Early Progress on the International Front
The new decade got off with a big bang, with significant developments in trade policy. Though their substance and effect seem to be a point of debate, I believe that all three of these recent developments will be positive for the U.S. economy, in some way.
Here is what transpired in January on the international front:
- Phase one of the US-China agreement was signed in mid-January. China has committed to buy an additional $200 billion of American goods and services by 2021 and crack down on practices that have long frustrated businesses.
- At the end of January, the President signed into law the S.-Mexico-Canada Agreement (USMCA) which replaces NAFTA. This was a rare act of bipartisanism and was a long-standing campaign initiative of the President.
- At the close of January, Britain officially exited the EU, almost four years after the Brexit vote.
With the Coronavirus and the effect that it is having on the economy, it is easy to overlook that earlier in the month, phase one of the US-China agreement was completed. This deal aims to stamp out the theft of intellectual property in which both parties agree to work to “ensure fair, adequate, and effective protection and enforcement of intellectual property rights.” The deal also contains commitments to halt the forced transfer of American technology to Chinese competitors.
Companies have long complained that, in order to do business in China, they were forced to hand over valuable technology and trade secrets. China has pledged not to require such transfers, including when companies apply for certain licenses or government approvals. However, there is skepticism on how the enforcement will work in practice, and it is unclear whether China will interpret it differently than the United States. Many believe that seeing how China has failed to live up to its promises in the past, trade experts and business executives are skeptical that the administration could get China to keep the commitments it makes. However, stipulations have been put in place unlike other trade deals in the past. The U.S. and China have decided to work out any issues on their own with the creation of a Bilateral Dispute Resolution process to receive and evaluate complaints. The deal also includes an appeals process where issues can be elevated from midlevel officials all the way up to the offices of the U.S. trade representative and the vice-premier of China. Most trade deals have typically referred disputes to a neutral third party, but this new agreement aims to streamline the dispute process.
The USMCA is one of the few agreements that has received bipartisan support, as well as the support of both business and labor. Lawmakers, economists, and trade experts have emphasized that the new deal offers much-needed certainty for companies and workers in all three countries. President Trump had long threatened to withdraw from the original NAFTA, a move that many believed would have substantially hurt the economies of all three countries. One of the biggest changes from NAFTA to USMCA is tighter rules on how North American autos and auto parts qualify for reduced tariffs. Those changes, which aim to increase car production within the region, will require that companies make significant and costly changes to car production. Auto manufacturers are being given three to seven years, depending on the type of car, to fully comply with the complicated new requirements. On the plus side, the deal includes new provisions on digital trade, which are designed to reduce costs and complexities for global companies, as well as enhance intellectual property protection. The USMCA is a 16-year agreement with a review every six years and a 16-year “sunset clause” when the agreement expires. Canada still has to ratify the pact, and the three countries still need to meet certain obligations before the deal can go into effect. Plus, once the countries are satisfied that they’ve met their obligations, it’ll take another two months before the USMCA takes effect.
The Brexit process can be best summed up as exhausting. Though historic, it only marks the end of the first stage of Brexit. The first order of priority is to negotiate a deal with the EU. The UK and the EU have agreed to an 11-month “transition process” in which the UK will continue to follow the EU rules while working to come to new agreements in trade, security, and other areas. Though 11 months seems like a long time, the time will pass quickly and there is still much work to do. Negotiations could take months, and all remaining 27 member states and the European Parliament have to be in agreement. Furthermore, the government has ruled out any form of an extension to the transition period. If no trade deal has been agreed and ratified by the end of the year, then the UK faces the prospect of tariffs on exports to the EU.
The overall effect of all of these recent developments is yet to be seen; however, I believe that these are steps in the right direction. Though the bipartisan U.S. International Trade Commission said the USMCA will produce a tiny gain of .35% to the U.S. GDP, the deal removes uncertainty, which is good for business and the long- term investment needed to keep sustained growth. And though there is still a long way to go in completing Brexit, the most recent step gets the process unstuck and puts Great Britain in a position to craft a full exit.
The US-China agreement is a bit more complicated since much needs to be done and there remains a lot of open-ended concerns on enforcement. In 2019, Michigan businesses paid an extra $1.9 billion in tariffs, which has had a drag on the local economy. However, the genesis of the trade war has been the theft of U.S. technology and the need for serious action on the protection of the U.S. IP. I have the great pleasure to work with entrepreneurs, experiencing firsthand the technology and solutions they develop, all with great investment and sacrifice. IP needs to be protected to maximize the development of new technologies and further the U.S. economy.
There is more optimism on the forefront as we look into 2020. General Motors has committed to building a new autonomous vehicle plant in Detroit, the U.S. consumer continues to spend strongly, and the economic developers of Southeast Michigan continue to see a strong interest to invest in the region.
I look forward to a robust 2020 and wish you and your business success!