It’s been a whirlwind month for trade agreements.
On Jan. 15, the first phase of the much-awaited U.S.-China trade deal was signed by both nations. Under the agreement, the U.S. will keep imposing tariffs of 25% on about $250 billion of Chinese imports, most of which are production inputs for finished goods. It will reduce tariffs from 15% to 7.5% on $120 billion of consumer goods.
China will maintain duties ranging from 5% to 25% on U.S. imports. It will buy an additional $200 billion of U.S. goods above the baseline year of 2017, in which it purchased $185 billion. China also committed to buying an additional $5 billion in U.S. agricultural goods.
The tariff issue aside, China agreed to step up its protection of intellectual property rights, which has been a sore point for many companies across the world that have seen their products copied without permission. The agreement mandates that China enforce intellectual property rights through criminal penalties.
The one area not covered, and certainly to be a concern to pharmaceutical companies, are life-saving biologic drugs.
A major issue to the U.S. is addressed within the agreement: stopping China’s practice of stealing foreign companies’ proprietary information or requiring them to share their technology with the Chinese government. However, as in the case of intellectual property rights enforcement, this area will be left solely to the Chinese government for enforcement.
Finally, China will ease the equity rules for foreign banks operating within the country.
Previously, China imposed strict equity restrictions on foreign banks, not letting them use equity held by their other banks outside of the country to comply with China’s laws. That made it hard for them to compete in China’s financial services market. Under the agreement, a bank’s equity held outside of China can now be used for compliance purposes.
The obvious upside of the agreement is that China is committing to buying more U.S. products, which should help ease the trade imbalance that the U.S. has with that country. However, committing to the terms of the agreement means that China will have to increase its U.S. imports by more than 50% in a short period of time. The probability of that happening remains to be seen.
Increased intellectual property rights and the protection of corporate secrets are two of the biggest complaints the U.S. government has had against China. Addressing these in the agreement is a welcome step in the right direction. However, the ultimate enforcement body to ensure compliance is the Chinese government itself. For this part of the agreement to work, it will need to act in good faith by providing self-enforcement, of which there are many skeptics.
After previous passage by the House, on Jan. 16 the United States-Mexico-Canada-Agreement, or as I like to say, “NAFTA 2.0,” was passed by the U.S. Senate. A collective sigh of relief was heard by North American companies that import or export throughout the hemisphere. Due to higher North American content requirements in the agreement, it is hoped that more manufacturing will take place on U.S. soil.
One provision of the trade agreement increases the amount of North American content in automobiles from 62.5% to 75%. Another requires trucks and light trucks to have 40% to 45% of their content manufactured by workers earning at least $16 per hour.
Most industry players I have talked to have expressed doubt that these requirements can adequately be achieved and monitored. Some say it will be easier to simply pay a tariff rather than attempt to achieve compliance with these rules. Stricter content and labor rate rules could mean higher prices for cars and trucks, which would be passed on to consumers.
The “putting to bed” of the agreement in the U.S. allows companies that were sitting on the fence because of the uncertainty to move forward with new investments.
Now Canada is the only country left to ratify the agreement, and it is expected to do so soon. This will wrap up a contentious three years in which NAFTA was bashed by the Trump administration, made uncertain and used as a bully pulpit against our North American neighbors. Putting it fully in place will allow the three countries to work hard again at being good neighbors and trading partners.