Two Big Trade Issues, One Big Event: NAFTA & China

Two Big Trade Issues, One Big Event: NAFTA & China

By: WITA Staff

On Thursday, June 21st, 2018, the Washington International Trade Association hosted “Two Big Trade Issues, One Big Event,” with panels to discuss two of the mostly timely trade issues: NAFTA and China. The first panel on NAFTA, featured distinguished panelists Kellie Meiman Hock, John Bozzella, and Jim Mulhern, with the moderator Eric Farnsworth. This first panel discussed the future of the NAFTA agreement and what it means to have a “modernized” NAFTA. The second panel of esteemed China experts consisted of Charles Freeman, Mary Lovely, and Derek Scissors, moderated by Bruce Andrews. Identifying the most challenging aspects of US-China relations, the panel commented on what future relations may entail.

This panel on NAFTA was moderated by Eric Farnsworth, Vice President of the Council of the Americas. He plays an important role as a leader and advocate on a broad range of issues such as US relations with the Western Hemisphere, economic development, trade and global governance. Farnsworth began the discussion talking about how NAFTA is a work in progress – it’s a durable platform to expand trade and investment, but it is outdated and needs to be updated for today’s climate and needs. The question that was posed is whether Mexico, Canada, and the US can successfully get this update done.

John Bozzella, President and CEO of Global Automakers was first to speak following Farnsworth’s opening remarks. He served as Senior Operating Executive for Cerberus Operations and Advisory Company, LLC since 2009, gaining experience and insight into a range of public policy and economic development matters. His experience working for Chrysler (2007-2009) and with Ford Motor Company (1994-2005) gave him an in-depth look into the automotive industry and public policy. As the first speaker, Bozzella talked about the importance of NAFTA to the automotive industry, describing it as a “seamless NAFTA industry”. He mentioned that half of US automotive imports come from Mexico and Canada and that he is concerned about the unwinding of NAFTA and the talk of bilateral agreements. He said that bilateral agreements would create more uncertainty and will lead to less investment and opportunity for the automotive industry. He concluded his statement by saying “we all share that sort of sense of uncertainty [about NAFTA] and that should be concerning to all of us. We do need to figure out how to get to yes [on an updated agreement] and it’s critically important not only to the auto industry, but also to the US economy that we maintain our regional platform.”

Following Bozzella’s remarks was Kellie Meiman Hock, managing partner at McLarty Associates. Having led the Brazil & Southern Cone and trade practices for McLarty Associates since 2000, she is well versed in various aspects of national industrial policies, trade negotiations, and obstacles to market access and investment. Hock urged us all to put ourselves in the shoes of the Trump Administration and understand that they are motivated by trade deficits. Despite this, we all have to focus on building a consensus on trade and not be motivated by what she called “noise factors” such as the midterms and trying to pressure our trading partners. In her opinion, there are 3 ways that the NAFTA negotiations could go. 1) The talks strike out or talks continue with no progress in sight. 2) President Trump will withdraw from the NAFTA agreement in the run-ups to the midterm elections. Within this second options, she sees the possibility of him splitting NAFTA into two bilateral agreements. 3) There is some sort of accord and there is a patched-up skinny NAFTA that calls for modernization.

The last speaker on the panel was Jim Mulhern, President and CEO of the National Milk Producers Federation. With more than 30 years working in Washington DC, Mulhern is a veteran on agriculture and food policy strategy. He helped direct the industries work on the 2014 Farm Bill and led numerous other efforts to combat issues on trade, food labeling, animal care, and immigration reform. Mulhern talked about how critical modernization of NAFTA is for the US dairy industry. From the US, 30% of cheese exports go to Mexico, but there is a big problem with trade with Canada – the tariff wall. The tariff wall between the US and Canada has a 200-300% tariff on dairy. For him, modernization of NAFTA is critical to bring down that tariff wall and integrate dairy into NAFTA just as the rest of US agriculture has been integrated. This tariff wall combined with the increasing milk fat consumption around the world has led Canada to increase production quotas for dairy on farms generating a 16% increase in production quotas over the past 4 years. This increase in production, causes them to dump skim milk, which doesn’t have as high of demand, into the world market, hurting the US as the largest export of non-fat skim milk. Mulhern stated that modernization of NAFTA is critical for the dairy industry and Trump’s focus on dairy is right on target. He believes in strengthening the ties with the Mexican market and making sure that Canada becomes an equal partner by bringing down this tariff wall.

WITA’s panel on NAFTA thoroughly reviewed the future of the NAFTA agreement and how modernization could impact the trajectory of the dairy and automotive industries. The event provided an all-encompassing view of the downfalls of NAFTA and 3 possible trajectories that it could go on. Eric Farnsworth started out by saying that “NAFTA is a work in progress” and the three panelists did a thorough job in providing the trade community with an image of what that progress would look like.

Kicking off the second panel of the event, Charles Freeman, U.S. Chamber of Commerce, comprehensively outlined the challenges of trade with China. Identifying three primary categories, he commented that beyond the bilateral trade deficit, theft of intellectual property and technology is an increasingly contentious issue, made more difficult by the challenge of reciprocal market access.

Derek Scissors, American Enterprise Institute, outlined the Chinese perspective. The two identified primary events in Chinese reform are the status of the state corporate center and rural land rights. China promised to combine rural and urban property land rights, a necessary step in order for individuals to become more profitable. While urban areas have pretty secure property rights, this is not the case in rural China where over 600 million people don’t have property rights to their most valuable asset. Aside from the priority of property rights, China is also struggling with a second area of reform: they recognize that their economy is increasingly reliant on innovation, yet when competition is suppressed for the sake of the state section, this results in less innovation and an increased incentive to steal intellectual property. This development model of coercion indicates a future of more problems to come.

Mary Lovely, Peterson Institute, questions whether the current punitive tariff approach to Chinese trade relations are helpful in bringing about desired changes. She discusses why the current tariffs are not an effective tool for internal change in China, citing the popular, but incorrect view that we should maximize the pain we can cause China. Thinking that the U.S. imports from China are several times larger than Chinese imports of U.S. products, it is not true that China will more quickly run out of items to tariff. A large share of U.S. imports are from multinational organizations beyond China alone. An estimated 60% of Chinese imports to the U.S. are from China, including iPhones, American made computer chips, and other electronic products. Tariffs on these items don’t hit domestic Chinese firms, but rather foreign multinationals. With little Chinese value added, the tariffs are hurting multinational companies more than China. Lovely believes tariffs won’t help us win the trade war or even hurt China, but instead will only harm our own economy. She ends by reminding the room that the more serious problem is a lack of discussion on Chinese violation of international norms.

Bruce Andrews, Rock Creek Global Advisors, credits the administration for recognizing that we need to take a stronger approach with China. Learning from the frustration of trying to cooperate with China in the last administration, the current administration has no doubt that Chinese practices merit much more attention than in the past. Outlining Chinese negotiating strategies, Andrews notes that they are organized, focused, and strategic in their negotiations. The challenge is that China is good at knowing what they want to give: they will only go as far as they are prepared to go and only moves forward if it is in their favor. Andrews notes that to be successful in negotiations, we need to push them. To be more successful in the future, the U.S. needs to identify a clear end goal. China is getting better at using the tools of global trade, and as the U.S. is walking away from using the WTO to our advantage, China is getting better at this.