Trade Promotion Authority Likely on the Way to President

After significant delays, both based in partisan gamesmanship and wariness from the most progressive in President Barack Obama’s own party, Congress appears close to approving trade promotion authority for the president. The move should clear the way for the United States to push a long-negotiate multilateral free trade agreements (FTA’s) to the finish line in the coming months.

Widespread reports have surfaced noting that key federal lawmakers have crafted legislation that will give Obama trade promotion authority, which is seen as critical for the administration to negotiating the final points of the Trans-Pacific Partnership, among other deals. Supporters, including organizations such as Business Roundtable, the National Retail Federation and more moderate/centrist lawmakers from each party, believe such authority would help fast track the enactment of business-friendly FTAs. Obama even made a passionate plea for the authority during January’s State of the Union address.

"Give me trade promotion authority to promote deals in Europe and Asia," Obama said. "I’ll be the first to admit that past trade deals haven't lived up to the hype. But 95% of the world's customers live outside our borders ... Small businesses need to sell more products overseas."

Trade promotion authority is a strategic working relationship between the president and Congress that sets the parameters for the U.S. in various international trade negotiations, establishes a framework for Congress and the executive branch to more quickly work out agreements and includes a set of legislative procedures that allows the president to submit to Congress bills implementing trade agreements for an up-or-down vote within a short period of time, without the threat of amendments, according to Robert Brown, a partner with Bingham Greenebaum Doll LLP. Congress has approved this authority for every president from the 1930s until 2007—perhaps not coincidentally, new trade deals have languished since that time.

“By renewing TPA with updated negotiating objectives, Congress can strategically address issues pertaining to current US trade negotiations,” Brown wrote in a 2014 article for NACM’s eNews. “These trade negotiations are of vital importance to the US economy.”

The TPP is the deal closest to complete and one most likely to benefit from potential passage of legislation granting Obama the trade promotion authority. The TPP involves a number of emerging Southeast Asian nations as well as the U. S., Canada, Japan, Chile and Peru, among others. The TPP is supposed to bring together the nations of the Pacific in some kind of trade partnership that will advance their respective economies. It was supposed to be the key to the U.S. "pivot to Asia" policy and, indirectly, a way to ease some of China's trade dominance in the region.

But it has been fraught with delays, diplomatic errors, allegations that the U.S. and Japan have been bullying their way through the trade talks and, perhaps the most unsettling, lack of transparency. Regarding the latter, nearly no one has seen official documents and specific recommendations including in the proposed TPP other than (if they’re to be believed) what has been released by WikiLeaks. These reasons and supposed protection of U.S. workers were among the complaints heavily bandied about this week by a number of liberal Democrats that oppose approving the authority. Many Republicans that in past years opposed giving Obama such authority have eased on their stances, at least publicly.

- Brian Shappell, CBA, CICP, NACM managing editor

Fed Beige Book: Strong Dollar, Weak Oil Prices Holding Back Several Sectors

(Prepared at the Federal Reserve Bank of Cleveland based on information collected on or before April 3. This document summarizes comments received from business and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials).

Reports from the 12 Federal Reserve districts indicate that the economy continued to expand across most regions from mid-February through the end of March. Activity in the Richmond, Chicago, Minneapolis, Dallas, and San Francisco districts grew at a moderate pace, while New York, Philadelphia, and St. Louis cited modest growth. Boston reported that business activity continues to expand, while Cleveland cited a slight pace of growth. Atlanta and Kansas City described economic conditions as steady.

Demand for manufactured products was mixed during the current reporting period. Weakening activity was attributed in part to the strong dollar, falling oil prices, and the harsh winter weather. Business service firms saw rising activity, especially for high-tech services, and they expect positive near-term growth. Cargo diversions resulting from labor disputes on the West Coast boosted activity at several East Coast ports. A majority of districts reported higher retail sales, and they cited consumer savings from lower energy prices as helping boost transactions. Auto sales rose in most Districts. Tourism and business travel is rebounding from the harsh winter, with contacts expecting growth for the remainder of the year in corporate and leisure travel. Residential real estate activity was steady to improving across most districts, although there was some slowing in housing starts due to abnormal seasonal patterns owing to the harsh weather. Multifamily construction remains strong. Activity in nonresidential real estate was stable or improved slightly across many districts. Agricultural conditions worsened slightly. Factors contributing to these conditions varied by district but included wet fields, persistent drought and a harsh winter. Investment in oil and gas drilling declined, while mining activity was mixed. Banking conditions were largely stable, with some improvement seen in loan demand.

- Source: Federal Reserve

Another Study Suggests B2B e-Commerce gaining popularity, but challenges remain

As manufacturers and wholesalers migrate from legacy systems to open, online platforms, business-to-business (B2B) online retailing is experiencing strong growth. The B2B online market could easily reach double the size of the business-to-consumer (B2C) online market, generating revenues of $6.7 trillion by 2020, according to Frost & Sullivan, a growth strategy firm.

In part, because B2B models are moving toward “ubiquitous online platforms that allow buyers and sellers from anywhere in the world to transact goods and services with ease,” adding legacy systems involving the use of electronic data interchange that can be expensive and cumbersome to handle is necessary.

The analysis from Frost & Sullivan, Future of B2B Online Retailing, reveals that B2B online sales will account for nearly 27% of total manufacturing trade, which is expected to hit $25 trillion by 2020. “Geographically, China and the United States will lead the B2B online retailing market. The latter is anticipated to double its revenue contribution to $1.2 billion by 2020.

“As marketplaces and cross-industry public platforms such as Alibaba and Amazon become popular, B2B online relationships are likely to move from a one-to-many to many-to-many business model. Instead of a model where one company invests and builds an e-platform for its suppliers, the preference will be for a solution in which anyone can integrate an e-procurement process and facilitate the purchase of goods online.”

Private industrial networks, where specific companies exchange products, and public market places for on-the-spot purchasing have gained prominence over the last decade, said Archana Vidyasekar, Frost & Sullivan’s Visionary Innovation Group team leader. “With businesses buying more than selling online, these seller-driven B2C-type open public networks will help provide more visibility and storefront capabilities to sellers.”

Unlike the B2C setting, however, B2B prices are variable and order volumes are high and wide ranging, necessitating a flexible shipping and logistics solution, Frost & Sullivan said. “Tax and regulatory concerns also impact sales highly, and providers typically employ large staff whose only responsibility is delivering products and services within these restrictions.”

Additionally, executing marketing or educational initiatives in the B2B setting are complex; clients must understand how products work and interact with systems they already have or are considering. “The black box effect, wherein a customer buys a device without a real interest in learning how it works, barely exists in the B2B context.”

“Nonetheless, with technological advancements facilitating the procurement of goods on the move through smartphones and tablets, business use of online platforms will rapidly grow,” said Pramod Dibble, the firm’s Visionary Innovation Group consultant. “The emergence of cloud platforms that offer more scalability, both as a software and infrastructure service too, is pushing businesses toward B2B online retailing.”

The firm suggests that Internet retailers offer a menu of services rather than one bundled option to allow customers to experience the online channel with low risk. “Even clients hesitant to disrupt their current ecosystem of sales and distribution will then begin using online channels, which automate many of the time-consuming and costly aspects of procurement.”

- Diana Mota, NACM associate editor

To read more about the future of B2B e-Commerce, click here for an eNews item about Forrester’s inaugural five-year B2B e-Commerce forecast.

New Automobile and Light Truck Sales Rebound

Suddenly, the automotive sector seems to have come back to life, as sales are higher than they have been in more two years. While this is good for auto producers and the many domestic companies supplying them with materials and parts, theories are split regarding whether it is a more long-term trend or merely a fleeting surge.

Those predicting hot automotive activity, the kind that helped carry U.S. manufacturing throughout parts of 2013 and early 2014, continue to reference the fact that the America car fleet is still pretty elderly by most accounts—the vast majority owning current vehicles for more than 10 years. This creates some consistent demand even though the average car can last far longer than was the case in past years. Another long-term motivator is the ongoing willingness of banks to lend widely for car sales. Banks have gotten interested in mortgages again, but there remains a desire to add car loans and similar activities.

The oft-cited arguments that the auto activity surge will be short-lived counter that most buyers rely on tax return money for downpayments and that more interest exists simply from people getting out of their houses more following the end of winter weather. This winter was brutal in a lot of ways. There were many parts of the country that got far more snow and ice than usual and when there is that kind of weather in a place that doesn’t usually deal with it—there are lots and lots of wrecks. To that point, it is often forgotten that roughly 35% of all car sales are out of necessity (i.e., a replacement) as opposed to simple desire.

Car dealers in such cities have been reporting a spike in activity motivated by need. However, there is concern if not assumption that, once the post-winter rush ends, some of the demand will ebb.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

Bankruptcy Roundup: Nevada/Chapter 9, Retail, Coal

Nevada legislators are considering legislation, Senate Bill 475, designed to give municipalities authority to file a bankruptcy petition under certain conditions. As written, the proposal requires that the state's tax commission must declare the entity in a severe financial emergency that is unlikely to cease within three years. The county or city, before filing the petition, must submit the proposed petition to the governor and the Office of the Attorney General for their review and approval.

EveryWare Global Inc. has filed Chapter 11 petitions to implement a prepackaged financial restructuring that cancels about $248 million of the company’s long-term debt in exchange for common stock representing 96% of its common stock post-emergence. "The liquidity provided by our lenders during this process allows us to focus on running the business in the ordinary course while we deleverage our balance sheet," the company said, adding it expects to emerge from bankruptcy within 60 to 75 days. EveryWare was formed through the merger of Anchor Hocking, LLC and Oneida Ltd. in March 2012 and is a global marketer of tabletop and food preparation products.

Xinergy Ltd., a U.S. producer of metallurgical and thermal coal, and 25 of its subsidiaries have filed for Chapter 11 protection. The company plans to operate its businesses and continue customer shipments during the reorganization. "Over the past several years, the coal markets in the U.S. have faced a number of significant challenges, including increased environmental regulations and reductions in demand due to weaknesses in the economy and lower natural gas prices," stated Bernie Mason, Xinergy's CEO, in a press release. "Additionally, continued weakness in the market for metallurgical and thermal coal, combined with an extremely cold winter that impacted the mining and shipment of coal, has continued to erode Xinergy's cash position."

- Diana Mota, NACM associate editor

Case Shows 'Trust but Verify' an Important Guiding Principle for Suppliers, Subs

A famous quote from the Cold War era, “Trust but verify,” is back in fashion on Capitol Hill and in many business instances, as many circumstances continually dictate its prudence. A recent fraud case out of Minnesota related to a public works project covered by the Minnesota Little Miller Act is a great example of the pertinence of this quote.

Scott County, MN authorities charged Gerard Roy on five counts of forgery, alleging he forged bond documents, including the payment bond, designed to protect subcontractors and material suppliers in the event of non-payment. Roy, of RSI Associates Inc., prepared the documents in question to win a contract on a government project last summer. Various subcontractors continue to wait on payments related to the project even though the municipality where the work was conducted (Hastings, MN) paid RSI in excess of $100,000 for cement and electrical work.

“The travesty in this case, is that what is considered ‘normal’ protocol for subcontractors and material suppliers—obtaining a copy of the bond and assessing the rating of the bonding company—most likely would not have uncovered this fraud,” said Chris Ring, of NACM's Secured Transaction Services. “An additional protocol—contacting the bonding company to assure the bond covers the related project—could have been completed to potentially uncover this fraud as well.”

Ring notes that fraud cases such as this are the exception rather than the rule. Business norms aside, a subcontractor or a material supplier on this type of project would best be served by assuming the potential of a worst-case scenario exists. “This exceptional case could result in a write-off, as the government will likely shield itself from responsibility related to this fraudulent act.”

- Brian Shappell, CBA, CICP, NACM managing editor

Former Secretaries Push for Free Trade Agreements

Free trade agreements strengthen United States’ competitiveness, spur economic growth and bolster job creation, wrote former Secretary of Commerce William Daley in a U.S. Department of Commerce blog. Daley, one of a group of 10 former commerce secretaries, whose tenures spanned from 1972 to 2012, made a plea to Congress to pass trade promotion authority (TPA) for President Barrack Obama. Recently, eight former U.S. Department of Agriculture secretaries had made a similar plea.

“American companies grow and succeed in the global market place through high-quality high-standard trade agreements that help our firms gain access to new overseas markets,” the bipartisan group’s letter states. “New U.S. trade agreements will generate more export opportunities for American companies, boost our economy, create jobs and yield overall prosperity for our country.”

The secretaries urged Congress to omit currency provisions from trade promotion legislation. “... we believe that currency issues would be more effectively addressed by the Department of Treasury through continued intensive dialogue and bilateral engagement, not by providing the commerce department additional authority under Anti-Dumping and Countervailing Duty law or through currency-related obligations in trade agreements.”

TPA, which hasn’t been approved since 2007, requires the administration to seek Congress’s guidance throughout negotiations. Obama is currently working on two agreements, which could open overseas markets to American companies: the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership. Combined, they will provide access to free trade arrangements with 65% of global GDP as well as provide preferential access to new potential customers, according the secretaries’ letter.

- Diana Mota, NACM associate editor

NACM’s Credit Managers’ Index Drops Again on Reduced Credit Access

The March report of the Credit Managers’ Index (CMI) from the National Association of Credit Management fell further this month, surprisingly, indicating that some serious financial stress is manifesting in the data. Concern is growing as the CMI flirts with the contraction zone, anything under 50, for the first time in nearly five years.

“We now know that the readings of last month were not a fluke or some temporary aberration that could be marked off as something related to the weather,” said NACM Economist Chris Kuehl. “These readings are as low as they have been since the recession started and to see everything start to get back on track would take a substantial reversal at this stage.”

Among the biggest areas of concern illustrated in the new data, both found in the unfavorable categories distinction, is deterioration in the rejection of credit applications and accounts placed for collections. On the favorable categories side, the troubling and steady slide of sales since an impressive October continues.

“The year-over-year trend remains miserable and seems to be getting worse, and thus far nearly all the blame can be laid at the feet of credit access,” Kuehl said. “There is just not a lot of confidence in those that are doing the credit offerings these days.”

The full March CMI report is available now. CMI archives may also be viewed on NACM’s website.

- NACM Staff

Business Starts to Look Towards Expansion

Many companies have been sitting in a holding pattern since the Great Recession officially started in the fall of 2007. Economic recovery has been weak, holding many companies back from investing in new structures and equipment—until now.

We had a flurry of automation and new equipment expenditures between 2009 and 2011, as companies opted for things like robotics instead of re‐hiring workers for more basic activities. Since then, companies have been "banking" profits for the past several years. Coupled with "cheap money" for borrowing stemming from historically low Federal Reserve rates, the time is probably correct for many industries and companies to make their next strategic move: expand their operations.

Add to this trend the rapid acceleration of online order activity, and there is a real push for the ability to handle new distribution and fulfillment strategies across the spectrum for retailers and their suppliers. Retailers are beginning to embrace the notion of the Omni-channel. Omni-channel strategies embrace the notion that a customer should be able to engage in commerce with a retailer in any manner that they prefer, whether it is online, brick‐and‐mortar, or in any other manner available. Fulfillment and where customers take delivery is also an important factor. The bottom line is that online sales volume (expected to add more than $1 trillion in new sales by 2018 worldwide) will continue to drive the need for flexibility, expansion and investment in how fulfillment is handled. That will lead to new construction and expansion of structures throughout the supply chain—especially as NAFTA trade heats up from a growing Mexican manufacturing supplier sector.

This is the counter argument to the reduced durable goods data and the credit crunch. There remains a great deal of money in the coffers of the corporate community and that means that they are less dependent on the banks than in the past. The business community has reasons to expand and, at the same time, some to be cautious. The sense is that many companies are starting to worry about market share, which can drive decision-making. The path of expansion this year will be determined by this tension between a need to compete and the need to be fiscally prudent.

- Chris Kuehl, Ph.D., NACM Economist and co-founder of Armada Corporate Intelligence

Where Should FSOC Go from Here?

U.S. Treasury Jacob Lew pledged Wednesday to protect the goals set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act and those of the Financial Stability Oversight Council (FSOC).

"No law is perfect," Lew told the Senate Committee on Banking, Housing and Urban Affairs members. "But let me be clear: we will vigilantly defend Wall Street Reform against any change that increases risk within the financial system, weakens consumer, investor or taxpayer protections, or impedes the ability of regulators to carry out their mission."

FSOC, which Lew chairs, grew out of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which is challenged with preventing future risk of financial institute failures. The council monitors market developments for potential risks to financial stability and then takes action against those that it deems threaten the nation’s financial system.

As a young organization, it “should be open to changes to its procedures when good ideas are raised by stakeholders,” Lew said. What constitutes a good idea differs among stakeholders and other interested parties, however.

A panel of FSOC’s critics voiced their concerns at the hearing. Speakers were comprised of Douglas Holtz-Eakin, president of the American Action Forum; Gary Hughes, executive vice president and general counsel of the American Council of Life Insurers; Dennis M. Kelleher, president and CEO of Better Markets, Inc.; and Paul Schott Stevens, president and CEO of the Investment Company Institute.

In response to concerns previously voiced, FSOC adopted a set of supplemental procedures last month. “Companies will know early in the process where they stand, and they will have earlier opportunities to provide input,” Lew said. “The changes will provide the public with additional information about the process, while still allowing FSOC to meet its obligation to protect sensitive, nonpublic materials. FSOC will provide companies with a clearer and more robust annual review process.” Holtz-Eakin characterized the changes “as a good first step,” stressing that more needs to be done.

Points of contention center around the desire for greater clarity on the metrics leading to designation. Lew, however, stated factors leading to a company's designation as a systematically important financial institution (SIFI) could not be quantified because the structure of each firm differs. Numerical metrics would not sufficiently capture a firm’s complex structure, he stressed.

“It is not clear the weight given to certain factors over others or what makes a designation more likely,” Holtz-Eakin said. “FSOC’s process needs more rigorous quantitative analysis, respect for other regulators and their expertise, greater concern for market impacts and a clear path for the removal of a designation.” Three of the four nonbank financial companies identified as SIFIs are insurance companies.

Hughes argued the designation and de-designation process lack procedural safeguards such as separate staff assigned to enforcement and adjudicative functions and clear explanation as to why particular companies were designated. “A company should have access to the entire record that is the basis for an FSOC determination.”

The problems and criticisms surrounding FSOC could reflect that part of the process still needs to be developed, said Jim Wise, NACM’s Washington lobbyist and managing partner of Pace, LLP, in a phone interview. “Is it transparent enough? Is it uniform enough? Does it allow for entities to prepare for this? Some people think it takes too broad an approach. It raises the question of whether Dodd-Frank really oversteps its boundaries.” In November, the Government Accountability Office released a report that analyzes the FSOC’s designation process for SIFIs. The report supports those that believe the process lacks transparency and accountability, adding that process should be systematic and measurable.

- Diana Mota, NACM associate editor

Click here to read “House Bill Promotes Shedding More Light on Financial Stability Oversight Council” in today’s eNews.