By Dezan Shira & Associates Industrial Zones (IZs) in […]MORE
Navigating the shifting winds of trade and tariffs
Joe Jurken has been doing business in China for 30 years. During a recent trip, he stopped to take a picture of the main dining room in a large western hotel in the city of Changzhou. The picture was remarkable for what it did not show – people.
Throughout his trip, Jurken, principal and senior partner at Milwaukee-based ABC Group, noticed the level of activity in China seemed to be lower than in previous years. Hotels felt like ghost towns and normally sold out trains seemed empty.
The question is whether the lack of activity is a normal slowdown in the Chinese economy or if the tariffs put in place by President Donald Trump are having an effect.
In Jurken’s view, the Chinese economy has been slower for the last several years. It is the result of a number of factors including cracking down on kickbacks to government officials, losing work to lower cost countries and a weaker domestic market.
“The tariffs if anything have been an excuse for the Chinese to acknowledge lower GDP,” said Jurken, whose business helps companies source from and export to Asia.
The tariffs President Donald Trump levied against China have also served the purpose of prompting negotiations between the two countries. The Trump administration initially put the tariffs in place in response to its own investigation into China’s handling of intellectual property and the forced transfer of technology to Chinese firms.
After rapidly escalating over the summer, a potential jump from a 10% to 25% tariff on $200 billion in Chinese exports to the U.S. was set to take place at the start of the year. The two sides were able to agree to a 90-day delay and then postponed the increase indefinitely as talks continued.
Even if the two countries strike a deal, it is unlikely the tariffs will be going away any time soon.
“We’re talking about leaving them for a substantial period of time, because we have to make sure that if we do the deal with China, that China lives by the deal,” Trump told reporters in March.
Jurken said he does not expect the 25% tariff will go into place, but he also cautioned a final deal might be difficult to achieve.
“This is probably going to be an ongoing dilemma as long as President Trump is in office,” Jurken said. “I think there will be a lot of contingencies. I think the Chinese are probably hesitant to have their feet held to the fire on certain levels or criteria being met.”
The uncertainty and potential cost increases has sent many manufactures that source from China looking to other low cost countries like Thailand or Vietnam.
“They’re there for the short- to midterm and you’ll see more and more industries going there, but because of the lack of population and lack of other things I think China will remain the number one importer of products for the foreseeable future, just because they have everything in place,” Jurken said.
Increasing trade tensions with China of course are not the only place Trump has taken action. He also increased tariffs on foreign steel and aluminum. Those prompted retaliatory tariffs from the European Union, leading Harley-Davidson Inc. to move assembly of motorcycles destined for Europe to a new facility in Thailand.
While the conflict with China or Harley’s decision-making draw plenty of headlines, more than 46% of Wisconsin’s exports go to Canada or Mexico. Trump and his Canadian and Mexican counterparts signed the United States-Mexico-Canada Agreement or USMCA as a replacement for the North American Free Trade Agreement.
The deal, which has not been approved by Congress, includes requirements for 75% of auto content to be made in North America and 40 to 45% of auto content to be made by workers earning at least $16 per hour. In the dairy industry, it includes provisions intended to expand access for U.S. producers to the Canadian market. There are also provisions that seek to establish intellectual property protections.
The USMCA also runs initially for 16 years and requires all three countries to agree to a 16-year extension. There are also provisions for regular reviews starting six years after implementation.
While the USMCA is signed, it still needs to make its way through Congress. In early April, House Speaker Nancy Pelosi said her members have concerns about provisions on worker’s rights, the environment and pharmaceuticals. She added enforcement provisions needed to be in the treaty for Democrats to move forward on the deal.
“No enforcement, no treaty,” she said at an event hosted by Politico.
Adam Schlicht, director of Port Milwaukee, said having a modernized version of NAFTA approved would help reopen some trade opportunities from the port. He added the port has also been strategic in trying to identify other opportunities beyond traditional trading partners.
“We did some shipments to Tunisia (last year),” he said. “We need to stay diligent in 2019 and beyond, identifying what are those developing economies that Wisconsin-based manufacturers can utilize if some of the traditional trade lanes via the port have been constricted as the result of tariffs.”