paths and expectations for both international and domestic business transactions, lifestyles and relationships.

Change will lead to adjustment. Maybe there will be more domestic vacations, shorter college times, fewer flowers in winter, more eating of white asparagus, and more living within extended families. We just might wind up with adaptations  which make society more productive and life more pleasant.

As President Trump’s announcements and communications capture the attention of world leaders, they can astutely trigger progress and new approaches. Recognizing that a crisis could happen tends to clear the mind.

The benefit of the tariff announcements depends on the new processes and changes which they trigger. Then the threat of tariffs can be a useful means to an end. Strong admonishment with flexible rescission can make all boats rise.

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).