The world will not wait while the United States figures out what it’s doing with trade.
The beginnings of new bilateral trade agreements are springing up left and right between countries that may never have otherwise given each other a second look. And as a result, the United States’ role as a framer of global trade rules may be slipping from its grasp as Europe and China look to step in.
Since last year, a slew of free trade agreements have been signed globally and none of them by the United States, according to Jeff McCauley, vice president of global accounts for U.S. trade management software company Integration Point.
“We’re seeing a lot more demand on the free trade agreement side,” McCauley said speaking at a recent Footwear Distributors and Retailers of America Footwear Sourcing Intelligence Summit in New York City. “Governments are signing trade agreements with each other and not the U.S.”
[Read more about how Trump’s policies are affecting sourcing: Has Protectionism Made Sourcing in America Great Again?]
Countries that want in on manufacturing apparel and footwear will find their way, whether the U.S. offers a helping hand or quite the opposite.
By way of just one example, McCauley said “Nicaragua, India and Mexico are all looking to become shoe producers and that excludes the powerhouses that are already out there. If the U.S. is no longer in the free trade agreement business, they’ll look to make bilateral agreements.”
According to the World Trade Organization’s count, 279 trade agreements are in place as of June 2017, with quite a lot more still under negotiation. Between last January and now, 27 agreements have been signed—China and Australia, Turkey and Malaysia, EU with Colombia and Peru, the EU and Ghana, India and Thailand—and none of them are with the U.S.
What’s more, with the U.S. out of what would have been the world’s largest trade pact, the Trans-Pacific Partnership, since January, countries have been looking to couple up even more than they had been before. Japan wants to do TPP anyway, and it’s working on a deal with the European Union. The European Union is pressing forward on its deal with Canada and also wants to establish trade ties with Mexico. China wants to trade with Mexico, too. And that’s just naming a few.
“While we’re sitting here and going into protectionist mode and telling our second-most valuable trading partner, Mexico, that we want to renegotiate NAFTA and we want to institute tariffs and we want to build a wall…China is telling Mexico, ‘We want to do business with you. We want to be your friend,’” said Gail Strickler, president of global trade for Brookfield Associates, speaking at a Texworld USA seminar in New York City last month.
That’s the kind of behavior that experts think could push the U.S. out of a leadership role in trade.
In its annual external sector report released late last month, which looks at global economic distortions, the International Monetary Fund warned against protectionist measures and their likely detriment to global trade.
“Protectionist policies should be avoided at all cost,” the IMF noted in the report. “The reason is that they are unlikely to meaningfully address external imbalances, while they would be extremely harmful for both domestic and global growth.”
Warned or not, the U.S. commander in chief seems to be sticking to his path on trade.
Here’s a look at the deals that are hatching and where some of these deals will leave the U.S. with regard to trade.
Who Europe’s making friends with
Some have said the United States’ withdrawal from the TPP was a gift served up on a silver platter for the European Union. And with the U.S. otherwise focused on renegotiating NAFTA and whichever deal may be next on the chopping block, the EU has room to slide into trade space left unattended to.
EU Trade Commissioner Cecilia Malmström, however, doesn’t see U.S. trade moves as a gift, but an opportunity.
“I do not regard President Trump as a gift maybe, but it is true that many countries have started to look around more broadly,” Malmström recently told Reuters. “Other countries feel that they need to look out for new friends and other allies, so yes, it has increased interest in cooperation with Europe and with others.”
Japan had been sticking on certain points in a trade deal with the EU and talks hadn’t progressed much, but Japan reached out to the EU last month to get these talks going again, and now both sides are pushing to conclude a deal this year.
Moves like this could start to see the U.S. forced to step back, whether it had intended to or not.
“The practical impact is that the U.S. gets squeezed out. Japan will start buying more apparel and footwear out of Europe rather than the U.S.” American Apparel & Footwear Association executive vice president Steve Lamar, explained. “Let’s remember that the TPP would have eliminated key barriers to U.S. exports, including a tariff rate quota on Made in USA footwear. Canceling the TPP delays that win and puts U.S. manufacturers at a disadvantage.”
Countering that perspective, Li & Fung executive director of government and public affairs Rick Darling said, “I don’t think a deal between Japan and the EU puts any kind of squeeze on U.S. apparel imports from Japan. The U.S. remains an important export market for many countries that have free trade agreements with the EU as both markets are critical to any strong export economy.”
The EU’s trade deal with Canada, the Comprehensive Economic and Trade Agreement (CETA), continues to move forward, and though held up by angst over European imports of cheese, the two sides could provisionally apply CETA on Sept. 21.
Here, as Lamar explained, “U.S. exporters are the primary losers unless we accelerate efforts to bring the EU-U.S. deal (the T-TIP) to a speedy conclusion. U.S. brands that trade between EU and Canada will be able to benefit. U.S. manufacturers seeking access to the EU market may choose to opt in by moving their product to Canada.”
Beyond Japan and Canada, the European Union is looking to do deals with Mexico, Australia, New Zealand, Malaysia and the Mercosur countries—Argentina, Brazil, Paraguay and Uruguay. Strickler said Mexican officials have stepped up efforts to finish the EU trade deal by the end of this year.
Who China’s making friends with
China has a lot going on with regard to trade, including what’s been called a rival trade deal to the TPP, the Regional Comprehensive Economic Partnership (RCEP).
Talks on the proposed deal launched in 2012 but there’s been extra zeal for getting it done since the TPP’s death (or critical condition) left a void for it to fill. The deal would see free trade between the 10 Association of Southeast Asian Nations (ASEAN)—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam—and the six countries ASEAN already has free trade deals with—Australia, China, India, Japan, South Korea, New Zealand.
As a point of drawing parallels, the TPP would have seen free trade between the U.S., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
“China is definitely being aggressive in establishing free trade agreements throughout Asia and South America, primarily to bring in those manufactured goods or those raw materials they need to produce those manufactured goods,” McCauley said.
China may also be mulling a bilateral trade deal with Mexico, which, if actualized, according to AAFA’s Lamar, may not impact U.S. sourcing all that much.
“Products made in China using Mexican inputs, or vice versa, under such a deal would still face the same duties in the U.S. market that they face now,” Lamar said. “Depending on how the rules work, it could create new opportunities to service other markets by lowering costs between bilateral China/Mexico trade.”
Agreeing that a China-Mexico trade deal would be of no real relevance to U.S. brands and retailers, Darling said, “There will be very little impact on U.S. sourcing strategies if a deal was struck between Mexico and China. The major issues for Mexico sourcing will be any ultimate adjustments to NAFTA that affect rules of origin or other tariff related changes.”
Speaking about a trade deal with Mexico in July, Chinese ambassador to Mexico Qiu Xiaoqi told Xinhua news, “Mexico is China’s second largest trading parter in Latin America and China is Mexico’s second-largest trading partner in the world,” he said, adding, “This is a highly important relationship and we have great interest in deepening and broadening these ties.”
[Read more about a China-Mexico FTA: Next in Trade: Will China and Mexico do a Free Trade Deal?]
Whether that deal comes to fruition or not, Mexico has made it clear that it will not be thrown off by U.S. whims.
Mexico’s economy minister Ildefonso Guajardo said at a news conference following talks with Commissioner Malmström this summer, “The clear message is that we will not paralyze ourselves given the challenges we face in the Washington renegotiations of the North American Free Trade Agreement…Mexico will continue to move forward and today more than ever the strategy of diversification (of exports) has become an obligation so as to re-position the Mexican economy.”
Who else is making friends
Japan appears to be leading the charge on moving a U.S.-less TPP forward and negotiators from the remaining 11 nations held talks in July on how to get that deal off the ground without the U.S., but some countries, like Vietnam and Malaysia may be interested in re-opening discussions on certain provisions, which could hold up any forward movement on the agreement.
If Japan can jumpstart TPP and get a deal finalized, it may not be good news for U.S. sourcing and trade.
“There’s no question it hurts us,” Lamar said. “We calculated $1 billion in duty savings the first year, and growing every year after that, once the TPP (with the U.S.) took effect. With just a TPP 11, the gains are reduced considerably. Duty savings into the U.S., as well as duty savings from the U.S. into other countries, are wiped away immediately. Residual duty savings—U.S. companies exporting from a TPP country into Japan or Canada—are still available.”
Other potential free trade friendships are blossoming between Canada and China, Australia with India and Indonesia, and Mexico with Brazil and Argentina. Meanwhile, President Trump has told South Korea it wants to renegotiate or end the just five-year-old U.S.-Korea Trade Agreement (KORUS), which he called a “horrible deal,” for the familiar reason that it’s brought on trade deficits that are simply too big. So far, the move hasn’t been well-received.
The WTO said regional trade agreements have risen in number and reach in recent years, but the U.S. seems to be curling in on itself while the rest of the world embraces more open-arm policies.
“Free trade is everywhere but here,” Strickler said.
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