07.02.08
Posted in China, Intellectual Property, Negotiating, Standards, Taxes & Tariffs, Trade Policy at 11:40 pm by Administrator
International Trade is again an issue in the Presidential campaign. John McCain was in Colombia this week and spoke out in favoring the Free Trade Agreement (FTA) with the country, calling Obama and the Democrats “protectionists”. The most famous FTA, the North American Free Trade Agreement (NAFTA) was a major issue in the 1992 campaign. H. Ross Perot pilloried NAFTA claiming there would be a “great sucking sound” as Mexico would siphon off jobs from the US to Mexico. That never occurred, and although there were never the major job gains that the George H.W. Bush promised, the US clearly has benefited from tremendous increase in bilateral trade.
How do FTAs work? The countries involved (this could be bilateral as in the case of Chile-US or multilateral as with Central America and the Dominican Republic –CAFTA-DR– with the US) negotiate on both tariff levels and codes of conduct. Most tariffs are reduced to zero, but inevitably some politically sensitive products are excluded (so most are “Almost Free Trade Areas”). On codes of conduct, the countries negotiate on issues like intellectual property, standards, financial services, etc. using the original NAFTA agreement and the WTO codes as a starting point. The resulting agreements have to be ratified by the respective legislative bodies. (In the US, under the negotiating authority, the House and Senate approve it on an up/down vote (no amendments allowed), as opposed to other international treaties which require a 2/3 vote of the Senate. Once the agreements are ratified the governments must pass implementing legislation to bring national law into conformity with the FTA. The FTAs also provide for consultations and dispute resolution mechanisms to ensure that both sides are living up the bargain.
For the US, the FTA is usually a great deal since the US has relatively low tariffs and already has strong laws that the codes cover. The pending agreement with Colombia is a case in point. Virtually all of Colombia’s exports enter the US duty free and Colombian companies already enjoy all of the protections in terms of intellectual property, investment guarantees etc. On the other hand, US exporters face considerable tariff and non-tariff barriers going into Colombia. Clearly the US has lots to gain from an agreement with our South American partner.
Why then is there such opposition from groups like unions and environmental groups? The unions may affected by job losses for union members who are protected from international competition. Frankly, with greater and greater trade, the marginal effect of an FTA with Colombia or South Korea on union jobs will be so small that it would be hard to detect by most statistical analyses. Nevertheless, manufacturing jobs are being outsourced (largely to countries with no FTAs, like China and India) and the unions are looking for scapegoats. On the environmental front, there is the concern that increased production will result in increased environmental damage. The FTA’s all contain environmental clauses, not as strong as some enviros would want, but considerably more that there are in the absence of FTAs (again China and India are prime examples.)
We are in an increasingly interconnected world and FTAs increase the interconnectedness. While there are some inevitable unintended results from FTAs, overall the global economy benefits.
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05.19.08
Posted in Economic Analysis, Government Resources, Strategies, Taxes & Tariffs at 5:12 am by Administrator
I was speaking with the site manager for a large corporation that has a significant R&D component. The Company has steadily off-shored manufacturing of its sophisticated product and little traditional manufacturing is left in the US. What is new is that the company is being tempted to offshore its R&D jobs as well. In this case Ireland is offering incentives of € 20,000 per research worker. I remarked to him that that was “real money” — the incentive being in Euros instead of dollars. Another factor was that Ireland has a low corporate income tax rate and that in particular moved decisions at the US headquarters
There is an on-going discussion about whether offering incentives produces real long-term economic growth. There are certainly lots of examples where the jobs never materialized or the industry hit hard times later on and the new plant shut down. On the other hand there are examples like the German and Japanese automakers who opened sites in the US South, bringing jobs and prosperity to those regions.
There are several issues to be addressed — does the industry fit the development strategy of the region? Putting a heavy polluting plant in Northern California would be a non-starter. Trying to develop a Web 2.0 cluster in an area of the country where few such companies exist may not result in lots of jobs.
Another issue is the net effect on government revenues – i.e. taxes. Some countries and localities have given such large concessions that the result is that the government unit has greater costs with a permanently lower income level (look at some of the oil drilling concessions). On the other hand, a good project will produce not only more jobs in the long run but also greater prosperity for the community and a larger tax base. With the aid of economic models, those contributions can be quantified.
Do incentives work? There are lots of examples where they have made an impact but the government authorities must carefully craft a package appropriate to the economic development strategy.
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01.26.08
Posted in Economic Analysis, Exchange Rates, Taxes & Tariffs at 12:31 am by Administrator
What was interesting about the tumult of the last week in global stock markets is that the concerns began in Asia about worries over the direction of the US economy. That led to Asian investors pulling out of US stocks and European investors followed suit. The US markets were closed on Monday but it was clear to the Fed and US Treasury Department officials that with the drop around the world, the US markets would face a tsunami of sell orders at opening bell. The Fed reacted quickly by cutting some rates by 3/4 of a point and the President and Congressional leaders advanced their timetable on a stimulus package. Was it enough? We’ll have to see but the markets are still clearly worried at week’s end. My personal opinion is that there are short term liquidity issues that the markets are reacting to and long term growth issues as the US consumer has cut back on spending due to changes in the mortgage market. The equity line of credit piggy bank, which financed most of the growth in consumer spending since 2002, has been broken. It’s going to take a while for the consumer to pay down debts to start consuming again.
But let’s think through the international business implications of the policy changes in Washington this past week. The cut in interest rates made short term financial investments in the US less attractive versus the Euro or Yen zones. That will keep the dollar weak, now at $1.46/Euro. That will be good for US exporters and for foreign tourism coming to the US. That will also make it more difficult for European countries to expand their economies via the traditional export markets. I would expect the ECB to also cut rates, even with the fears about inflation.
The economic stimulus package will also affect the other major trading partner of the US, namely China. With the Yuan tied to the dollar, the interest rate cut will have little effect. However with a larger percentage of US income being spent on imported goods (estimated to be 21% today versus 19% in 2001), the stimulus package will increase demand for goods from China and part of the stimulus package will leak out of the economy.
Bottom line — Weak dollar, boost for US exports to Euro-zone and boost for Chinese exports to US.
What is your opinion – post a comment!
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10.24.07
Posted in Taxes & Tariffs at 7:34 pm by Administrator
This used to be a complicated task, but for most products it is now simpler. Most logistics providers should be able to provide you with the information using their websites or databases.
If you want to do it yourself, the first task is to find the Harmonized Tariff Schedule number for your product (also known in the US as the “Schedule B” number. The best link is from the US government website Export.gov (http://www.export.gov/logistics/exp_logistics_schedule_b.asp). The process may take some word association but you should be able to find the number.
Second, you need to find the desintation country tariff schedule (see: http://www.export.gov/logistics/exp_001015.asp). In that schedule, you may need to drill down further than the HST number as each country puts specific products in different categories. That should give you the specific amount plus an indication if there are other taxes (like VAT) or quotas that might apply to the product. But remember, the destination country will have the final say on the classification.
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