Perspectives by Michael R. Czinkota on “Trump trade playbook: Growing uncertainty shifts US economic ties”

Trump administration’s trade strategy is shaking up the global economy. Quitting agreements, talks of new deals and tariffs threats. There is much to keep up with Washington’s changing economic policies.

CGTN’s Daniel Ryntjes reports.

The most recent fast-forming development is that Donald Trump has ordered a national security investigation into automotive imports. That may lead to new tariffs on vehicles from Europe, Japan, and South Korea. The Commerce Department, led by Secretary Wilbur Ross will look into cars, trucks and auto parts. He is using the national security provision in U.S. trade law known as Section 232 also being used in the steel and aluminum cases, which makes it harder to challenge at the World Trade Organization.

Dr. Derek Scissors, an economist, and scholar at the American Enterprise Institute said the administration is not geared up for central planning.

“I think parts of the administration are thinking strategically and other parts are thinking strategically in a different way and it adds up to no strategy,” Scissors said.

It’s a house divided. Peter Navarro is seen as the biggest trade hawk. He’s the Director of the White House National Trade Council and is in favor of direct and sustained confrontation.

Those with a more traditional approach to global trade include U.S. Treasury Secretary Steven Mnuchin and Director of the National Economic Council Larry Kudlow.

Dr. Scissors adds that “the United States doesn’t seem to be sure what we are trying to accomplish. So the tactics of putting China or other countries off balance and that’s worked fine. But if you don’t know what you are trying to win, then you can’t win.”

For a broader perspective, the official responsible for threatening tariffs for the purpose of renegotiating trade under former U.S. President Ronald Reagan was Michael Czinkota, now an associate professor of international business and marketing at Georgetown University’s McDonough School of Business. He thinks tariffs are good “as a tool for attention, for really thinking through, as long as you never use them.”

He thinks the current tariff threats are just that. “I would be amazed if there would be a broad blanket implementation of tariffs.”

The U.S. has continued to send out mixed signals, but the less hawkish in the administration have aligned with China’s statements about backing away from a ‘trade war’ following meetings in Washington with President Xi’s Special Envoy Vice-Premier Liu He. China said it has agreed to further open up its markets to U.S. agricultural products while negotiations continue.

Interview with China Global Television Network on Possible Outcomes for US-China Trade Deal

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

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.

An Example of Midterm: The Tomato: Vegetable or Fruit?

Today, we had a midterm in the “Marketing Across Borders” course in the McDonough School of Business at Georgetown University. Students were asked to elaborate on the trade consequences of a Supreme Court Decision “Nix vs. Hedden” 1893. Our working title is “The Tomato: Vegetable or Fruit?”.

Here is my summary of the case, please feel free to comment or send us your analysis of this case and I will respond to you. Enjoy!

The Tomato: Vegetable or Fruit?

In 1893, the U.S. Supreme Court grappled with an international legal question that continues to confound to this day — does a tomato qualify as a vegetable or a fruit?

Though many associate the tomato with the stews, salads, and sandwiches that are typically the domain of vegetables, any botanist will tell you that the plant meets the scientific definition of a fruit: a seed-bearing structure that  develops from the ovary of a flowering plant.

But in the U.S. Supreme Court case Nix vs. Hedden, the judges unanimously arrived at a different definition. They ruled that imported tomatoes should be taxed as vegetables, which had a 10 percent tariff when they arrived on American shores, rather than as fruit, which carried no tariff.

Though the court acknowledged that a tomato is technically a fruit, it went on to write that according to the “common” definition most people use, tomatoes fall under the same category as other vegetables such as lettuce, cabbage, and carrots. In other words, a tomato counts as a vegetable because most people thought it was.

A more recent example of changing definitions in trade policy arose during a trade war between Vietnam and the United States that started in 2001. When cheap imports of Vietnamese catfish threatened to put U.S. producers, who had higher costs, out of business, American lobbyists and lawmakers scrambled to find a way to bar Vietnamese producers from the market.

The coalition persuaded Congress that the word “catfish” only applied to U.S. varieties, not Vietnamese imports, even though there was no biological difference between the fish. Thus, when Congress normalized trade relations with Vietnam, its definition of “catfish” excluded basa or tra, the names applied to Vietnamese catfish.

Even today, the questions explored by the Nix v. Hedden case continue to have implications. What does this Supreme Court case – along with the example of the Vietnamese catfish – tell us about trade policy? Who ultimately defines a product, and how could altering definitions affect trade policy? Do tariffs still play a role in modern-day international trade, and can marketers make a difference?

Please analyze this case.

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).