Trade Measures Open Doors for Manufacturers

Derek Floyd
RSM McGladrey

Many mid-sized manufacturers are hailing recent trade initiatives that open Central American markets to U.S.-made goods and services and better enforce trade agreements with China.

The Central American Free Trade Agreement (CAFTA), which President Bush signed in August, opens markets that, although relatively small in terms of overall U.S. exports, are developing rapidly. And the U.S. Trade Rights Enforcement Act, passed last fall, contains mechanisms to ensure fast-growing China abides by its previous trade agreements. Both measures offer potentially big benefits for mid-sized manufacturers, experts say.

Central America
Central American countries have enjoyed nearly duty-free trade with the United States during the past 20 years, putting U.S. manufacturers at a disadvantage. CAFTA “levels the playing field and removes some significant tariffs on exports,” said Chris Wenk, director of international trade policy for the National Association of Manufacturers (NAM).

Consider these numbers: in 2004, a U.S. exporter of motor vehicles or automotive parts paid tariffs as high as 11.1 percent on all goods sold in the CAFTA nations, which include Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. A wide range of other manufactured exports, Wenk said, faced tariffs of 7 percent or more—while goods that CAFTA nations exported to the United States entered largely duty-free. The new agreement immediately eliminated 80 percent of tariffs on U.S. exports to all CAFTA nations except Costa Rica, where negotiations continue. At the same time, the pact guarantees CAFTA signatories open access to U.S. markets. By 2015, the agreement calls for the elimination of all trade duties between the United States and these Central American nations.

According to U.S. trade experts, the current $32 billion CAFTA market ranks only as the nation’s 14th largest export destination. However, even before the agreement, trade between the United States and CAFTA countries was accelerating. From 2000 through 2004, exports to CAFTA destinations grew by almost 16 percent, compared with roughly 5 percent growth in overall U.S. exports. That growth, Wenk said, should translate into an additional $1 billion in export opportunities for manufacturers and distributors.

While companies with existing export relationships in Central America will reap early gains from CAFTA, Wenk said several regions or industry segments are well positioned to develop profitable new business opportunities, including:

• Florida and other South Atlantic and Gulf Coast states. Seven of the top 10 exporters to CAFTA nations are based in the southeastern United States. As the top state, Florida boasts 7,000 small to mid-sized businesses with export ties to Central America, representing $3.2 billion in sales. While states in the southern United States have geography and longer standing connections on their side, Wenk said companies in other parts of the country also may have much to offer Central America. In Minnesota, for example, there are 258 manufacturing companies that export to Central America, and about 60 percent of those are small to mid-sized firms. “There’s a lot of room for those businesses to grow market share,” he said.

• Motor vehicle and auto parts manufacturers. Before CAFTA, this market segment paid the highest export duties among all U.S. manufacturers. However, the new trade pact accelerates the tariff phase-out on these products to five years from 10, making this a particularly attractive new market opportunity. According to a brief by the U.S. Trade Representative, manufacturers of information technology products, construction and agricultural equipment, paper products, pharmaceuticals, and medical and scientific instruments may benefit most from export opportunities generated by CAFTA.

• Raw goods for textile and apparel manufacturing. Prior to CAFTA’s passage, garment factories in Central America and the Dominican Republic were the second largest buyers of U.S. yarn and fabric supplies. If those businesses continue to use American-made products to manufacture clothing or textiles, those goods can flow duty-free to the United States. That’s a vital tradeoff, experts say, because textiles manufactured in Asia have no such protections. “It’s important to remember that 500,000 people work in the textile industry in Central America, and they use U.S.-made products,” Wenk says. “Whether it’s zippers made in Georgia or cotton from Alabama, CAFTA will help lessen the risk that those customers will lose market share to Asian competition.”

• Agribusinesses and producers of agricultural products. Under CAFTA, more than half of all U.S. agricultural exports to Central America and the Dominican Republic became duty-free January 1, with a gradual phase-down to completely free trade scheduled by 2025. Previously, tariffs on such U.S. exports as vegetables, fruits, and nuts were as high as 16.7 percent. The American Farm Bureau estimated CAFTA will generate an increase in farm exports—including wheat, potatoes, corn, soybeans, pork, poultry, beef, and produce—of as much as $1.5 billion per year. On the other hand, the pact offers little support to U.S. sugar producers, largely because domestic production of sugar in CAFTA nations has grown dramatically in the past decade.

• Economic benefits. Not only do exporters benefit via reduced tariffs, they’re now more competitive because of the equal cost of doing business. Expected increases in exporting expands the use of export incentives offered through the tax code. Newly developed benefits, such as the domestic manufacturer’s deduction, provide a tax benefit of up to 9 percent for profits derived from U.S. manufacturing. And the Interest Charge Domestic International Sales Corporation provides a tax break of up to 20 percent on profits from exporting. Through CAFTA agreements, these savings will augment further the benefits of open trade and reduced tariffs.

China
If CAFTA gave mid-sized manufacturers strong incentive to consider exporting to emerging Central American nations, the Trade Rights Enforcement Act gave those same companies better tools to ensure trade with the Chinese economy remains fair.

This act provides for close monitoring of Chinese compliance with a range of trade obligations, including intellectual property rights; market access for U.S. goods, services, and agriculture; and accounting within Chinese subsidies. It also requires the U.S. Treasury Department to define “currency manipulation” in foreign nations and report to Congress twice a year on international monetary activities considered suspect. In a statement shortly after the trade enforcement act became law, NAM President John Engler said the act would ensure American businesses could maintain their export rights guaranteed under World Trade Organization (WTO) rules.

When China joined the WTO, it agreed to abide by countervailing duty provisions for the offset of subsidies, and this bill ensures that for American companies, Engler said. “The bill also toughens U.S. trade enforcement in a number of other key areas, including intellectual property protection, access to China’s markets, and providing more resources to address trade problems with a number of other countries.” IBI

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