A brave new world

In the face of uncertainty, experts and companies ponder the future of free trade agreements

Posted on Mar 15, 2017 :: Cover Story
Posted by , Insight on Manufacturing Staff Writer

Oh, what can change in a year.

In February 2016, then-President Barack Obama signed the Trans Pacific Partnership trade deal with 11 other countries. Fast forward just a few months to the thick of the presidential campaign, and both Hillary Clinton and Donald Trump opposed the deal.

The rest, of course, is history. On day three of his presidency, President Trump formally withdrew the United States from the TPP, and he’s vowed to begin renegotiating the North American Free Trade Agreement with Canada and Mexico.

Trade is vital to the New North’s economy. In 2016, exporters in the New North saw a rebound in demand for products made here after two years of declines, according to data released by the International Trade Administration.

The data shows exports from the five metropolitan statistical areas within the New North reached about $4.4 billion in 2015, an increase of more than $120 million, or 2.8 percent, from 2014. Exports from those New North MSAs reached a 10-year high in 2012 of $4.7 billion, then declined slightly in 2013 and 2014 before the rebound this past year.

Overall, the MSAs that make up the New North region account for more than 19.5 percent of the state’s $22.4 billion export trade. A total of 8,857 Wisconsin companies were exporters, supporting 118,958 jobs statewide — 93 percent percent of which were supported by the export of manufactured goods.

Trump’s presidency is young, and much uncertainty remains. What led to the political unpopularity of the TPP and the desire to renegotiate NAFTA, and how does this affect businesses and manufacturers in Northeast Wisconsin that export to overseas markets?

We asked area trade experts and businesses that export to share their thoughts.

How do free trade agreements affect businesses in Wisconsin?

Exports account for a significant share of business for Shawano’s Cooperative Resources International, a farmer-owned co-op that specializes in dairy and beef cattle improvement.

“About half of our bottom line comes from the international market, so it’s a pretty important part of our market,” says Huub Te Plate, senior vice president of marketing for CRI.

With a global depression in milk and meat prices, last year was a difficult one for CRI, whose primary exporting partners include Brazil, China, Mexico, Argentina and Germany. However, in a typical year, CRI’s international business experiences double-digit growth. “That’s how important our international business is,” Te Plate says.

With uncertainty abounding, Te Plate says CRI is doing a lot of reassuring of business partners in Mexico, a country where the company has some operations.

“If you look at these trade agreements, they are very important for us,” Te Plate says. “Countries want to make sure they’re importing safe products. Agreements like NAFTA and TPP give assurances.”

Te Plate says he does have concerns about renegotiating NAFTA because he doesn’t know what would replace it. He worries that change can make people cautious of buying, and if they’re uncertain about access, they’ll begin to look at other sources for goods. In addition, he thinks other countries like Brazil might see an inroad to doing business in Mexico with NAFTA in jeopardy.

Quality Assembly & Logistics of Marinette exports about two-thirds of the products it produces. Guy Meyerhofer, QAL’s president and owner, says he thinks NAFTA is working well, but it affects the company’s largest customer, GE Healthcare, more than it directly touches QAL.

Meyerhofer says whatever change is coming, it will happen slowly, and perhaps not even during this presidential administration.

“If there is a change, I think the big players like GE and the auto industry, they’re the ones who will have to push back and be heard,” Meyerhofer says.

There’s a lot of uncertainty right now, says Meyerhofer, because Mexico is a developing country. He sees potential in Mexico growing and becoming a major player in North America.

“The U.S. buys more from Mexico than the other way around,” he says. “It’s really not in our favor to kick a sleeping dog.”

Jim Tress, QAL’s director of sales and business development, anticipates that a number of countries that subsidize business would be interested in approaching Mexico. “If I was on a negotiating committee with Mexico, I’d certainly be considering ways to entice the situation, including government subsidies.”

What is the TPP and why did sentiments toward it cool?

The United States and 11 other countries, including Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam, negotiated the deal. According to the Office of the United States Trade Representative, it sought to:

• Eliminate or reduce tariffs and non-tariff barriers

• Facilitate “development of production and supply chains, and seamless trade”

• Promote innovation, productivity and competitiveness

• Ensure “economies at all levels of development and businesses of all sizes” could benefit from trade

• Provide a way for other countries from the Asia-Pacific region to join the agreement in the future

Ngosong Fonkem, compliance counsel for Alta Resources Corp. who has lived and worked in Asia as a law professor and trade consultant, says many of the objections to TPP stemmed from the secrecy of the negotiations as well as concerns about losing U.S. jobs to other TPP countries with lower wages or looser environment standards.

“During the election, the cooling attitude toward TPP came down to campaign rhetoric,” Fonkem says.

“They were both vying for the same group of constituents — people who’ve lost their jobs (like those in the Rust Belt).”

Roxanne Baumann, director of global engagement for the Wisconsin Manufacturing Extension Partnership, also says secrecy likely led to negative perceptions, in addition to the complex nature of the agreement and the omission of China.

What might the United States stand to lose without the TPP?

Fonkem says Wisconsin, and the manufacturing industry in particular, benefits from free trade agreements.

“Every time you’re doing business with someone or you’re negotiating, there’s always going to be winners and losers,” he says. “But the overall benefit of entering into a free trade agreement substantially outweighs the negative impact it might have on the economy.”

Fonkem says most economists believe joining the TPP would have brought the United States marginal economic benefits. However he says it’s important to also examine the non-economic benefits as well, such as the leadership role the United States could have played in Asia.

“The influence of China in southeast Asia is growing rapidly,” Fonkem says. “Its investment in all the Asian countries around the area is growing.”

If the United States had been part of the TPP, it could have influenced how the rules of trade would have been written, he says. With the United States getting out now, China has an opportunity to fill that void.

That doesn’t mean Fonkem didn’t have any concerns about the TPP.

“President Trump, like many others, is right to be concerned about people losing some factory jobs,” he says. “The TPP probably would have killed some jobs in some sectors; however, it would have created jobs in other sectors.”

Baumann says that due to its complexity, it’s hard to say exactly what the United States could stand to lose without the TPP. Its outline, she says, would have guided future trade with some of the state’s most important trading partners, including Canada, Mexico, China, Japan and Australia.

“The stated goal was to create a fully integrated economic area and establish consistent rules for the unprecedented growth of global investment,” Baumann says.

TPP countries account for 44 percent of total U.S goods exports and 85 percent of total U.S. agriculture exports, Baumann says. Furthermore, Asia is an important market, with 66 percent of the world’s population projected to live there by 2030.

It’s vital, therefore, to pay attention to Asia, Baumann says, as the area will be filled with middle-class growth and people in need of goods. If a group of countries in Asia created a trading bloc with no tariffs, they would be more likely to buy from one another than the United States, so we need to pay attention to that, she says.

How would TPP have affected Wisconsin?

The United States entering the TPP would have benefited the dairy industry, Fonkem says. TPP was poised to take away most tariffs and value-added taxes, which are imposed when selling internationally.

“Wisconsin producers of milk and cheese were going to be able to sell to their Asian counterparts at a much cheaper rate because those taxes would be essentially reduced, for the most part eliminated,” he says. “But now they’re still going to be in place, so that’s where it hurts Wisconsin.”

Wisconsin agriculture exports to Japan are strong, Baumann says, so this issue could factor in there.

What factors led to a desire to renegotiate NAFTA?

Issues like immigration, border security and job loss all played a huge role in the 2016 election, and these also led to discussion of reviewing at NAFTA.

“It’s been blamed for blue collar job losses, declining wages and companies shifting manufacturing to Mexico,” Baumann says.

“Most economists find no credible data to document widespread U.S. job losses from trade agreements,” she says. “There may be gains and losses in some industry sectors, but the net effect is neutral.”

Manufacturing employment has decreased since the mid-1980s, while at the same time output has increased, Baumann says. Thus, while it may seem easy to point the finger at NAFTA, she says it’s important to consider the effects of advances in technology, increased automation and greater efficiencies offered through lean manufacturing and value stream mapping.

All of that said, Baumann sees value in reviewing the agreement that’s more than 20 years old. A lot has changed in the world, she says, citing the increasingly global economy and the explosion of the Internet and ecommerce.

“It may make sense to relook at this, as long as it’s done with the intent of helping all parties grow, increase jobs, provide higher earnings, better products, less inflation and more cooperation,” Baumann says.

Fonkem also believes a lot of the negativity around NAFTA stemmed from outsourcing. “People lost their jobs, and most people are not too happy about that for obvious reasons.”

This led to negative attitudes toward globalization and free trade, but Fonkem says this issue was beyond our control because the world has become increasingly competitive. He believes the jobs that left aren’t going to return.

“It doesn’t make sense, from a business perspective, to pay someone exactly the same or pay someone more when they could pay someone less to do exactly the same work, essentially of the same standard and quality,” he says. “We are in business to make money.”

What’s the best way forward?

Many uncertainties remain.

“While the estimated economic impact of the TPP was going to be modest in measurable economic terms, the TPP was not U.S. law, as the U.S. Congress had not yet ratified it,” Fonkem says. “However, the consensus among economists is that pulling out of multilateral free trade agreements that are already in place, such as NAFTA, would have negative effects on not only the U.S. economy, but also Wisconsin.”

Fonkem says Trump still needs to fill most of his economic advisory positions, and for those that have been filled, most are strong free trade proponents. Trump, he says, has talked about doing trade deals on a transactional basis, so one possibility Fonkem sees is more bilateral agreements versus multilateral ones.

“It seems that Trump is much more willing to look at things from a bilateral standpoint as opposed to agreements with multiple parties because it’s just very, very difficult to enter into any agreement with a lot of people or parties (versus one or two),” Fonkem says.

CRI’s Te Plate says the world is very connected. “Like a lot of other companies that rely on international business, we can see the good and bad in trade agreements,” he says. “We’re in pretty good shape as long as we keep other countries friendly.”