jtiblog

Blogsite of the Institute for Legal Studies

International Trade in the Era of Trump

2017. February 17. 18:16
Lukasz Gruszczynski
HAS CSS Institute for Legal Studies / MTA TK Jogtudományi Intézet

The United States has been a champion of free trade and economic globalization for many years. It was one of the architects of the General Agreement on Tariffs and Trade and a founding member of the World Trade Organization. However, the election of Donald Trump as the 45th President of the United States has the potential to dramatically change this picture. The new president has repeatedly blamed the current international trade arrangements for destroying jobs in the American industry sector (in fact many studies show that the major driver behind this process is automation). For example, during one of the Republican debates he said “I think NAFTA has been a disaster. I think our current deals are a disaster. I'm a free trader. The problem with free trade is, you need smart people representing you. We have the greatest negotiators in the world, but we don't use them.” In this context, he promised to redesign the existing trade bargains. But are those plans realistic? How will such moves change the international trade landscape?

One of the first decisions of the newly-elected President was to withdraw from the Trans-Pacific Partnership (TPP). It is worth recalling that the purpose of this agreement was to create one of the largest free trade areas (FTA) in the world, covering the Asian and the Pacific countries (i.e. Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam). The treaty was negotiated for more than seven years and eventually signed in 2016. It is not clear what will be the fate of the TPP after Trump’s US decision. While other countries may agree to go ahead with their ratifications and simply create a smaller FTA (for example, Australia called for the creation of the “TPP minus one”), this seems to be a rather improbable option. For many participating countries, access to the American market was one of the main reasons for joining the deal. Moreover, the agreement was designed in a way that reflected many US economic interests (e.g. with respect to the protection of intellectual property rights and market access for specific categories of services). Without US participation, these aspects seem set to become obsolete.

Given the obsession of the new President with the US trade deficit, his decision might seem to be rational, as the TPP would definitely contribute to its increase. On the other hand, it should be stressed that the agreement from the beginning had an important geopolitical dimension. The United States, by tightening its economic ties with Asian countries, intended to strengthen its position vis-à-vis China. When one considers this aspect, the decision of President Trump is less rational and exposes his inconsistent stance on the priorities of American foreign policy. It should be noted that he has repeatedly stressed that the growing position of China (both economically and militarily) poses one of the greatest threats for the United States. However, the US withdrawal from the TPP will actually strengthen the position of China. Already in 2012, in response to the TPP initiative, it started its own negotiations with 16 countries (seven of them also being TPP parties) with the aim of creating an ambitious free trade area (the so-called Regional Comprehensive Economic Partnership), covering approximately 31% of the global GDP. Now this will be the only option for Asian and Pacific countries interested in the expansion of regional trade liberalization.

Equally grim are the prospects for a mega-regional deal between the United States and the European Union. The Transatlantic Partnership in Trade and Investment (TTIP), an agreement which has been in negotiation since 2013, could create an even larger free trade area than the TPP. Although the negotiations are still being formally conducted, one may expect that they will be soon either frozen or officially closed. The geopolitical consequences probably will not be so grave as the TTIP project was already half alive before the election of Trump. The long-term consequences of termination of the TTIP negotiations may however be more significant than just free trade, as the failure of the project may be seen as evidence of a growing disagreement between two (soon to be three) partners and could eventually weaken the Atlantic alliance, which constitutes a foundation of the current world order.

President Trump also plans to renegotiate the North American Free Trade Agreement (NAFTA), an ambitious economic treaty that was signed in 1994 between Canada, Mexico and the United States. And he does not exclude, in the event of failure of such re-negotiation, US withdrawal from the agreement altogether. Although technically this would not be difficult (i.e. the American President can use his executive powers without the need for congressional approval), in practice such a move will be extremely controversial and opposed by many US corporations, many of them closely connected to the Republican Party. The economies of the US and Mexico are very much linked – the United States is the recipient of 73% of Mexican exports (291 billion USD per year), while Mexico is the second most important trading partner for the US, accounting for 13% of US exports (approx. 190 billion USD per year). Also, American direct investments in Mexico are high (totalling in 107.8 billion in 2014). In fact, a considerable part of the Mexican exports to the US come from American subsidiaries. This means that termination of the agreement will affect US companies as much as Mexican ones. Considering these facts, withdrawal would seem a rather improbable option, and the aggressive rhetoric of the new President may be regarded as simply a negotiation tactic which allows for strengthening the position of the US. It is possible that the re-negotiations may concentrate on the exclusion of certain sectors from the NAFTA rules (e.g. the automotive or computer sectors), or the introduction by Mexico of voluntary export restraints (similar to those which were introduced by Japan in the 1980s).

Trumps has also criticized the WTO, saying on several occasions that the US may consider withdrawing from the organization. Again this extreme scenario is very unlikely because it would have an enormous impact on the US economy, inevitably leading to a recession. Renegotiation of the WTO arrangements also seems unlikely. Amendments of WTO rules require in principle the consent of a two-thirds majority of Members (cf. Art. X of the WTO Agreement), which in the current situation is almost impossible. A more likely scenario is the initiation of a series of new WTO dispute settlement proceedings against China. In this context, one may expect a complaint relating to the alleged manipulation of the value of the Chinese Yuan. The US has claimed for a long time that China is artificially depreciating the value of its currency. The Obama administration came to the conclusion that the chances of winning such a proceeding are rather low and decided not to initiate one. Trump may nevertheless give it a try. It is also possible that the new US administration will decide to impose a series of unilateral trade restrictions on several countries, which is illegal under WTO law. Again the major candidate is China, but Germany may also find itself on the list. The fact that the US would ultimately lose such proceedings in the WTO may be of secondary importance, inasmuch as the WTO agreements do not provide for retroactive economic sanctions; they can only be applied with respect to future trade (in principle after authorization by the WTO Dispute Settlement Body is granted). Since sometimes it takes years to conclude a proceeding, the US can maintain its restrictions for quite a long time. How would China react? It would probably respond with its own sanctions, which would mean an open trade war between the two economic powers.

In sum, the election of Trump does not mean the end of economic globalization and international trade between the US and the rest of the world. It may, however, mean a big shift in its leadership. Chinese President Xi Jinping has recently vigorously defended principles of free trade during his speech at the World Economic Forum. So the questions arise: Could China become the leader of the free trade world? And do we really want such leader?

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The views expressed above belong to the author and do not necessarily represent the views of the HAS Centre for Social Sciences.

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