The Coronavirus: A New Risk of Trade

Over the past three generations, analyses of trade have indicated that speed of innovation and change is supportive of improved living standards. Growth of a country’s international trade has typically been more rapid than growth of the domestic economy. 

There is strong historic support for the benefit of speed. The Roman empire’simpact on thought and development can still be felt today. Its territories, also in the Middle East, were expanded less through armed conflicts, but rather through the speed and improvements offered to its international collaborators. The Pax Romana insured that merchants could travel safely on the roads that were built, maintained, and protected by Roman legions. The common coinage facilitated the speed of business transactions throughout the empire. Central market locations through the foundation of cities and excellent communication systems enabled the development and distribution of innovations. 

But conditions change. On February 2, the U.S. State Department placed China on a travel advisory of ‘Level 4: Do Not Travel’ due to the novel coronavirus (Covid-19) outbreak.  As of February 12, the death toll from the virus is at least 1,113. 

It matters how quickly something can be provided to a specific location. Also needed is control of the speed of distribution combined with the capability to plan for the “what if” question in case a disruption of shipment is required. 

We need to discover and systematically assess possible trouble spots of globalization and highlight the consequences of dependence. It is vital for the formulation of strategic visions to understand the need and capacity for disruption.

In the 1970s, Professor Bernard LaLonde of The Ohio State University expanded his analysis of inventory carrying cost to include the expense of capital tied up in the storage of goods. With interest rates of 17 percent and higher during the Carter presidency, his innovative assessment of expense and risk changed corporate inventory management substantially.  

The speed of Chinese viral contamination sends us a risk signal for trade. We discover that rapid propagation does not just work for incoming and outgoing goods and services. Just as there has been substantial growth in health care tourism, where patients obtain lower cost medical services by traveling abroad, the expansion of viral infection can be hard to contain. 

Rapid distribution outwards and inwards can be deteriorating and distracting. The coronavirus outbreak is our wakeup call to be alert, not just to the benefits but also the risks encountered in international outflows and inflows of services, ideas, thoughts, and goods.

This problematic raises the key issue of how to deal with such risky occurrences. One useful approach is the consultation with experts who have experienced sudden, frequent, and unexpected risk conditions. Such expertise can be sourced best from the Middle East where there have been many past occurrences of uncertainty, scrutiny, and restraint. Local experts may be able to help manage hostile business environments both at home and abroad. They can anticipate repercussions from disruptions and also calm down hyper reactions. And therein lies much of the wheel of fortune: if enough people believe in a condition, their understanding may well become reality. Let us not accept complex issues without expert insights.

Keywords: Coronavirus; Covid – 19; Risk; Global Trade; Outflow; Inflow; Bernard LaLonde; Distribution; State Department; International Trade

Trump and Reagan: Whose Trade Policy Wins?

Professor Michael R. Czinkota

After signing the United States – Mexico – Canada agreement and ‘Phase 1’ of the China trade deal, President Trump has now moved his international trade focus onto some of the closest U.S. allies, the European Union. During the World Economic Forum in Davos, Switzerland, he proposed tariffs on auto imports from the EU, on wines, cheese, yogurt, and handbags from France, and on whiskeys from Ireland. 

The international trade policy efforts by Trump are remindful of President Ronald Reagan. Both presidents are stars of the Republican party and very frowned upon by Democrats. Trump and Reagan were focused on reducing the U.S. trade deficit and increasing the global competitiveness of the U.S. industry.  A look onto the past will provide a better understanding on whether Trump’s bold approach to trade policy wins over Reagan’s more sedate procedures. 

The 1980s:

The U.S. trade deficit was significant and growing precipitously. In the early Reagan years, it averaged $30 billion and reached $123 billion by late 1984. 

Reagan’s preference for free trade contributed to the Administration’s initial lassitude on this deficit. Gradually, however, calls for protectionism emerged. Examples were the U.S. automotive and footwear industries. Even clothespins were considered by some worthy of protection against foreign imports. In response, Reagan signed the Trade and Tariff Act of 1984 to reduce unfair global trade practices. There were also additional efforts to increase exports. Reagan announced bilateral trade agreements with Israel, and later with Canada. New rules were implemented to ease U.S. trade with China, yet the trade deficit continued to rise and reached $148 billion in 1985. 

The final, major trade legislation of the Reagan administration was the Omnibus and Competitiveness Act of 1988, which authorized negotiations in the General Agreement on Tariffs and Trade (GATT) and required the U.S. Trade Representative to take aggressive corrective action against countries that had large trade surpluses with the U.S.

The end of the Reagan years coincided with a sharp rise in globalization forces. The emergence of new technologies in transportation, communications, and information dramatically lowered the costs of international business and marked a rise of worldwide competition.

Trade Policy After 2016

Similar to Reagan, Trump has focused on fair trade. Some consider his approach more aggressive and populist. Trump ignited a new fervor in international trade policy. His tariffs have been imposed rapidly and often with little debate. His style has managed to concentrate the focus of trade partners. The constantly hammered message says: trade is now important to the U.S. 

Trump has argued consistently that the U.S. has been ignored or treated unfairly for decades in trade-related matters. He has pushed an “America First” policy with no more ongoing global support from the U.S. He renegotiated the North American Free Trade Agreement (NAFTA), eliminated the Trans-Pacific Partnership (TPP), as well as criticized major companies such as Carrier, Ford, and Mondelez – for selecting their production location without patriotic consideration. 

Trump tariffs of 2018 covered about $304 billion of imports into the U.S. Together with other forms of protection, they have had limited effects on the U.S. trade deficit. Some countries filed formal complaints against the U.S. with the World Trade Organization (WTO).  Trump responded by threatening corrective measures against the WTO if U.S. interests were not considered.

Comparing Reagan and Trump

Reagan’s policy endeavors were initially quite modest but became more assertive over time. Efforts sought to reduce the growing U.S. trade deficit with Japan and bolster American industrial exports. Trump’s trade deficit is significantly larger both in real and relative terms. Trump’s policy uses more harsh, aggressive, and clear approaches stating his expectations and demands, as well as reflecting the consequences of nonconformity.

Efforts by both the Reagan and Trump administrations to “level the playing field” have met with insufficient success. The powers of China and emerging markets are rising. American influence around the world should not become precarious. The time is right for further enlightened action on international trade. Countries need to understand the drivers of U.S. policy, which requires embracement of new approaches, new linkages, and new leadership directions for an entirely new era. 

Professor Michael Czinkota teaches international marketing and business at Georgetown University. His most recent book is In Search for the Soul of International Business, 2019. He served as Deputy Assistant Secretary in the U.S. Department of Commerce in the Reagan and Bush Administrations. 

Key Words: United States – Mexico – Canada agreement, President Trump, President Ronald Reagan, Trump tariffs, World Economic Forum, World Trade Organization (WTO), Omnibus and Competitiveness Act of 1988, General Agreement on Tariffs and Trade (GATT) and international trade policy

The Secret To Trade Policy Success

University teaching is again in session. As in past summer and fall semesters I teach international business at both Georgetown University in Washington D.C. and at Kent University in Canterbury, U.K.

With students I note three different categories of sentiments, quite telling of voting tendencies.  Two virtually equal blocs boast firmly established perspectives with little room for flexibility. Between them are the persons most crucial for policy and politics: hedonists. They seek to enjoy life, adopt views of happiness and comfort, and, in all likelihood, determine the key  prize: election victory!

At Kent, discussions will often times center around the political disputes surrounding the British exit from the European Union and th outcomes of new steps taken by Prime Minister Boris Johnson.

Students and faculty are highly aware that the value of the pound is declining against the dollar and that some beach houses near Kent are for sale. However, this is only relevant to those who need dollars or want to sell a beach house. Some seem to value education less which leads to a drop in student enrollment and translates into less public support for universities. Overall, dislocations are mainly seen as temporary phenomena – so no major changes by voters and businesses are implemented or expected.  Even if there are shifts, primary attention rests with the British Isles, not with the rest of the world.

At Georgetown, there is great interest in international business as illustrated in my seminar on “International Trade: ‘The Insiders’”.  Students were given the following prompt, “In case of a trade war, which international products would you be willing to give up and which ones would you stress to keep?”

Students generally agreed they could not do without their foreign-made consumer electronics and technology. “I am extremely reliant on Chinese made Apple products in my everyday life,” was a typical statement.

Low-tech was important too.  Examples were an unwillingness to sacrifice foreign pencils and pens, because of other countries’ comparative advantage in quality and price.

There was a split and much disagreement regarding clothing. Some believed it would be a necessary industry to bring back to the U.S. Others felt the increase in prices would hurt low-income and middle-class families, an issue of personal responsibility or promulgated by those who enjoy the good life.

Respondents also disagreed on automobiles. Some felt U.S. consumers should have access to foreign automobiles, because they “tend to be of higher quality in luxury, performance, and fuel economy”.  Those who believe that the U.S. should stop importing cars also extoll the value of public transportation and environmentally-friendly options. Economic resurgence of domestic manufacturers was seen as a side benefit. Stop importing products known for exploiting child labor or using harmful labor practices was a strong sentiment.

Food issues drew mixed opinions. Some felt that the U.S. should feed its residents with domestically-produced goods only, while others believed that autarky with domestic agriculture would erode quality of life and hurt the environment. Values were important. Tobacco and other socially harmful products should be abandoned.

Proponents for giving up foreign steel cited America’s heartwarming history. With its production the  US used to have a steel industry that was respected, wide spread, moderately effective and an important employer.

Personal experiences influence what one is willing to give up. “I would sacrifice olives from Greece because I have them right now and I don’t eat them,” said one. “I have

a surplus of nylon clothing that is definitely [not] necessary considering how little I actually go to the gym,” admitted another.  “I don’t want to sacrifice my eating preferences under any circumstances,” a Nutella lover wrote.

Differences in reasoning by students who are the upcoming “young tigers” reflect diverse perspectives, priorities, and preferences. There was little room or willingness to change one’s views. Consequently, any new trade policy will require room for implementation and will face strong variance of support.

Americans have  large and acceptable self interest, which must be understood by policy  makers. I perceive personal self-oriented desires to account for approximately one fourth of the tipping power leading to decisions. These special needs and expectations must be recognized, affirmed, appealed to and rewarded with clear commitments to make and fulfill promises. Ignoring the smiles, the pleasures and the extent to which life is affected by policy and its collateral effects is done at ones’ own peril.  It’s not all economics!

Expert talk: Martha Lawless from International Trade Commission

It was delightful to host Ms. Martha Lawless at my International Trade class this Wednesday. She covered topics from service trade, international e-commerce and trade barriers and shared her insights on government regulation, tax policy and the challenge with counterfiet products. Students were very engaged in the conversation and raised great questions. Thanks Ms. Lawless for the talk and we would love to have you again in the future!

Let Us Organize World Trade

There is broad historic agreement that the World Trade Organization (WTO) has been one the most successful international institutions; its membership accounts for more than 98 percent of world trade. However, today’s global economic landscape is changing rapidly, coupled with retrenchment and distancing from multilateral agreements. Combined, these factors impact the discernible value and role of the WTO going forward.

Changed Patterns of Trade and Investment

The expansion and development of IT infrastructure, telecommunications, and computing made the global revolution of the last few decades possible. New technologies, nonexistent when the WTO was established in 1995, have become crucial for growth and development in this decade. The outsourcing revolution has affected the developing world in a major way: global manufacturing and new services have dramatically changed supply chains; corporate espionage and intellectual property infringements supported many corporate changes in developing countries; and WTO negotiations and augmented enforcement procedures have not been able to slow that trend.

Moreover, one of the most critical issues in global trade is the aspect of unprecedented imbalances. Today, China is the new top global merchandise exporter with a total of $2.263 trillion, or 16.25 percent of world exports, according to WTO reports. It is the largest global exporter of goods, 17 percent of world exports, and the third largest importer, 12 percent of global imports.

The United States is the main goods importer with 13.4 percent of the global imports, totaling $2.4 trillion. In 1994, the United States was running an annual merchandise trade deficit of about $120 billion; by 2017, the U.S. annual trade deficit with China alone has ballooned to over $375 billion.

Stalemate at the WTO: Too Big to Be Effective?

The last successful WTO negotiation — the Uruguay Round — was a result of a strengthened, single market in Europe, the creation of NAFTA, and several plurilateral agreements, such as the Information Technology Agreement (ITA).

The Doha Round of negotiations, beginning in November 2001, aimed to achieve major reforms in the international trading system, with an explicit focus on developing nations. Nevertheless, this premise failed; disagreements concerning the agricultural sector, free trade of services, and intellectual property rights have stalled negotiations.

Twenty years ago, the principal WTO concerns were pollution, global warming, disease, and structural unemployment — none of these agenda items, arguably, have been addressed effectively, much less solved.

Size is also an issue. The WTO is comprised of 164 members, with widely diverse perspectives, levels of development, linkages, and ambitions. The WTO system has become unwieldy because of the unanimity requirement of its voting process. The result: progress with new agreements is at a standstill. Case in point is the reduction of trade tariffs, which, at a global 3 percent of Most Favored Nations status, is at the same level as in 2000.

China: A “Rule Shaker” or a “Rule Maker”?

The West’s open invitation for China to join the WTO in 2001 paved the way for its rise to a global economic power. Since then, the balance of power at the WTO has changed dramatically. Chinese outward investment in the global economy has increased thirtyfold, from $7 billion (making up only one percent of the global FDI) to almost $200 billion (13 percent of the global FDI).

China entered the WTO as a “rule taker,” evolved into a “rule shaker,” and now aims to become a “rule maker.”

In fact, economic relations between China, the United States, and the EU define many of the agreements and disputes at the WTO. Xi Jinping’s “China Dream” of national rejuvenation could be seen as a way to reshape the international economic system, putting China at the center.

China has not been an easy partner for the West. Initial optimism that China would turn toward a free market economy has yet to come to fruition. Moreover, with its “capitalism with Chinese characteristics,” the country has taken the main benefits of the open trade system by creating major distortions and causing disputes that the WTO lacked the capacity to handle. Controversial issues include intellectual property rights (IPR), free market revisions through government subsidies and state-owned enterprises (SOEs), unequal conditions for market access with major restrictions to market entry in China, and unfair technology transfer. Foreign firms operating in China struggle against restrictive regulations — the government often requires them to hand over their intellectual property as a condition of market access. Asymmetrical market access and lack of reciprocity are magnified further at political levels.

With the existing WTO rule book, it is difficult to hold China accountable. Implications of Chinese “market distortion” and “unfair competitive conditions” consume global trade relations rhetoric; these opinions, voiced loudly by the current U.S. administration, are also shared broadly by other players, such as the EU and Japan. Due to high trade deficits, the United States is pushing for WTO reforms, increasing tariffs, and blocking the nominations of seats on the WTO’s appellate body (where the U.S. is a major player in the dispute resolution process) as leverage. Desired reforms aim to regulate market distortions caused by government interventions, simplifying the process of gathering information on unfair trade and investment practices, broadening the scope of banned subsidies, and setting boundaries to proportionate retaliations. But, at the end of the day, why would China agree on reforms that jeopardize its state-run economic model?

The WTO as a Reflection of a “New World”

The WTO does not operate in isolation from changes and new developments impacting trade. In the last two decades, the world’s macroeconomic environment was shaken by at least two significant events: the spread of terrorism, and the financial crisis of 2008. Terrorism has enhanced the inward focus of the political and economic aspects of national security; the global recession has caused an inward retraction of production and services. International economic issues were largely ignored as attention shifted to domestic job creation, the security and protection of domestic credit markets, and enhancing liquidity. Further, financial and political conflicts seem to foster greater polarization among legislators in many countries around the world.

As a result of continued stalemates and disagreements at the WTO, external actors are adopting a new “do-it-yourself” approach defined by preferential plurilateral trade negotiations — handmade for and benefitting only a limited number of players.

In addition, there is the issue of China’s growth in influence. In September 2018, the United States together with  the EU and Japan signed a brief statement voicing shared concerns regarding the future of the WTO, questioning its validity as a primary platform for multilateral trade. As an immediate result of difficult trade relations between the United States and China, and tremendous  pressure applied by the current U.S. administration, China afforded European companies access to some sectors, while pledging to cooperate with the EU on WTO reforms — a decision taken in July 2018 during the EU-China Summit.

Since the appearance of President Xi Jinping at the World Economic Forum two years ago, Beijing has been signaling that it is willing and prepared to assume the role of a new custodian of globalization. However, it seems obvious that China would not accept any reforms at the WTO, or any level, that would jeopardize its own economic model and welfare. At the same time, China wants to preserve the existing global trade order, as the outside world is more crucial than ever for its economic development.

Today’s global economic realities are not only introducing a new set of concerns and means of doing business, they are also challenging the very effectiveness of the WTO’s historical role as an arbiter of world trade.

Valbona Zeneli is the Chair of the Strategic Initiatives Department at the George C. Marshall European Center for Security Studies. The views presented are those of the author(s) and do not necessarily represent views and opinions of the Department of Defense or the George C. Marshall European Center for Security Studies. 

Michael R. Czinkota is a professor at the University of Kent in Canterbury and at the McDonough School of Business at Georgetown University, He is a former Deputy Assistant Secretary of Commerce in the United States Department of Commerce.