Manufacturers expect to gain from trade deals cutting red tape at borders, open markets to services.
By Eric Kulisch
Business groups and trade experts are optimistic that two sets of international trade negotiations will be concluded within the next year, unlocking more than $2 trillion in new trade and setting the stage for broader global arrangements.
On one track, the World Trade Organization is making progress on a multilateral pact that would reduce transaction costs for cross-border trade. And recently, a limited bloc of countries has struck out on its own to develop rules for liberalizing trade in services, which trade advocates say would benefit manufacturers as much as any sector.
Negotiators at the WTO have substantially drafted the text for a trade facilitation agreement and many observers predict it has a good chance of achieving the necessary consensus within the 157-member body to pass at the ministerial meeting scheduled for December in Bali, Indonesia. Trade facilitation is being tackled as a stand-alone issue after nations failed to agree on trade rules governing all sectors as part of the Doha Round of talks.
Reducing red tape — bribes to ensure release of imports and exports in less developed countries, port delays, excessive or redundant customs fees, document processing for customs clearance, and inspections — on a multilateral basis would stimulate at least $1 trillion in additional worldwide exports, Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, said at the Transportation Research Board’s annual conference in Washington early this year.
The growth would take five to seven years to fully achieve as countries gradually changed their border management and transportation systems to meet the new standards, he explained.
Trade agreements tend to focus on reducing tariffs, but the global average for tariffs is about 5 percent today. Trade impediments account for 10 percent of the cost of an imported item, double the tariff cost, according to Hufbauer.
U.S. Customs and Border Protection officials, for example, have stated their goal is to make it easier for companies to do business by pushing down transaction costs 10 to 15 percent. The agency has aggressively collaborated with industry since early 2011 to ensure consistent application of trade regulations and increase efficiency at ports of entry through programs such as advance collection of air cargo data for pre-departure security screening, a simplified entry pilot that enables shippers to get clearance for their goods prior to arrival at a U.S. port and centralized import centers organized around specific industries.
Several countries, such as the United States and the European Union, have implemented agreements to treat qualified shippers in their respective supply chain security programs as equivalent to their own, eliminating the need for companies to apply to each program, follow different criteria for securing international cargo and being audited by two sets of regulators. The customs cooperation is expected to lead to cost savings and more predictable shipping schedules.
“Multinationals put trade facilitation as their top agenda item in negotiations because that’s where the payoff is,” Hufbauer said.
Foreign aid for building modern customs capacity in less developed countries, such as anti-corruption training and digitizing customs documents, delivers big dividends. For every dollar of assistance to a customs authority there is a $6 increase in two-way trade, he added.
The World Economic Forum says that when a country falls 10 percent in its Enabling Trade Index, which ranks countries on a range of factors, there is a corresponding drop of about 40 percent drop in imports and exports by value.
“In an era of high unemployment, if politicians reduce trade transaction costs you could get about 3 million jobs in advanced countries and about 18 million jobs in developing countries,” Hufbauer said.
The pending agreement pushes countries to adopt a single point for filing customs documents and has a single government agency responsible for clearing goods into a country, among other steps, but doesn’t ensure access of foreign firms into port, intermodal and other transportation sectors.
Hufbauer said the hope is that countries will realize it is in their self-interest to make their borders more efficient so they can share in global value creation.
New Services Rulebook. In January, the Obama administration notified Congress of its intent to negotiate outside the WTO structure a new trade agreement aimed at promoting international trade in services with 20 like-minded governments (or 47 countries if all EU members are counted) in what is being described as the most significant trade negotiations for services in two decades. What they decide will set the rules for trade in services for much of this century if others follow, according to industry officials.
Among the countries interested in improving trade relationships to support growth in services are Costa Rica, Turkey, Australia, Canada, Chile, Japan, Mexico and Panama.
The international services agreement (ISA) differs in that it involves a frustrated group of countries that feel establishing modern trade rules for services is too important to wait for a comprehensive WTO trade pact, which has stalled because of differences between developed and less developed countries over agriculture and manufacturing. But organizers have created welcoming conditions so that other countries can easily join the agreement, and reap the benefits, when they are ready to do so.
Trade advocates say leveling the playing field for services will provide huge benefits to manufacturers, not just retailers, insurance companies, banks, and fast-food chains.
The service sector runs a gamut of tasks from accounting to pet grooming and entertainment, but also includes production design, legal counseling, distribution and logistics, and telecommunications, which companies can provide internally or by contracting with third parties. Farmers too depend on services such as crop storage, distribution, equipment maintenance, and insurance.
“If we’re going to be competitive in manufacturing in the United States we’ve got to make sure that all of these services are competitive and are able to operate throughout the world,” Peter Allgeier, president of the Coalition of Services Industries and a former deputy U.S. trade representative and ambassador to the WTO in Geneva, said at a recent briefing for reporters.
CSI represents U.S.-based companies that provide services internationally and are interested in opening up new markets and ensuring they get fair treatment.
Integrated logistics companies FedEx and UPS, both CSI members, praised the White House for joining the ISA talks, saying it would enable them to expand investments and offer a wider assortment of transportation and logistics products to customers.
More than 90 million Americans work in service industries and their average salary is more than $60,000, contrary to perceptions of the sector being dominated by hotel maids and fast-food cashiers, Allgeier said. Those who work for companies that sell services overseas make 15 to 20 percent more, he added.
A major reason for the resurgence in U.S. manufacturing during the past three years, Allgeier said, is the quality, competitiveness and efficiency of services in the United States compared to other countries.
“Information technology, communications and logistics services are important because they enable businesses to access global markets and get their inputs around the world faster,” Jack Colvin, vice president of global trade issues for the National Foreign Trade Council, said.
Getting an agreement that improves service delivery is also important because many manufacturers sell directly to consumers through Websites, Facebook, and Twitter, and have research and development operations around the world, he added.
Allgeier pointed to a recent study of Swedish tool maker Sandvik which showed the company relied on 40 different services to produce its high-end products.
According to the Office of the U.S. Trade Representative, the United States exported $606 billion in services in 2011 and U.S. sales totaled $1.7 trillion when combined with sales through foreign affiliates — more than any other nation. Every $1 billion in U.S. services exports supports an estimated 4,200 jobs. U.S. officials say a services agreement will increase exports and create jobs.
Services account for about 75 percent of U.S. economic output, but America only exports about 3 percent of its gross tradable output compared to 28 percent and 18 percent for the agriculture and goods sectors, according to the U.S. Bureau of Economic Analysis.
A recent study published by the Peterson Institute estimates that tradable business services remain five-times less likely to be exported than manufactured goods.
“If business services achieved the same export potential as manufactured goods globally, U.S. exports could increase by as much as $800 billion. To begin to realize this potential, we need to surmount a range of barriers that lock out, constrain, or disrupt the international supply of services,” U. S. Trade Representative Ron Kirk said in a letter to House Speaker John Boehner.
Hufbauer conservatively estimates that an ISA could create $1 trillion in new global economic activity.
A recent analysis by the WTO and Organization for Economic Cooperation and Development underscores the close integration between services and production. Trade statistics traditionally attribute the entire value of an import to the country where final assembly took place without accounting for the innovation and services that added value to the product. Traditionally, about a quarter of global trade involves service, but if the service component in manufactured goods is accounted for services actually make up 45 percent of international trade, according to the WTO and OECD.
The negotiations should facilitate the delivery of services by all methods, including over the Internet, Colvin and Allgeier said. And they should make it easier for companies to send personnel to overseas locations to provide services by requiring countries to allow temporary entry of high-tech and other workers and encouraging development of trusted traveler programs to speed people through customs, they added.
U.S. diplomats should make sure the ISA includes several criteria, such as non-discrimination so that U.S. companies receive the same treatment in other markets as local companies, Allgeier said. Also important is the freedom to operate in whatever legal form that makes business sense — such as a branch, affiliate, or a partnership — without being forced to take on a joint venture partner that provides little value beyond access to government officials. The Coalition of Service Industries further called for the free movement of data so that companies can store data in the cloud or in regional locations without having to establish a server to manage information in every country in which they do business. And the ISA should address state-owned enterprises, which have advantages such as rules denying foreign commercial firms the ability to offer the same products, government subsidies or preferential financing.
Japan Post is an example of a government-run enterprise that’s accused by foreign rivals of being protected from outside competition. The Japanese government a few years ago scaled back plans to privatize Japan Post, which offers postal, banking and insurance services.
Kirk said the ISA must also cover services that have not been conceived yet so new innovations aren’t stunted.
But the United States has some barriers to competition of its own that it will have to face in negotiations. Protectionist policies include limits on special visas for professional workers that have prevented companies from accessing talent educated at U.S. universities, as well as restrictions on telecom companies and foreign ownership and control of U.S. airlines. And inland and coastal shipping between domestic ports is not open to foreign-flag vessels under the Jones Act.
Overall, the U.S. services market is relatively open, but other countries are going to demand more temporary visas for their citizens as part of the talks, Colvin said. Immigration reform legislation being debated in Congress could lock in U.S. policy ahead of the agreement if the administration is not careful to coordinate the two policy debates, NFTC President Bill Reinsch added.
Compared to most trade negotiations, the ISA process has moved very rapidly. In just one year, the coalition has reached a common understanding on how negotiations will be conducted and representatives are now back in their respective capitals to get the legal or political mandates necessary to make proposals in Geneva by April or May.
Colvin said he senses a lot of enthusiasm for a services agreement in Congress. Democrats that used to slam trade as destructive have campaigned about the importance of global engagement and there’s recognition that the United States has a comparative advantage in services.
Prospects for progress are also good, Allgeier said, because the deal is focused on services only, is a negotiation among members that have affirmatively said they want an outcome, the United States and EU are working together, and talks are taking place in Geneva where representatives will be in constant contact versus engaging in episodic rounds of negotiations. Countries such as India and China are watching closely and could join the process.
In a follow-up interview, Hufbauer said it’s important to eventually bring the ISA under the WTO umbrella because otherwise signatories won’t have access to the WTO’s dispute settlement procedures that provide “the only real bite” to ensure countries follow through on their commitments. Under WTO rules, three-fourths of the members have to agree to incorporate an outside trade deal.
Organizers of the trade facilitation compact have talked about a Plan B to break off into a plurilateral agreement if some countries object over not getting a package deal that addresses their pet issues, similar to, but with more members than, the international services agreement.