Trade in the Time of Trump

This past Monday, my wife, Gail Strickler, was asked to speak on current trade issues at the World Trade Day - Town Hall Meeting at the Fashion Institute of Technology in New York City.   Gail was the Assistant USTR for Textiles in the Obama administration from 2009 through 2015 and was responsible for, among other things, the TPP negotiations in the textile and apparel sectors.  She currently consults for a company that advises manufacturers, brands and retailers, including textile and apparel companies as well as NGO’s and associations in the area of trade policy ramifications and opportunities.  Here is the text of her speech:

 

Good Evening!!

Several weeks ago when Dean Frumkin invited me to welcome you all to our discussion tonight for World trade day and offer my thoughts on where we are amidst the ongoing war president Trump has declared on global trade, I could not have guessed that we would be meeting just as the battle has escalated and the long threatened tranche three tariffs would be implemented against China. So, we could not choose a better time to look at how the global trade war this administration is waging effects our industry and especially some of the SME’s that are the lifeblood of the New York fashion scene.  There are some serious potential consequences that you may be able to mitigate if you understand the details and act quickly.  There may also be some unexpected opportunities created with these actions which are certainly worth considering.

 

To me trade is the ultimate tool or weapon depending upon how it is used and executed. We can make peace, we can make war, we can better our own quality of life, we can lift millions out of poverty, or we can pillage and plunder lands not our own and exploit indigenous peoples.  The ravages of “bad trade” leave scars, poverty and desolation for far longer and worse than many traditional wars and the benefits of “trade done right” can create long lasting prosperity and opportunities for generations.  When countries fully realize their competitive advantages and trade with each other we all benefit.

 

The saying goes if you give a man a fish etc…. but if he learns to fish efficiently and develops the right equipment, he not only feeds himself for a lifetime, but he can sell you fish and buy your cars and trucks and wheat …….

 

  For example, Haiti, the poorest nation in our hemisphere was ravaged by “trade”.  With no regard for ecology or respect for the land, the French clear-cut millions of acres, destroying the topsoil and leaving what was once a lush and fruitful land unable to grow enough to even feed her own people.  Similar scenarios exist in Asia, South America and throughout Africa where countries have strip mined and raped lands not their own.  On the other hand, millions in China, Singapore, Vietnam, Malaysia and on and on have been lifted out of poverty through jobs created by trade.

 

In our own country jobs related to exports pay on average of 18% more than similar jobs based only on domestic markets. Realized efficiencies in industrial production and greater yields in agriculture can help equip and feed a growing global population at lower cost allowing people to prosper.

 

 

So, from my perspective, trade, our trade promises and obligations, should be treated with the same level of respect as the declarations of war.  They can bring opportunity, risk and responsibility tantamount to declarations of peace or war. 

 

Now we have a President conducting trade policy by tweet. On March 1st, 2018 a day after announcing tariffs as high as 25% on imports of steel and aluminum, Trump tweeted that “trade wars are good, and easy to win”

His metric for assessing “winning and losing” is the US bilateral trade deficit. Most economists disagree with this perception, viewing trade deficits not as a sign of economic strength or weakness, but as a function of macroeconomic factors like investment flows, currency fluctuations and growth rates.                                                                                                                                                                                                                                                                                                          

His claims, that trade deficits are to blame for job losses in America’s manufacturing sector is ill conceived, and pulling the US out of existing and future trade agreements and slapping tariffs on imported steel, aluminum and Chinese assembled products will not bring back or create new manufacturing jobs in the United States. If anything, it might help generate jobs in other countries with cheap labor, as companies try to mitigate their exposure in China; or lead to greater investment in automation at home, thus costing even more manufacturing jobs.  

In fact, Mr. Trumps actions have had an effect on the trade balance; - The U.S. reported a record trade deficit in 2018 of $891.3 billion, an all-time high.  

Further the effects of President Trumps trade war are likely to have far reaching implications long after he departs office.  Will other countries ever be willing to invest the time, money and effort to garner a trade deal with the US again, knowing that just one election later a new President could erase the agreement or for all intents and purposes erode its value?

Since the very first efforts to create a fair and enforceable global trading system in the post WWll world, the US was a reliable ally. A signatory to the original GATT and a leader in the MFA Multifiber Arrangement.   While many countries may not agree with certain typical U.S. positions on trade, whether it be GI’s (geographic indicators), GMO’s (genetically modified organisms) or ROO’s (Rules of Origin) at least our trading partners knew where we stood, and knew that an agreement with the US was figuratively “etched in stone”.  Trade agreement were sacrosanct, requiring congressional approval and negotiations were carefully coordinated among the different branches of government.

The US defended its positions at the WTO and honored our obligations even when the court ruled against us.  Now we are faced with a new scenario.  A President who has acted arbitrarily with indifference to long standing allegiances, values and history and who seemingly lacks the intellectual capacity to understand the ramifications.

 When the U.S. invokes section 232, and places duties of 25% on products of our closest NATO allies in the name of National Security can we ever be trusted?

 

It took seven years and huge effort among twelve countries to achieve the US led TPP agreement

…And as Thomas Friedman the Pulitzer prize winning economist stated back in 2017 “Trump simply threw away the single most valuable tool America had for shaping the geo-economic future of the region our way and for pressuring China to open its markets. Trump is now trying to negotiate trade openings with China alone — as opposed to negotiating with China as the head of a 12-nation TPP trading bloc that was based on U.S. values and interests and that controlled 40 percent of the global economy.  It is hard to think of anything more stupid.”

He further explained that a senior Hong Kong official told him “When Trump did away with TPP, all your allies’ confidence in the U.S. collapsed,”

"Tariffs will make our Country MUCH STRONGER, not weaker," the president tweeted. …..he continues to state that tariffs are paid by foreign countries and extol the tariff revenues collected by the U.S. government as a boon to the U.S. economy. He seems oblivious to the way in which tariffs hurt Americans and sees them only as a tool through which he can build leverage. But countless studies show U.S. tariffs, including those his Administration has imposed, are taxes that American companies pay. These taxes ultimately work their way through supply chains in the form of higher consumer prices or lower margins. And these tariffs usually trigger retaliatory tariffs, that worsen the damage by denying market access in foreign countries for U.S. exporters.

As we know he is threatening to extend tariffs to the remaining $325 billion in Chinese goods — taxing virtually everything the U.S. imports from China. including the four major categories of goods left to tariff—computers, phones, footwear and of course, apparel!!

How does a company prepare and plan when one presidential tweet can change trade policy and your sourcing and production landscape?

 

To put things in perspective the U.S. is the single largest importer of apparel and textile products in the world.  97% of our apparel is imported.  We consume approximately 25% of all the apparel made and almost 40% of that comes from China.  Still another $13 Billion comes from Vietnam and $5 Billion from Bangladesh much of it using Chinese made inputs.  In addition, importers already pay more than $16 Billion in duties, more than 35% of all tariffs collected, paying some of the highest duty rates we assess; so should the administration follow through on its threat to include apparel in the next escalation of the trade war with China, importers could face up to 57% in duties and tariffs.  Even if this does not occur the third tranche includes many textiles that domestic manufacturers use to make garments here.  This could increase costs for U.S. apparel manufacturers and make us less competitive globally.   After all, if you ship Chinese fabric to Vietnam or even France to make garments; the finished product would arrive here without paying punitive duties, so it is important to consider these unintended consequences. So I should mention that while it hasn’t been officially announced yet there will be an exclusion process for the third tranche so U.S. manufacturers that use Chinese inputs for manufacturing will have a chance to have those HTS codes excluded, so if you are using fabrics from China please keep informed and take part in the exclusion process.

 

So, what can you do to turn this challenge into an opportunity?

Here I want to raise another issue facing our industry right now that is at least as compelling and probably even more of a long-term threat— that is the issue of the sustainability of our industry.

The UN Sustainable development goals or SDG’s as they are referred to define Sustainable development as development that meets the needs of the present without compromising the ability of future generations to meet their own needs.  It means that the production of the fibers, yarns, fabrics, garments and other textile products do not harm the environmental or deplete our resources and have a positive impact on the people and communities associated with its activities. 

 So you’re probably thinking what does that have to do with trade?

So first let me explain why I believe these issues are linked especially in the framework of SME’s and NYS business development.;

  The overwhelming explosion of the fast fashion business and the environmental waste it creates in its production as well as in cheap clothes discarded into our landfill is quite possibly a greater threat to our future than our trade policy and I believe that the pool of intelligence, talent, and innovative thinking found here in New York could play a major factor in addressing this looming disaster.

Presently :

Textile industry generates about 2.5 trillion pounds of greenhouse gases.

Fiber used for clothing annually: 110 billion pounds

Clothing disposed of: 100 billion pounds

Clothing put into landfills: 65 billion pounds (U.S. about 25 billion pounds based on EPA estimates)

Microfiber into oceans: 1 million pounds annually (about 45 million pounds projected through 2050 based on current trend)

BUT; For the first time consumers, especially Millennials, are willing to pay more for sustainable products and reselling fashion is becoming mainstream with companies like the Real Real, and Poshmark succeeding in making used clothing fashionable in their own right.  Major retailers like Neiman Marcus, and other fashion brands are looking to get into the resale market. 

But much more innovation and new paradigms will be needed to truly make our industry sustainable.  More science to create a circular system for reusing fibers and yarns and to keep plastics out of our oceans.  Better methods to dye and finish fabrics and greatly reduce the water, chemicals and energy needed to make them.  New algorithms to create better platforms to help people resell and repurpose their clothing.     A new model for the intrinsic value of a garment and a return to better quality, durability and greater longevity for the now resalable and retained product.

So together let’s see if we can reform retail to recycle, reuse, repurpose and thus renew our industry making us once again the reliable trade partner.

Thank you!

 

Needless to say, she holds some pretty strong opinions and isn’t afraid to state them.  I think the point about the implications of abandoning TPP warrants repeating.  As Chairman of NCTO during much of the TPP negotiations, I led the organization through some difficult negotiations with USTR and Commerce on the rules of origin and duty regime for textiles and apparel in TPP.  Rather than simply oppose any liberalization on trade, as NCTO had previously done, we actively participated in the process of negotiation, with the understanding we would support the TPP agreement if the final result gave the industry a fair shake and time to adapt to the new trade order.  Our thinking was, to put it colloquially; it was better to have a seat the table than to be on the menu, as we had on several occasions in the past.  In addition, I believed TPP, while it would have an effect on the industry in any case, was an important strategic agreement and absolutely essential to the United States’ long term economic health.  Trade was (and is) going to be liberalized globally, with Asia standing out as a critical and growing area.  It’s better to help set the rules than to be left on the sideline.  Which is where we find ourselves now.  I believe abandoning TPP was a grave strategic error, and one we are now paying for, and will pay for far into the future.  One can only hope those now in charge gain some insight and sanity and salvage what we can.  One can only hope.