Despite NAFTA’s pivotal role in facilitating over $1 trillion of trade each year between Canada, the United States and Mexico, Trump’s administration has on several occasions called for the end of NAFTA or to have significant portions of it re-negotiated to favour American interests.

Re-negotiations began in early 2017, and since then progress has since been made in some areas. Those involved in discussions remain hopeful, but Trump’s attitude towards the agreement remains a wild card and its continued future is by no means guaranteed.

So what would happen if the United States decided to terminate NAFTA, and how can you prepare to handle the resulting scenarios?

How will tariffs be affected?

The consensus among experts is that if NAFTA is terminated, trade would then be governed by the World Trade Organization (WTO) Most Favoured Nation status tariff rules. They stipulate that if a country implements a lower customs duty rate for a product for one country, it must then do so for all WTO members.

Stephen Walkom of the Toronto Star concluded that under these rules, 41% of Canadian exports to the U.S. would remain tariff-free, with most others receiving only small tariffs. The Financial Post surmised that tariffs under these rules would average 3.5% in the U.S., 4.2% in Canada and 7.1% in Mexico, while RBC Economics Research estimates 4% tariffs would be the average for Canadian exports.

Speculation continues regarding whether the previous Canada-U.S. Free Trade Agreement signed in the late 1980s would come back into effect. Many have concluded it would have to be re-implemented before going into force. In that case, the agreement would likely be re-negotiated as well, facing many of the same hurdles NAFTA currently faces. Trump has expressed a preference for bilateral trade agreements to their multilateral counterparts and focused most of his attention on U.S.-Mexico trade complaints. However, a seamless transition from NAFTA to a bilateral Canada-U.S. agreement remains unlikely at best.

Trade between Canada and Mexico comprises only about $40 billion of the over $1 trillion of trade done between the NATFA countries each year, but also faces the most straightforward solution. Even without NAFTA, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) would eliminate almost all tariffs between Canada and Mexico, both signatories to the agreement. This would then produce an almost identical tariff environment to that which they currently enjoy under NAFTA.

How would Canada and Mexico react?

Canadian officials, including Prime Minister Justin Trudeau, have remained optimistic in their outlook on NAFTA in comments to the media, stating that moving forward with NAFTA in place is their expected result. While they have mentioned that several contingency plans are in place, no specific details have been offered.

Pivots to Europe, the Pacific region covered by the CPTPP and the Chinese market would be expected as part of any contingency plans, should NAFTA fall apart. With the vast majority of Canadian exports still heading to the U.S., however, efforts to help Canadian businesses navigate any new tariffs and negotiate any new trade agreement to replace it would also be a high priority.

Mexico has been more transparent in its planning efforts, in part because of contention over NAFTA’s future in the lead-up to their July 2018 presidential election. Their likely Plan B would be to diversify trade with as many new trade deals as possible. Mexican officials have recently discussed free trade with Brazil, Argentina and the European Free Trade Association (EFTA), consisting of Switzerland, Norway, Iceland and Liechtenstein. Their exports to Brazil, Canada, Japan and the EU all grew in 2017 as well.

Some Mexican politicians have also pushed a Plan C to eliminate as many tariffs as possible and become a “Latin Singapore” to encourage more trade with other countries.

Develop your Plan B to thrive in a post-NAFTA environment

According to a recent survey of Canadian businesses, 75% feel the outcome of NAFTA will affect their decision making processes, but 66% have no contingency plan for if it ends.

With this in mind, what steps do you need to take to protect your business from tariffs that could wreck your bottom line, re-orient your supply chain or adjust your sales strategy to better fit the rules without NAFTA in place?

The first step you need to take is to evaluate the full role of NAFTA on your day-to-day operations and finances.

What NAFTA clauses do you use when transporting goods across borders? Do you or your employees/colleagues travel for work across NAFTA borders to offer services or complete sales? How could your customers, clients, suppliers and other businesses you work with be affected? These questions will help you start to understand the full effect on your business, so you can start developing contingency plans.

Once you understand the full scope of its effects, you’ll need to determine what additional costs or other hurdles your company would face in each scenario:  the continuation of NAFTA, trade under the CPTPP or a bilateral Canada-U.S. free trade agreement, trade under the WTO most favoured nation status, or any additional tariffs or regulations that may be implemented. While some businesses may be able to do this themselves, getting help from a customs broker or agent may be a good idea for other businesses to ensure details are factored in and each HS code is classified properly.

Next, you should talk to your suppliers, clients and customers about the potential effects of NAFTA termination on your relationship. If rules of origin changes take place, you may need to change the way your goods are sourced or where they are created to avoid substantial financial penalties.

Finally, you need to develop several plans for each potential scenario, detailing exactly how your business will be affected, what steps you will take to address those changes and how your operational efficiency, supply chains, and finances will respond as a result.

For some businesses, this may be as small as acknowledging a few extra tariffs that will need to be paid, and making minor adjustments to accommodate that in the bottom line. For others, moving business to other countries, making structural changes to their supply chain, or altering partner relationships may be required to maintain a profitable long-term business future.

Whatever the end result, now is the time to start preparing your NAFTA Plan B

Whether trade between Canada, the U.S. and Mexico continues under NAFTA, WTO rules, new trade agreements or something else, the three markets will still be integral for businesses in each country and billions of dollars of trade will cross the borders between them each year.

With so many potential outcomes to the current NAFTA situation, it’s important for the businesses buying and selling across those borders to be prepared for any scenario. While it may seem daunting, taking the proper steps to address each potential issue will save you a lot of time and stress later on.

Once you fully analyze NAFTA’s effects on your business, understand the potential new costs and legal changes that would come into place if the deal is terminated, talk to the businesses you work with and develop new plans, your business will be ready for even the worst case scenario.

The post It’s time to develop your Plan B in case NAFTA is terminated – here’s how appeared first on Trade Ready.

These questions all briefly came to the forefront on December 29, when President Trump tweeted critical remarks about Amazon’s delivery deal with the United States Postal Service (USPS), claiming the USPS should charge Amazon much more than they currently do.

While a June 2017 op-ed in the Wall Street Journal made a similar point, arguing the USPS lost $1.46 per Amazon shipment it delivered, its author also holds a stake in FedEx and several others have disputed his calculations, claiming the USPS’ contract with Amazon is not causing the organization any financial issues.

The USPS, FedEx, UPS and last mile delivery: who wants it more?

However the numbers add up, there’s no doubt that we all want last mile delivery to get packages to our homes or offices – after all, who has time to go pick up every package they order at a warehouse or distribution center? So who wants to get those packages to our doors, and why?

The last mile of delivery, or the final stage of delivery from the local/regional warehouse to your doorstep, has traditionally been the most expensive stage of the delivery process. It can’t be done as efficiently as moving large quantities of packages from one warehouse to another and requires vehicles and manpower to make each delivery. The cost per delivery also accelerates dramatically in less densely populated areas, making it cost-prohibitive for some delivery companies.

Given that the USPS is already engaged in door-to-door delivery six days a week, they have generally been able to complete Amazon’s deliveries with lower costs. As a result, the USPS handles about 40% of Amazon’s last mile delivery. In comparison, UPS handles 20-25% of Amazon’s final deliveries, while FedEx handles an additional 15-20%.

The USPS is efficient enough that even UPS and FedEx rely on the USPS to make a portion of their last mile deliveries, estimated to be about 30% of FedEx’s total ground packages in 2014. UPS or FedEx ship their packages to the nearest distribution center to the final delivery address, and then pay the USPS to complete the final stage.

As e-commerce continues to grow, however, so does the demand for last mile delivery of vast numbers of packages, and volume should continue to grow well into the future.

And as the volume grows, the more cost-effective it becomes for other companies to become more involved in last mile delivery.

As a result, in 2017, both UPS and FedEx announced plans to introduce new lower pricing for shipping goods within a 50 mile radius, rather than adding a higher rate or surcharge, in an attempt to win over more of the growing last mile delivery market. According to DC Velocity, this announcement was accompanied by efforts from FedEx to open four new major hub centers and 19 automated distribution facilities in the preceding 12 months, and hundreds of millions of dollars of investment by UPS to improve automation in its local hubs to improve productivity by 25%.

Amazon trying to get a piece of the action

Never one to be shut out of a potential business opportunity, Amazon has recently also started experimenting with various delivery options of their own.

The Amazon Flex program pays regular people to serve as Amazon delivery personnel in their own vehicles in specific markets, as long as they can complete delivery within an allotted time window. Amazon is also testing a program called Seller Flex, where Amazon’s own vehicles will pick up goods from the warehouses of select third parties to make the deliveries to consumers. The new Amazon Key further allows Prime members to have delivery people open their doors and enter their homes to deliver packages inside, potentially serving as a piece of a larger plan to take over more last mile delivery.

With drone and self-driving vehicle technology continuing to progress as well, any company able to utilize it for quick, cost-effective last mile delivery – whether USPS, FedEx, UPS, Amazon or a new player – could also cause seismic changes in the future.

Proliferation of delivery options ultimately about making money

No matter who delivers a package to your door, the delivery will cost them money, so how do they make a profit? In the case of USPS, their contracts with Amazon and others guarantee them massive numbers of packages, and can then utilize their existing network to deliver them efficiently.

For FedEx and UPS, their hope is that the combination of reducing their own cost per delivery with increased automation and warehouses, and savings by handling deliveries themselves, rather than paying USPS to handle the last mile, will pay off. The competition between the two will also mean both will be eager to take hold of as much of the market as possible in hopes of preventing the other from dominating it. Depending on what kinds of deals they’re able to offer to Amazon or other major companies like Wal-Mart, Best Buy and Staples, they may be able to encourage them to use their services rather than develop their own and further decrease competition.

For Amazon, not having to pay USPS or other carriers would be a consideration. Holding complete control over the delivery process would also let them have greater control over speed, and more ways to encourage customers to pay for Amazon Prime to have faster shipping and other options.

Whoever comes out on top will be in position to profit as e-commerce sales rise and more packages than ever require last mile delivery, making this a key issue to watch for years to come.

The post Who’s knocking at your door? Analyzing the future of last mile delivery appeared first on Trade Ready.

As populist nationalism surfaces across the globe from the U.S. to Europe, Russia and India, adverse effects on free trade are no longer a possibility, but a reality.

In Europe Brexit may only be the beginning. Though Macron’s victory seems to have put an end to Frexit concerns for the time being, Grexit remains a distinct possibility in Greece, and after the Renzirendum, the Italian referendum last December that caused Europhile Prime Minister Renzi to step down, the term Quitaly also popped up.

In the U.S., travel bans, visa restrictions and publicity about both have already cost the U.S. significantly in the loss of tourism and business income. The U.S. President has revoked American participation in the Trans-Pacific Partnership (TPP), and in doing so also killed the Transatlantic Trade and Investment Partnership (TTIP). Trump has also targeted NAFTA, causing Mexico and Canada to wonder if North America will be taking a step backward in business collaboration.

Also in the Americas, a Latin-American free trade zone has been going nowhere for decades. This January, however, the Latin American Integration Association (best known by the acronym for its Spanish name, ALADI) tried to breathe new life into it in light of what´s been happening north of the border.

Closely tied to increasing barriers to trade are impediments to the free movement of labor. Global businesses rely on a diverse workforce, and restricting immigration does not do them any good. Just witness the reaction of many Silicon-Valley multinationals to the travel ban decreed by the new U.S. administration.

Politics is changing the field for global business

Much of global politics for the past few decades seemed to agree with the economic theory that factors of production are best utilized when they are free to flow towards their most efficient use. That was the logic behind, for instance, the European Union´s Schengen Agreement in 1985, aimed at doing away with border controls. In 2016, however, as a reaction to the European refugee crisis, border controls were “temporarily” reinstated in seven countries (Austria, Denmark, France, Germany, Norway, Poland, and Sweden).

Meanwhile, in Asia, The Economist reports on impending labor shortages in countries like China or Thailand. Unfortunately, immigration and visa regulations hinder immigration from countries with labor surpluses like the Philippines or Bangladesh.

All this political mayhem coincides with the reported retreat of the multinational firm, per The Economist. According to their numbers, the profits of multinationals as a group have dropped by 25% in the span of only five years. And politics has little to do with it. Instead, a combination of maxed-out economies of scale and tax arbitrage comes into play. Many multinationals are just too big to be successful. And arbitrage has brought the tax burden as low as it can go.

Moreover, it is not only multinational corporations that feel the heat. In an increasingly complex world, small and medium-sized companies can be hard-pressed to find the resources to navigate the waters of international business.

So, in some ways, it seems that the runaway success of globalization over the past 20-25 years has sown the seeds of its own troubles. As wealth shifts around the planet, steelworkers in America’s Rust Belt stare into the abyss, the “huddled masses” in Africa go looking for greener pastures, and the rising middle class in China´s megacities scrambles to hire illegal domestic workers from the Philippines.

Clearly, the world has changed. And clearly there are some dark clouds on the horizon. What should global business leaders be doing in this uncharted territory?

10 ways you can do what’s right for your business

In the end politicians don’t do business. They only have the ability to either get in the way, or to help facilitate more success. Either way, it’s up to business leaders to get the deals done and to export and import, as well as encourage tourism and investment. We simply need to keep the faith and move forward.

We should have faith that trade is good. Push past any populist noise to do what is right for your business.

Whether you’re in the U.S., Europe, Africa or Asia, 85% or more of new opportunities in the next 5 years are somewhere else outside of your country. Go for it!

Here are some tips you can use to grow globally and successfully:

1. Listen to your tribe. Know your customers and listen to their pains and needs.
2. Create joy for your customers. Keep customers satisfied and wanting more from your team.
3. Globalize. Whatever it’s called and in whatever form it takes, globalize your firm. Prioritize your growth opportunities and execute effectively.
4. Leverage technology. More than ever technology will drive the opportunities, from artificial intelligence, to machine learning, big data and more – be familiar.
5. Have a global vision. View the world holistically and be aware of low hanging opportunities.
6. Stay focused. Keep the main thing the main thing.
7. Add diversity. Add people from different cultures and of different ages, especially young people, to your team. They’ve grown up in the internet age and will help keep you on track.
8. Improve communications. Know your message and keep your team and community aware of progress and next steps. Don’t fear repetition.
9. Stay ahead of shifting news. Keep your ears open for the latest news and make quick decisions.
10. Adjust as you go. Be faster, better, and more flexible than your competors.

Speak now or forever hold your peace

Business leaders must remember that consumers around the world are the primary drivers of the economy, not politicians. In an extreme case like Venezuela, politicians can completely destroy an economy with comprehensively bad policy. But in that case, business leaders have not been given a chance to provide their input in order to help.

In most countries in Europe, Asia and the Americas, business leaders have a voice and typically are not shy to share their opinions. You shouldn’t be either. Speak out for your business and trade in general, and push forward with the tips above, and we’ll all be the better for it.

The post Will populist politics pull the plug on trade progress? Survival tips for executives appeared first on Trade Ready.

One of the administration’s decisions, announced in early June 2017, is the United States’ withdrawal from the Paris Climate Agreement. At first glance, this decision appeared to be catastrophic. The many great strides that had been made by the previous administration to fight climate change seemed to be erased in one fell swoop of the pen.

Nevertheless, one of the most interesting reactions to this decision is the strengthened resolve of many corporations, as well as U.S. municipal and state jurisdictions, to stay the course, and in certain cases to set even more aggressive carbon reduction targets. In fact, it appears as though the resolve of multiple jurisdictions around the globe has intensified and the transition to a clean tech economy is well on its way.

Where there is change, there is also opportunity

Canada’s clean technology and services sector is now in a position to capitalize on the global shift toward a clean economy. With or without the Trump administration, this transition is happening. The global market for clean technologies is growing exponentially and Canadian exporters can position themselves as champions of clean technologies, taking a large share of this rapidly growing market.

It has been suggested that the opportunity for Canadian exporters may actually increase as the U.S. backs away from its carbon reduction commitments. Federal program support for American companies looking to export their clean tech solutions to global markets is likely to be significantly reduced. This will create more opportunities for Canadian exporters.

This opportunity is probably best summed up by Tom Rand, clean-technology venture capitalist and lead clean tech advisor at MaRS. In his closing remarks at the annual acclaimed Cleantech Forum held in San Francisco in January 2017, he concluded that:

If the U.S. wants to walk away from climate action, then Canada will be more than happy to eat its cleantech lunch.

This opportunity has not been lost on the Canadian government, which has identified clean technology as a priority sector for exporting around the globe. This priority sector includes products and services in renewable generation such as solar and wind, energy storage, and energy efficiency, to name a few. Export programs are available which provide support and assistance to Canadian enterprises offering these advanced technologies in overseas markets.

Turning green into gold with sustainability programs

With this transition to a green economy, there exists a second area of opportunity for Canadian enterprises in creating the business case for sustainability. Corporations are looking for ways to reduce their carbon footprint. In doing so, they are eliminating waste and increasing efficiency, which can lead to a global competitive advantage. Many corporations, large and small, have created the business case for sustainability and have seen profits increase.

As an example, Canadian Manufacturers and Exporters (CME) is administering the SMART Green program, which assists Ontario small and medium sized manufacturers with reducing their greenhouse gas (GHG) emissions. The program is funded by the Government of Ontario Green Investment Fund, which supports investments in clean technology and process improvements to improve energy efficiency and reduce GHG emissions. Programs of this sort aim to improve the competitiveness of manufacturers and, at the same time, contribute to GHG reduction targets.

With or without program support, corporations on both sides of the Canada-U.S. border are turning green to gold.

Many enterprises are greening their entire global supply chain and have made it a priority to take a sustainable approach to doing business. In order to be a global supplier, there must be a focus on sustainability and corporate social responsibility (CSR). Not only is it the right decision to protect the environment, it makes good business sense for companies looking to enter and succeed in global markets.

It’s time for Canadian exporters to build their competitive advantage

As many countries around the globe endeavour to shift away from fossil fuels and reduce their carbon footprint, this transition to a green economy promises to be challenging and rewarding.  Canadian exporters of innovative technologies are poised to take advantage of this building momentum at home and abroad.

With Canada’s largest and most accessible trading partner appearing disinterested in promoting jobs and investments in clean technologies at the federal level, this may be a tremendous opportunity for Canada to use this sector as an engine for growth. If embraced and done properly, this will become a big competitive advantage for Canadian exporters doing business around the world.

The post Growing momentum for clean tech will spur exports – here’s why appeared first on Trade Ready.

However, those affected companies may avoid the 45% tariff on imports by using a Bonded Warehouse or a Foreign Trade Zone (FTZ). For example, in South Florida, numerous importers bring merchandise into the U.S. that is not intended for U.S. consumption, but rather for exportation and consumption overseas. Those importers can take advantage of either a Bonded Warehouse or FTZ to bypass the 45% duties.

What is a Bonded Warehouse?

A Bonded Warehouse “is a customs regulated warehouse which must comply with strict Custom and Border Protection requirements.” According to the CBP, any merchandise that is stored in the Bonded Warehouse “is under the joint custody and joint supervision of both CBP and the Bonded Warehouse proprietor.”

The most notable rationale to use a Bonded Warehouse is that it offers a duty exemption feature as “it is a secure location where imported goods are stored without the importer or warehouse owner having to pay any duty” before the merchandise has been withdrawn for consumption.

The major benefit is that duties are only paid to CBP “upon withdrawal of the merchandise” for consumption in the U.S.

Imported goods can be stored in the warehouse for up to five years, and those goods can be manipulated or undergo manufacturing operations. “With a Bonded Warehouse, you can store restricted items until you are able to move them elsewhere or get permission to bring them into the country,” according to the regulation.

What is a Foreign Trade Zone?

A Foreign Trade Zone (FTZ) is a secure area that is under CBP supervision, but is not considered within customs territory. The CBP explains that FTZs are “located in or near CBP ports of entry,” and are the American version of what are known in the rest of the world as free trade zones. Both domestic and foreign goods may be placed in an FTZ.

Under the FTZ procedures, there is no requirement for payment of duties on foreign goods while placed in the FTZ. Duties are strictly payable only if those foreign goods enter CBP territory and are for domestic consumption.

Similar to the Bonded Warehouse, the Port of Miami website explains that there are various advantages to choosing an FTZ. “While in the zone, merchandise is not subject to U.S. duty or excise tax” and goods can be transferred to another zone, or exported from the zone without being charged duties.

In contrast to a Bonded Warehouse, goods can be stored in an FTZ for an unlimited amount of time, and manufacturing and manipulation is also permitted within the zone.

Additionally, “[d]uty is payable on either the imported components or the finished product, whichever has the lower rate. There is no duty on waste material or on value added manufacturing such as labor, overhead and profit.”

With an ability to curtail the possible 45% import tax by opting for either a Bonded Warehouse or an FTZ, the time to apply is now.

The post What is Trump’s 45% tariff on Chinese imports, and how can I avoid it? appeared first on Trade Ready.

The Border Adjustment Tax (BAT) is currently a hypothetical plan that has been presented by President Trump and the Republican Party (GOP). While there is growing speculation and uncertainty around this topic, here is what is known thus far, along with some tips for importers to curtail the BAT.

What would the BAT mean for trade?

The BAT would tax goods that are made overseas and shipped to the United States (imports), but would not tax goods that are produced in the United States (U.S.) and sold domestically or internationally (exports).  This would change how foreign and domestic companies calculate the corporate taxes they pay on profits.

As explained by The Economist, “for tax purposes, ‘profits’ would be domestic sales minus domestic costs.” The “border adjustability is all part of a plan to create a destination-based cash flow tax,” Forbes added, which would change the current corporate income tax. The destination-based cash flow tax would cause the tax rate to be lowered to 20% from the current average rate of 39%.

As a result, businesses would be able to write off their capital investments in the year those investments were purchased. They will also no longer have to pay taxes to the IRS for profits they earn overseas, and will no longer have the ability to “deduct interest as a business expense;” the Tax Foundation explained.

Based on an economic theory perspective, import taxes and export taxes would cancel each other out, therefore creating two potential avenues where BAT would not affect trade. Either the dollar might appreciate just enough that imports and exports end up costing the same as they did before the tax; or American prices and wages would rise enough to undo the competitive advantage that border-adjustment confers.

However, if the economy does not adjust to the BAT, importers would end up paying a lot more taxes in comparison to exporters, which could cause an unprecedented surge in inflation.

To prevent a negative impact on the economy, the Federal Reserve would have to provide a way to raise the value of the dollar to ensure taxes on imports and subsidies on exports would offset each other.

Is the BAT a VAT?

Some economists have compared BAT to a Value Added Tax (VAT), which is used in the European Union. In general, they consider the VAT a “broadly based consumption tax assessed on the value added to goods and services.” The Wall Street Journal added that “Businesses along the chain [of production] collect the tax and send it to the government. …it is the consumer who pays the tax, because the final price of the goods and services [consumers] buy reflect all of the taxes that have been charged up that point.”

Some economists consider the BAT, in its current state, to be very similar to the VAT in regards to retail markets, affecting the consumers who purchase personal commodities. For example, apparel stores relying heavily on imported inventory would face a tax bill that can be 3-5 times larger than their actual profits. While economists are not certain what the long-term effects will be, they do predict that in the short term there could be a 15-20% increase in prices on many household items. This could force many middle class consumers to purchase fewer goods.

Does the BAT violate GATT or GATS?

Other economists and members of the World Trade Organization (WTO) believe BAT could violate Article III of the General Agreement on Tariffs and Trade (GATT).

The broad and fundamental purpose of Article III is to avoid protectionism in the application of internal tax and regulatory measures. More specifically, the purpose of Article III, ‘is to ensure that internal measures not be applied to imported or domestic products so as to afford protection to domestic production.’

For the BAT to comply with GATT, any current or future U.S. tax measures “must be levied on imported products at a rate or amount no higher than the rate/amount levied on domestically produced ‘like’ products; and must provide a border adjustment on exports that is no greater than the amount of tax actually levied or owed on those goods.”

Currently, the GOP’s potential plan is in contravention of GATT, as it would give tax deductions for domestically produced goods, while at the same time denying deductions for those same goods that would be imported.

Another issue that could arise within the WTO is whether the BAT would violate the General Agreement on Trade in Services (GATS). The question would then arise, as suggested by PIIE, as to whether the denying a business deduction for an imported service amounts to less favorable treatment than that given to the same service purchased from a domestic supplier. If BAT does create treatment that is less favorable to imported services than to domestic services, then the BAT would also be in violation of GATS.

While there is much uncertainty, speculation of a future BAT will continue to grow. Until the Trump Administration and GOP present a comprehensive plan with congressional approval, one thing is certain: importers have to begin planning now.

The post New trade taxes may be coming – here’s how you could be affected appeared first on Trade Ready.

Although the RCEP has been in negotiation for several years, its significance has increased sharply following the decision by President Trump to pull the United States out of the Trans-Pacific Partnership on his third full day in office.

The TPP was signed on February 4th, 2016, involving 12 nations including the United States. However, there was a major disagreement between the Obama administration and the Trump administration about whether or not the TPP is favorable for America.

The result is that America has now pulled out of the TPP. Following America’s exit from the agreement, the RCEP has the potential to replace it as the dominant trade deal in the Asia-Pacific region.

Who would be included in the RCEP?

While the deal has not been finalized yet, the following nations are all said to be potential members of the RCEP.

South Korea                             Singapore

Japan                                        Brunei

China                                        Thailand

India                                          Indonesia

Myanmar                                  The Philippines

Vietnam                                    Australia

Cambodia                                 New Zealand

These 16 nations have a combined population of 3.27 billion people, or 46% of the world’s population, and a GDP of approximately 19.2 trillion dollars – 24% of global GDP.

What are the most significant implications of the deal?

One of the most significant implications of the RCEP is that the world’s two most populous nations, India and China, would be involved in a large trade bloc. Neither of these nations are a part of the TPP.

The RCEP is set to cover trade in goods, services, and investments, intellectual property issues, economic and technical cooperation, dispute settlement, competition, and a number of other concerns. This deal would be a landmark trade development in the western Pacific region.

The RCEP covers many of the same issues as the TPP, but does not contain as stringent protections for human rights, labor, and the environment as the former agreement.

Ultimately, the RCEP could create one of the largest free trade zones ever enacted and lead to an unprecedented amount of trade activity between member nations. However, both workers and the environment may not enjoy the same protections as they would have had in deals like the TPP.

China and America are moving in opposite directions on free trade

The greatest driving force behind the RCEP appears to be the fact that the leader of the United States believes that it is not beneficial for the country to be involved in enormous multilateral free trade deals, unlike China.

In fact, President Trump campaigned on a platform of opposition to both the TPP and NAFTA, a free trade agreement between the United States, Canada, and Mexico. President Trump even went as far as to call NAFTA “the worst trade deal the U.S. ever signed.”

Trump’s primary opposition to free trade deals is that he believes American workers are losing too many jobs to cheap outsourced labor. In other words, he wants to keep more jobs inside the U.S. Trump has also accused China of currency manipulation, and has stated that the U.S. needs to be reimbursed more for the security it provides around the world.

A combination of all of these things means that the world of international trade could see some major shifts. The U.S., the nation with the world’s largest economy, looks likely to take a much more protectionist stance on trade in the near future.

Perhaps because many jobs flow there due to cheap labor, China appears to be very open to free trade. China has the world’s second largest economy, with a GDP of $15.26 trillion (2016). Considering that Japan has the third largest, and India has the seventh largest, a trade deal involving all three of these nations could be very powerful.

What does this mean for the future of international trade?

The RCEP has not yet been formally signed, but there is a good chance it will go through. In fact, Ganeshan Wignaraja, an advisor with the Asian Development Bank, said “An RCEP agreement seems probable in 2017 due to intensified negotiations.”

So, in the near future, the Pacific region could be dominated by a free trade haven that connects India and Australia with China and many other Asian nations, while the United States adopts increasingly protectionist measures on the other side of the Atlantic.

Countries who wish to trade with the United States in this new era could find themselves facing a new barrage of tariffs, taxes, and duties. It may also be significantly more difficult for American companies to outsource jobs to Asian countries, as the Trump administration looks for continued ways to protect American jobs at the expense of new multilateral trade deals, which would have the potential to create new jobs both in the U.S. and in other countries.

Whether or not other Pacific nations such as Mexico and Canada will ever join the RCEP is yet to be determined. However, if Trump also pulls the United States out of NAFTA, then these two nations may be eager to seek new free trade deals and look to the RCEP in its place.

By pulling out of the TPP, President Trump claims to be doing what he believes is in America’s best interest. However, it was estimated that the TPP could have brought the country an extra $77 billion in revenue per year. So, in order for America to make up this lost revenue, it will have to bring in a substantial amount of money from tariffs, and keep a   jobs in the country.

The tectonic plates of the international trade world are shifting. Once key decisions are made about the RCEP and NAFTA, the trade landscape could be entirely redefined, creating a whole new set of parameters for companies to consider as they do business internationally.

The post What is the RCEP and how could it affect global trade? appeared first on Trade Ready.

To some degree, that answer has to be yes; but not entirely.

Washington goes bilateral

For decades, trade policy has been led by Washington. No other capital has had a bigger influence on global commerce. Being the largest economic, military and geopolitical power certainly means that any major shift in U.S. trade policy will impact global trade policy as well.

This is seen most clearly with the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP). President Trump has already withdrawn from the TPP, though that doesn’t mean the deal is wholly dead (more on that below). If we extend his logic on the TPP to the TTIP, as investors would be wise to do, that agreement between the U.S. and the E.U. is likely at the end of its road as well.

Under President Trump, Washington has indeed gone bilateral. Trump decries multilateral trade deals as bad for America. His focus, he says, will be on establishing bilateral trade relations and negotiating from a position of strength. He thinks the U.S. can get better deals for its workers that way.

After all, the U.S. is the biggest economy in the world, and it can easily overpower many other countries in bilateral talks. The U.S. negotiators will have an enormous amount of leverage in bilateral negotiations, even with other major economies. By contrast, American bargaining power often decreases when it is negotiating with multiple countries, as was the case with the TTIP and the TPP.

NAFTA’s future is more certain than either the TTIP or the TPP, since it is an existing, entrenched trade deal. With established links and interests, it will be much harder to nix the regional pact. However, a renegotiation is almost certainly going to occur. Donald Trump’s re-election depends on it—he won office because of votes in the Rust Belt, and those voters feel passionately that NAFTA should be scrapped or renegotiated.

NAFTA renegotiations will be an historic challenge for Ottawa. While America’s sights are largely set on trade with Mexico, Canada needs to brace itself for what could be a rough ride as well. Though trade with Canada almost never made its way into a Trump campaign speech, complacency will not serve our policymakers.

Is the TPP dead?

There were two major players in the TPP negotiations—the U.S. and Japan. It was commonly believed during the negotiations that if either of those two countries failed to ratify it, the deal was dead. While Japan ratified the pact, the U.S. will not.

However, that doesn’t mean the TPP is dead per se. Australia is pushing for the deal to continue without the U.S., though this is unlikely. Even if the deal doesn’t get ratified and the TPP is gone in name and country make-up, many of the innovations that came from it may find their way into future trade deals. The TPP was often heralded as the new gold standard for trade—these ideas don’t go away with the end of the pact. Expect to see some of those processes replicated in future deals.

Is the world following the U.S. to bilateral trade?

As Washington pivots away from decades of multilateral trade policy, will the rest of the world follow? To some degree, they will be forced to. Countries that want a trade deal with the world’s largest market will be forced to negotiate bilaterally with the U.S. This includes Japan and the U.K.

However, there is no evidence yet that the rest of the world will only negotiate bilateral deals with other countries.

In Asia, China is still pushing the Regional Comprehensive Economic Partnership (RCEP), which consists of 16 Asia-Pacific countries. Furthermore, ASEAN countries are continuing their economic integration.

Multilateral trade isn’t dead in Europe either. After Trump’s election, Canada and the E.U. ratified the Comprehensive Economic and Trade Agreement (CETA). The United Kingdom, too, is keeping a multilateral E.U. trade deal on the table in its Brexit negotiations.

Nevertheless, there are still storm clouds for multilateral trade in Europe. While the TTIP has not been officially abandoned, anyone who took in Trump’s rhetoric on the TPP cannot imagine he supports the E.U. deal.

The TTIP is further complicated by an E.U. election calendar which is not favourable to the agreement. Over the coming years, France and Germany (the major E.U. players) will both have elections in which populist candidates are either leading in the polls or rising in popularity. The result is that French and German mainstream leaders will be forced to make concessions. While they are unlikely to abandon the TTIP altogether, they may have to tamp down enthusiasm and make some changes. Of course, the victory of right-wing populists in either country could kill the deal as well.

There is no doubt that Donald Trump’s election will change world trade, marking a break from the multilateralism that has become popular in recent decades. However, there is currently no evidence that the rest of the world will shift its policy framework just yet, placing the U.S. at odds with many other countries over the future of international free trade.

The post Does the Donald Trump era mark the end of multilateral trade? appeared first on Trade Ready.

Among the many events and excellent keynote speakers, I attended a presentation by Dr. David Fung, entitled “Meeting the challenges of growth demand: a shipper’s view.” Dr. Fung currently serves as Chairman and CEO of the ACDEG Group of Companies, a global technology integrator with business partnerships in several different sectors in North America, Europe, and Asia.

His analysis of the current and future business prospects for ocean freight carriers was quite pessimistic, due to changes in the economic forecast and in the business models now being used around the world. For example, with business producing more goods locally, the number of containers shipped has diminished substantially. New technologies such as 3D printing are also decreasing the need to ship by sea.

Of course, nobody wants to hear pessimistic forecasts, but we have to appreciate the contradictory opinion because it helps businesses prepare for tough times. He concluded by encouraging the audience to not look to the past for solutions, but to focus on looking forward and accept the new challenges.

Even the top companies are facing challenges

I wanted to investigate this outlook further, but data from the major ocean freight shippers is not always easy to obtain and when we do, the data is always a bit old.

I looked at the financials for Maersk, the world’s largest shipping company, whose latest data is from Q4 2016. On their financial report, they argue that the demand for transportation of goods grew below expectations in the first half of the year, leading to significant downward pressure on freight rates. In the second half of the year, and especially in Q4, demand increased while the number of deliveries was reduced, which led to a gradual improvement of freight rates.

The difficult business environment during the year enabled industry consolidation, and Hanjin Shipping Co. Ltd., the world’s seventh-largest container shipping company, went out of business. Despite this, Maersk Line continued its cost leadership strategy and gained significant market share.

Maersk Line nevertheless recorded a loss of USD $376 million (compared to a profit of $1.3 billion in 2015) and a return on invested capital (ROIC) of -1.9% (+6.5% in 2015). The underlying result was a loss of $384 million (profit of $1.3 billion in 2015) due to poor market conditions leading to sustained lower freight rates. The lower rates were then partly offset by higher volumes and lower unit costs related to lower bunker price, higher utilization and cost efficiencies.

Looking at the financials for Nippon Yusein Kaisha (NYK) Line as well, their revenues for the first three quarters of 2016 were ¥2,272.3 billion, but their forecast for the same time period in 2017 is just ¥1,414.5 Billion, a major decrease.

Tough times for the industry may be worsened by the Trump administration

While Hanjin’s insolvency made headlines in early 2016, they weren’t the only company struggling at the time.

Due to the sharp decline in ocean freight rates, all of the world’s top 15 container shipping companies reported negative operating margins (EBIT margin) for the first six months of 2016 except the Asian shipping company Wan Hai, which only operates regionally.

Since then, the biggest news story in the world has been the election and presidency of Donald Trump. The election and its economic consequences are not still clear and it is too early to say if and when the change will bring some improvement or deteriorate the current forecast for the industry.

One possible effect is on the iPhone, one of China’s biggest focuses in 2017. Based on the iPhone’s packaging dimensions (15.5 cm x 9 cm x 6 cm, 0.385 kilograms) it is estimated that 44,000 phones will fit in a standard 40-foot shipping container before it hits the weight limit. However, based on recent announcements by Apple, more production is scheduled to happen in the United States because the Trump administration is pushing for Made in America production.

Are sunny skies ahead for the ocean freight industry?

Despite the rough start to the year, the September 2016 quarterly financial report of Hapag-Lloyd, the world’s fifth-largest container carrier, remained positive. It reminds their investors that according to the IMF, the volume of global trade, which is key to the demand for container shipping services, was forecasted to increase by 2.3%. Continued growth of 3.8% is expected in 2017.

Based on current forecasts, the growth in global cargo volumes could reach up to 4.2% in 2017. IHS Global Insight is also predicting average annual growth of approximately 5% in the global container shipping volume from 2018-2021.

The issue is of course, is whether the growth of 5% forecasted for the period will be enough to cover for capital expenditures and operating expenses, while still allowing some profit. Even this level of growth may not be enough to cover rising costs for companies, and could result in further problems unless they begin to consider new approaches.

Innovative and courageous thinking is needed to guarantee future success

The current data confirms that the ocean freight is experiencing tough times, and will likely continue to do so. The question now is whether the time has arrived to re-think their business models.

It seems that now is the time to collaborate, rather than compete, and that doing so to meet logistical needs might improve profit margins.

I want to conclude by thanking the Cargo Logistics Canada organizers for the realization of such a wonderful event. Also, a big thank you to Dr. Fung for his “courage” to share his view about the shipping industry, especially when the industry would prefer not to listen to his pessimistic views.

The challenge for the industry is now that they know about the difficulties, what can they do to turn the challenges into profit? Time will tell, but I think major opportunities await to those companies able to tackle these major challenges head-on, rather than hoping things will get better on their own.

The post The ocean freight industry is struggling – but is there hope on the horizon? appeared first on Trade Ready.

Since it came into force in 1994, the North American Free Trade Agreement (NAFTA) has had a massive impact on trilateral trade between Canada, the U.S. and Mexico. Trade between the three countries has increased dramatically, and their economies are now more intertwined than ever before.

In recent years, however, the backlash against the agreement has grown as some have blamed the agreement for the loss of American manufacturing jobs to Mexico and elsewhere.

In the wake of Trump’s election as President of the United States, it seems likely that NAFTA renegotiations will commence soon. We talked to some of the top experts in international law, customs and trade issues about what we can expect for the future of the agreement, and how NAFTA could be modified to benefit businesses in all three countries.

Moderator: Jon Yormick (@yormicklaw) is Special Counsel for Phillips Lytle LLP, and specializes in U.S. customs, cross-border strategies, export controls, economic sanctions, and FCPA/anti-bribery issues. He also runs his own international business law practice, with offices in Buffalo and Cleveland.

Panelists:

Alicia Nicholls (@LicyLaw) is an independent trade and development consultant in Barbados, as well as a consulting legal researcher for Franhendy Attorneys.

Horacio Lopez-Portillo (@hlopezpo) is a Partner at Vazquez, Tercero and Zepeda in Mexico City, specializing in trade and customs law, anti-dumping, tax litigation and corporate law.

John Boscariol (@tradelawyer) is Partner and leader of the International Trade and Investment Law Group at McCarthy Tetrault LLP in Toronto, specializing in anti-corruption, trade sanctions, export controls and other areas of international trade and investment law.

Joy Nott (@JoyNott) is the President and CEO of the Canadian Association of Importers and Exporters (I.E. Canada) in Toronto.

Paola Viviana Murillo (@Latinmirrai) is the Founder and Director of Latincouver, which helps expand local business opportunities for business in Latin America or with Latin American countries. She is also Marketing Consultant and PR Director for Mirrai International, working to help build connections between businesses in Latin American and Canada or the U.S.

What are NAFTA’s greatest strengths and weaknesses as a free trade agreement? Do the positives still outweigh the negatives?

@yormicklaw Q1. Greatest strength is market access to worlds’ largest economy (USA). Weakness= older than the internet!! #TradeElite

— Joy Nott (@JoyNott) February 9, 2017

#tradeelite For me, positives greatly outweigh the negatives. Strengths are no tariffs, integrated supply chains, strong regional content.

— HoracioLópezPortillo (@hlopezpo) February 9, 2017

A1 NAFTA ground-breaking in 90s but now needs an update.Never properly addressed trade remedies & overly complex rules of origin #TradeElite https://t.co/nm0Qf1k52c

— John Boscariol (@tradelawyer) February 9, 2017

Is NAFTA 2.0 still necessary given its age and the complexities of rules of origin?

#NAFTA was very much WTO-plus when it came into force but now #CETA demonstrates we can do much better, we can go much farther #TradeElite

— John Boscariol (@tradelawyer) February 9, 2017

@yormicklaw A2: Also need to have a relook at RoO. US might likely want more stringent RoO for autos and autoparts. #tradeelite

— Alicia Nicholls (@LicyLaw) February 9, 2017

#tradeelite Yes, #NAFTA 2.0 both necessary and convenient, but not new #NAFTA. Should be careful not throw away the good in hopes of better. https://t.co/GixfxCl30j

— HoracioLópezPortillo (@hlopezpo) February 9, 2017

A2. eCommerce did not exist when NAFTA was drafted. Business has evloved and NAFTA must also evolve #TradeElite

— Joy Nott (@JoyNott) February 9, 2017

#TradeElite A2. It’s much more than NAFTA 2.0. It’s about the new world complexities that represent challenges and opportunities

— Paola V Murillo (@Latinmirrai) February 9, 2017

@tradelawyer mentions #CETA. Should that be a model for #NAFTA 2.0 or perhaps #TPP, despite US withdrawal? #TradeElite?

— Jon Yormick (@yormicklaw) February 9, 2017

#tradeelite #CETA would be great model if competition policies were similar in #NAFTA region. Thus, I favour a #TPP model @tradelawyer https://t.co/7pPLVIWyYW

— HoracioLópezPortillo (@hlopezpo) February 9, 2017

#CETA and #TPP are both agreements that better reflec modern business. #NAFTA was great foundation and where it all started #TradeElite

— Joy Nott (@JoyNott) February 9, 2017

President Trump called the TPP a disaster. Will his negotiators be willing to look to it and CETA as models for NAFTA 2.0?

@yormicklaw @POTUS his USTR is experienced so they may consider those elements in those agreements which align with US interests #tradeelite

— Alicia Nicholls (@LicyLaw) February 9, 2017

A3: yes,elements of both #TPP & #CETA, Trump blew up TPP for political reasons & to improve negotiating strength – bilateral #TradeElite https://t.co/PlK1WZECA1

— John Boscariol (@tradelawyer) February 9, 2017

A3. Again this comes down to USA wanting 100% wins with American companies getting the most & it’s not possible. #TradeElite

— audrey ross (@tresAudrey) February 9, 2017

@tradelawyer @joynott Bilaterals will take longer to negotiate and create more sets of rules for companies to cope with. Agreed? #TradeElite

— Jon Yormick (@yormicklaw) February 9, 2017

@yormicklaw @tradelawyer Bilaterals do make intl biz harder, but not impossible. Trade regions are much better, hands down #TradeElite

— Joy Nott (@JoyNott) February 9, 2017

#Tradeelite Given the state of things (#NAFTA) 100% USA wins needs #Canada and #Mexico winning also. https://t.co/NvG84wAAC0

— HoracioLópezPortillo (@hlopezpo) February 9, 2017

How should NAFTA 2.0 address issues such as e-commerce, labor, the environment, and services?

@yormicklaw improving on the labor and environmental side ags, market access for trade in digital goods and services #tradeelite

— Alicia Nicholls (@LicyLaw) February 9, 2017

A4. Give Customs officers a higher value threshold to support #ecommerce via courier. #TradeElite

— audrey ross (@tresAudrey) February 9, 2017

A4: unlikely to see firm enforceable enviro & labour commitments from Trump admin – will likely be window dressing on NAFTA 2.0? #TradeElite https://t.co/xkkkWW6YQT

— John Boscariol (@tradelawyer) February 9, 2017

How do you respond to those who blame NAFTA for job losses? How can NAFTA 2.0 affect the future job market?

A5. Technology is the real reason jobs are lost – robots on assemply lines rather than people. NAFTA got a bad rap #TradeElite

— Joy Nott (@JoyNott) February 9, 2017

@yormicklaw #tradeelite 1. Automation 2. Many of those jobs would have gone to China or elsewhere w/o Nafta due to high wages costs in US.

— Alicia Nicholls (@LicyLaw) February 9, 2017

#TradeElite those kinds of jobs are gone forever, can’t be reversed; #NAFTA 2.0 s/b designed to boost new economy, incl business immigration https://t.co/tEAZgd6oDJ

— John Boscariol (@tradelawyer) February 9, 2017

#tradeelite. A5. The labour force will quickly adapt to NAFTA 2.0

— Paola V Murillo (@Latinmirrai) February 9, 2017

#TradeElite I could hardly agree more with @tradelawyer #NAFTA 2.0 should take advantage of and build on the competences of each member. https://t.co/lBOwwmLhUx

— HoracioLópezPortillo (@hlopezpo) February 9, 2017

When should we expect renegotiations? What can businesses do to affect or react to potential changes?

@yormicklaw likely once Trump’s trade team has been confirmed. #tradeelite

— Alicia Nicholls (@LicyLaw) February 9, 2017

A6. If it looks like demise is close at hand brush up on MFN duty rates & start adding to your quotes as buffer. #TradeElite

— audrey ross (@tresAudrey) February 9, 2017

@yormicklaw #tradeelite Lobby for the issues of importance to them. This is already happening eg: Agri groups in US

— Alicia Nicholls (@LicyLaw) February 9, 2017

#TradeElite A6 #Mexico has begun consultations w/ business. Not a bad idea. Businesses should lobby and participate as much as they can. https://t.co/cBgCap7Ryc

— HoracioLópezPortillo (@hlopezpo) February 9, 2017

@tresAudrey A6. I agree that biz between CDA and MX can continue no matter what. CDA biz needs to start to think globally ASAP #TradeElite

— Joy Nott (@JoyNott) February 9, 2017

Canada and Mexico can deepen their trade relationship and look for new opportunities. #tradeelite

— Paola V Murillo (@Latinmirrai) February 9, 2017

Read the rest of the chat and join future discussions by following the #TradeElite hashtag. Stay tuned for the next #TradeElite chat, coming up Thursday, March 9 from 2:30-3:30PM ET.

The post What’s next for NAFTA? appeared first on Trade Ready.