US, outsourcing, Congress, Trade

Political Round-Up: A New Congress, a New Trade Agenda

Political Round-Up: A New Congress, a New Trade Agenda
How Changes in Congress Will Impact HR Services Companies

By Ernest C. Baynard IV, Meridian Hill Strategies

Overview
Since the passage of the North American Free Trade Agreement (NAFTA) in 1994, international trade has been arguably the most divisive “wedge” issue among Democrats in Congress.  With twenty-seven Republican House Members voting against the Central American Free Trade Agreement (CAFTA) which narrowly passed the House and Senate in 2005, it can also be said that trade is a divisive issue among Congressional Republicans as well.  Given this reality, it was not surprising that international trade was included in the package rolled out by the new House Democratic majority during their historic first “100 Hours” in power.  However, with the expected arrival of several new trade pacts negotiated by the Bush Administration, and the renewal of Trade Promotion Authority just around the corner, the Democratic leadership is now moving to define its agenda for international trade.  The outcome could have significant consequences for U.S. companies who currently wish to do business abroad, or hope to do so in the future.

A New Trade Agenda
A recent letter to President Bush from Speaker Pelosi and leading Congressional Democrats called for a fundamental shift in U.S. trade policy in light of the recently announced $764 billion trade deficit, the highest in the nation’s history.  Leading progressive groups have become more vocal in calling for a number of new policies in light of outsourcing concerns.  These policies increased protections against identity theft and financial fraud, the fear of which is often heightened in the face of increasing shifts of professional and service sector work overseas to lower-wage countries.  Additionally, according the Washington-based Global Trade Watch, Congress and over 30 states are considering policies that would prevent service work paid for with state and federal tax dollars from being sent overseas.

Trade Promotion Authority
The first order of business for the House Committee on Ways & Means, which has jurisdiction over trade, will likely be the renewal of Presidential Trade Promotion Authority (TPA), which expires in June 2007 unless extended by Congress.  TPA gives the President a free hand in negotiating trade deals and submitting them to Congress for up-or-down votes with no amendments.  If TPA is not renewed, Congress would have the ability to alter trade deals with amendments that could include anti-outsourcing provisions.  Business groups, led by the Business Roundtable, formally began their efforts push for renewal of TPA last week.  Conversely, progressive groups, led by Global Trade Watch and organized labor, renewed their campaign to defeat or fundamentally reshape TPA.  Additionally, House Ways & Means Chairman Charles Rangel, who wants to move ahead on trade, recently began polling Committee members to get a clearer picture of where they stand on TPA.  

Congressional leaders have recently discussed several scenarios whereby TPA could be renewed.  The first involves “limited” approval of TPA for a short period of time to allow the Doha Round of World Trade Organization Negotiations to be successful.  Leading Senate Democrats have stated that they would support TPA renewal if it were tied to a wider economic package to provide relief to U.S. workers who have suffered “trade related” job loss.  This is significant because it could provide economic assistance far beyond what is currently provided under federal Trade Adjustment Assistance (TAA) programs to communities who have lost jobs due to outsourcing or offshoring.  Depending upon the size and nature of this package, it could also partially offset the atmosphere of political hostility to outsourcing in communities across the U.S.  Additional “strings” that could pave the way for TPA renewal may include guarantees that nations engaging in trade pacts with the U.S. must have labor and environmental standards that conform to internationally accepted norms such as those set forth by the International Labor Organization (ILO). 

Trade Deals and New Markets on the Horizon
Peru
There are a number of bilateral trade deals that have been negotiated that will likely come to Congress this year for approval.  The first among them is with Peru.  The U.S. and Peru concluded negotiations on a bilateral trade agreement on December 7, 2005.  The deal will eliminate tariffs and other barriers to goods and services.  Under the agreement, U.S. financial services suppliers will have full rights to establish subsidiaries or branches for banks and insurance companies.  Additionally, Peru will allow U.S. based firms to offer services cross-border in areas such as financial information and data processing. 

Opponents to the Peru trade deal have argued that the pact should not be ratified due to lack of enforceable labor standards and inadequate safeguards against the continued use of child labor in Peru.  Should the Congress reconcile these differences and approve the Peruvian trade agreement, many feel that other trade deals, such as Korea and Columbia, could follow.  Conversely, if Peru gets bogged down, one can expect few, if any, trade deals negotiated by the Bush Administration to be approved by Congress during the next two years.

Korea
Korea is the world’s tenth largest economy with an annual GDP rapidly approaching $1 trillion and the seventh largest export market for the U.S.   Korea’s economy is both dynamic and fast-growing and represents a significant market with substantial opportunities for HR and other business services companies seeking to expand operations to Asia.  Negotiations have slowed due to a dispute on how to liberalize their respective automobile sectors but talks recently resumed in an effort to finalize this deal.

Brazil
Brazil is one of the world's major countries, ranking fifth in both geographic size and population (more than 188 million people) and has the world's eighth-largest economy.  Until recently, Brazil has not received much attention as a potential target for IT, HR, and other business services offshoring.  However, President Bush’s recent visit to Brazil and a recent story in the Wall Street Journal highlighted this nation as a potentially hot trade and commerce destination for U.S. businesses.  Brazil's proximity to the U.S. makes it distinctly more accessible than more distant Asian locations making it a more desirable location to do business. 

Brazil’s population, which has been growing steadily at 1.1% per year, has an estimated educated workforce of over 85 million.  The cost of labor in Brazil is lower than virtually all other South American or European countries, with a 30% salary advantage cost over the U.S.  According to studies, the average salary for an entry level IT worker is about $9,000, while in China and India it's about $5,500.

According to a 2005 AT Kearney Report, Brazil has one of the largest domestic Information Technology markets worldwide, even bigger than established offshoring players like Canada, Ireland, and India.  This big and sophisticated domestic market can be a solid base for future export growth. A Global Outsourcing Report, issued in May 2005 by Going Global Ventures NY ranked Brazil 15th in the Global Opportunity Rank 2005 with a projected position of 4th by 2015.  The domestic market has already proven its capacity by providing world class solutions for specific segments including financial services, retail, government and telecommunications.  The 2005 AT Kearney Report also found that the capillarity of the telecom industry is several steps ahead of India and China. 

One other important factor to include is Brazil’s dominance in the Latin American region, where its GDP positions it as the second largest.  This coupled with a good World Bank political stability index makes it an attractive target for commerce and investment. 

Brazil also launched its “four pillar” approach to improving the business climate: offer structures, qualify human resources, promote and develop the Brazil brand, and review the regulatory framework.  This effort is being steered by a joint government-private sector business committee.

BPO continues to be a fast growing sector of Brazil’s economy, with an expected increase of 8.7% from 2004 to 2008, making it the fastest growing of any other offshoring service.  Large companies, including IBM and Accenture are already very active in Brazil.  However the marketplace is quickly growing to receive the demands of mid-tier companies and manage smaller contracts with good quality/price positioning.

The Brazilian government is very interested in becoming a destination for offshoring, with a target of $2 billion for information technology services exports by 2007.  The Bush Administration has long identified Brazil as a top target for a bilateral or multilateral trade agreement but serious disputes, mainly stemming from desires to protect the respective agricultural sectors of both nations, have stalled negotiations.  That said, recent interest in Brazil and the economic factors mentioned above could make it a top target for outsourcing in the next ten to twenty years whether a trade agreement is ratified or not.

What Could These Trade Deals Mean for You?
Bilateral trade deals are designed to lower tariffs, integrate economies and streamline the ability of foreign trading partners to do business in some, if not all economic sectors.  These deals also create a litany of new rights, remedies and incentives between trading partner nations that did not exist before.   Absent formal trade deals, there often exist trade liberalization measures that make it easier or more attractive for U.S. companies to bring operations and economic opportunity to other countries.

Barring any trade liberalization measures, unique opportunities may exist between U.S. companies and nations actively seeking a bilateral trade deal.  The trade and economic development staff of embassies such as Peru, Colombia, Korea, and others are in constant contact with Members of Congress in their efforts to win approval of their FTA.  These individuals are highly knowledgeable about opportunities in their homeland and usually have a wealth of contacts and ideas as well.  They are generally very receptive to providing economic opportunities to U.S. companies on their soil in order to show goodwill as they make their case before Congress that their nation merits a trade agreement.

In addition to trade pacts and resources within the embassies, the U.S. government has significant resources to provide financial support and protection to U.S. companies seeking to do business aboard.  The U.S. Export-Import Bank supports purchases of U.S. capital goods and related services by guaranteeing or insuring loans to international buyers.  Ex-Im provides a host of resources to U.S. businesses with opportunities abroad including loan guarantees, insurance, direct loans, and other financial tools.

What Can You Do?

• There are a host of groups in Washington that are active on trade issues.  Use the HROA as a resource to find opportunities to work with groups active inside the Beltway on trade issues and locations that make sense for you.  These groups often provide a wealth of new resources and information.  Additionally, the groups represent a significant networking and business development opportunity, particularly for small and mid-sized HROA members.
• “Fair Trade” may not represent a barrier or threat to your business.  The two of the most repeated and most compelling arguments against FTAs are lack of enforceable labor and environmental standards.  The nature of HR services depends upon a stable, educated, adult workforce and is generally not harmful to the environment when compared to enterprises such as agriculture and heavy industrial activities.  Therefore, it may be in the long-term interest of member companies to embrace ideas and policies that are designed to ensure a professional, educated workforce in other nations over the long-term.  In this vein, it may be in the long-term interest of the industry to embrace sensible safeguards against acts such as identity theft and fraud.

About the Author
Ernest C. Baynard IV is a veteran of the last five election cycles who has managed numerous media and public affairs campaigns for a diverse group of corporate and political clients. He has also served in several senior level positions over the past ten years in the White House and on Capitol Hill. As President of Meridian Hill Strategies Inc., Baynard works with some of the nation’s top CEOs and political leaders to create a powerful voice for them inside the Beltway and in the national media. He serves as a guest lecturer on media and politics at the United States Military Academy and has also lectured at Georgetown University and Johns Hopkins University. Baynard has made numerous appearances on CNN, MSNBC and other networks regarding international trade issues before Congress.

Please note: The opinions and perspectives in the preceding article do not necessarily reflect the opinions of the HROA, its Board of Trustees, or its management. Agree/Disagree with Ernest Baynard’s assessment? Let us know your opinion! Send an email to: info@hroassociation.org.