5. Implications of the New US Trade Policy
Economic implications of US protectionism
With the Trump administration’s trade policy still in flux, it is difficult to make a full assessment of its possible economic impact. If implemented in its more extreme version, US protectionism, as outlined on the campaign trail and since Trump’s inauguration, could provoke retaliation by its trading partners, to the detriment of all parties.
Prior to the election, a study found that an outright trade war could lead to a recession in the US in 2019, with more than 4.8 million jobs lost.102 Export-dependent industries that manufacture equipment used to create capital goods in IT, aerospace and engineering would be the most severely affected. But even sectors unconnected to trade would feel the impact of a major trade dispute rippling through the economy, particularly in states where traded goods are produced, with Washington State, California, Massachusetts and Michigan projected to be the worst affected.
As already noted, a full trade war seems increasingly unlikely. But even scenarios that involve a ‘milder’ form of protectionism would have negative consequences for the US economy. Imposing tariffs on imports from specific countries would not only result in rising prices for consumers; it would also hit firms that depend on importing intermediary goods. This could eventually lead to trade diversion to other markets: for example, firms could begin to source their imports from suppliers in Southeast Asia instead of from Mexico or China.103 Thus, tariffs would not automatically mean more products being made in the US.
While the imposition of trade barriers may offer protection to some industries, it would reduce incentives for innovation and hamper the US’s competitive edge overall. As a consequence of higher intermediate inputs, exports would also become more expensive and thus less competitive in the global marketplace. Combined with the cumulative costs, including time and effort, arising from potential trade disputes, US GDP growth could be adversely affected.
Strategic implications
Three strategic implications of the Trump administration’s trade policy stand out: the geostrategic effects of a US withdrawal from mega-regional trade deals; the consequences arising from a ‘deal-making’ model of foreign relations that focuses on trade; and the ramifications for international economic cooperation.
Withdrawal from mega-regional trade deals
By withdrawing from the TPP and casting a shadow of uncertainty over the future of TTIP and TiSA, the US is abandoning its leadership role in international trade. This hurts its credibility as a reliable partner, and undermines the West’s ability to set the rules for international trade.
In particular, the Trump administration’s abandonment of the TPP is seen by its critics as reinforcing doubts about the US’s commitment to economic leadership in the Asia-Pacific region.104 It is also a setback for efforts to deepen key partnerships in a strategically important part of the world. One of the intended benefits of the TPP would have been in encouraging domestic economic reforms in Japan and Vietnam, but such ambitions have now been dealt a serious blow.105 While other TPP signatories are now engaged in efforts to keep the deal going in the absence of the US, increasingly some countries in the region are being pulled into the orbit of China, which has been backing the rival RCEP. There is an overlap of seven between the 12 countries that had signed the TPP and the 16 countries that are negotiating the RCEP.106 Unlike the TPP, however, the RCEP is mostly concerned with tariff reductions, and does not focus on high standards in new trade issues such as the digital economy, state-owned enterprises, labour and environmental protection.
With TTIP on hold, questions have been raised about the ability of the US and the EU to provide joint international economic stewardship. An opportunity has also been missed to reassert the transatlantic alliance. The stalled TTIP process is a major blow for the EU, which has recently passed a tough credibility test in concluding its trade deal with Canada but is preparing itself for the loss of a pro-free trade voice and its second largest economy with the intended withdrawal of the UK.107 At the same time, with the US apparently retreating from the global trade arena, there is an opportunity for the EU to become the primary advocate for high standards in international trade agreements. EU Trade Commissioner Cecilia Malmström has emphasized that the US’s decision to scrap the TPP presents the union with new trade opportunities in the Asia-Pacific region, and has pointed to increased interest on the part of other TPP signatories in engaging with the EU as a trade partner.108
With the TiSA process – involving 23 WTO members that together account for 70 per cent of the value of global trade in services – currently on hold, there would appear to be little impetus to set a new cornerstone for shaping the trade rules of the 21st century. By not taking the opportunity to advance trade rules governing financial services, telecommunications and e-commerce, the US puts itself at a strategic disadvantage as a global leader in these areas. And given its uncertain future, TiSA – envisioned as an open agreement that could eventually translate into a broader WTO arrangement – is unlikely to kick-start the trade agenda under WTO auspices.
Trade and a deal-making model of foreign relations
President Trump portrays himself as a deal-maker, and has repeatedly emphasized his willingness to tie trade to other foreign policy issues. The US–China relationship is the most prominent example of this model.
Tackling the US trade deficit with China will be an important goal for the administration. In order to get Beijing to agree to concessions on trade, the Trump administration could use issues related to the South China Sea or Taiwan as bargaining chips and offer President Xi greater scope for assertive behaviour in the region. Trump has also repeatedly suggested that he would use trade as an incentive to persuade China to be tougher on North Korea’s missiles programme,109 although he has denounced China’s increased trade with North Korea during the first quarter of 2017 as a sign that Beijing is failing to cooperate sufficiently to rein in Pyongyang.110 The launch of the administration’s investigation into China’s practices regarding US intellectual property rights was reported in August 2017 to have been deferred in order to encourage China’s cooperation at the UN on North Korea sanctions.111 However, Trump’s subsequent threat to cut off all US trade with any country that does business with North Korea was widely regarded as a warning for China, as North Korea’s major trade partner, to do more to squeeze Kim Jong-un’s regime.112
For all the president’s rhetoric on using trade as a bargaining chip in relations with other countries, there have thus far been few signs of this being put into practice. For instance, regarding Mexico, Trump suggested that the NAFTA renegotiation should start with immigration and border security issues.113 He also floated the idea of introducing a 20 per cent tariff on Mexican imports, which his administration would recognize as a contribution from Mexico towards the cost of the wall he had repeatedly promised to build along the border.114 But these proposals are missing from the official US renegotiation objectives that have since been released.
Shortly before his inauguration, Trump seemed open to ending targeted sanctions on Russia (imposed in 2014 in response to Russia’s annexation of Crimea and support for separatists operating in Ukraine), in return for a deal on nuclear weapons reduction.115 Although trade is a relatively minor factor in US–Russian relations and in the sanctions debate, the imposition of new sanctions in August 2017 – at the behest of Congress – has contributed to an escalation of tensions between the two countries, and makes striking a ‘grand bargain’ between Washington and Moscow almost impossible. Russia’s Prime Minister Dmitry Medvedev described the recent measures as ‘the declaration of a full-fledged trade war’, while President Trump, who reluctantly signed the new sanctions bill, criticized it as infringing on his powers to strike good deals for the US.116
It remains to be seen how Trump’s favoured transactional approach to trade and foreign policy will play out. In theory, linking trade to foreign policy issues could open up opportunities for deals and breakthroughs in US external relations. In reality, however, such deals may prove to be highly unstable in the face of complex historical relationships and competing interests.
International cooperation on trade: the WTO and the G20
With an inward-looking US whose rhetoric and actions put ‘America first’, international economic cooperation will be much harder to achieve. In the trade arena, a more aggressive US approach could lead to tensions with other major economies.
With an inward-looking US whose rhetoric and actions put ‘America first’, international economic cooperation will be much harder to achieve.
Efforts to progress multilateral trade liberalization at the WTO had already stalled before Trump’s election in 2016, but the prospect of the organization being able to move the multilateral agenda forward appear slim to none in the context of the US administration’s preference for bilateral deals. Moreover, the WTO’s role as a forum to settle trade disputes could be undermined by US protectionism. It is likely that the US will bring more trade cases before the organization, and also probable that its actions will cause more disputes to be brought against it. A more aggressive trade policy could mean that the US violates WTO rules, leading to more cases that it stands to lose.117 As already noted, the 2017 USTR trade policy agenda suggests that the US will not be bound by WTO rulings.118 Failure to comply with a ruling would seriously undermine the credibility of the WTO’s dispute settlement system.
The G20 has latterly been struggling to provide leadership on the rising risks to the global economy, notwithstanding its successful containment of the worst of the global financial and economic crisis that began a decade ago. Until recently, one thing that all G20 leaders agreed on was the commitment to free trade. With the Trump administration at the table, however, the G20 did not settle on a basic statement opposing protectionism. Instead, after intense discussions, the compromise communiqué acknowledged the traditional pledge to fight protectionism while making concessions to Trump. That a shared language regarding trade was arrived at in the G20 statement stands in contrast to wording on climate change and the Paris agreement, in which the US set itself apart from the other 19 countries. While the joint language on the trade issue is an achievement, the compromise wording now has to be translated into action. Otherwise, the G20 risks losing relevance at a time when protectionism has been identified as a key risk for the global economy.119
102 Noland, M., Robinson, S. and Moran, T. (2016), ‘Impact of Clinton’s and Trump’s Trade Proposals’, in Noland et al. (2016), Assessing Trade Agendas in the US Presidential Campaign.
103 Sapiro, M. (2017), ‘Trade’, in Wickett, X. (ed.) (2017), America’s International Role Under Donald Trump, Chatham House Report, London: Royal Institute of International Affairs, https://www.chathamhouse.org/sites/files/chathamhouse/publications/research/2017-01-18-americas-international-role-trump-wickett-final2.pdf (accessed 16 Jun. 2017).
104 See for instance comments by Michael Froman (the Obama administration’s USTR who negotiated the TPP) and Senator John McCain in Baker, P. (2017), ‘Trump Abandons Trans-Pacific Partnership, Obama’s Signature Trade Deal’, New York Times, 23 January 2017, https://www.nytimes.com/2017/01/23/us/politics/tpp-trump-trade-nafta.html?_r=0 (accessed 16 Jun. 2017).
105 Heath, T. R. (2017), ‘Strategic Consequences of U.S. Withdrawal from TPP’, RAND Corporation, 27 March 2017, https://www.rand.org/blog/2017/03/strategic-consequences-of-us-withdrawal-from-tpp.html (accessed 16 Jun. 2017).
106 The seven countries are Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam.
107 The EU–Canada Comprehensive Economic and Trade Agreement (CETA) provisionally took effect in September 2017. For further information see European Commission (2017), ‘EU-Canada trade agreement enters into force’, 20 September 2017, http://trade.ec.europa.eu/doclib/press/index.cfm?id=1723 (accessed 29 Sept. 2017).
108 Hoppe, T. (2017), ‘E.U. Trade Commissioner Warns U.S. against Trade War’, Handelsblatt, 20 February 2017, https://global.handelsblatt.com/politics/e-u-trade-commissioner-warns-u-s-against-trade-war-709208 (accessed 16 Jun. 2017).
109 See, for instance, Diamond, J. (2017), ‘On North Korea, Trump signals break with US-China policy’, CNN, 18 April 2017, http://edition.cnn.com/2017/04/17/politics/trump-north-korea-china-policy/index.html (accessed 16 Jun. 2017).
110 Gilchrist, K. (2017), ‘China clashes with Trump over North Korean trade’, CNBC, 7 July 2017, http://www.cnbc.com/2017/07/07/china-trump-north-korea-trade-clash.html (accessed 18 Jul. 2017).
111 Talev, M. (2017), ‘Trump to Wait on China Intellectual Property Probe’, Bloomberg, 8 August 2017, https://www.bloomberg.com/news/articles/2017-08-08/trump-is-said-to-wait-on-china-intellectual-property-probe (accessed 31 Aug. 2017).
112 Smith, A. (2017), ‘North Korea Crisis: Trump Threatens to Stop U.S. Trade With China. Could He?’, NBC News, 4 September 2017, https://www.nbcnews.com/news/world/north-korea-crisis-could-trump-stop-u-s-trade-china-n798561 (accessed 29 Sept. 2017).
113 Martin, E. and Cattan, N. (2017), ‘How Trump’s Wall Makes Nafta Talks Even Thornier: QuickTake Q&A’, Bloomberg, 13 February 2017, https://www.bloomberg.com/news/articles/2017-01-26/how-reopening-nafta-might-affect-three-nations-quicktake-q-a (accessed 16 Jun. 2017).
114 Diamond, J. (2017), ‘Trump floats 20% tax on Mexican imports to pay for wall, but considering other options’, CNN, 27 January 2017, http://edition.cnn.com/2017/01/26/politics/donald-trump-mexico-import-tax-border-wall/ (accessed 16 Jun. 2017).
115 Faulconbridge, G. and James, W. (2017), ‘Trump’s offer to Russia: an end to sanctions for nuclear arms cut – London Times’, Reuters, 15 January 2017, http://www.reuters.com/article/us-usa-trump-russia-arms-deal-idUSKBN14Z0YE (accessed 16 Jun. 2017).
116 Weaver, C. and Foy, H. (2017), ‘Trump grudgingly signs ‘flawed’ Russian sanctions bill’, Financial Times, 3 August 2017, https://www.ft.com/content/dbb3dbc0-7791-11e7-90c0-90a9d1bc9691 (accessed 31 Aug. 2017).
117 Bacchus, J. (2017), ‘Trump’s Challenge to the WTO’, Wall Street Journal, 4 January 2017, https://www.wsj.com/articles/trumps-challenge-to-the-wto-1483551994 (accessed 16 Jun. 2017).
118 The 2017 USTR trade policy agenda says that ‘even if a WTO dispute settlement panel – or the WTO Appellate Body – rules against the United States, such a ruling does not automatically lead to a change in U.S. law or practice.’ See Office of the United States Trade Representative (2017), 2017 Trade Policy Agenda and 2016 Annual Report of the President of the United States on the Trade Agreements Program, p. 3.
119 For instance, in the run-up to the G20 summit in Hamburg, the IMF warned that inward-looking policies and protectionism are downside risks for economic growth. IMF (2017), Global Prospects and Policy Challenges – G-20 Leaders’ Summit, July 7–8, 2017, Hamburg, Germany, Washington, DC: International Monetary Fund, https://www.imf.org/external/np/g20/pdf/2017/070517.pdf (accessed 29 Sept. 2017).