IBUS 430

Group Number 2 Mack, Dione, Justin, Kawah, Huy

[INTERNATIONAL ISSUES WITH NORTH AMERICA]

A not all inclusive research paper covering North American Trade Disputes, Trade Policies, Trade Regulations, Trade Trends, and Import/Export management, marketing, and finance issues.

Trade Disputes:
Trade dispute between USA and Canada
Summary: As it stands, the United States and Canada are one anothers largest trading partner. Currently, softwood lumber is one of Canadas largest exports to the United States. As a reference to statistics, in 2005 alone, Canadas provinces shipped a monumental 21.5 board feet of lumber valued at U.S. currency of $7.4 billion dollars. This article analyzes the long ongoing dispute between the countries of USA and Canada involving the softwood lumber industry. Beginning in the 1840s, this dispute had arisen in the U.S. over imported Canadian wood. Throughout the many years this dispute had been reoccurring where both sides seem to disagree on pricing strategies, regulation, economic impacts, and the impact of unintended consequences. Although resolutions of limited durations had been sought out, trade barriers, primarily in the form of U.S. countervailing duty (CVD) and anti-dumping (ADD) tariffs resulted to a monthly $100 million a month imposition. The following reflects on the main arguments from both the U.S. and Canada, thereafter the adverse effects to which each country endures. United States: The U.S. lumber producers base their arguments against Canada on five main issues which begin with the determination of the stumpage fees, which are charges Canadian lumber producers have to pay to provincial governments for the right to lumber production. This price mechanism used by Canada goes against market conditions therefore the stumpage fees decided by provincial governments give a favorable advantage to pricing in Canadian lumber. Second, refers to land ownership in Canada, which are 95 percent owned by the provincial government. Even the smallest cost per unit cost differential advantage by Canadian producers results in a substantial cost advantage over U.S. producers. Third, is that lumber produced in the United States public timberland, relatively 5 percent of total timberland, uses an auction in a market-based system of bidding. Canada limits timber auctions. Fourth, Canada will not allow a non-Canadian company to acquire Canadian logs harvest in Canadian public timberlands thus does not allow non-Canadian companies to export Canadian logs. Lastly, Canadian share of the U.S. market for softwood has been rising and currently accounts for a considerable 34 percent. Canada: The following points can summarize arguments presented by the Canadian side. In reference to stumpage fees, it is not a price. It resembles a tax imposed by the government on the tenure holder in return for the right to harvest government-owned natural resources of timberland. Accordingly, using price-mechanism analysis is not deemed applicable. As such, stumpage fees in Canada are adjusted regularly to reflect any change in market conditions. The U.S. auction system, on the contrary, locks up prices for many years with no room for changes to accommodate market fluctuations. With the WTOs issue on Canadian stumpage fees; the fees do not provide competitive advantage to Canadian producers, and meets the test of adequate remuneration set out in U.S. countervailing laws. In comparison, Canada argues the difference both countries forest softwood production and marketing systems differ which invalidates the benchmark use for a free-market system. Lastly, Canada places restrictive regulations on lumber companies with regard to the use of timberland and the sharing of infrastructure costs. Latest Agreement: In April 2006, Canadian Prime Minister, Stephen Harper, reached an agreement with U.S. President George Bush Jr. to suspend dispute for seven years. Both sides agreed to return to the previous regime of managed trade. In part, the United States would drop tariffs, both CVDs and ADDs, and return $4 billion of the $5 billion already collected in

tariffs. The remaining one billion would be kept by the U.S., half of which would be disbursed to members of the Coalition of Fair Lumber Imports who initiated litigations against Canada. Canada agreed to cap its share of US market at 34 percent. Additionally, Canada agreed to impose an export tax and limit its shipments of lumber if prices in the United States were to fall below their current levels. Lastly, the U.S. would dismiss any petition for CVDs and ADDs on Canadian softwood exports. Disputes over the new agreement would then be submitted to a panel of non-North American commercial arbitrators. Impact of the Dispute: The U.S. building industry and home owners would be negatively affected. Inflation of material costs have resulted in tariffs and limited supplies. Reports show that since the tariffs were imposed in 2002, the price of building materials has been rising at double-digit rates, quadruple the rate of inflation. These increases could add $5,000-$7,000 to the cost of building an average sized home, and have made 300,000 moderateincome Americans ineligible for home ownership mortgages. The National Association of Home Builders (NAHB) went on record demanding that the U.S. government eliminate the tariffs completely. Disruption of the U.S. market can be catastrophic for Canadas softwood industry, which ships 70 percent of its lumber production. Threats from suppliers in other countries including Scandinavia, New Zealand, and Chile, have gained a small share of the growing market. Most importantly, the trade relationship both sustain to gain from one another has felt the negative impacts from this dispute. Although softwood makes up for less than 5 percent of total trade between the United States and Canada, the largest bilateral trade relationship in the world estimates at a astronomical $1 billion a day between the two. After the U.S. government decided to defy NAFTAs panel ruling on August 2005, Canada retaliated with considering placing duties on shipments such as energy products like electricity, oil, and natural gas to the USA. Analysis: After reading the article, I believe that the countries are leading towards managing their disagreement. In 2013, when negotiations resume it is imperative for both parties to continue to resolve the lumber issue and minimize any collateral damage. Considering that the United States continues to contract with Canada for such an overwhelming portion of their lumber market share, I feel that the U.S. lumber industry will continue to suffer financially from the outsourcing. In order, to control the balance in both domestic goods and exported goods, the implementation of tariffs must be used. Since most U.S. companies already prefer Canadian lumber for its higher quality, I think it would be fair for the United States to implement subsidies for domestic producers in the lumber industry. Also a possible solution to help domestic producers would give tax credits and encourage domestic companies to purchase U.S. goods such lumber. Also, with an ongoing threat of new suppliers of lumber producing countries such as Scandinavia, New Zealand, and Chile, I believe Canada will be forced to work with the U.S. in order to maintain its highest purchaser. Lastly, I agree with the critics from this article who doubt a lasting resolution on the basis of three factors. The three main obstacles include a disregard for agreement, land-ownership structure versus strategy of acquisition, and a pattern of managed trade interim solutions. If history repeats itself and negotiations are based on interestbased principles rather than collaborative solutions, both countries will continue to dispute.

U.S. and Brazil Reach Agreement on Cotton Dispute

Summary: The United States and Brazil have reached an agreement aimed at settling a long-standing trade dispute over American subsidies to cotton growers. The announcement came one day before Brazil was to begin imposing up to $830 million in sanctions with authorization

from the World Trade Organization. The WTO had ruled that American subsidies to cotton growers had violated global trade rules. Impact of Dispute: Under a preliminary deal, Brazil would hold off on retaliation in exchange for American concessions includes the modification of an export loan program as well as a temporary assistance fund for the Brazilian cotton industry. Broader issues in contention would be deferred until Congress takes up the next farm bill. The Brazilian sanctions added up to $591 million in higher tariffs on a wide array of goods, including autos, pharmaceuticals, medical equipment, electronics, textiles and wheat. The U.S. would also need to set up a technical assistance fund of $147.3 million a year. This represents the value of the retaliation the WTO had authorized for American payments to cotton producers under a marketing loan program and countercyclical loan program. Lastly, the United States agreed to evaluate whether the Brazil commodity of fresh beef could be imported from Brazil while preventing the introduction of foot-and-mouth disease. The plan moves to recognize Santa Catarina, a state in Southern Brazil, as free of the disease. Analysis: Avoiding the immediate harmful economic effects from any trade retaliation is best for both countries. The U.S. cotton industry may be impacted with the loss of subsidies whereas the Brazilian will continue to improve with funds from the resolution. I agree with the resolution because of the violation of trade agreements the United States broke. The U.S. cotton imports had a competitive advantage in the country, which put domestic production at a disadvantage. The WTOs ruling was fair in its proceedings and further serves as a standard for appropriate trade guidelines worldwide.

Trade Trends:
Decrease in Trade Barriers and Heightened Green Trade Initiatives
The 21 member Asia-Pacific Economic Cooperation Forum (APEC) has consistently sought to promote free trade and economic cooperation throughout the Asia-Pacific region, including the North American countries of Canada, Mexico and the United States. Within the past few years negotiations have been largely focused on establishing a free-trade zone among key members called the Trans-Pacific Partnership (TPP). The goals of the TPP are to further increase trade volume among TPP member nations by decreasing trade barriers. Currently 13 APEC members are included in the TPP negotiations, including the United States, Canada and Mexico. The TPP negotiations, which began in 2004, are expected to be majority completed by 2013. If the alliance is confirmed, TPP will be the largest free-trade pact since NAFTA was finalized in 1994 (REUTERS, 2012). Besides working to establish the TPP, the APEC forum seeks to promote the trade of Green Technology among its member nations. This year the members of the forum agreed to cut duties on technologies that promote economic growth while maintaining the integrity of the environment. Specifically the group identified 54 green technologies that will carry a duty of less than 5% when traded among APEC members; the reduced duty goes into effect in 2015. The 54 identified technologies included power generating equipment from renewable energy sources such as solar technology, windmills and bio mass technology. Also included are technologies aimed at treating water waste and repurposing recyclables. With the increase awareness of the importance of environmental research, APEC also targeted technologies created for environmental monitoring for reduced duty (REUTERS, 2012).

The unanimous decision to reduce duty fees on the trade of green technologies addresses two important goals of the APEC forum: promoting the growth of the green technology sector and liberalizing trade between member nations. However, the decision to reduce tariffs on green technology carries with it fears from many U.S. nations that the deal will negatively impact U.S. job growth in the future. The overall impact of APECs focus should prove to be positive for the global economy as well as the green sector. First, corporations will have a greater incentive to produce and market green technology. In addition to incentive, increased global competition as a result of decreased duties should cause more rapid technological advancements amongst participating nations. The formation of the Trans-Pacific Partnership (TPP) will further open global markets and encourage trade among participating members. However, this agreement may negatively impact other non-participating countries since they will not likely be able to compete with the projected free-trade pact. Also, competition between member nations will drastically increase and low-cost producing countries, such as China, will be able to sell their products at a lower price and gain an inherent advantage to competing countries with higher production costs.

Canada Moving Away from Dependence on U.S. Market

For years Canada has relied heavily upon its trade relationship with the United States. At the peak of their reliance, in 2002, the U.S. purchased 85% percent of Canadas total exports. However, since the global economic crisis, Canada has slowly been moving away from their dependence on the U.S. imports market. Several factors have directly contributed to the decline in Canadian exports to the U.S. First, the appreciation of the Canadian dollar against the U.S. dollar has made Canadian goods less competitive in the U.S. market. Also, heavy competition for U.S. purchases has developed in the last decade between Canada and China. In 2003, China beat out Canada to become the top supplier of U.S. exports. Another factor has included tightened border restriction between the two bordering countries as a result of the 9/11 terrorist attacks. Because of these restrictions trade between Canada and the U.S. has become more time consuming and costly. Furthermore, the impact of the U.S. recession has shown a decrease in the United States demand for foreign goods. Lastly, and most significantly, capitalizing on opportunity, Canada has broadened its horizons to establish trade partnerships with a greater variety of countries including Europe and China and as a result have shifted a great deal of their trade focus away from the U.S. market (Derek Burleton, 2012). Due in part to the overall impact of NAFTA, the U.S. and Canada will remain significant and stable trade partners, however, Canadas trend towards independence from the U.S. is set to continue. Within the next decade, it is projected that the U.S. will account for only two thirds of Canada's total exports (Derek Burleton, 2012). Canadas shifted focus will likely benefit the country greatly. As a result of their effort, Canada has recently joined in the negotiations of the projected Trans-Pacific partnership. This partnership is an alternative trade alliance group involving nations along the Pacific Rim. Once the negotiations are finalized, Canada stands to increase trade relations with Countries like China, Vietnam, Australia and Chile. Relationships outside of the NAFTA alliance, which includes the U.S. and Mexico, will increase the number of Canadian exports significantly and help bolster the guarded Canadian economy.

As an outcome of Canadas increase independence from the United States, the Canadian economy will be less tied to U.S. economic trends and thus their markets should become more independently stabilized. For the producers of Canadas GDP, this means a greater cushion from unforeseen foreign disasters, such as those witnessed on 9/11. On the flip side, Canada will have to become more price competitive in order to compete within a larger market. As far as the United States is concerned, the diversification of the Canadian market should carry little impact since the U.S. has already diversified its own market. Moving into the future the U.S. must continue to focus on increasing their own GDP rather than remaining a primary source of income for other countries.

Import/Export Management, Marketing, Financial Issues:

Geographical Indications and The Trade Related Intellectual Property Rights Agreement (TRIPS): A Case Study of Basmati Rice Exports Kranti Mulik and M. Crespi (2011)
This academic journal talks about a controversy over patent rights on three new strains of Basmati rice to RiceTec, Inc. by the U.S patent and trademark Office, in which it gives a severe disadvantage toward other importers and exporters of this industry to promote Basmati rice within the U.S market. A high quality, long grain rice called Basmati rice is hard to grow for commercial purposes, therefore RiceTec decided to obtain benefit from the Trade Related Intellectual Property Rights Agreement (TRIPS) to have a patent titled of Basmati rice lines and grains. RiceTec, Inc. (RiceTec) is a Texas development company that produces and exports a Basmati-type rice called Texmati, and in 1996 this rice company was granted with a patent on basis of 20 claims made of cross-bred rice lines and grain developed that eventually harm different foreign exporter, like Indian exporter, and thus disrupt the competition on the demand of this product. So the term Basmati is not allowed to use in marketing its rice, but only from the RiceTec, Inc can use it in marketing its rice, since this company has claims some entitled of the term for protection of its own product. So the Basmati rice industry in other countries, such as India and Pakistan, have been affected in their exports and productions by this patenting right, creating restriction in its marketing on this product. The controversy of the TRIPS agreement makes it favorable for developed countries, such as the US, to determine dominance or control on the industry within its own domestic market. Besides, TRIPS as it is now based may provide little help to developing countries trying to protect their traditional goods and practices. Importers who obtain its Indians Basmati rice have to face a serious issue of how to promote its commodity, product differentiation, without using the term Basmati, in which it defines the high quality of this rice-type. I personally disagree with the granting of patenting rights on this kind of commodity, because commodities, such as rice, are basic needs that regardless of the competitive market it must be beneficial for the society and competitors to satisfy the demand. Plus, with the TRIPS will disrupt the harmony and healthy competition within any marketplace. This kind of

product is well known as generic product since it has a long history of the usage if the term Basmati rice, therefore the term should be used equally for other competitors. The impact of granting the property rights of the Basmati rice to RiceTec will make importers with a disadvantage of losing its distinct image in certain segmented markets. The future of Basmati rice from other exporters rather than RiceTec, Inc. may rely largely on how effectively RiceTec performs. Importers have to find a way to market its rice and preserve the distinct image of Basmati rice without able to use the term Basmati. The meaning of the TRIPS agreement may be considered as a risk for those importers who seek different products from around the world to compete in the U.S market, especially within the agriculture industry, whereas domestic companies like RiceTec can make some allegations to protect its market and industry. Hence, importers must seek different methods of market its product to reach the adequate market segmentation for its product. The Basmati rice is known as high quality rice, but competitors will have to promote this product line as with other differentiations. The opportunities of this patent right may go only with RiceTec that can expand a whole product line with the Basmati rice-type; they may promote its product with high quality and long grain rice that is characterized. Besides, those industries who have not used this intellectual property right to protect its product and market may consider using it now, perhaps to generate a competitive advantage. The threats may go to the rest of agriculture industries that cannot use any terms of other producers producing similar products from exploiting the reputation built.

US Automotive Sector: Import/Export analysis

The automotive sector has recently been the topic of choice between the United States and China. The United States recently took action in the WTO against China policies in the automotive sector claiming that China unfairly subsidized exports of fully complete autos and automotive parts. The U.S. claims that over the course of two years China has provided approximately 1 Billion Dollars in parts and fully complete automobiles. Although China does not export fully complete automobiles to the United States, it does export autos to other developing countries. Therefore, an unfair subsidy would give Chinese automobiles an unfair advantage in the developing country against U.S. vehicles. In light of this accusation Chinese officials have denied in general that they subsidize exports (Keith Bradsher, 2012). The same day that the U.S. took this action, the Chinese have asked the U.S. to participate in a formal W.T.O. consultation over a U.S. law that allowed the Commerce Department to impose CVD (countervailing duties) on exports from non-market economies retroactively, which violates the W.T.O.s transparency obligations. This kind of law creates an uncertain legal environment for Chinese exporters. Officials in Beijing say the decision was made independent of the U.S. move, and the timing is coincidental (Inside US Trade, 2012) The automotive industry has not been the only sector in the news. Aluminum, a closely related industry, has been increasing in demand overall. Projected growth estimates put that aluminum exports will increase by a drastic 57%. Most of that growth has been attributed directly to Chinas growing industry. Aluminum is one of the United States strongest exports and according to industry leaders is the main factor that helped the domestic industry weather the global storms that have slowed European and Chinese markets (staff, A, 2012). Rolled

aluminum is one of the chief of these exports and has multiple uses including use in the construction of automobiles. This correlation is not merely a coincidence and I believe that we will indeed see a continued increase in exports to China of rolled aluminum as they increase their automotive production. This in turn will allow China, if it is indeed subsidizing its automotive exports, a clear advantage in the automotive industry. This will happen because even though aluminum is increasing in demand the price for aluminum has stayed relatively low (staff, A, 2012) A low per unit price will keep overall automotive construction costs low. Couple a low price of aluminum with additional funding from a Chinese government and the cost of production could reach a minimum that would push out and endanger U.S. automotive companies exports in developing countries. This is something the United States obviously has a concern about, however the real question is are they realizing that appealing to the W.T.O. may just be a stopgap measure and the real problem may be in trying to grow our raw material exports while keeping our produced goods at an export amount level and a price level that is beneficial to the U.S. economy.

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