A New Direction for International Trade Policies? The Potential Impact on U.S. Businesses

IMG_1033In two weeks, the United States will inaugurate the 45th president of the United States, Donald Trump. Along with the transition from one administration to another comes a possible change in the U.S. approach to international trade. Today’s post is the first part of a series focused on the 2017 international trade agenda. Part I emphasizes what you need to know about two significant U.S. trade agreements in the current context and their impact on U.S. firms that operate domestically and/or internationally.

Trans-Pacific Partnership Agreement

Over the last few years, the Trans-Pacific Partnership (TPP) agreement faced both strong support and criticism. TPP supporters touted the agreement as a pathway to preferential access to additional markets throughout the Asia-Pacific region, such as Japan, Malaysia, and Vietnam.

Twelve countries signed the agreement in February 2016. However, President Barack Obama will leave the White House without having his signature trade deal ratified by the U.S. Congress. The failure to ratify the TPP has led some to argue that the TPP is dead and others to raise questions about its fate during the Trump presidency. On the campaign trail, Trump mentioned that he would “withdraw” from the TPP upon entering office out of concern that the agreement would lead to an increased loss of jobs.

As the fate of the TPP continues to look dimmer in the United States and other member countries, all is not completely lost in terms of market access. Businesses can still benefit from existing trade deals and trade arrangements with many of the TPP countries such as Canada, Mexico, Chile, and Singapore. These trade deals allow companies to import goods from member countries without paying taxes on those imports. At the same time, companies export their goods to other countries that are a part of the same deal without having taxes placed on their goods. As a result, these companies can become more price-competitive in those markets.

 

North American Free Trade Agreement

Canada and Mexico are the two largest trading partners with the United States in terms of exports. Both countries are a part of the North American Free Trade Agreement (NAFTA), which took effect in 1994. Canada and Mexico also signed the TPP. I just mentioned above that, even without the TPP, firms still have access to other markets via earlier trade agreements. One of those agreements would be NAFTA.

NAFTA has not gone without its share of criticism, particularly from President-elect Trump. He has described NAFTA as the “worst trade deal” and seriously harmful to the U.S. manufacturing sector. Trump has put forth the idea of renegotiating NAFTA. If the other NAFTA partners, particularly Mexico, do not agree to the terms of a revised deal, then the deal would be terminated. (President Barack Obama also proposed that Canada, Mexico and the United States “amend” NAFTA prior to his presidency.)

I do not disagree with strengthening the labor and environmental provisions of NAFTA, or any other trade deal for that matter. However, in today’s global economy, terminating trade agreements and implementing protectionist policies are not the answer.

Getting rid of NAFTA will probably do little to bring jobs back to the manufacturing sector. Instead, terminating such an agreement merely ignores the reality of jobs that are lost to advanced technology. Terminating NAFTA also does little to distinguish between outsourcing and exporting. Outsourcing involves moving operations overseas altogether, which is usually to benefit from lower-cost labor. Exporting, on the other hand, merely entails selling a good or service to consumers in an international market while continuing to produce at home. Whereas, I understand the efforts to keep production in the United States for the sake of saving some jobs, getting rid of a deal may harm those businesses that continue to produce goods and services in the United States to sell to consumers in the Mexican and Canadian markets. Also, businesses that rely on lower cost imports may be negatively impacted as the cost of production increases and, thus, prices for the consumer.

In sum, trade policies create or hinder opportunities for business owners in the overseas market. It is important for business owners to stay abreast of these policy implications as they develop strategies for competing both domestically and internationally.

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