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  • USMCA & China Trade Deal Phase 1 – Impact on Washington Manufacturing Companies

    Jan 30, 2020

    IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog has been provided by Bill Virgin of Washington Manufacturing Alert (www.washingtonmanufacturingalert.com).

    USMCA & China Trade Deal Phase 1 – Impact on Washington Manufacturing Companies

    The U.S. has signed two major trade deals, one with Canada and Mexico, the other with China.

    But just how major are those deals really? Behind the surface rhetoric, what’s really in them?

    Did manufacturers, particularly those in Washington, get anything out of them?

    Even at the surface level there’s no consensus about what the U.S.-Mexico-Canada Agreement (a successor to the North American Free Trade Agreement) and the phase-one agreement between the U.S. and China represent for the domestic manufacturing sector.

    “The USMCA is the first trade agreement that will result in more manufacturing jobs, not fewer,” said U.S. Trade Representative Robert Lighthizer following the Senate’s approval of the agreement.

    “This historic agreement will begin to rebalance our vital trade partnership with China and benefit both of our countries,” said a statement from the Trump administration following the signing of the preliminary trade deal with China. “The signing of this agreement will be an incredible boost for American businesses, farmers, manufacturers, and innovators.”

    But the Alliance for American Manufacturing, an industry group that has long favored an aggressive trade policy toward China, said “for American manufacturing and its workers, the phase one agreement is completely inadequate. The agreement does not level the playing field for American workers in the U.S. or global market.  With nearly all the major structural issues left unresolved – including industrial subsidies, overcapacity, state-owned enterprises, predatory investment, currency manipulation and misalignment, cyber intrusions, worker rights, environmental rules, and tax policy – we urge an immediate resumption of negotiations and sustained economic pressure” through tariffs.

    Interestingly, the association endorsed ratification of the USMCA, saying that “while past forecasts of job gains through trade agreements have been wildly overstated, we believe, if properly enforced and implemented, the new rules established under this agreement will reduce some incentives to ship jobs abroad. The USMCA should be viewed as a starting point for these efforts, rather than the culmination of them.”

    A WMA analysis suggests that while neither agreement provides sweeping shifts in the trade landscape for Washington manufacturers, certain product categories could see some significant changes.

    For the USMCA, one of those is dairy.  Northwest Dairy Association, which markets its products under the Darigold brand, has for several years objected to Canadian dairy pricing policies it says wall off the Canadian market to imports and dump product in export markets in which the U.S. competes.

    “The top priority for America’s dairy industry in this negotiation has been for Canada to eliminate its program that allows low priced dairy ingredients to undersell United States dairy sales in Canada and in third country markets,” the U.S. trade representative said in a background sheet. “As a result of the negotiation, Canada will eliminate what is known as its milk classes 6 and 7. In addition, Canada will apply export charges to its exports of skim milk powder, milk protein concentrates and infant formula at volumes over agreed threshold, which will allow United States producers to expand sales overseas.”

    Canada will also provide new tariff rate quotas exclusively for the United States for fluid milk, cheese, cream, skim-milk powder, butter and cream powder, concentrated and condensed milk, yogurt and buttermilk, powdered buttermilk, products of natural milk constituents, ice cream and ice-cream mixes, whey and margarine.

    “This is a victory for U.S. agriculture and the U.S. dairy industry, as well as the U.S. as a whole.” Northwest Dairy Association said in a statement. “The agreement a) preserves dairy access to Mexico, b) provides the U.S. greater access to the Canadian market, c) ends Canada’s controversial Class 7 program, d) caps their exports of proteins, and e) provides greater transparency.”

    For Washington winemakers, the USMCA includes a provision to “ensure British Columbia eliminates discriminatory treatment of U.S. wine in grocery stores and includes new non-discrimination and transparency commitments regarding the sale and distribution of alcoholic beverages,” according to the trade representative.

    As to the China agreement, the biggest regional impact may be a resolution of a long-running dispute over trade in solar-energy components and raw materials that has led to the shutdown of REC Silicon’s Moses Lake polysilicon refinery.

    In retaliation for U.S. duties on imports from China of solar panels, China hit U.S. shipments of polysilicon (used to make electricity-producing solar cells within those panels) with tariffs that had the effect of shutting off that market. Slumping sales forced REC Silicon to curtail and then halt production at Moses Lake last July, resulting in the layoff of 450 workers.

    “In 2014, China closed its market to U.S. polysilicon by imposing tariffs on imports of U.S.-made solar-grade polysilicon,” REC Silicon said. “China has heavily subsidized its own polysilicon producers since imposing the tariffs on U.S. producers and has focused on concentrating demand for polysilicon in China. This industrial policy has created massive overcapacity in China, burdening the global industry and worsening conditions for the U.S. polysilicon industry.” China represents 92 percent of global polysilicon demand.

    The phase one agreement includes a commitment from China to increase purchases above a 2017 base-line level of a number of U.S.-produced manufactured goods, including industrial machinery, electrical equipment, pharmaceutical products, aircraft, vehicles, optical and medical instruments, iron and steel, solar-grade polysilicon, hardwood lumber, and chemical products. The agreement says those purchases will be at least $32.9 billion above the 2017 baseline in 2020, and at least $44.8 billion above that baseline in 2021.

    But the agreement doesn’t specify how those increases are to be distributed among all the categories of manufactured goods.

    REC Silicon also noted that at almost the same time as the announcement of the phase one agreement, China’s Ministry of Commerce said it would extend tariffs on imports of solar-grade polysilicon from the U.S. and South Korea for five years.

    “We do not expect this announcement from [the Ministry of Commerce] to affect or change China’s commitment to purchase solar-grade polysilicon from the United States,” the company said in a statement. But it also cautioned that “any benefit for U.S. manufacturers and workers will depend on how China implements the agreement.”

    REC Silicon said it has made no decision on restarting the Moses Lake plant. The company also operates a plant in Butte, Mont., which serves the semiconductor market.

    If you find this content interesting or beneficial similar content can be found 25 times a year in the Washington Manufacturing Alert.  Subscriptions are available for $140 per year for email delivery and $160 per year for mail, plus appropriate sales tax. Subscription information can be obtained by contacting the publication at (425) 227-4471 or editor@manufacturingalert.com.

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.

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