Reinvigorating Trade Negotiations: Optimists in the Midst of Battle

Free trade advocates are known for being optimistic; espousing the removal of trade barriers that are often jealously guarded by domestic constituencies as part of the national interest. The global movement towards free trade as envisioned by the World Trade Organization has always been an uphill battle, but this month it has had its fair share of reasons for hope. Negotiations for trade agreements have been struck between the EU and Japan as well as the EU and the US in the Transatlantic Trade and Investment Partnership TTIP), and Japan announced its bid to join the 11 countries negotiating the Trans-Pacific Partnership (TPP). These will be the most comprehensive trade agreements in history if they are fully realized, and the collective member countries constitute nearly 70% of world GDP. The conclusion of these trade deals, although bilateral, would be a great step forward in defining comprehensive free trade standards for the global market.

The reasoning behind this reinvigoration of free trade deals is expressed clearly in a study commissioned by the German Federal Ministry of Economics and Technology, as explained below:

The transatlantic free trade initiative needs to be considered against the backdrop of (i) eroding competitiveness of industrialized countries relative to emerging nations such as China and India, (ii) the long-lasting standstill in multilateral negotiations at the World Trade Organization (WTO), and (iii) the need for growth-stimulating structural reforms, as vividly highlighted by the current crisis in the EU.

The impetus and goals of these agreements are not only economic in nature, but also geopolitical. The Information Technology and Innovation Foundation (ITIF) describes “a battle being fought now for the soul of the global trading system”, in which these free trade deals can promote high standards for reducing barriers to trade and set the agenda for future multilateral trade talks.

However, as  ITIF notes, there are many obstacles to overcome in this process. Agriculture, automobiles, cultural industries, and textiles are all industries that are historically reluctant to liberalize. Non-tariff barriers such as incompatible regulatory systems are even more problematic, but liberalizing these areas will bring the most benefits. The services market is another complex area, but because 30% of manufacturing costs are business services, there are strong economic incentives to liberalize trade in services. Since a large part of trade volume between these countries is intra-industry and intra-firm trade, companies’ costs for intermediate goods will be substantially reduced. Although most studies focus on the static and immediate gains from these trade deals, the dynamic and ongoing benefits will create positive feedback that renews the economic foundations of industrialized nations.

This is an opportune moment for trade deals, and the window may be closing fast. The political will is currently there to complete these deals, but may not last after the woes of the latest recession have tempered. Europeans and Americans are trying to stimulate their languishing economies, and Japan is pursuing radical new policies to end stagflation. Geopolitical considerations and a renewed emphasis on international competitiveness are the final pieces of the puzzle that make the deals more plausible at this point in time.

There are reasons for optimism in trade policy circles, but the battle is only just beginning.

Posted By: Ben Copper

Sources: IFO Institut, Information Technology and Innovation Foundation, Foreign Affairs

Picture Credit: Cargo Ship Terminal Burchardkai (Hamburg, Germany), courtesy of flickr user      Reinhard_Schuldt

Do traditional measurements misinterpret global trade?

As the world economy becomes more interconnected, it has become clear that import/export trade figures by themselves do not fully capture how much the US contributes to global commerce. Imports and exports merely measure the trade in completed products between nations and present a flawed picture. On the other hand, metrics such as US foreign affiliate sales provide information on longer-term investment and entrenchment in foreign markets, thereby giving a substantially different, and perhaps more accurate, look at what the US provides in goods and services.

Taking a look at exports trade data, a country like Ireland looks inconsequential to US trade with only $7,276 million (USD) in exported goods. However, Ireland is actually an important hub for transnational companies, and rakes in huge amounts of investment as shown by the foreign affiliate sales which puts Ireland at around $171,895 million, a number that eclipses Mexico at $143,478 million. Using only exports, Mexico is our number two trading partner for exports, but when we use the Sales/Export ratio, Mexico stands at 0.9, whereas Ireland is at 23.6.Without accounting for foreign affiliate sales, policy makers would have no idea of the importance of Ireland to US commerce. In addition, using foreign affiliate sales sheds light on other trade relationships, including Germany a country that many policymakers are worried about due to our supposed trade imbalance. In actuality, while US exports with Germany are only at $48,161 million, the US foreign affiliate sales are at $244,785 million and a ratio of 5.1. This means that the US is very much invested into Germany and the trade imbalance is not as nearly as significant when looking at both sets of metrics. This also presents an interesting note on the relative significance of trading partners. Policy-makers often stress the importance of China to US trade, but when looking at foreign affiliate sales, China is only at $138,991 million compared to Germany’s $244,785 million. This has the implication that the US actually has more trade interests in Germany, which is something that is completely unacknowledged when measuring using only export trade.

Using only export numbers presents an incomplete depiction of US trade. It is very difficult to make smart policy that improves US trade potential if the true trade relationships between the US and foreign countries are not understood. In terms of trade importance to the United States, opportunities lie with the newly proposed Trans-Atlantic Trade Agreement at almost $1,473,483 million in foreign affiliate sales. The United States must begin to rely more on foreign affiliate trade data or at least use it to supplement traditional import/export measurements to get a more accurate representation of US trade interactions.

Posted by: Matthew Goldberg

Sources: U.S. International Trade Commission, Vox, OECD, U.S. Census Bureau

Guest Contributor William Krist: Exchange Rate Manipulation

Negotiators for a Trans-Pacific Partnership Free Trade Agreement need to address currency manipulation when they meet March 4^th in Singapore.  Deliberate manipulation of foreign exchange rates by a number of countries is one of the most egregious of all unfair trade practices today.  By maintaining an artificially low exchange rate, a country in effect imposes an extra charge on imports (equivalent to a tariff) and also gains an unfair trade advantage in the U.S. and third country markets.  While this practice has long been recognized as an unfair trade practice, international trade rules have no effective provisions to address this issue.  The U.S. wants the Trans-Pacific Partnership agreement to be a template for future trade agreements.  To achieve this goal, currency manipulation must be addressed in the agreement.  (To read the entire paper, click here)

William K. Krist is a Senior Policy Scholar at the Woodrow Wilson Center.  He is a former Senior Vice President of the American Electronics Association.  He has written extensively on trade, development, and the environment.

Global Trade and the State of the Union

Unsurprisingly, the State of the Union address focused primarily on the domestic economy. President Obama emphasized issues such as the looming sequester and the need for immigration, entitlement, and tax reform. In terms of major announcements on the international trade front, the President revealed that the US aims to start talks with the EU towards creating a “comprehensive transatlantic trade and investment partnership.” This is a significant development for a multitude of reasons. A free trade partnership between the US and the EU would streamline trade by reducing regulatory barriers and tariffs, thereby expanding the already huge amounts of exchange. Not only would a transatlantic free trade agreement heighten the interconnectedness of these two massive markets, it would drive growth, deflect increasing competition from China, and would help reestablish the authority of the United States and Europe as leaders of the global economy.

The President also announced that the US is on course to finish negotiations over the Trans-Pacific Partnership, an agreement that will substantially increase US trade presence in the Pacific. There was no date given about when the talks would be complete, but it appears that things are falling into place. In addition, the President outlined some domestic economic policies that were relevant to global trade issues. For instance, President Obama’s unveiling of the “Fix-It-First” program, which intends to put people to work on urgent infrastructure repairs, could improve US trade performance through more efficient and faster travel times. Smart Grid enhancement would make the US a more appealing place to do business and it would protect vital information trade-lanes from cyber disruptions. The energy boom, both through enhanced fossil fuel production and clean energy development, will allow the US to dramatically increase its energy exports and could fundamentally transform the global energy trade. Through the creation of innovation centers, President Obama wants to accelerate the continuing trend of re-shoring in order to increase US export trade.

While domestic issues were clearly the main theme of the address, it is vital that President Obama address the larger context issues of global trade to enact policy that will take advantage of new economic opportunities. It would also be a mistake to underestimate the potential of trade as a key engine of economic growth for the US and the global community. A secure and healthy global economic structure is important in order to maintain further international stability.

Posted by: Matthew Goldberg

Sources: Wilson Center, United States Trade Representative, ABC News, Department of Energy

Photo Credit: Presidential Seal courtesy of flickr user Dave Newman

Currency Devaluation and the Threat of Global Currency War

The rapid devaluation of the Japanese yen has created fresh fears of global currency instability. Citing perennially slow economic growth, Shinzo Abe—the newly elected Prime Minister of Japan—decided to crackdown on deflation through aggressive monetary policy easing that would significantly devalue the yen. However, policy-makers from the EU and the US have decried Japan’s move as an attempt to gain a competitive trade advantage by cheapening its currency so that its goods and services cost less, thereby increasing export trade. The Euro in particular has seen a marked rise that may hurt the EU’s economic recovery if growth and demand for European goods were to slow down.  Japan has stressed that it is not deliberately trying to devalue its currency, saying the yen’s decline has more to do with a market correction following a period of strength. Nevertheless, there has been heated rhetoric demanding that Japan halt, or at least slow down, yen devaluation.

In order to diffuse tensions, the G7 (Group of Seven) countries—comprising the US, the UK, France, Germany, Italy, Canada, and Japan—said they would “consult closely” on any action in foreign exchange markets. Furthermore, the G7 avoided criticizing Japan and stated that “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.” Japanese policy-makers were reassured by the announcement and according to Taro Aso, the Japanese finance minister, the statement “properly recognizes that steps we are taking to beat deflation are not aimed at influencing currency markets.”

The statement by the G7 comes ahead of a meeting of G20 finance ministers and central bankers in Moscow on Friday. It is expected that Japan will come under scrutiny for its currency policy. Hopefully, the members of the G20 will be able to reach some sort of agreement to regulate and resolve tensions that have arisen from exchange rate discord in order to avoid a potential currency war.

Posted by: Matthew Goldberg

Sources: New York Times, Reuters, Financial Times, CNN Money, Finance Enquiry

Photo Credit: Forex Money for Exchange in Currency Bank courtesy of flickr user epSos. de

World Economic Forum 2013: A Post Crisis Davos

As the global economy begins to show signs of recovery, leading economic thinkers, heads of states, and major CEOs recently met in Davos, Switzerland for the annual World Economic Forum. These VIPs attended numerous events, networked, and traversed a new global economic landscape characterized by renewed optimism. The new disposition was reflected by this year’s theme—“resilient dynamism”—which represents an important shift in the perception of the world economy from something that is weathered to a force that can provide new opportunities.

While the outlook has become more hopeful, it does not mean that we are out of the woods just yet. As Axel A. Weber, Chairman of the Board of Directors of UBS, Switzerland, and a Meeting Co-Chair, declared, “The feeling is that the worst is behind us. But the mood bordered on complacency.” Not everything pointed towards the positive, especially the WEF’s own Global Risks 2013 report which offers a pessimistic outlook, saying the global community’s ability to address significant challenges, such as global warming, were limited by economic issues like “severe income disparity” and “chronic fiscal imbalances.” The report concludes that these systemic problems must be addressed in the near future in order to both sustain global economic growth and to avoid widespread social unrest.

On an interesting side note, the WEF, working with the science magazine Nature, noted several important but relatively remote potential economic threats known collectively as “X Risk Factors.” These include: Runaway Climate Change, Significant Cognitive Enhancement, Rogue Deployment of Geoengineering, Costs of Living Longer, and Discovery of Alien Life. While these issues are currently not as tangible as “concerns such as failed states, extreme weather events, famine, macroeconomic instability or armed conflict,” says the WEF, “they capture broad and vaguely understood issues that could be hatching grounds for potential future risks.” However, it is not unimaginable that we may confront many of these issues in the coming decades, and therefore, it is prudent to prepare for these prospective threats.

Overall, while Davos may often be thought of merely as a gathering of “fat cats in the snow,” it does have real worth both through its influence in setting the economic discourse and its role as a place for global leaders to reflect on global economic challenges.

Posted by: Matthew Goldberg

Sources: WEF, CNN, Business Insider, The Information Daily

Photo Credit: World Economic Forum 2013: Microphones courtesy of flickr user World Economic Forum

Value-Added Trade: New Tracking Tool Reevaluates U.S. Trade Deficits

A new database developed by the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) goes beyond traditional trade measurements by analyzing the value added by different countries during production to get a more accurate estimate of global trade balances.

According to the OECD, “traditional measures of trade, that record gross flows of goods and services each and every time they cross borders, may not accurately reflect modern trade patterns and could, if taken alone, lead to ill-informed policy decisions.” The conventional gross-value approach to measuring trade does not take into account the value of intermediate goods into the finished products. For example, while an iPad is “Made in China,” according to a study by the Personal Computing Industry Centre, the U.S. adds $275 to the total production cost, while China only adds $10. Using these figures, the Economist estimates that while iPads accounted for around $4 billion of America’s reported trade deficit with China in 2011, the deficit was only $150 million if China’s exports were measured on a value-added basis. These kinds of misleading estimates apply to more than just iPads. The database statistics show that the trade deficit with China has been drastically overstated in traditional measurements and is actually 25% lower when evaluated in value-added terms.

With modern supply chains becoming increasingly interdependent, the value-added approach better represents today’s interconnected world.  Hopefully U.S. policy-makers will take this new database seriously and use it to more accurately assess the magnitude of U.S. trade deficits, while also recognizing the benefits that the U.S. receives from international trade.

Posted by: Matthew Goldberg

Sources: The Economist, OECD, Bloomberg

Photo Credit: made in china courtesy of flickr user twicepix

United States Rejects UN Telecom Treaty in Dubai

The United States on Thursday said that it would not sign the new ITU treaty aimed at Internet governance. The U.S. delegation at the conference in Dubai, led by Ambassador Terry Kramer, commented that there were “too many issues here that were problematic for us.”

The treaty is intended to govern how telephone calls and communications traffic is exchanged internationally. Though the treaty is not legally binding, the provisions surrounding Internet governance and content matters were opposed by the United States and several other governments such as the UK, Canada, and Sweden. The U.S. delegation further noted that the treaty should not be applied to Internet providers as well as private and government networks, but rather to traditional telecom operators. Though toothless, the treaty could set a future precedence on Internet governance that would be against U.S. interests, according to Mr. Kramer.

Technology trade groups, spearheaded by Google, warned early on about the danger of adopting the ITU treaty and its potential for leading to future censorship of the Internet. Other criticism of the treaty included the risk of creating an obstacle for innovation and increasing government regulations of the Internet.

Political leaders from both parties passed resolutions in the House and the Senate directing the U.S. government to oppose international efforts to increase ITU’s control over the Internet.  Other Western countries joined the U.S. in questioning why governments should meddle with the free flow of information on the Internet. Some of the most vocal nations in favor of the new treaty were China, Russia, Iran and the Gulf Arab states. In total, 89 countries signed the treaty; 55 did not. The conference showed the deep ideological rift among the 193 member nations of the UN.

The treaty will take effect in January 2015. It remains to be seen where the non-signatory countries will end up, many of which may yet sign the treaty. What is certain at this point, however, is that the future of the Internet, and how to govern it, will remain a hot debate topic in the coming months and years.

Posted by: Samuel Benka

 Sources: The Los Angeles Times, The Seattle Post Intelligencer, The Hill

Photo Credit:  ITU WCIT 2012 Courtesy of Flickr user veni markovski

Starbucks: Serving So Much More than a Cup of Coffee

Starbucks was not kidding around when they dropped the word “coffee” from the logo. As of Wednesday, November 14^th Starbucks Corporation has acquired Teavana Holdings Inc. for about $620 million. Entering the tea market is the latest strategy of the company to satisfy a growing global consumer demand for caffeinated beverages. In the words of Starbucks CFO Troy Alstead, “[tea] is the second-most consumed beverage in the world, second only to water. We should be leading in tea.”

Expanding into different beverage markets is a logical next choice for the company, which has seen a drop in domestic store presence by 440 locations within the last four years. Teavana marks the largest of a string of acquisitions by the coffee giant, including a $30 million deal with fresh juice brand Evolution Fresh Inc. and a $100 million purchase of La Boulange Bakery (Bay Bread LLC) last year. This is not the corporation’s first foray into the tea market. Tazo Tea was acquired in 1999 is now worth approximately $1.4 billion annually in pre-packed tea bag and drink sales. The two brands, however, will not create an Apple-like cannibalism of sales; Starbucks maintains that the two brands are “complementary” and company leadership has yet to decide if they will both be sold in Starbucks locations.

The company has released a plan to open 1,000 new Teavana stores in the US within the next five years. Will these new locations maintain Teavana’s trademark brand image loose-tea and its pottery shop ambience, or will the consistent packaging of a Starbucks experience be present in the new Teavana stores? While this remains to be seen, company heads have stated that their coffee will not be sold within Teavana shops.

This is likely to be an image and not a monetary decision for the corporation. Besides ownership of the entire drink experience- coffee, tea, juice- and the pastry on the side, Starbucks also earns billions each year in sales of its retail bottled beverages and juices at grocery stores and quick stop shoppes. Furthermore, the coffee king is planning to extend its reach into far-flung markets favoring tea, particularly in China and India where tea is consumer up to 16 and 7 times more often than coffee, respectively. Teavana, having recently expanded past North America and into Kuwait, will certainly get more face time on the global market as a result of one of Starbucks’ “smartest acquisitions” yet.

 

Posted by: Sophia Higgins

Sources: Bloomberg News, Reuters, Starbucks Corporation

Photo credit: Black Coffee and Tea in White Cup is Hot @ epSos.de’s photostream courtesy of Flickr user epSos.de

Techonomy Conference 2012: Objectives of Technology-Driven Economic Revitalization

On Wednesday, September 12^th business leaders, political figures, and technology experts came together for the annual Techonomy Conference in Detroit. Hosted by the Detroit Economic Club, the conference’s agenda focused on the role of technology as a vital component of achieving social progress and economic growth.  This single day program is especially committed to the issues of “reigniting U.S. competitiveness and economic growth, creating jobs, and revitalizing cities in a technologized age”. Featured speakers included Grady Burnett, the Vice President of Facebook’s Global Market Solutions, James Dougherty, an Adjunct Senior Fellow for Business and Foreign Policy on the Council of Foreign Relations, and Justin Fox, the Editorial Director of the Harvard Business Review. They addressed the crowd on topics ranging from challenges in the era of globalization to the democratization of finance and product development to the future of manufacturing and its impact on employment. Audience members were also greeted by the founder of Techonomy, David Kirkpatrick, and treated to speeches on individual entrepreneurial development and other related topics.

The conference took a local look at Michigan and Detroit’s economic struggles for revitalization and at the challenges faced auto-mobile industry. Described as the Silicon Valley of an “earlier era”, Detroit is said to represent the larger issues facing American cities, including adapting to changes in education, employment, and infrastructure brought on by an increasingly globalized market society. Some have questioned the conference’s location of Detroit due to current economic struggles. Techonomy’s founder sends a different message, citing Detroit’s troubles as emblematic of cities that have missed the opportunities of technology in the past but have the potential to resolve these issues. Even a recently hurting automobile industry, a defining characteristic of Detroit, stands to make substantial gains from strengthening its tech culture of efficiency and educational achievement.

What were the goals and expectations of Techonomy? The event sought to utilize the revitalization of industry through technological advances, entrepreneurship, and innovation as major strategies for economic recovery. A focus on the increasing globalization of business and industry practices seemed also to be an objective of the conference. Intent on keeping America pushing the technological envelope, speakers discussed the future of expanding innovation and inspiring competitive growth. Complementarily, lecturers represented a diverse background of national industry and intellectual leadership, to address the concern of declining US competitiveness in detail and tackle the issue from unique viewpoints.

What can the public expect to come from this meeting of multi-disciplinary minds? Perhaps policy-makers will be influenced by the incredible support from the business community for this technology initiative as a means of creating jobs and stimulating urban development. Another possible outcome is a renewed emphasis on education for current and future generations to establish a more highly-skilled workforce with improved techno-literacy. Finally, perhaps Americans will see more pressure for regulatory reform easing start-up business restrictions. Ultimately, conference publicity should push technology to the forefront of economic recovery initiatives as a tool for improving US competitiveness and improving urgent urban issues to speed along city development.

Forbes highlights examples of innovative entrepreneurs in the Detroit area who exemplify these aims and serve as best-practice models for aspiring start-up companies. With the help of the Techonomy and its conference speakers, the American public may be able to look forward to more success stories like these.

Posted by: Sophia Higgins

Sources: Techonomy, Forbes, CNBC

Photo Credit: 2010_08_05_techonomy_105 @ Techonomy courtesy of Flickr user dserals