Part 2 of 2. Part 1 dealt with trade deficits and market turmoil.
While experts agreed that trade generates a net benefit, they also told Insider that some challenges remain, including unfair trade practices — currency manipulation, poor intellectual property protections, worker exploitation and governments propping up their domestic industries with subsidies that can undermine important American business sectors — and job losses that occur because of trade.
Erin Ennis, spokeswoman for the US-China Business Council, said that U.S. businesses in certain sectors face some serious challenges to enter the Chinese market. Cloud computing companies, for example, have to obtain three kinds of licenses from the Chinese government before they can start their operations, and two of those receive national securities reviews. While rules don’t forbid a foreign company from getting those licenses, no foreign company has obtained one, Ennis said.
Other companies operate in a sector with outright restrictions on what and how much they can own, which places them at a disadvantage from the start, she said.
While the U.S. conducts a national security review of foreign companies through the Treasury Department, Ennis said that America places restrictions on only a handful of sectors, including broadcasting and uranium production. In general, she said, the U.S. approach has been that all foreign companies are welcome to do business here because it aids the domestic economy.
Ennis also emphasized that the trade relationship between the countries has improved over the years. When China joined the World Trade Organization, for example, it lifted many investment restrictions on foreign companies.
Whereas many U.S. companies used to have to form joint ventures with Chinese partners to enter the Chinese market, that is no longer the case in most sectors, Ennis said.
Much like Qingdao Haier bought Louisville-based GE Appliances, a U.S.-based white goods maker could acquire a competitor in China without a JV partner, she said. A lot of U.S. companies still do look for Chinese partners, though, because they rely on their expertise about markets and regulations.
Ennis said that the members of her trade group, which consists of 200 U.S. companies, including FedEx, Walmart and Ford Motor Co., question whether the kinds of policy changes that would improve the fairness of international trade can be achieved through protectionist measures.
She said the USCBC has yet to see how putting tariffs on Chinese products, which President Donald Trump has proposed, will put pressure on Chinese leaders to provide more protections for intellectual property.
“It’s not entirely clear what the administration has in mind,” she said.
Fears of a trade war for weeks have prompted investors to flee stocks. On Wednesday morning, the Dow Jones plunged more than 500 points after reports that China had proposed tariffs on $50 billion in U.S. goods including soybeans and cars. At 10 a.m., the Dow was at about 23,643, still down more than 1,000 points for the year.
Charles Gascon, regional economist and senior coordinator at the St. Louis Fed, said that free trade sometimes gets a bad name because people confuse trade agreements with free trade. For example, the North American Free Trade Agreement — which Trump has called the “worst deal ever” — is an agreement that moves the partners — the U.S., Canada and Mexico — closer to free trade, much like businesses from Kentucky can do business in Ohio and Tennessee.
Those agreements do not eliminate all practical challenges, Gascon said, but they do include provision that foster trade and provide protections for U.S. businesses, including for intellectual property. Those kinds of protections are fundamental to the capitalist system because they allow businesses to get a return on their ideas and products.
“To the extent that that’s not happening, that’s a detriment to our ability as a global economy,” he said.
Phil Lynch, a Brown-Forman vice president, said such agreements are a critical element of the distiller’s efforts to promote international trade.
The Louisville-based company generates more than half its sales outside of the U.S.
Trade agreements force other countries to “recognize that brands like Jack Daniel’s and Woodford Reserve are American-made products and cannot be legally ‘knocked off’ with cheaper imitations,” he said.
“So just as most of the world recognizes and supports that Scotch whisky can only be made in Scotland and Tequila can only be made in Mexico, bourbon can only be made in the U.S. and Tennessee whiskey can only be made in Tennessee.
“Governments in countries with trade agreements agree to help protect those categories from counterfeit knockoffs,” Lynch said.
Ford, which operates in one of those industries that requires foreign investor to work with Chinese partners to enter the Chinese market, did not want to talk about specific policy prescriptions that could make trade in China more equitable for U.S. companies.
“We encourage both governments to work together to resolve issues between these two important economies,” the automaker told Insider via email.
In December, Ford, one of Louisville’s largest employers, said that it wanted to intensify its China growth plan, which includes introducing more than 50 vehicles there by 2025, including 15 electric vehicles.
Avoiding a ‘race to the bottom’
Jason Bailey, executive director for the Kentucky Center for Economic Policy, said a trade deficit that occurs as a result of unfair trade practices is problematic for reasons including job losses.
Many foreign steel and aluminum producers, for example, receive subsidies from their governments, which allows the companies to undercut American producers of an industry that plays an important role in the U.S. economy, he said.
“There is some justification for us to take action … because of what other countries are doing,” he said.
Bailey also said that some foreign companies can offer lower prices for their products than their U.S.-based competitors because they exploit their workers by having them work in unacceptable conditions.
“You need to find a balance that both creates opportunities in poor countries, which we want, and I think benefits us all … (but) doesn’t create a race to the bottom, here and around the world, on labor standards,” he said. “I think there are human rights abuses that happen, and that should not be an acceptable method of competing.”
In addition, Bailey said, U.S. job losses that have occurred because of unfair trade practices have hit primarily working families without a college education, especially in the manufacturing sector. As production has been shipped overseas, workers have lost often unionized jobs with good wages and benefits for jobs that pay much lower pay.
“We as a country … do little to help those who are harmed,” Bailey said.
Kevin Kliesen, business economist and research officer at the Federal Reserve Bank of St. Louis, agreed.
Job losses occur for many reasons, including trade, productivity gains and increased mechanization, he said.
Kliesen said he knows that firsthand: He came from a farming family in Colorado. A hundred years ago, about half of America worked in agriculture to produce the nation’s food. Today, thanks to mechanization and other factors, only about 1 percent of the population is needed to produce the nation’s food.
“Economists … could do a better job, I think, in terms of framing the debate,” Kliesen said. “Many economists say there’s only benefits to trade, there’s no cost, and we do recognize there are costs to trade.
“Obviously, if you’re in an import-competing industry (such as textiles) … you have competitive pressures from imports (that) may be lower-priced,” he said.
But trade also generates tremendous benefits because competition among businesses, foreign and domestic, squeezes inefficiencies out of the system, which, on balance, is positive.
Kliesen said that while the nation is providing help for people who lose jobs because of international trade, it does have to do more.
“I think education/retraining is a key component,” Kliesen said, “but the thing is, those things can be expensive, and those things can also take a fair amount of time.
“It’s not like flipping a switch,” he said.
Edwin Webb, president and CEO of the World Trade Center Kentucky, said that one way that America could reduce some of its trade deficit is to get more U.S.-based companies — including those in Kentucky — to do business overseas.
When Kentucky businesses take that leap into international markets, they gain an immense amount of knowledge and experience — and it forces them to think about their products and strategies in a new way, which makes them more nimble and innovative, Webb said.
But many small and midsize Kentucky businesses are intimidated to diversify beyond U.S. borders and they’re often unsure of where to start, he said. Of the state’s 90,000 businesses, only 5,000 are selling internationally.
“To me, that’s our biggest challenge in the state,” Webb said.
UPDATED: This post has been updated with Wednesday market reaction to news about Chinese retaliatory tariffs.