Adrienne Braumiller participates in the IR Global Virtual Series – International Trade: Global and regional trade in the post pandemic

Foreword Co-Authored By Andrew Chilvers And Bob Brewer

Global Trade: Combating protectionism and the pandemic

The past 18 months were a huge shock to international trade as increasing protectionism and Covid-19 wrought havoc with all previous forecasts and economic roadmaps.

Many business analysts predicted that the double whammy of protectionism and pandemic would spell an end to globalised trade.

Indeed, if we roll back a few years many economists were already warning that international trade was tapering off even before President Trump, Brexit and the coronavirus. As older, more established economies converted to the new digital economy, less goods were being shifted around the world. This coincided with the rise of China as an economic superpower, the proliferation of international laws, regimes and treaties governing trade and the increasing interconnectedness of supply chains.

But this complex global trading pattern was also the architect of its own undoing, creating financial instability, a trade imbalance, climate change, a rise in cyberattacks and the spread of the pandemic through trade networks. These crises then reverberated across the globe, appearing in different jurisdictions and spreading across local borders.

The Trump administration’s moves to address the trade imbalance with other trading partners was a catalyst for the resulting rise in protectionism – overnight he was using tariffs as a tool. This was particularly the case with China, where supply chains were impacted as businesses had to work around the tariffs, causing supply chain diversification and huge issues around the rules of origin.

This imposition of tariffs has now forced US businesses to take on higher costs at exactly the wrong moment, ie during a global pandemic. This has also had a knock-on effect with other US trading partners such as Canada, Mexico and the EU, which are all re-evaluating their trading relations with China, particularly around the rules of origin to ensure products are not using mainly Chinese components.

What are the opportunities and challenges that face global and regional trade in your jurisdiction?

There have been a lot of opportunities and challenges. Elizabeth, it’s interesting that trade is down for Canada. For the United States it was down 18.5%. That really has been devastating for several of our clients and in particular there’s been a huge impact on them as a result of the lockdown and the trade war with China. A lot of people were thinking that once the Trump administration changed to Biden tariffs would be swept away, but that’s clearly not going to happen and that has been a big challenge for US organisations.

The US will re-engage with the WTO, which should lead to a substantial reduction in unilateral ‘trade wars’ and tit-for-tat tariff exchanges. Under Biden, we will be an active participant in the WTO and will use the organization to bring pressure against China and other nations on issues such as subsidies and stateowned enterprises. There is still an urgent need to reform the WTO, but the new administration seems poised to jump in and push for improvements.

The United States-Canada-Mexico Agreement (USMCA) entered into force on July 1, 2020, after a long journey that began in 2017 with multiple US threats to terminate the North American Free Trade Agreement (NAFTA). Its journey effectively ended when the Trump administration and the Democratic Congress agreed in December 2019 on a series of amendments to the original text signed on November 30, 2018. Automobiles and auto parts typically accounted for more than 25% of total NAFTA trade in manufactured goods and about 950,000 jobs in the US. Some automotive components cross the Canada and/or Mexico borders as many as eight times before they are assembled into a finished automobile in one of the three NAFTA countries. It is not surprising that this was the focus of the NAFTA renegotiations and that these changes will build on other pressures to shift current Chinese supply chains to North America.

What is the impact of non-preferential rules of origin in the post-pandemic trading environment in your jurisdiction?

As far as protectionism rises, the interest in participating in free trade agreements goes down proportionately. Part of the problem with that or the reason protectionism won’t go away is because free trade isn’t free. It takes a great deal of effort to identify the rule of origin, whether something qualifies for a free trade agreement and the fact that not all gains from a free trade agreement are immediate.

Governments feel some pressure to implement protectionist policies and measures, including tariffs, as a way of saving domestic goods, domestic jobs and enterprises. And, of course, the global pandemic led to restrictions on movement and created a demand for local goods and services. In the US there’s also a lot of concern with China, Russia, and Venezuela.

The real focus is China. One of my clients wanted to shift production to Mexico to take advantage of USMCA (CUSMA) and we sent in a ruling to customs, and CBP decided that despite a complex assembly of more than 100 operations the final good was of Chinese origin.

As we go down to the various authorities who enforce the law, customs will find more opportunities to say that something, despite the level of complexity, is of Chinese origin and thereby more duties apply. That has a chilling effect on people’s desire to have anything to do with Chinese inputs or manufacturing. I think that focus on non-preferential rules of origin is critical for the US.

The “Buy American Act” reinforces US Government purchases of US made products. Biden’s team committed early in the presidency to implement a “worker-centered trade policy” that will impact the legislation and trade deals that his administration will touch. As protectionism rises – the interest in FTAs falls. Perhaps the reason protectionism won’t go away is that the benefits of free trade take time and are harder to measure effectively.

Predictions: what do you think global and regional trade integration will look like in your jurisdiction in five years?

There’ll be a shift of supply chains. There are multiple pressures forcing enterprises to abandon or at least significantly reduce their dependence on Chinese sourcing. The US-China trade war, national security concerns, the entry into force of the USMCA, COVID-19, and carbon footprint concerns, are combining to stimulate extensive changes in the way global enterprises conduct their business, such that up to 26% of global exports with a value of $4.6 trillion could move to new source countries within the next five years.

The pandemic will probably accelerate the spread of Industry 4.0. The idea that everything was going to be done by robots was never realistic, as there are many activities where it is not cost-effective to deploy an expensive robot. Garment sewing is still done primarily by people, in the developing world, as are many fine tasks in the electronics and auto value chains. But the pandemic must change the cost calculation at least to some extent. Imagine an activity where it is slightly less expensive to hire workers in the developing world compared to deploying a robot in an advanced economy. Now firms are aware of potential disruption from pandemics and/or trade blockages. With that risk factored in, the robot may now be the cost-effective choice. Industry 4.0 is not suddenly eliminating manufacturing opportunities in developing countries, but it has to be constraining them, and more so after COVID-19 than before.

Probably the biggest risk for trading opportunities in the developing world is growing protectionism in more advanced economies, often dressed up as national security protection. The US introduced serious protection before the pandemic, most of it aimed at China. Heading into the recession, the US was taxing about half of the imports from China at a 25% rate. In the short run, this created new opportunities for other developing countries. A certain amount of final assembly in garments, footwear, and electronics shifted to countries such as Vietnam, Indonesia, and Mexico. These tend to be the most labor-intensive tasks, and higher wages in China were already driving this production abroad even before the trade war started.

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