Global trade realities and President Trump’s goals

Five months into the Trump administration, there remains a great deal of uncertainty about the future of global trade policy. A few issues have been resolved, a few new ones have erupted, and many more remain in a state of limbo.

Perhaps most importantly the fears some had about an impending trade war with China seem to have been averted for the time being. Prior to the election, Trump had stated his intention to slap 45% tariffs against Chinese goods and to declare China a currency manipulator on day one in office. At this point the chance that this will occur has fallen to near zero.

With respect to currency, the Trump administration deferred to the legislated semi-annual foreign exchange policy review by the US Treasury department. Their report in April kept China on the currency manipulator watch list while noting that China only satisfied one of the three criteria used to determine currency manipulation. At the same time, Germany, Switzerland, Korea and Japan satisfied two of the three criteria. Nevertheless, since no country satisfied all three, no one was labeled a currency manipulator. Importantly, this outcome demonstrates the administration’s willingness to accept the legislated procedures on this issue.  It is worth noting that this outcome was similar under the Obama administration, who also publicly assailed China as a currency manipulator but ultimately accepted the Treasury’s verdicts.

With respect to other trade actions against China specifically, Trump has seemed to back off from trade threats, especially after President Xi Jinping’s visit to Mar-a-Lago in April. Quite possibly, China’s willingness to put greater pressure on North Korea in opposition to its nuclear weapons and missile testing was sufficient to reestablish China as a strategic geopolitical partner for the moment rather than a serious economic threat.

President Trump has continued to speak out against countries that have large trade surpluses with the US, most notably Germany. Like most politicians seeking support from union labor and import-competing industries like steel and autos, the trade imbalance seems an obvious example of unfairness in trade. These same interest groups conveniently ignore the fact that the “balance of payments,” which includes the financial account as well as the current account, is always balanced. Furthermore, imbalances in trade are better explained by national savings and investment proclivities than they are by undervalued currencies. However, fixing the imbalances in a more effective way would require greatly reducing government budget deficits and promoting private savings in the US,  less politically appealing than threatening trade protections which can have an immediate positive effect on particular special interest groups. Thus, I think we can expect Trump’s rhetoric to continue to reflect this simplistic view of trade, but we can hope that possible actions will be restrained by Washington’s current international commitments.

With respect to free trade areas, the prospects for the future are mixed. Immediately after becoming president, Trump pulled out of the Trans Pacific Partnership (TPP) agreement. The remaining 11 Asian Pacific countries have floated the idea of revising the TPP amongst themselves, but that remains an unlikely outcome since the US is most of those countries’ largest trading partner. Wilber Ross, the US Commerce Secretary, has suggested the US may continue its talks on the Trans-Atlantic Trade and Investment Partnership (TTIP), promoting an FTA with the EU, and there have even been suggestions that a US-UK trade agreement may be discussed after Brexit occurs.

However, President Trump has initiated a renegotiation of the North American Free Trade Agreement (NAFTA) in an effort to “improve and modernize” it. Details about exactly what that means have been scarce and special interest groups are now rapidly hiring lobbyists to devote attention to the renegotiation. It is hard to envision that a successful renegotiation will result in ever more open trade, but instead is likely to carve out more exceptions to free trade that will advantage particular industries.

Even more interesting to watch will be the actions of Robert Lighthizer, the recently appointed US Trade Representative. Recently he cautioned that a WTO decision to allow China to be granted market economy status would have cataclysmic consequences. A WTO dispute case on the matter was filed in December by China against both the US and the EU. As a former trade lawyer representing the interests of US firms in trade remedy cases, Lighthizer has expressed dissatisfaction with the slavish adherence to WTO rules. As such he is likely to be sympathetic to rule changes that tend to benefit US industry interests. Dissatisfaction with WTO dispute outcomes could lead to proposals to renegotiate the WTO.

The danger of applying US pressure in these international venues to advance changes that favor US special interests, however, is that other countries may decide they don’t wish to play under these rules any longer. It is very important to remember that a liberal trading regime requires countries to tie their hands and avoid offering protectionist support every time a domestic industry faces international competitive pressures. Extra protection is available under the narrowly defined trade remedy laws, which until now only affects a small percentage of international trade.

However, the Trump Administration seems intent on increasing trade remedy actions across a variety of industries. Compared to a total of 17 trade remedy actions last year, 8 new petitions have been filed between just March and May of this year. In addition, the first global safeguards action since 2002 was filed this Spring on solar cell imports, while the first national security investigation since 2001 was filed on steel and aluminum imports.

In the longer run, if the US begins to demand much greater recourse to protectionism, even under current rules, then the entire liberal trading regime could be put in jeopardy. A system that took root after WWII and took several generations to build up could come crashing down in a few short years. Let’s hope that the Trump administration recognizes this potential danger and avoids bringing the world liberal trading system too close to the precipice.