NAFTA issue? (2019).

Other than replacing NAFTA acronym an unpronounceable letter soup as U.S.M.C.A., Trump only made cosmetic changes in order to put his own stamp of success on the agreement.

But in order to understand the issues address by the NAFTA agreement some economic principles need to be introduced.

1- Labor-intensive mass manufacturing used to be profitable in the U.S., but technological improvements and rising labor productivity combined with higher wages decreases the bottom line of many firms. These firms then adopt capital-intensive production technologies such as robotics or outsourcing jobs to other countries with cheaper labor cost of production.

2- Outsourcing also occurs when manufacturers use obsolete or older technologies that requires finding domestic workers at low wages or make the choice of either go out of business or find a profitable location to move its business.

These are the two burning issues that manufacturers together with policy makers are facing in today’s economic reality and must find a balance among interests. Trying to stop capital from finding safe heaven for profit domestically or abroad is counter-intuitive for a market economy.

Take Trump’s most visited argument against international trade—Trade Deficits—which, he uses as an illusion of the facts that blur the underlying issues.

As a reserve currency the U.S. can purchase goods from the world market simply by printing money or printing treasury obligations that are sold mainly to Asian countries, particularly, China and Japan. This exercise is an exchange of printed paper for goods which are destined to be accounted as trade deficits. However this issue is not new for after the end of the Bretton Woods system, the U.S. surged as stable preferred reserve currency. Financial trade markets as well as in manufactured goods markets begun to show a growing trade deficits that continue today and recognized among other reasons, in the poor saving rates of Americans.

A glance at macroeconomic theory reveals that in simple terms a trade deficit occurs when a country's imports exceeds its exports, in other words, an outflow of domestic currency to foreign markets. Economist use international trade balance among other factors to measure current account surplus or deficit. Net capital outflows are related to net exports, therefore, related to gross domestic production. The equation used to show the relationship between the current account, savings and investment is:

S = I + NX = I + NCO

S = savings

I = domestic investment

NX = net exports

NCO = net capital outflows

“The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account. The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments.”

The current thinking in trade economics is a choice for a company that has labor intensive manufacturing to either go out of business, or migrate to developing nations in order to shift its comparative advantage.

As a result advance economies like the U.S. experience de-industrialization and enter into a service-oriented welfare state that offers new jobs in technological evolution like healthcare, insurance and financial services that need to adopt advanced information technologies and hire highly skilled workers from a pool of well educated work force.

A trade war with China cannot stop the decline of American manufacturing and employment when it is driven mainly by “rapid technology progress, such as automation, robots and artificial intelligence.” The unintended consequences of such strife with creditor nations may significantly reduce American’s welfare and cause the U.S. to lose its leadership in free trade and its status as reserve currency. The result could mean a sell off by creditor nations or just dump U.S. securities bringing chaos to financial markets.

Walking out of WTO, renaming NAFTA or starting trade wars is not going to change basic economic principles of the financial or manufactured markets but could instead provoked a world recession as insecurity In the money market triggers run away inflation.

What happens with the money collected from the trade tariffs? Is it being used to partially offset the republican tax cut?

Recently, Trump made the absurd claim that the money raised from new import taxes will be used to pay down America's large debt. This is a ludicrous statement considering that the national debt is currently at $21.4 trillion! Tariffs generated a relatively small amount of revenue in 2017, $33.1 billion.

In addition Trump’s outlandish claim on tariffs is that he is taxing foreigners, but the reality is that tariffs are taxes on U.S. companies and consumers. After the end of World War II, US public policy has moved towards free and open trade, and reduced trade barriers. This increase in international trade has led the global community to growth in employment, production, and incomes for the countries involved.

In recent economic history the United States has been the crusade toward free and open trade; nonetheless, the U.S. applies high tariffs on selective categories of goods. Instead of focusing on trade policy to reduce commercial barriers, Trump has been quick to levy new tariffs while at the same time, intimidating trading partners of further trade restrictions if the US does not get the trade concessions it wants.

Data shows that tariffs don’t achieve their intended objectives, and instead have the inverse result in higher prices, lower employment, and slower economic growth. Smart policy makers should not erect barriers to trade but promote free trade and the economic benefits it brings. If a U.S. manufacturer has to pay 10 or 25 percent more to get steel from Canada or from China, that same company has to pay the tariff when it imports that good and the U.S. business has the choice of either absorbing the extra cost or pass it on to consumers as simple as that.

There are already signs that inflation is creeping in because the effect of Trump's tariffs. One simple example is a soft drink makers that has to raise its price because aluminum tariffs are making the aluminum can it uses more expensive.

In terms of Trump's claim that money raised from the tariffs will be used to pay down the debt is false at best. The imposition of tariffs on $85 billion worth of foreign goods so far, would raise about $21 billion, a very small percentage (0.1 percent) of the debt. On the other hand, the money raised from the tariffs does little to counterbalance all the money Trump has added to the debt with his outlandish tax cuts to the wealthy. Additionally, Trump has announced a $12 billion aid package to farmers hurt by the tariffs. This only adds spending that will further reduce the revenue coming from his imposition of tariffs. The indicators as a whole are that the Trump administration has entered a circle of unintended consequences or worse yet, just plain ineptitude and lack of understanding of proven economic principles.

How will the tariffs on American products affect the national budget of Canada?

Trump thinks tariffs are “great” but as his increasing tariffs might sound great to his base of supporters there are international consequences to be aware of.

Improving a domestic economy by taxing imports might sound like a great idea for Trump, it is the equivalent of denying access to the largest economy in the world in order to get concessions from weaker allies who will certainly retaliate. This can have the effect of starting a tit-for-tat trade dispute that can escalate into a full blown trade war with the expectancy that the weaker economy will collapse first. A game of chicken or Russian roulette if one prefers with grave consequences for millions of consumers when in reality the simple issue is: Americans buy foreign products, just as other nations buy American-made products and crops resulting in what is known as international trade. Because of a of largely mechanized agricultural production of massive scale in the US the agricultural community depends on foreign buyers each year. So, retaliation to agricultural tariffs is a losing proposition for this industry.

The Chinese retaliatory tariffs of 25 percent on soybeans, in response to Trump’s $34 billion in tariffs on Chinese products, has shaken the cash market of soybeans as the spot market price tumbled 20 percent so far.

Steel and aluminum is another industry of concern, since Canada is one of the United States’ biggest trading partners, the retaliatory tariffs are certainly something to pay close attention to as Trump’s trade policy wobbles directionless. Canada has taken the initiative of inviting trade ministers from the EU and other countries for a WTO summit in Ottawa, however, Trudeau did not invite the US trade representative for Trump has manifested he wants to do away with this international trade body of trade rules which the US had a major role in founding!

Many American business leaders are legitimately concerned that these unprecedented Trump wobbling positions on trade can negatively affect the entire world of financial markets falling into recession or worse yet, a runaway inflation. Although, many consumer goods such as foods and beverages may have been produced domestically, they require imported steel or aluminum for their packaging. The resulting higher costs of manufacturing will adversely affect profits resulting in higher consumer prices at the grocery store. Analysts like Dan North state that “the roughly 150,000 jobs that could potentially be saved in steel and aluminum industries is dwarfed by the nearly 2 million jobs at risk in industries that use imported steel and aluminum" which again, will be passed on as higher prices for the end consumer ensuing inversely proportional to Trump’s intent!

Should the European Union agree to negotiate a bilateral agreement with the US as proposed by Donald Trump?

Trump does not like multi-lateral trade agreements because countries as a group can exercise muscle during negotiations while in bilateral trade agreements the US has the advantage of economic size to extract disadvantageous concessions from the weaker nation. Case in point is The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). The TPP that was agreed with 11 negotiating partners, including Canada and Mexico. Trump dumped TPP and has shown no interest in the TTIP.

Trump has said that “Tariffs are the Greatest! “may want to be more ambitious by dumping all barriers to trade than the deals or negotiations he inherited and likes to get rid of protectionism in a number of areas, including anti-dumping, countervailing duties, and Jones Act restrictions on shipping to and from American ports, along with agriculture subsidies.

These action would be a remarkable about-face for his current administration policies on trade but it would require an agreement from Congress and these remaining areas of U.S. trade protection have survived years of liberalization attempts and have deep-rooted support from members of Congress.

However, removing these barriers in bilateral negotiations have other issues, if the United States were to drop tariffs on X items for a given country, WTO rules would require the United States do so as well against all other countries. This is one reason why other Presidents have favored multilateral negotiations.

There is an additional set of problems than just dropping subsidies and barriers because they include regulatory issues such as tech companies engaged in anti-competitive behavior. Tech companies and the agricultural sector might want to use the opportunity of a trade deal to lean their weight as leverage due to their bigger size. Nonetheless, these changes would not address the obsession Trump has with trade deficit, since that reflects the difference between savings and investment, not trade policy.

Tackling trade deficits would require heavy government intervention in the economy where the United States would need to stop borrowing from the rest of the world especially, Asia as U.S. borrowing is the mirror image of a trade deficit. This would likely require substantially higher interest rates in the United States, in order to entice the public into higher savings rate.

We are witnessing a recent experience with China, that “one tweet can halt communication between the two parties, and rapidly escalate into the imposition of tariffs" that can lead to a full blown trade war.

While global trade war risks have dominated the agenda of late another red flag is the ongoing flattening of the US yield curve. In addition, financial markets have to contend with dollar reserves being exchange for euros and other currencies as Asian countries strip their dollar reserves to a historical low of 62%.

Current economic condition is forcing central bank policy normalization and higher short-term rates; while longer-term pessimism over the global economy is prompting a financial flight to safety. Trump is terrified of the Feds increase in interest rates because that would put a hole on his bluffing balloon regarding trade and his bloated tax cuts which is adding to a mounting deficit of debt to GDP ratio of 108% in 2018.

Press reports indicate that China’s holdings of US sovereign debt dropped to $1.165 trillion in August, from $1.171 trillion in July. Tokyo cut its holdings of US securities to $1.029 trillion in August, the lowest since October 2011.

Discharging US Treasuries, one of the world's most active reserve financial papers, has recently become a trend among major holders. Russia dumped 84 % of its holdings this year as relations between Moscow and Washington are at their lowest point in decades despite Trump’s election which was favored by the Russians.

Goldman Sachs reports that Turkey and India have followed suit. Like Russia, Turkey has dropped out of the top-30 list of holders of American debt following a conflict with Washington over the attempted military coup in the country two years ago. While India remains among the top-30, the country has cut its US Treasury holdings for the fifth consecutive month, from $157 billion in March to $140 billion in August. Russia, China and Iran, dragged down the dollar’s share of global central-bank reserves and these data is confirmed by the International Monetary Fund.

If Trump economic dominoes start to fall the US economy will suffer unknown consequences as this is entirely new territory the current administration is trekking on.

Are freight charges added to the shipping invoice for calculating the import duty?

International trade most commonly used accounting methods for charging duties at border crossings or ports of entry are:

Free on Board (FOB) and Cost Insurance and Freight (CIF) these two inconspicuous terms refer to the terms of sale commonly used in world commerce and known as X sales point.

1.- FOB point of sale is on board the vessel free of any other charges to the buyer.

2.- CIF point of sale means the seller includes the cost of freight and insurance.

There is however a subset of conditions mainly set by carriers that must be paid by either the seller or the buyer.  In general terms--from the perspective of the carrier-- define which services are provided under the terms of carriage. For example, loading and unloading of the cargo, stowage or trimming and whether materials need to be used to secured cargo on board such as dunnage. The following terms apply to mainly bulk and break bulk cargoes as containers have another sub-set of costs charged by either a cargo consolidator or a freight forwarder but not included the scope of this writing.

FILO (Free In- Liner- Out): Buyer or seller pays for loading and carrier pays for unloading.

FIO (Free- In- Out): Carrier pays for loading and unloading

FIOS (Free- In Out- Stowed): Carrier pays for loading, unloading and stowage of cargo

FIOST (Free In- Out –Stowed- Trimmed): Carrier pays for loading, unloading, stowage and trim of cargo

FIOT (Free In -Out Trimmed): Carrier pays for loading, unloading and trimming of cargo

FLT (Full- Liner- Terms): Carrier pays for loading, trimming and stowage at port of origin and unloading at the port of destination.

LIFO (Liner In- Free Out): Carrier pays for loading at port of origin buyer pays for unloading at destination.

Moreover, it is important to consider total shipment costs when adding duties, taxes, port handling fees and other fees for a particular cargo. Duties are also influenced by the content of the cargo and the destination port. These charges will affect the price the buyer might be willing to pay for a given product known as the "landed" cost of the merchandise.

Besides, most international transactions are subject to the assessment of duties and taxes imposed by the importing country's government. A shipment's duty and tax amount may be assessed by:

·         Product value

·         Trade agreements

·         Country of manufacture

·         Use of the product

·         The product's Harmonized System (HS) code based primarily on three factors:

·         What an item is?

·         What it is made of?

·         What it is used for?

Value-Added Tax (VAT) or Goods and Services Tax (GST)

International commerce also has some exemptions to the taxes and regulations described herein but it can vary within individual country’s policies.

These items are temporarily imported duty free as long as certain conditions are met and procedures are followed.

For instance items destined to:

·         Entre- Port warehousing

·         Tradeshows

·         Conventions

·         Training

·         Assembly

·         Processing

·         Re-export after resale

·         Repair or replacement of damaged goods

Declared Value for Customs duties, taxes or exemption for invoiced items are stated in a Customs official shipment’s declared value along with the description of the goods.

Inaccurate declared value is one of the most prevalent reasons for duty and tax disputes among buyers, sellers and authorities engaged in world commerce.

When do you think the US economy will tank?

The US economy will tank when the false perception of a great economy catches up with the reality of mathematics. Trump predicted economic growth of 4 percent due to his business acumen, success in the real estate market and a “great brain.” However, recent revelations by the New York Times contradicts this assertion by saying that Trump inherited over $400 million dollars using fraudulent schemes to avoid paying taxes and then squandered most of that wealth in bad business decisions only to be rescued by Russian “credit lines” that will become due during his time in office.

Economic forecast for gross domestic product, is that it will rise to 2.4 percent in 2019 according to the Federal Reserve which is 1.6 percent Trump’s wishful prediction. Moreover, the U.S. debt exceeded $21 trillion in 2018 although it had remained stable after sequestration was activated requiring a mandatory 10 percent federal budget cut through 2021. Moreover, Trump might repeal it as tax collections fall below projections from his tax largess for wealthy Americans. Never mind that he promised to reduce the debt as his policies may increase it by $5.6 trillion.

The U.S. debt-to-GDP ratio is forecast to hit 108 percent by the end of 2018, a level that is not a sustainable and well above the 77 percent benchmark that the International Monetary Fund recommends for a healthy economy.

The appointment of Lawrence Kudlow as head of the National Economic Council indicates how firmly Trump and supply-side economics control the republican view of wealth distribution and the how it should take place. However, lowering taxes can create a budget hole that can only be filled by printing new money which many economic researches agree on the notion that new printed money becomes proportional to inflation. These supply-side view ignores that it doesn't work when the maximum tax rate is below 50 percent, according to the Laffer Curve which Kudlow argues as his basis for the economic policy!

On another front China is the world's second-largest economy, behind the U.S. since 2014. Notwithstanding, China's economic growth is slowing from double digits to 7 percent annually but proportionally to its size it will continue to affect the U.S. economy with a higher influence than in the past. One reason is of course the U.S. debt to China which still is larger than to any other country while China continues to accumulate US treasuries for its international trade needs.

Another economic pressure comes from energy price inflation. The International Energy Forum projected, in 2007, that by 2030, oil prices will be $95 a barrel in nominal dollars. “The EIA's Annual Energy Outlook predicts that U.S. shale oil production will level off after that. As a result, oil prices will rise to $114 a barrel by 2050.”

One of the most important functions of the Fed is managing public expectations of inflation for once the public expects inflation, “it becomes a self-fulfilling prophecy.” Confidence in the current economy is Trumpian and the Feds must walk a high rope balancing act managing Trumpian politics with economic reality in order to moderate public behavior. But as the Fed continues to raise interest rates even though at a slow pace, it knows that mortgage rates will rise, and housing prices will drop to offset the higher cost to home buyers. The public on the other hand, thinks the real estate market will crash in the next few years as housing prices rise, combined with raises in interest rates by the Fed. To many observers, it looks simply as an asset bubble that will be followed by a collapse.

Who will benefit the most from the new trade agreement between Mexico, Canada and the US?

NAFTA survived almost intact as the changes made are mostly hot air from Trump and any modifications to the agreement must go for approval by the respective Congress of each country. The underlying reason for the agreement to stand mostly as is arises from the fact that manufactures are dependent on the supply chains they established during the years of the agreement and a sudden cancellation would have brought disastrous economic consequences to all three countries. Disrupt, demolish and then take credit for appeasement or building is the current logo over the Trump's Whitehouse.

Discussions between the United States and Canada had turn sour amid insults from Trump to PM Trudeau. The president said he had rejected a meeting with Mr. Trudeau because he would no buckle under Trump’s “charm”. However, the office of PM Trudeau said no such meeting had ever been requested. Trump also threatened to tax auto exports from Canada to the United States if Canada did not agree to his demands.

In essence the changes trumpeted by Trump are merely text editing and spell check of the entire document but Trump like to take credit for someone else’s work as when he waves to his crowd of supporters with a hat that doesn’t belong to him. In any case, modifications to the agreement must be reviewed by a new Congress expected to be dominated by the democrats who will probably be impeaching Trump if director Mueller’s report is as damming as expected.

What are some key NAFTA problems USMC solves?

NAFTA survived almost intact as the changes made are mostly hot air from Trump and any modifications to the agreement must go for approval by the respective Congress of each country. The underlying reason for the agreement to stand mostly as is arises from the fact that manufactures are dependent on the supply chains they established during the years of the agreement and a sudden cancellation would have brought disastrous economic consequences to all three countries. Disrupt, demolish and then take credit for appeasement or building is the current logo over the Trump's Whitehouse.

Discussions between the United States and Canada had turn sour amid insults from Trump to PM Trudeau. The president said he had rejected a meeting with Mr. Trudeau because he would no buckle under Trump’s “charm”. However, the office of PM Trudeau said no such meeting had ever been requested. Trump also threatened to tax auto exports from Canada to the United States if Canada did not agree to his demands.

In essence the changes trumpeted by Trump are merely text editing and spell check of the entire document but Trump like to take credit for someone else’s work as when he waves to his crowd of supporters with a hat that doesn’t belong to him. In any case, modifications to the agreement must be reviewed by a new Congress expected to be dominated by the democrats who will probably be impeaching Trump if director Mueller’s report is as damming as expected.