Cutting Through the Trade Noise, Vermont’s Offer You *Can* Refuse, and No Animus, Just Cannabis
Here’s What You Need To Know
Trade was front and center as the world’s seven major industrialized economies gathered in Canada for last week’s G7 summit. As Canada and the European Union (EU) have their plans in place to retaliate beginning next month against U.S. steel and aluminum tariffs, tensions boiled over into “chaos” as President Trump trolled allies, called Canadian Prime Minister Justin Trudeau “meek and mild” on Twitter, and refused to endorse the negotiated statement on shared priorities coming out of the summit. These events were only further obfuscated by the internet musings over whether Trudeau’s eyebrows are real.
If you are left wondering what is going on, you are not alone. When it comes to trade, many are taking sides based on their feelings toward the President rather than the facts of the issue at hand. We are only in the opening salvos of the trade debate, and so cutting through the noise and rhetoric (admittedly, no easy feat) with meaningful facts is imperative to preparing for what’s to come:
- How Did We Get Here? The U.S. recently imposed tariffs of 25% on imported steel and 10% on imported aluminum, impacting the EU and Canada, among other nations. In retaliation, the EU and Canada – as well as other countries – have prepared measures against U.S. exports that take effect in July. Although the EU, Canada, and U.S. have all had among the lowest overall tariff rates in the world according to the World Bank, certain products in specific countries have barriers to protect domestic industries.
- What Trade Disparities Actually Exist? For example, Canada imposes a 270% tariff on imports of U.S. dairy products. Yet, dairy exports are only a small portion of U.S. trade with Canada, and American producers have used technological advances that resulted in a large trade surplus with Canada in dairy products despite the tariff. Additionally, vehicles shipped from Europe to the U.S. face a 2.5% tariff, whereas cars built in the U.S. and exported to the EU face a 10% tariff. While having relatively low tariff rates broadly-speaking, the U.S. places some of its highest tariffs on apparel and clothing accessories and footwear imports at an average of 18.7% and 11.9%, respectively.
- Does The U.S. Have A Trade Deficit With Canada? Canada is the biggest export market for U.S. goods and services. Despite Trump’s claim that Canada makes “almost $100 Billion Dollars in Trade with U.S. [sic],” a 2018 report by his Council of Economic Advisers said that in 2016 “the United States ran a trade surplus of $2.6 billion with Canada on a balance-of-payments basis.” Meanwhile, the U.S. Trade Representative says the trade surplus with Canada was $8.4 billion in 2017, and the Commerce Department’s number is at $2.7 billion that year. The difference between these numbers and the deficit cited by Trump is that the latter’s only included merchandise goods and not trade in services such as accounting, legal services, telecommunications, and the like – which accounts for a large part of U.S. trade.
So, what does this debate mean for businesses and the economy? The noise out of the G7 is only the beginning of what is shaping up to be a major policy flashpoint in the coming years. The system that has served the U.S. well for so long is going to need to be brought up to date for the next 70 years. Trump’s objections are as much about what a services-focused economy means for lower-skilled workers than the nature of our trade relations. Being informed on the reality of the debate will be key to defending the aspects of trade policy that still work and addressing those that do not, as well as help you determine how your firm can adapt to this evolving environment.
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News You Can Use
VERMONT’S OFFER YOU *CAN* REFUSE
The State of Vermont has an offer that, at least in the cutting words of The Wall Street Journal Editorial Board, you “will probably refuse.” In an attempt to capitalize on the growing remote work movement as a way to bring more people to the state and into its workforce, Governor Phil Scott (R) approved legislation that will pay 100 people who work remotely full-time up to $10,000 each to relocate to Vermont.
Despite perks like world-class skiing, verdant beauty, and a low crime rate, critics point out that workers who relocate (at least initially) will divert funds from policies that could directly contribute to the existing local workforce. In addition, the Journal views the offer as “effectively a loan – with a punishing interest rate,” because workers who relocate will then be saddled with Vermont’s “high-tax misery.” As we have seen with other high-tax states, such gimmickry may not be enough to stop the flight of businesses and people to states with more friendly policy environments.
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NO ANIMUS, JUST CANNABIS
With 30 states and D.C. having laws legalizing marijuana in some form, regulatory tensions between the federal government and local jurisdictions show no sign of easing – meaning that policymakers at both levels will continue to propose ideas that shape the debate. However, one area of the marijuana economy in particular appears to have all policymakers seeing green: banking.
California state lawmakers are moving a bipartisan bill that would create state-backed banks in the world’s largest legal marijuana economy to “provide limited banking services to pot-related businesses,” which would not only guarantee banking services to the industry, but help alleviate public safety concerns of the cash economy and make accounting, audits, and oversight more practical. At the federal level, the President said last week he backs a bill cosponsored by unlikely duo Sens. Elizabeth Warren (D–MA) and Cory Gardner (R–CO) that enables banks and credit unions to do business with cannabis-related companies in states where the drug is legal. It remains to be seen what laws are implemented and how soon, but these parallel activities suggest that it may soon be “high” time for a policy solution that gives clarity to both the marijuana economy and the financial sector that serves it.
CARBON CAPTURE RAPTURE
Here is some good news for the environment: technology that removes carbon dioxide from the atmosphere is cheaper than scientists previously thought. A 2011 economic analysis by the American Physical Society estimated that it would cost $600 to pull a ton of carbon dioxide from the atmosphere, yet scientists this month outlined the design of an industrial plant that could capture carbon at a cost of between $94 and $232 per ton.
Klaus Lackner, who leads Arizona State University’s Center for Negative Emissions, claims this new data suggests these developments “are coming within striking distance of making [carbon capture] interesting economically,” which could encourage market forces to further refine this technology to create greater energy efficiency, benefit the atmosphere, and even lead to the development of carbon-neutral liquid fuel. While energy forecasting remains notoriously difficult, human ingenuity and market forces – both of which were brought to bear in advancing carbon capture technology thus far – demonstrate an alternative approach to potentially revolutionary breakthroughs, rather than stifling regulation and environmentalist obstruction.
ACTIVIST INVESTING DOESN’T PAY
The proliferation of activist investing continues, foisting political agendas onto the governance of corporate entities despite such agendas being outside of a firm’s core business. Now, a new study from the National Association of Manufacturers goes further by providing evidence that resolutions driven by activist investors do not increase shareholder value, and in fact can have a negative impact given the “high cost in time and resource involved for companies.”
Further, when the politicization of the shareholder process reduces the value of public companies, everyday Americans who invest in the stock market or have pension funds face tangible consequences, highlighting the need to push back against the prevailing narrative that activist investing is a credible way to enhance investment performance.