Carl Lewis:
Welcome to The Connected Enterprise podcast. This is Carl Lewis, your host from Vision33, and my guest is Thomas McInerney, an international lawyer. Thomas, welcome to the podcast. Tell us about you and your work.
Thomas McInerney:
Thank you, Carl. I've been working basically as a lawyer in the US and internationally. I originally worked in securities, mergers, and acquisition law, but I’ve started working on issues affecting global sustainable development. For example, how countries' legal systems could be improved to enable more streamlined economic and social development. Or I look at the international treaty system and the international agreements that support economic, political, and social development in countries.
I work as the executive director for a center on rule of law and development at Loyola University of Chicago School of Law and teach international rule of law and development. I've been doing that for many years.
Carl Lewis:
You live abroad, correct?
Thomas McInerney:
Yes, I live in Bangkok, Thailand.
Carl Lewis:
It's early morning for you. I appreciate your getting out of bed early.
Thomas McInerney:
I have my coffee.
Carl Lewis:
Business is global these days, and what happens in one place trickles and affects every place. That’s why these questions are interesting for small and midsized enterprises (SMEs). How are SME supply chains affected by trade agreements?
Thomas McInerney:
Trade agreements are important for all businesses, and there are two major contributions. One is how companies have access to markets outside of the US and their ability to sell products in countries. Over the past 20-30 years, there's been an increase in major international trade agreements that have given American companies access to markets that in the past would've been subject to tariffs. So, it depends on the line of business and the market you're selling into, but the tariff regime has come down significantly. That makes it easier to sell products overseas.
Another aspect of trade agreements is the administrative aspect of selling into other countries. There's often a lot of paperwork to sell overseas, and trade agreements can streamline that, which reduces costs and time. There have been a lot of interesting developments in relation to trade and thinking about trade agreements that will have bigger effects on SMEs. This is one outcome of the pandemic and the major supply chain disruptions we've seen. Because in addition to selling internationally, American companies are also importing goods and using those in their supply chains. There were big bottlenecks associated with the pandemic, and what trade negotiators are looking at now is how to make more resilient supply chains and prevent those imbalances.
Carl Lewis:
Interesting. Do you have examples of how, for instance, USMCA (formerly NAFTA) has made things better or worse for US businesses?
Thomas McInerney:
That’s interesting because it wasn’t entirely apparent that NAFTA was negative for US businesses, but it was a major political issue. If you look at the research, it's unclear to what degree it's helped or hurt American businesses. Some research suggests it affected jobs, but probably at a much lower level than what was argued politically. That same research also shows that NAFTA provided tremendous economic benefits, so the US benefited tremendously in terms of dollars.
Even if that were true, the USMCA has included provisions that are interesting for American businesses, particularly for businesses working in the digital world. When NAFTA was negotiated in the early '90s, eCommerce was in its infancy, so it didn’t have any provisions relating to digital marketplaces and eCommerce. In the new agreement, there were significant additions, like preventing data restrictions, requiring data to be held locally, and reducing or preventing tariffs on digital commerce. Digital commerce can be taxed, but not indiscriminately against particular countries' firms.
Carl Lewis:
Right.
Thomas McInerney:
It also calls for open access to government data. And—here's where the trade facilitation issue comes in—that trade facilitated in terms of the administration and documentation can be done electronically. No need for paper, which streamlines things tremendously. For US companies in the digital marketplace, the USMCA offers a much more level playing field, and the free transfer of data is a key element of that.
Another interesting aspect of USMCA: There was always this question about whether the labor standards, particularly in Mexico, were lower than US standards and whether that constituted an economic advantage to those producers. So, there was a site agreement in NAFTA dealing with labor issues. But in the USMCA, there are enhancements. One requirement is the auto industry paying workers $16 an hour minimum, which enables collective bargaining unions in Mexico to demand higher wages, which will help level the playing field. If there was a concern about whether US businesses/economy were losing out because of NAFTA, some provisions moderately enhanced those protections.
Carl Lewis:
That's interesting that it guaranteed Mexican workers $16 an hour. In the '90s, they were making $29 an hour in Detroit, so that’s a big difference between the two places. Likewise, the US is no longer part of the Trans-Pacific Partnership. Why is that? And has that had benefits somewhere?
Thomas McInerney:
That whole episode was interesting from political and geopolitical standpoints. The nature of trade agreements has been gradually changing. In Seattle in 1997, there was a huge anti-globalization protest at the World Trade Organization Ministerial Conference. It was quite chaotic. It launched the anti-sweatshop movement and the environmental activists’ demands to include labor and environmental provisions. Fast-forward to the Obama administration and the Trans-Pacific Partnership, and you see that the agreement's many provisions were much more thorough in terms of the labor and environmental protections people were asking for 20 years ago. That agreement was with many Asia-Pacific countries with differing levels of economic development.
Other provisions were added, like anti-corruption, which required countries to make bribery illegal. Something that was included in the OECD Convention on Bribery and the UN Convention on Corruption was built into trade agreements. Also, transparency. So, when governments changed the rules regulating particular segments of the economy that they needed to adopt basically similar types of procedures to what would be followed in the US for administrative law changes, you have to provide notice, the opportunity for people to comment, and reasons for the regulation changes. These kinds of things were included in the TPP, but it became politicized, and the US never ratified it. As a result, the other signatories—Australia, New Zealand, Vietnam, Indonesia, and many countries throughout the Asia-Pacific region—agreed they would sign the TPP, and it was renamed.
Essentially, they incorporated by reference the provisions of the TPP, and then they added new provisions. That agreement works for many countries in the region. One rationale was to help balance US and Western interests in the Asia-Pacific area, vis-a-vis China, and strengthen US ties to countries in the region. Meanwhile, China has been advancing its own trade agenda and put forward what's called the Regional Comprehensive Economic Partnership Agreement, which is enforced now between many of the same players in the region, including Australia, for instance, which, let's say it brings China into the trading system in a way that wasn’t conceived of when the TPP was under development. That geopolitical aspect has happened.
Carl Lewis:
That's interesting. How difficult is it to craft a free trade agreement between countries?
Thomas McInerney:
I haven't negotiated trade agreements, but it's a bear. A mammoth undertaking for countries. Trade agreements in the past were narrow and very specific. We would work on specific sectors. If you go back to the General Agreement on Tariffs and Trades negotiating process, which lasted decades, they would attack specific sectors of the economy, so it was a piecemeal approach. What's happened in recent decades is what some legal scholars call the ‘mega trade agreements.’ Those include everything: bribery, labor standards, government rulemaking, procurement, etc. It's a much bigger animal that’s trying to integrate disparate political and economic systems. You can imagine the number of different interests that come into play. Countries don’t just have issue-specific interests, they also have sectoral interests.
So, you may agree on a rule that positively affects one industry but negatively affects another, so the negotiators have a real challenge. One of the controversial aspects of these trade agreements has been the role of the private sector and to what degree trade negotiators engage with the private sector. Or are they doing the private sector’s bidding? Are they privileging the interests of private sector actors over consumers, for instance, or workers? The trade negotiators are in a difficult situation, and in the US, it's even more difficult because of Congress’s power and its requirement to approve trade agreements. There was a method designed to streamline the process called Trade Preferential Authority, which would allow the US Office of Trade representative to negotiate trade agreements subject to certain parameters agreed on by Congress and the USTR before that.
Then, the approval process in Congress was ‘yes’ or ‘no’ when the draft agreement came in. That gave the USTR greater confidence that when it was negotiating the agreement, it would be presented to Congress and approved. During negotiation, there would be ongoing information-sharing with Congress about how the negotiations were going. The TPA Authority expired and hasn't been renewed, so the Biden administration is negotiating what they call the Indo-Pacific Economic Partnership, an economic framework, but it's unclear to what degree it will be a trade agreement. The approach is a bit different from traditional trade agreements. They're starting with more of a process of engagement and discussion with the states. That may culminate into negotiation of the specific trade agreements, but the Biden administration hasn’t asked for the TPA Authority, and this is the process underway right now to provide something in lieu of the TPP.
Carl Lewis:
Is it fair to say that in the past, trade agreements were likely to be between just one or two countries, and now we're doing this regional approach, making it more complicated?
Thomas McInerney:
Absolutely. There are still a lot of bilateral individual countries among themselves, but these major regional trade agreements are becoming more common. We all heard during the COVID crisis, "This is the death of globalization," but that's not true in a lot of respects. If you're in business, and maybe because of COVID-19, many businesses have thought about reducing their supply chain risk and maybe onshoring things they would've offshored previously. But really, the name in the game for most businesses is that they continue to procure and sell globally, and these trade regimes make it easier. There's still a lot of debate about the effects. Does it harm the economy? The environment? But the trade agreements in development now are an improvement from prior agreements.
Carl Lewis:
What's the basis for ESG disclosure and due diligence standards? Also, please define ESG for us.
Thomas McInerney:
That's another area that's come under criticism, particularly in the past six months. ESG means ‘environmental, social, and governance’ standards. Twenty years ago, the idea that businesses should be concerned with things like the environment, labor practices, or human rights was considered ‘out there.’ It wasn’t something people gave a lot of attention to. One driver of concern about those issues was trade-related, as I described in terms of the WTO process in '97. What we've seen then over time is that the trade agreements have started taking these concerns more seriously, but in terms of economic regulation overall, there are growing approaches to encouraging, and sometimes requiring, companies to implement standards for basically two aspects of the business.
One is a disclosure obligation; the other is a due diligence obligation. Two sets of requirements will affect how businesses operate. But it’s been growing for over 20 years, and it looks like it will continue to grow. Some of that is the zeitgeist. It's about people's expectations about the world. We see too many environmental problems happening in the world. I read an article about biodiversity loss—the amount of vertebrate life on the planet has been reduced by 52% over the past 50 years. Sometimes, you can read these things, and something hits you like, "Oh, my God." So, people and business owners are concerned about these things.
There are many questions about whether ESG should be voluntary for companies. Should they employ practices just because they want to be good corporate citizens? The counter side is, well, is that sufficient to address the societal and environmental problems the world is facing? The big story is that more and more of these issues are becoming matters of regulation. The big player is the European Union, which has gone much further. Some European countries have been implementing laws that make ESG practices mandatory. Germany and France, among others, and now the EU are adopting regulations that pertain to both disclosure and due diligence relating to everything from human rights to climate change and labor standards.
Carl Lewis:
Ok, Thomas, we’ve got about 10 minutes left, and I have two more questions. How does ESG disclosure and due diligence affect SMEs, and is there a way they can find it useful for strategy and operations?
Thomas McInerney:
The EU’s regulations are intended for large companies, but there's also a provision relating to companies in particularly risky businesses, meaning businesses that may have disproportionate effects on things like the environment or labor standards. The threshold at which the proposed regulations will apply is set much lower for those firms in the so-called risky businesses. Many EU SMEs won’t have sufficient revenues, but if you're a US company, you have to be doing $150M in business in Europe with over 500 employees to be subject to the rules unless you're in the risky category, in which it's $40M in revenues and 250 employees. So, you need a significant amount of business in Europe to be subject to those rules.
But if you’re participating in a supply chain with Europe-based companies, they’ll be required to apply those rules. To disclose or manage risks in their supply chain, they’ll ask you what your processes, procedures, and risks are. So, there’s a long-arm aspect to these European regulations that will affect the whole value chain. That's subject to thresholds, too. If you're only a small supplier, it won’t rise to the level of materiality they're going to necessarily need you to change your practices. But that's a hard way SMEs may need think about these things. There's also the argument about the business advantages of applying ESG standards.
Carl Lewis:
Right.
Thomas McInerney:
There's a lot of research that suggests that there may be an advantage to your customers. They may see you as a more responsible citizen and feel better about maintaining that relationship. I think that's perhaps overstated, and I doubt it will drive consumer demand, but there is that aspect. The flip side is negative. It's what people sometimes call ‘the front-page test.’ If something you're doing ends up on the front page of the newspaper, how are you going to feel about that?
So, it's a matter of risk mitigation for companies to avoid things that might be technically legal but would be controversial if exposed because it goes against the tide of what standards and norms are considered acceptable today, such as human rights. Twenty years ago, there weren't human rights standards for business. The UN has adopted the UN Guiding Principles on Business and Human Rights that describe businesses’ obligations to mitigate and avoid exposure to human rights abuses. I think there's a potential advantage but also a potential risk management aspect for SMEs.
Carl Lewis:
How are technology companies contributing to the implementation and operation of global treaties in the environmental field?
Thomas McInerney:
As part of being an international lawyer, I'm interested in treaties as regulatory standards and how they apply to different issues. I've been studying the question of how technology is affecting how treaties operate. It’s not a typical topic international law focuses on, but increasingly, it's become a concern because, as we all know, technology is playing a bigger and bigger role in our lives. While there's a lot of concern about technology, we're talking nowadays about AI and its risks, privacy issues, surveillance issues, etc. There's another story about how technology is helping inform treaty processes. There are a lot of innovations happening.
Often, SMEs play a big role in this. I've seen that a key part of managing treaties is monitoring the conditions in the world. If we talk about biodiversity, how many species are out there? Are populations decreasing or increasing? What are the trends? There's new equipment, like camera traps. They’re put in forests and monitor endangered species on an ongoing basis. Acoustic monitors can be put in remote locations to monitor birdsong. Many of these new technologies are being developed by small companies operating in the niche and may involve collaboration with scientists. These various technologies are being integrated and applied in novel ways. Not off-the-shelf things, but bootstrapped solutions to provide better data and knowledge.
Carl Lewis:
Thomas, thank you for being here. I learned a lot. And to everyone out there, until we meet again, stay connected.