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Trade and Tariffs: Protecting Your Business from EU-US Trade Conflict
- 1. Trade and Tariffs: the view from Europe …and how to help protect your business from collateral damage
- 2. Roadmap: - Define our terms / issues / players - “Trade War” is not a misnomer - Discuss the view from Europe - Highlight strategies to hedge your trade risks Patrick Chappatte, , Le Temps, Switzerland
- 3. Defining Europe for trade purposes: - EU (27+1 as Brexit is negotiated) - EFTA - Ukraine and Turkey (special access) - Russian Federation
- 4. How do tariffs impact companies? Primary effect Carrier Heating and Air Conditioning relies on aluminum. Prices on market now 10% higher. Result = HVAC work price goes up. Cost for consumers ↗ Secondary impact Margins are low – if material prices go up 10%, some products may not be competitive against other U.S. or foreign competitors. Prices up = business lost. Tertiary impact Lost business = less growth and employment. Reduced employment also means less consumer spending power and shrinking markets. Companies must flex to survive.
- 5. Who are the key players in the current trade conflict from our perspective? Trade Representatives: EU - Cecilia Malmström U.S. - Robert Lighthizer Director of Trade and Manufacturing Policy: Peter Navarro European Commission President Jean-Claude Juncker
- 6. Repercussions of trade conflict
- 7. Tariffs, Trade Wars and Political Risk: Why ‘Trade War’ is not a misnomer “For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934.” Michigan Senator Fordney of the 1922 Fordney- McCumber Tariff Act
- 8. Trade and conflict Former French Foreign Minister Robert Schuman (known as the ‘father of Europe’) famously declared in 1950 that the purpose of increasing trade ties between European nations (through what is now the EU) was to: “make war not only unthinkable but materially impossible”
- 9. OK, but what about Europe? EU perspective US (administration) has become an enigma Why aren’t you using the WTO? US has a winning record, and was a champion and founder for the system to resolve trade issues. Angry – nascent recovery in EU threatened by trade spat. Agile – will attempt to take world business that leaves China/US United Kingdom perspective We have to negotiate a free trade agreement with this team? Brexit slashed growth forecasts…this makes it worse. Can we steal business from the EU (that we were probably losing due to Brexit)?
- 10. Future of EU-US trade negotiations? Latest USTR press release: “Ministers will then meet in November to finalize outcomes in a number of areas. Specifically, we hope for an early harvest in the area of technical barriers to trade.” “protecting human health and the environment” = GMOs? Monsanto-Bayer? Labeling, electrical, safety requirements The issues that will not easily go away WTO Doha round negotiations – 5 years, failure Sticking point between the US and EU – agriculture Financial services industry Who can benefit from London’s loss?
- 11. Why Brexit matters (on this issue): UK departure from the EU is likely to raise the level of environmental/safety concerns for EU officials. REACH (Chemical) and related non-tariff barriers only going up The same is true for labor market protections, more NTB for US importers? The deal brokered between the UK and the EU will say much about the EU’s willingness to be flexible in support of trade (versus inflexible to prove a political point) Brexit’s timeline (major November meeting) coincides with U.S. midterm elections and both the EU and UK will look to benefit from US-China trade squabbles. Brexit’s extended negotiations show just how long and complex major intranational deals can be. Is the US administration able to successfully compete on this horizon with our shorter election cycle?
- 12. US trade war target: Russia Russian perspective (Trade) War is the continuation of politics by other means. Chaos in ‘Western’ system serves Russian political purposes, even as sanctions bite. Russia is not interested in supporting ‘Western’ institutions or supragovernmental organizations that it does not control.
- 13. US trade war target: Turkey
- 14. What can we do to avoid the potential tariffs? EFTA and their FTAs Notable EU trade agreements: Canada Japan: “largest bilateral trade deal ever” Ukraine? Yes, Ukraine…and maybe Georgia & Moldova Deep and Comprehensive Free Trade Areas (DCFTA)
- 15. Definitions of where a product is from and how it is treated: ‘Rules of Origin’ WTO? “GATT has no specific rules governing the determination of the country of origin of goods in international commerce. Each contracting party was free to determine its own origin rules, and could even maintain several different rules of origin depending on the purpose of the particular regulation.” EU?
- 16. Move your production - Fishing vessels - Aerospace - Jeans? - Kitchen appliances - Cosmetics
- 17. Establishing a company in Europe SE (societas Europaea), GmbH, SàRL, s.r.o., etc. https://ec.europa.eu/growth/single- market/services/services-directive/in- practice/contact_en For example, Lithuania: https://investlithuania.com/investor- guide/start-your-business/ Norway (Not EU but EFTA): https://www.altinn.no/en/start-and-run- business/
- 19. What if I sell agricultural products or raw materials? https://www.callmycongress.com/
- 20. How do I stay informed on these issues? @SamsonAtlantic U.S. Trade Representative website: https://ustr.gov/about-us/policy-offices/press-office/press-releases EU Trade Site: http://ec.europa.eu/trade/trade-policy-and- you/publications/news-archive/ Department of Commerce: https://www.commerce.gov/news FT / WSJ / Reuters.com EU-specific news sources (in addition to Handelsblatt, Guardian, DW.com, France24): https://www.politico.eu/ https://europa.eu/newsroom/home_en https://www.neweurope.eu/ https://www.euractiv.com/
- 21. Questions! Samson Atlantic LLC 401 North Michigan Avenue, Suite 1200 Chicago, Illinois 60611 TEL (US) 312-836-3776 Email: info@samsonatlantic.com Twitter: @SamsonAtlantic
Editor's Notes
- Brief introduction Roadmap
- - Image in the lower left from Patrick Chappatte, Le Temps, Switzerland
- EU 28 for now EFTA / EEA – Norway, Switzerland, Lichtenstein, Iceland
- That last line – companies must flex to survive – we are going to get into that issue later in this presentation as it goes to the critical issue of what you can do to keep your company ahead of the game when tariffs throw your business strategy for a loop.
- Good article on Lighthizer’s philosophy: https://foreignpolicy.com/2018/08/06/you-live-in-robert-lighthizers-world-now-trump-trade/ Peter Navarro is the engine driving much of the current administration’s antipathy towards China, and Mr. Navarro has often criticized both Germany and China for their trade policies and alleged currency manipulation. Mr. Lighthizer, on the other hand, is a long-term DC trade expert who worked closely with Bob Dole and he and his team are the ones that would actually negotiate and trade agreements with the EU or other nations of interest.
- It creates uncertainty – very hard to project costs and market opportunities if the foundations are changed underneath you. It forces trading partners to look for other markets and geopolitical alliances Obviously it slows exports and production as existing markets shrink And in a protracted conflict, it leads to increased unemployment as firms lay off redundant labor
- Why Trade War is not a misnomer Picture on left: Joseph Warren Fordney To provide protection for American farmers, whose wartime markets in Europe were disappearing with the recovery of European agricultural production, as well as U.S. industries that had been stimulated by the war, Congress passed the temporary Emergency Tariff Act in 1921, followed a year later by the Fordney-McCumber Tariff Act of 1922. The Fordney-McCumber Tariff Act raised tariffs above the level set in 1913; it also authorized the president to raise or lower a given tariff rate by 50% in order to even out foreign and domestic production costs. One unintended consequence of the Fordney-McCumber tariff was that it made it more difficult for European nations to export to the United States and so earn dollars to service their war debts. More on Smoot Hawley Tariff act of 1930 and impact it had: economic yes, but also political as it serves as a catalyst for more nationalist behavior among all trading nations. It did not ‘cause’ a war, but it certainly worsened the economic situation world wide and reflected the more nationalistic and populist rhetoric that nations were willing to spout, even if the math did not make much sense. Interesting article in the Economist from 2008 about JP Morgan bankers recognizing this issue and trying to persuade the president to veto the Act. https://www.economist.com/christmas-specials/2008/12/18/the-battle-of-smoot-hawley
- Synopsis of article from : https://www.jstor.org/stable/173934?seq=1#page_scan_tab_contents Journal of Conflict Resolution, 1980, author Solomon William Polacheck – NC Chapel Hill and Stanford Second quote from World Bank article on the relationship between trade and conflict in fragile states – titled Trading away from conflict. Available at: http://www.worldbank.org/en/topic/trade/publication/trading-away-from-conflict https://www.gsb.stanford.edu/insights/matthew-o-jackson-can-trade-prevent-war – third quote/article Fourth quote – International press also acknowledges and is concerned about this connection between trade and conflict - https://www.scmp.com/comment/insight-opinion/united-states/article/2155565/trade-wars-cause-world-wars-history-shows-will
- European leaders are fully cognizant of this relationship and increasing trade ties. In fact the MAIN purposes behind the establishment of what is now the European Union was to foster trade between European nations to avoid any future conflicts. The was famously expressed by the ‘father of Europe’, former French Foreign Minister Robert Schuman in his famous declaration on 9 May 1950, He said that the purpose of increasing trade ties between nations was to “make war not only unthinkable but materially impossible’.
- Photo from the European Commision Article of interest: https://www.wsj.com/articles/u-s-eu-negotiators-meet-in-bid-to-ease-trans-atlantic-trade-tensions-1536608293 GMOs / Monsanto-Bayer merger: https://www.dw.com/en/what-the-bayer-monsanto-merger-means-for-food-farmers-and-the-environment/a-19296103
- The UK may still flinch – London Mayor’s breaking with his party. https://www.bbc.co.uk/news/uk-politics-45537784 Picture of Michel Barnier from Politico.EU My nomination for Time Man of the Year, European edition Absolutely dominated his opponents to this point, first David Davis (resigned) and now Dominic Raab, who is striving mightily to catch up.
- Russia – China trade comparison from 2015 Radio Free Europe article: https://www.rferl.org/a/top-russian-and-chinese-trading-partners-compared/27224437.html Just last week, Russia hosted the Chinese military in the largest wargames ever hosted in the Russian Federation in over 40 years, involving over 300,000 troops from both nations in Eastern Russia. https://www.scmp.com/comment/insight-opinion/united-states/article/2164632/why-china-russia-military-exercises-should You can see from the chart above the US-Russia trade is not robust. The sanctions should have dramatically limited Russian access to US dollar transactions, and yet as recent investigations have shown in places like Estonia (Danske Bank) and Switzerland, they are still laundering funds with willing partners throughout Europe. Russia will back China in any (trade) war with the U.S., as their economic interests are much more closely tied to their neighbor’s, and they frankly embrace the same kind of State-Owned Enterprises (SOEs) concepts that China does. Case in point – the military is one of the largest companies in the country. Case in point, one of the largest SEOs is Rostec https://www.occrp.org/en/panamapapers/russia-how-to-structure-a-deal-russian-style/ Sergei Chemezov – former roommate in Dresden when they were both working for the KGB
- Turkey is currently hosting 3.5 million Syrian refugees., which is the largest refugee population in the world according to the World Bank (http://www.worldbank.org/en/country/turkey/publication/turkeys-response-to-the-syrian-refugee-crisis-and-the-road-ahead) It is a tremendous financial burden, despite the substantial help that they are getting from the international community and the EU to help defer costs. If the Turkish economy tanks, my assumption is that the Turkish government will look to use this as an excuse to push the refuges on to Europe. This is turn will bring back images that we saw a few years ago of large scale immigration in to Europe. The European economy is recovering, but it is a weak recovery and a new flood of refuges would not only overburden the system, it would likely push to populists into power in countries such as Germany, France and the Netherlands, who end up hosting many of the refugees. Economic impact? One study showed (https://www.focus-economics.com/blog/impact-of-refugees-on-european-economies) that of the refugees that came into Germany, for example, only 12% have entered the work force. That is unsustainable. By nominal GDP, the Turkish economy is the 17th largest in the world. In terms of European nations, only Germany, the UK, France, Italy and Spain rank ahead of it. Then there is its interconnectedness to the EU and to the eurozone in particular. Among its largest trading partners are Germany, France, Italy, Spain and France, and the EU is comfortably Turkey's biggest trading partner. It has a population of 80 million and is a country of pivotal geopolitical significance, given the fact of the cultural, political and geographical boundaries it straddles. Arguably most importantly of all, Turkey has done a deal with the EU over the travel and relocation of refugees — a fragile and politically sensitive agreement that has looked far from watertight in recent times. https://www.dw.com/en/turkish-economic-shadow-looms-over-europe-and-beyond/a-45063573 Growing concerns about contagion – Argentina, Turkey, India…not a good trend.
- EFTA listing from Philippines Free Trade Agreement: https://www.dti.gov.ph/international-commitments/bilateral-engagements/efta-fta EFTA rules of origin: Customs The EEA Agreement provides for a free trade area covering all the EEA States. However, the EEA Agreement does not extend the EU Customs Union to the EEA EFTA States. The aim of both the free trade area and the EU Customs Union is to abolish tariffs on trade between the parties. However, whereas in the EU Customs Union, the EU Member States have abolished customs borders and procedures between each other, these are still in place in trade between the EEA EFTA States and the EU, as well as in trade between the three EEA EFTA States. Furthermore, the common customs tariff on imports to the EU from third countries is not harmonised with the customs tariffs of the EEA EFTA States. The EEA Agreement prohibits tariffs on trade between the Contracting Parties. Therefore, all products, except certain fish and agricultural products, may be traded free of tariffs within the EEA. In order for a product to obtain preferential treatment under the EEA Agreement, it has to originate in the EEA. The EEA Agreement therefore contains rules of origin that determine to what extent a product must be produced or processed within the EEA in order to obtain status as a product of EEA preferential origin. The pan-Euro-Mediterranean (pan-Euro-Med) free trade system is a network of FTAs between a significant number of European and Mediterranean countries. All these agreements are based on identical rules of origin. Significant advantages for economic operators are generated through this system of free trade, since a product may be traded between the free trade zones without losing its preferential status, and since producers are allowed to freely use raw materials and components originating in any of the participating countries in the production of originating products.
- Link here to CETA (Canada-EU) rules of origin details: https://www.cbsa-asfc.gc.ca/publications/dm-md/d11/d11-5-15-eng.html
- Snip about Harley Davidson is for this article: https://www.wsj.com/articles/harley-davidson-to-shift-production-overseas-to-offset-eu-tariffs-1529927301 Image from the New York Times Polaris moving production overseas as well – due to aluminum / steel tariffs but also anticipating retaliatory tariffs from EU Other areas under attack: https://www.dw.com/en/eus-retaliatory-tariffs-on-us-products-come-into-effect/a-44342588