The Impact of US Trade Agreements on Wholesale Distribution
- Current US International Trade Agreements and Potential Changes
- Current Benefits of Trade Agreements for Distributors
- The Effect on Wholesalers of Barriers to International Commerce
- See if your business is ready for change!
Current US International Trade Agreements and Potential Changes
The US economy faces significant changes over the next few years. With the inauguration of Donald Trump as US president, there is a strong focus on the renegotiation of current trade agreements regarding international commerce.
One of Trump’s key election pledges concerns the North Atlantic Free Trade Agreement (NAFTA). This is a trilateral agreement between the US, Canada and Mexico that has been in place since 1994.
The purpose of NAFTA was to benefit the three member countries by eliminating barriers to imported/exported goods and investment. However, analysis has shown that while it has had an extremely positive impact on the Mexican economy, the effect on the Canadian economy has been insignificant, while the US has seen only modest benefits.
The agreement has aided the US by removing import/export tariffs and placing the US on a strong competitive footing against China; while this has created a net increase in jobs, it has also meant that many positions have been lost to Mexican labor.
While NAFTA is set to remain in place, President Trump is committed to renegotiating the terms of the agreement to make them fairer towards America and American workers. He is also determined to take a tougher stance on those breaching the terms of the agreement.
In addition, Trump has taken the US out of the Trans-Pacific Partnership (TPP). This is a similar agreement to NAFTA that has facilitated the free movement of goods between 12 member countries: Canada, Vietnam, Peru, Mexico, Malaysia, Japan, Brunei, Australia, New Zealand, Chile and Singapore.
A similar agreement between the US and Europe, the Transatlantic Trade and Investment Partnership (TTIP), is currently on the table. The terms are currently subject to negotiation with the US continuing as a member. However, given the current political climate under the Trump administration, it is highly questionable whether the US will continue as a member state.
Current Benefits of Trade Agreements for Distributors
At this point, wholesale distributors benefit from current arrangements. The reasons for this are twofold:
1. Wholesalers depend on international agreements to source goods at the best price
The wholesale distribution of goods has very narrow margins. It is essential that the goods for distribution are sourced cheaply. At this time, import trade agreements between countries enable distributors to source goods globally.
2. Export agreements facilitate access to emerging and existing foreign markets
Many wholesale distributors rely on being able to sell to markets where there is a need for goods that are only produced in the US without barriers to impede their export. Furthermore, wholesalers benefit from reciprocal agreements that protect such things as copyright, environmental standards and wages across country borders, helping them to remain competitive.
The US exported $1.454 trillion of goods globally in 2016, an increase of 37.6% since 2009. It imported $2.252 trillion of goods in the same year, an increase of 40.6% since 2009. As a component of the US economy, wholesale distribution accounted for 5.9% of US GDP, making it the fourth largest key industry.
The Effect on Wholesalers of Barriers to International Commerce
At present, the US economy is hugely reliant on cross-border commerce. Removal of current trade agreements will force wholesalers to buy domestically, increasing purchasing costs. Alternatively, should wholesalers elect to continue to buy abroad, imported goods will be subject to punitive tariffs, and these will erode profits.
As for the export markets, current trade agreements that protect patents and intellectual property, as well as decreeing standards on worker’s wages and pollution levels, will be removed. This will allow “sharp practices” to proliferate in foreign markets. Coupled with export tariffs, this will make US wholesalers both non-competitive and unprofitable abroad.
President Trump’s vision for the future aims to bring traditional industries back to US soil. This will end the reliance on foreign markets, boost the economy and create jobs, especially for unskilled workers.
However, America has become a high-wage economy based on the production of quality goods. The US enjoys a virtual monopoly of the sale of such goods in many foreign markets as well as aiding developing economies and Americans with the import of cheap goods.
The current direction risks causing inflation, while allowing wages to stagnate; this could have a detrimental effect on the economy in the long term. It may be that current policy represents a step backwards for the US economy.
See if your business is ready for change!
The future of wholesale distribution is headed down a new path due to changing trade agreements. Take a look at our free health self-assessment to find out if your business can withstand major changes to the wholesale distribution industry!