A path forward

September 25th, 2017 / By: / Featured

Today’s trade issues can impact your business in the future.

 

Editor’s note:  I asked an expert, Nate Bolin, an attorney with the Washington D.C. law firm Skadden, Arps, Slate, Meagher & Flom LLP, to answer my questions about trade issues, our featured topic in Advanced Textiles Source this month. Mr. Bolin advises clients on international trade laws, trade agreements and U.S. export controls. He is presenting Sept. 26 at IFAI’s Advanced Textiles Conference and Expo on the topic, “Understanding ITAR and the Future of Export Controls on Advanced Textiles.”

 

Q:  We’ve heard quite a bit about big trade deficits, particularly with China. One of your colleagues said in a presentation at a previous IFAI Advanced Textiles Conference, “It’s really unsustainable.” How does this deficit directly affect U.S. businesses, and how should they respond?

A:  First, it’s important to put this in context. There are many different ways to measure the balance of trade between the U.S. and other countries. You have the trade balance in services, in merchandise, and there are various measures of trade flows between specific U.S. trading partners—the so-called bilateral trade deficits. There can also be trade deficits or surpluses in U.S. trade in particular sectors, such as autos, textiles, apparel, information technology and others. When most people talk about “the U.S. trade deficit,” they are referring to the fact that the U.S. imports much more merchandise than it exports. Notably, in some areas such as services, the U.S. has a trade surplus, and we export more than we import in those cases.

Overall, the U.S. has a very large merchandise trade deficit with the rest of the world. That deficit has been growing since at least the end of the 1980s, but its growth really accelerated after China joined the World Trade Organization (WTO) at the end of 2001, and U.S. tariffs on Chinese goods were reduced significantly. Since that time, the overall trade deficit has grown enormously, and the biggest part of that growth has been in our trade with China.

So, on the one hand, trade deficits are simply a measure of economic activity—exports and imports. On the other hand, persistent, large-scale trade deficits can have very serious consequences for U.S. companies and U.S. competitiveness. If the U.S. imports a large volume of a certain product and exports very little of that same product, over time U.S. manufacturers of that product become less competitive because they are unable to increase their production, shipments, investments, R&D, and pay their shareholders a reasonable return on capital investments, as imports take a larger and larger share of the U.S. market.

These companies also may have difficulty obtaining new investments that they need to continue to grow and compete. Eventually, you can see a hollowing-out of entire U.S. industries. When that happens, it is very difficult to reestablish the industry and again become competitive in the global marketplace.

You see that effect to a degree in the U.S. textile and apparel industries, where according to data compiled by the U.S. Congressional Research Service, manufacturing employment has fallen from nearly 1 million workers in 1990 to less than 200,000 today. Some of that decline has been due to productivity enhancements and other changes in the industry, but there is no denying that imports have played a role.

U.S. companies are doing everything they can to compete with imports and to be competitive globally with their exports, but the increased level of imports has clearly made that more difficult. Even as U.S. companies invest more in productivity improvements, R&D, and advanced textiles, their competitors in other countries are using capital and low interest rates, fostered by a favorable balance of trade, to rapidly move up the same value chain. The U.S. is going to have to fight harder and harder for an ever-shrinking share of the market, and it risks losing its technological edge. In that sense, what is reflected in the U.S. trade deficit really is unsustainable.

U.S. companies understand this. They see the effects of imports every day on their sales, investments and bottom line, and they’re working hard to remain competitive, to get their leaders in Congress and the administration to respond appropriately to trade deficits, and to promote the continued development of U.S. manufacturing and know-how. What is needed is steady, sustained attention to the issue and a plan to address it through our trade and economic policies.

When you travel to China, Japan, Korea and European Union countries, and you watch their evening news programs, it is common to see reports on their countries’ balance of trade and trade deficits. It’s a high priority, important and news-worthy topic in those countries, and for good reason.  They understand that trade deficits matter, and their leaders and press focus on it; the U.S. needs to do the same if we want to remain competitive.

 

Q: Textile manufacturing is said to be on-shoring, or coming back to the U.S. Do you think more international businesses are either now manufacturing in the U.S. or partnering with U.S. businesses that manufacturer in the U.S.? Are there trade agreements that have anything to do with this, or is this more a result of world economy fluctuations or other factors? How could policies of the Trump administration impact this?

A: Organizations like the National Council of Textile Organizations (NCTO) have done a good job of tracking this issue. According to NCTO, capital investment in the U.S. textile and apparel industries in 2016 was up significantly over 2009 levels, and employment and business activity have generally stabilized after years of job losses and closures from 1995–2008. There are many reasons for this. Of course, there is general economic recovery since the 2008–2009 financial crisis, but you also see the effects of continual productivity gains in the U.S. textile manufacturing industry, increased automation and low U.S. energy prices.

Trade agreements also play an important role. For example, NAFTA’s yarn-forward requirements mean that textile and apparel manufacturers who want to import their textile and apparel products from Mexico and Canada without duties have a strong incentive to locate manufacturing in the NAFTA region.

New trade agreements or a renegotiated NAFTA could help to support the continued on-shoring of U.S. textile and apparel manufacturing and employment. For example, the U.S. could close some of the loopholes like tariff preference levels in the existing NAFTA that allow imports from outside NAFTA (such as from China) in certain instances. Greater enforcement of existing trade rules could also have an impact, such as by reducing false country of origin and other tariff preference claims. (See “A New NAFTA?” on this site for more about the status and impact of this agreement.)

 

Q:  Trade agreements don’t change often or quickly, but when they do, it seems that discussion heats up fast. Are U.S. businesses in agreement on what they want to see happen with renegotiated deals, or is there controversy about this?

A:  No trade agreement can be perfect, and there definitely have been winners and losers to one degree or another due to the terms of existing trade agreements. Many companies have benefited from increased exports and the ability to more flexibly source from various countries under trade agreements like NAFTA and the Dominican Republic – Central America Free Trade Agreement (DR-CAFTA). It’s not surprising, then, that in 2016 Mexico and Canada were the top two export markets for U.S. textile and apparel manufacturers, accounting for over $13 billion in exports.

China is currently the third top U.S. export market, but Chinese policies—such as joint venture requirements, forced technology transfer arrangements, subsidies, and value-added taxes—have had an impact on the U.S. industry’s ability to increase exports to China. At the same time, Chinese imports have most certainly had a tremendous impact on the U.S. textile industry since China joined the WTO. This can be seen in statistics on U.S. imports and employment. While much of the industry has adjusted to this through many painful years of restructuring, closures and layoffs, pressure from China and other countries has continued as the textile industries in those countries have moved up the value chain and produce more and more advanced products. Trade agreements like an updated NAFTA could help to counterbalance these trends, by increasing the incentives for manufacturing in North America. Bilateral arrangements with China and other countries could further increase the ability of U.S. companies to export.

 

Q:  What should we be watching in the next few months? What could happen? The comment period is over for NAFTA, as I understand it. Are there other comment periods in process or on the horizon? What should U.S. textile businesses be doing right now to help protect themselves in the future?

A:  This has definitely been one of the busiest years on record so far for trade policy and trade negotiations. Here are a few of the many things to be watching.

NAFTA negotiations

The U.S., Canada and Mexico have stated their intention to conclude negotiations over a new NAFTA agreement by the end of this year and are on pace to meet that target. The third round of NAFTA negotiations is being held in Ottawa, Canada Sept. 23–27, and the fourth is already scheduled for mid-October in Washington, D.C.

Rules of origin, which determine whether goods like textiles and apparel receive preferential tariff treatment, have been a key area of the negotiations, and we can expect to see more developments and “horse-trading” in that area. While the initial comment period for NAFTA has passed, U.S. trade negotiators continue to consult with Congress and remain open to comments from interested members of the U.S. industry. Companies that have an interest in these issues should definitely continue to engage with U.S. government agencies and Congress to make their voices heard.

Brexit and a U.S.-U.K. trade agreement

The U.K. is working toward its withdrawal from the European Union (EU) by March 2019. Before that happens, the U.K. needs to pass new legislation to implement or modify existing EU laws and regulations in U.K. law. Companies that have been affected by EU requirements—such as for REACH chemical registrations, as well as other certification and testing requirements for imports—should keep a close eye on this process and look for opportunities to address areas of the regulations that they consider burdensome or a barrier to trade. Once the Brexit process is complete, the U.S. and U.K. have signaled their interest in entering into a bilateral trade agreement, and informal discussions about the terms of such an agreement are already underway. So again, it will be important for U.S. companies to monitor and engage with that process.

U.S.-Korea Free Trade Agreement

The U.S. has been pressing Korea to revisit the terms of the existing U.S.-Korea Free Trade Agreement (KORUS), which some in the administration, Congress and industry see as making the U.S. trade deficit with Korea worse. So far, the U.S. has not signaled that it will withdraw from KORUS, but we can expect to see some tough negotiations and continued pressure from the U.S. to have Korea open its markets to more U.S. products and otherwise take steps to reduce the trade deficit.

Increased trade remedy cases

U.S. law permits a private right of action for U.S.-based manufacturers (including those with foreign ownership or investment) to bring cases against imports that they believe to be benefiting from illegal foreign subsidies, or to be sold below their normal value in the exporter’s home market. If the case is successful, the U.S. will impose additional tariffs on the imports in question.

There has been a tremendous increase in the number of these cases since the November elections, and it would not be surprising to see additional cases filed over the coming months. Companies that are being injured by unfairly traded imports should seriously consider whether a trade remedy case would help to address that injury.