Globalization and trade

Global trade is entering uncertain times. A new industrial age is afoot and there is a question of whether we’ll stumble. There’s an old Louisville Slugger behind the door that’s seen service since the 1950s - albeit in recent decades more for home defense than hitting a homer over the fence. What’s more American than a baseball bat? Over in Helsinki, Finland, a company was formed in 1950, ostensibly to distribute U.S. cigarettes and related products. The company, at the time known as Amer-Tupakka, was successful enough that in 1961 the company acquired the right to produce and sell Philip Morris cigarettes for the Finnish market. But change in corporate direction came in 1989 when the now Amer Group bought Chicago-based U.S. Wilson Sporting Goods. By 2004 Amer was out of the tobacco business and fully engaged in sports, acquiring (and occasionally divesting) brands like a kid trading baseball cards. In 2015, Louisville Slugger was added to Amer Sports catalogue of companies, which already included a less known manufacturer of baseball and softball bats, DeMarini. So, what’s more American than a baseball bat? is a more complicated question than meets the eye. Louisville Slugger is just one of the countless brands whose ownership and distribution are part of the advance of globalization through trade and technology. Organized globalization of economies has been underway for centuries. It can be argued that institutions like England’s East India Company and similar state supported corporations were the globalizing force of their time. Now nothing is more ubiquitous than a cellphone stuck to the ear or being viewed whether a person is walking a street in Topeka or Timbuktu. Whether it is a phone, the Golden Arches, or presidential inauguration baseball hats, globalization exists at every level of modern life and international trade is fueling it. And that’s a dilemma. What is a fair share and how can it be determined? Content Management Whose exports are they? When an IPhone or IPad hits the US market, is it really a Chinese export? How much of that auto imported from Mexico or Canada is really an import? Conversely, how much of an auto like a Toyota or BMW assembled in the U.S., is domestic?

It’s a truly knotty problem when it comes to trade agreements like NAFTA. President Donald Trump has tweeted his unwavering dislike for international trade agreements with the summary rejection of TPP (Trans Pacific Trade Agreement) and his favorite, NAFTA. Trump has expressed his desire to re-negotiate or scrap the 23-year old accord. NAFTA is particularly sensitive as it involves the United States’ two principal neighbors, Mexico and Canada. The importance of cross border trade with the U.S. is immense for all three nations. The U.S. is Mexico’s major trade partner at $295 billion in exports and $236 billion in imports (2015 figures) – a deficit of roughly $59 billion. With a deficit of nearly $60 billion it is easy to understand the new Administration’s desire to re-dress the Mexican trade balance issue. It appears to be the low hanging fruit in the global trade relations of the U.S. But there are many complications that belie the US-Mexico trade deficit. First and foremost is the fact that 40% of the inputs to manufactured goods like vehicles originate from the U.S. This doesn’t take into account the intellectual property value of these items, which is a hidden value often returned to U.S. investors. This doesn’t mean there isn’t room for negotiations – 23-years is a long time for any marriage. Dr. Walter Kemmsies, Managing Director, Economist and Chief Strategist JLL Ports, Airports and Global Infrastructure, suggested in an interview with the AJOT in regard to the inputs, “If it’s 40%, bring it up to 50%,” in terms of local content. Kemmsies makes a sensible point. Are we (US-Mexico) arguing over customs trade balances or the actual transacted business? When an item used in assembly of an auto crosses the borders (US-Mexico-Canada) forty odd times, it is difficult to untangle the actual trade balance involved in the finished product. Although it is not exactly apples-to-apples, in contrast to Mexico’s 40%, China’s export sourced content is around 4% U.S. The caveat being how much of a product like an IPhone or IPad is really going to China operations off the declared costs. Interestingly, since NAFTA was launched, Mexico’s deficit has remained nearly the same – basically as Mexico’s trade with the U.S. went up so did U.S. exports to Mexico (not surprising given the linkage between U.S. exports and Mexican manufacturing). Picking the Right Fight No doubt there is a push back against globalization and thus international trade. There have been protests around the world – generally advocating the rights of the small against the uber-companies and their global wealth. As the Brexit vote and Trump election articulate, the protest has moved out of the streets and into the seats of power. What makes trade contentious is the perceived loss of jobs. As Dr. Kemmsies, and other economists have pointed out, there is a far greater loss of jobs to automation than any other factor. Kemmsies observed the U.S. and indeed other mature, largely consumer based economies are moving their manufacturing into upstream products – higher tech. It’s the type of manufacturing a nation doesn’t want to share as it has a high R&D content and requires a specialized work force. The problem with picking a fight over trade based on jobs, is simply, does a job worth less than $12 an hour really contribute to nation building? In some places, yes. But in advanced economies? Revolution in the Winds The idea has been posed by a number of economists that a “fourth” industrial revolution is upon us. The first of the three was the use of water and steam to enable mechanized production beyond human effort; electric power for mass production and to extend human endeavors far beyond the power base is often cited as the second; and the third is electronics and information technology which has led to unprecedented scale of automation. The very automation that has altered the workplace. The proposed “fourth” industrial revolution is digital-plus. It is the ability to produce goods in 3-D and to bundle technologies in ways never imagined. It’s been said with some distaste, manufactured goods have moved from the tangible to bits and bytes. Nonetheless, the bits and bytes make everything and every place work. More than any prior industrial revolution this is a global event – like trade - and the genie can’t be put back into the bottle.