By Gavin Everson
Even in the heady days of the pandemic when much of the world was still shut down, there was a glimmer of optimism amongst those invested in global trade. With a new president at the helm in Washington, proponents of free trade and globalism had held out hope that there would be a market shift away from the protectionism and volatility that had characterized the Trump years.
Between 2017 and 2020, the world saw dramatic shifts in global trade dynamics. On its third day in office, the Trump administration bowed out of the Trans-Pacific Partnership (TPP) and waved off any hope of resurrecting a trade deal with the EU on the grounds that Washington preferred bilateral trade deals over multilateral ones. It wasn’t long before it announced a renegotiation of the North American Free Trade Agreement (NAFTA), as well as tariffs on steel and aluminum imports – even from key allies and trade partners – on the grounds of national security. All this while criticizing the mandate and track record of the World Trade Organization and eventually refusing to approve appellate court judges to the international organization, rendering it impotent to enforce the global trading system. And then came the trade war with China, which saw a 25% tariff placed on essentially all imports coming from China, and restrictions on Chinese companies investing in the U.S.
The move toward protectionism was a marked swing away from the free-market principles championed by previous Republican administrations. When Joe Biden was elected, the hope was that he would usher in a more moderate period of trade relations. But those hopes soon faded. Congress failed to renew the Globalized System of Preferences, which provided preferential duty rates to developing nations. Tariffs on imports from China remained in place and new sanctions were placed on Chinese goods with content from the contentious Xinjiang region where human rights abuses are alleged to be taking place.
Across the Atlantic, talks over a trade deal with the UK were dismissed due to the President’s dismay over the UK’s move to establish a hard border between Northern Ireland and the Irish Republic. And while the Biden administration was eventually able to find common ground with the EU over the steel and aluminum tariffs (to which the EU had responded with tariffs in kind on U.S. consumer imports), the agreement was seen as highly favorable to U.S. interests and only temporary in nature.
Investment Down
All of this has had a chilling effect on international investment. Global foreign direct investment in 2023 grew marginally at 3% but only when factoring in major economies. Without them, FDI would have registered a contraction of 18%. More concerning is that the investment that did take place was only a continuation of existing projects. Greenfield projects declined year over year, as did international project finance deals.
At the regional level, it’s worth noting that the ASEAN bloc of Southeast Asian economies, which has typically seen consistent FDI inflows saw a 16% decline in 2023, though greenfield projects were admittedly up in the manufacturing sector where companies have been moving away from China to places like Vietnam, Thailand, Malaysia.
Trans-Pacific Trade
One of the tenets of the Biden administration’s approach to matters of trade has been a move to isolate China through alliances with market economies, rather than confronting China directly. In 2021, it signed the AUKUS agreement, a security partnership between the U.S., UK and Australia designed to keep China’s military activity in the south Pacific in check. On the economic front, the administration has put significant time and dollars ($1.2 billion) into courting Southeast Asian countries in the form economic development funding. The goal is to bring these countries deeper into the orbit of the United States and further away from that of China.
There’s little questioning the Biden administration’s desire to distance its economy from that of China. The tariffs against Chinese goods remain in place and the administration doubled down on them in May 2024, adding increased rates to predominantly (though not exclusively) clean tech products.
Yet, while a new mandate for the Biden administration would likely see more of the same, a return to the Trump administration is far more likely to amplify trans-Pacific tensions. The Trump campaign has already suggested it would heighten tariff rates against Chinese imports to 60%. That in addition to a proposal for a 10% universal tariff on all imports into the U.S. In addition, the Trump campaign has already set its sights on Chinese production taking place in Mexico for future tariffs.
There is little reason to believe the ongoing blockade of WTO appellate court judges is likely to end under a Trump administration, which originally initiated the blockade and which has received bipartisan support under the Biden administration.
Trans-Atlantic Trade
Trade relations between the U.S. and its partners across the Atlantic will need to be watched closely by investors, particularly those with a stake in trans-Atlantic trade. Relations between the U.S. and EU have been cordial in recent years, but key geopolitical issues continue to create tension. One is uncertainty around America’s commitment to NATO in the face of Russian aggression. The second is the Biden administration’s Investment Reduction Act (IRA), which provides tax incentives for the purchase of domestically produced electric vehicles, disadvantaging foreign EV producers.
What will be different, however, irrespective of who claims the White House come November, is that the U.S. administration will be dealing with a European Parliament that has moved decidedly toward the right and a new center-left government in the UK. Each of these parties will have to make quick and definitive choices about where it wants to channel its diplomatic energy. The EU will have to choose to move close to Washington or to Beijing. Does it allow for Chinese technology to be used in the EU? Will it take a stand against China’s dumping practices? These decisions will be closely watched in both Washington and Beijing. Similarly, a new center-left government in the UK – which is more center than left – will have to find careful balance, as well. The UK had historically been the largest contributor of FDI into the U.S. outside of North America but is now its fourth largest. London has been pining for a free trade deal with the U.S. for years as this was the golden prize for the Brexit movement. That deal has yet to become a reality. The Trump campaign has indicated a willingness to negotiate said agreement, but for London to do so, it will have to agree to terms that would put one of its new government’s main priorities – improving trade terms with the EU, its largest trade partner – in some degree of jeopardy. In short, London will have to make a choice between better trade with the EU and freer trade with the U.S.
For all the tension between the U.S. and EU, trade between the two parties has nevertheless witnessed substantial growth. Prior to the pandemic, there was an exchange of $805.3 billion in merchandise goods across the Atlantic. By 2022, that number had grown 17% to reach $943.9 billion. And it’s not only trade numbers that have increased. Each party has made significant investments into the other’s economy. This demonstrates that the private sector remain bullish about prospects for trade across the Atlantic despite the cordial yet intensifying tensions.
The UK link
Global businesses will want to watch closely not only the fate of a U.S.-UK trade deal, but the permanence of a trade deal with Canada to replace the current provisional one.
A return of Donald Trump to the White House would increase the chances of a U.S.-UK trade deal, though the negotiations will most certainly be challenging. The importance of this for U.S. companies engaged in global trade shouldn’t be understated. American companies with interests on both sides of the English Channel have been saddled with administrative burden since the conclusion of the Brexit process. New customs processes, heightened regulatory requirements and an added layer of complexity as goods cross between Northern Ireland and the Irish Republic have all contributed to discouraging American investment in the UK.
What will be key is a degree of improved harmonization between EU and UK customs processes. The trade deal between the EU and UK has made trade across the English Channel cumbersome. Today’s U.S. firms that export to the EU by transshipping through the UK face the ominous challenge of having to ensure proper classification of goods as they enter the UK under one customs regime and the EU under another. Add to that disparate regulatory regimes and the requisite customs duties that need to be paid and suddenly transatlantic trade doesn’t seem quite so palatable.
In the event the U.S. and UK strike a free trade deal, the customs burden will likely only intensify as the UK importers of U.S. goods will need to be even more scrupulous about their customs administration in order take advantage of preferential duty rates. On the flipside, they’ll be saving a bundle on customs duties and their U.S. partners will achieve far greater price competition in the global market.
The Canadian link
As noted above, U.S. companies with interests across the Atlantic will want to watch closely the finalization of the UK-Canada deal. The deal has already been in place provisionally since the close of Brexit and has, for the most part, mirrored the terms of the free trade deal Canada has held with the EU since 2017. That will allow U.S. companies looking to reach UK or EU markets with the opportunity to establish production facilities in Canada from which to export to the UK.
Yet, there’s a certain degree of redundancy in the Canada-UK trade deal. That’s because the UK has already been accepted into the CPTPP – of which Canada is a member – pending ratification by six of the trade deal’s members. Thus far, three have already completed the ratification. Canada isn’t one of them. There’s still some tension between the two regarding trade in beef.
The good news for U.S. exporters is that once the inclusion of the UK has been ratified by six CPTPP members, they will be able to reach the UK market – and by extension the EU market – by establishing production in either Canada or Mexico (both CPTPP members) and exporting to the UK from there. The challenge will be to ensure that any goods that are eventually making their way to the EU undergo substantial transformation if they are to qualify for duty exemption when they enter the EU.
Key considerations
U.S. firms with interests across the Atlantic (and globally) should be reviewing their supply chains to reduce geopolitical risk, which has been on the rise in recent years. For those with a specific focus on trade across the Atlantic, following is an inexhaustive list of key considerations.
End market: Where are the goods you’re moving going to end up? If the final destination is the EU, versus the UK, this brings with it the complexity of an additional layer of regulatory and customs requirements to navigate. It also requires an understanding of what constitutes substantial transformation under the UK-EU trade agreement.
Origin of production: Companies with globally integrated supply chains will want to strategically locate their production facilities to optimize their supply chains for duty exemption. As noted above, locating production in Canada or Mexico versus within the U.S. or within a non-CPTPP market in Asia could mean losing out on significant savings in duty outlay.
Supply Chain Flexibility: With new governments in the UK and EU and potentially a new one in the U.S., businesses should be prepared to shift their production processes and supply chains to accommodate both positive and potentially negative shifts in trade relations.
Nature of goods: U.S. companies producing carbon-intensive goods that are looking to invest in production in the UK or EU should be aware of new legislation in the EU (and soon to follow in the UK) that requires onerous accounting of carbon footprint, not only for the production taking place in the EU/UK, but for all the imported product components.
Logistics: There’s significant benefit to using free trade deals like the CPTPP, but the UK is the only Atlantic member of the trade bloc. That makes the logistics of moving goods from the Pacific Rim far more time-intensive and expensive. Temperature controlled goods, perishable items and high-demand products that require speedy time-to-market aren’t ideal for supply chains that extend across both the Atlantic and Pacific.
The outcome of the 2024 U.S. election could conceivably create a sea change in how the country engages with the global trading system, or the change could be rather negligible. The bigger question is whether the change will see the U.S. re-engage in global commerce or retreat further into isolation. Either way, U.S. companies with global interest must be prepared to respond.
Gavin Everson has more than 35 years of experience in customs, international trade and logistics management, particularly in implementing customs and logistics processes and systems. He has responsibility for advising and delivering Customs solutions to Livingston’s EMEA clients.