6. Conclusion: Opportunities for a New Trade Framework
Donald Trump was elected president in part because he was able to tap into the sentiments of voters who felt that they had been left behind by trade. In this respect, some of his success was based on misperceptions (such as the exaggerated impact of trade on US jobs and wages, or a discourse that placed heavy emphasis on the US merchandise trade deficit while largely ignoring the surplus in the services sector), but he also pointed to valid concerns about international trade (for example, insufficient adjustment mechanisms for those adversely affected by trade, and unfair practices by some other countries). By building on the latter, there remains an opportunity to move the debate on trade forward during his term of office and address some genuine shortcomings within the current trade system. While productive engagement with Washington on trade will be a challenge for its international partners, there are other potential routes that could have a moderating effect on the Trump administration’s protectionist intent. This concluding chapter sets out the components of a new framework that would, notwithstanding the incumbent president’s ‘America first’ rhetoric, strengthen global trade.
Elements of a new trade framework
Pursuing alternative avenues for engagement on trade
External partners that recognize the benefits of bilateral and multilateral trade links involving the US, and of US leadership on trade liberalization, will still find allies within the Trump administration – among them National Economic Council director Gary Cohn and Secretary of State Rex Tillerson. Together, they should make common cause in emphasizing the economic and strategic opportunities for the US stemming from trade, and the risks of protectionism.
Given the role of Congress in shaping trade policy, external partners of the US should also deepen their engagement with relevant congressional players. House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell, for example, support free trade and can play critical roles in forming alliances committed to moderating Trump’s protectionist agenda. While for the Obama administration Congress was often an obstacle to moving the trade policy agenda forward, it now stands as a line of defence against excessive protectionism.
The US’s partners should recognize that there is a critical role to be played by US states and cities in promoting trade and investment ties, and engage with governors and mayors in support of free trade. Notable among these potential allies are the leaders of the states bordering Mexico and Canada.
The US’s partners can, moreover, look to further their own cooperation in the face of US disengagement on international trade. For instance, representatives from Mexico and Canada are already talking about how to work together in the NAFTA renegotiation; and the remaining 11 TPP countries have been exploring options to keep the deal alive without the US. Moreover, in July 2017 consensus among the other G20 countries played a role in persuading the Trump administration to moderate its stance and agree to joint language on trade at the Hamburg summit.
Busting myths – and acknowledging valid concerns
Making the case for trade liberalization has traditionally emphasized the benefits of open markets and international competition, while disregarding or downplaying concerns of sceptics. A more persuasive case would still emphasize the gains by highlighting the economic and strategic benefits of trade, but at the same time recognize that some concerns have basis in reality.120
Discrediting myths is one important component in promoting a more positive message on trade. The best-known line holds that ‘exports are good, imports are bad’. But because imports allow for the consumption of a greater variety of goods and services at a lower price, the task for free-traders is to change the narrative to one of ‘exports are good, imports are good’.
A related myth is that the trade deficit is bad, and that closing it will return jobs to the US. While the effects of trade and technological change on the labour market cannot be entirely decoupled, what needs to be communicated more effectively is the far greater impact of new technologies and automation on jobs. This should promote a wider understanding that protectionism will not bring back manufacturing jobs; rather, it will kill current and future jobs. At the same time, even if technological change is the greater culprit in causing job displacement, the adverse consequences of trade are real and should not be dismissed. Affected individuals and communities need help to adjust, and governments must play a role in this.
The myth that bilateral deals serve the US economy better than do regional or multilateral deals should also be addressed. For the Trump administration to conclude multiple bilateral deals instead of a single regional agreement would have major disadvantages. Striking and ratifying deals country by country is more difficult, time-consuming and potentially more costly than is focusing on one larger agreement. And implementing multiple bilateral agreements would mean the introduction of many different sets of rules according to the arrangements concluded with each partner.121 By contrast, there is the prospect that the standards established in forging a single deal with many countries may eventually become global standards, thus setting the rules of the road.
Any trade negotiation needs a degree of confidentiality in order to progress. All the same, as negotiations are increasingly about reducing rules and regulations, the case for input from civil society and for wider public engagement has become stronger. While the public’s concerns over the potential impact of trade agreements on consumer, environmental and labour standards may be overblown at times, policymakers should nonetheless address their constituents’ fears. Furthermore, the US and its external partners should have an objective discussion on the need to balance investor protection via trade agreements with the government’s right to regulate.
Developing a new strategy to assist workers hurt by trade
Just as rehashing long-standing arguments in favour of free trade is not enough, neither will much be accomplished by simply expanding existing programmes to help workers adversely affected by trade. As already noted, TAA is restricted to certain parts of the US workforce, and is widely regarded as costly and ineffective. The name and objective of the scheme also contribute to the public’s misperception that trade – and not technological change – is the primary cause of job displacement in the US.122 This does not mean that TAA should be abandoned. Instead, it should be overhauled and become part of a more holistic approach to mitigating the effects of job displacement.
A comprehensive adjustment programme should be based on proposals for livelihood insurance. For instance, as set out in a 2016 paper by the Council on Foreign Relations, remedial measures should include: expanding the earned income tax credit for low-income workers; introducing wage insurance that tops up salaries for workers who lose jobs they have held for a minimum of three years and are re-employed at lower pay; providing income-contingent, repayable loans for workers wishing to retrain and upgrade their skills; and subsidizing relocation costs for workers who move to geographic areas where jobs are.123
In order to respond to the job displacement caused by trade (as well as by technological change and other factors), the fundamental problem of a skills mismatch needs to be addressed. This is best done by investing in labour-market policies that focus on skills-training and lifelong learning. Concrete initiatives should centre on increasing funding to community colleges and encouraging apprenticeships. Indeed, in June 2017 President Trump signed an executive order to increase the number of apprenticeships.124
Investment in human capital is not only essential to help the US compete internationally, but is also needed to help rebuild the domestic consensus in support of the country’s leadership on trade.
A comprehensive strategy aimed at both assisting workers affected by trade liberalization and increasing the resilience of the workforce for the future should involve the federal, state and local governments as well as the private sector. Investment in human capital is not only essential to help the US compete internationally, but is also needed to help rebuild the domestic consensus in support of the country’s leadership on trade.
Enforcing existing trade agreements and tackling unfair practices
The trade agreements that the US has entered into, along with the rules of the WTO, are enforceable. However, some countries stretch these rules and thus tilt the playing field in their favour. Monitoring compliance and enforcing rules is, moreover, highly costly and very time-consuming.
The Trump administration has made the enforcement of existing trade agreements a priority, and has signalled that it will vigorously invoke US laws in conjunction with bilateral, regional and WTO mechanisms for dispute settlement. It will also likely self-initiate investigations into subsidies and dumping as well as other perceived unfair trade practices. However, this should be done in such a way that does not politicize trade remedy actions or risk unravelling established processes for international dispute resolution.
In bringing cases against China before the WTO, there is a potential for collaboration between the US and the EU. Overcapacity in the Chinese steel sector also hurts European businesses, and the EU is currently reforming its own trade-defence instruments in order to better respond to what it deems unfair practices. At the beginning of October, the European Parliament, Council and Commission agreed on a new methodology to calculate dumping.125 Meanwhile, proposals for the modernization of trade-defence instruments – focusing on improving transparency, faster procedures and more effective enforcement – are the subject of ongoing discussions between the EU institutions.126 Thus, through a coordinated response to unfair trade practices, the US and the EU could not only leverage their resources, but also be more effective in shielding their respective domestic producers from unfair competition.
The issue of currency manipulation is currently not addressed in trade agreements, and neither the IMF nor the WTO is able to respond effectively in this context.127 This aspect should be added to new trade agreements. A currency chapter in future trade deals could, for example, include a specific obligation to refrain from manipulation and introduce a dispute settlement mechanism.128
At a time when the US public (like others globally) is sceptical about trade agreements, taking a tougher stance on enforcement and tackling unfair practices – as the Trump administration is suggesting – could actually help to restore public confidence in trade being conducted on fair terms and on a level playing field.
Modernizing NAFTA
Renegotiation of NAFTA is also a priority for the Trump administration. If done right, this may be beneficial not just for the US, but also for Mexico and Canada: the goal should be to strengthen the competitive position of North America as a whole. There is a need to modernize NAFTA, and given that areas such as the digital economy were still nascent concepts when the agreement came into force in 1994, e-commerce and data flows should be included in a revamped NAFTA.
Labour and environment provisions were originally covered in side agreements. These should be brought formally into NAFTA in order to strengthen these areas and give them the same legal status as the rest of the agreement, making enforcement much easier. Moreover, as trade agreements are now more about rules and less about tariffs, including these provisions would give workers greater protection.
When NAFTA was negotiated, it notably failed to establish a fully integrated North American energy market. At the time, Mexico’s constitution exempted the country from most of the energy investment provisions. Its constitutional reforms in 2013 mean that energy can now be addressed in a NAFTA renegotiation. Improving energy provisions is an objective shared by all NAFTA parties.129
By recrafting the rules of NAFTA, there is an opportunity to tackle the mutually acknowledged shortcomings of the current deal. There could be a shared win for all three parties if reasonable compromises can be found.
Striking new trade deals: focusing on competitive sectors and major trade partners
The US can benefit from further trade liberalization. Given that its tariffs and other trade barriers are already among the lowest in the world, entering into new agreements would entail other countries lowering their restrictions much more in comparison.
Some of the highest remaining barriers are in the services sector, where US businesses are global leaders and have a competitive advantage. Moreover, the US consistently has a large trade surplus in the services sector, standing at some $250 billion in 2016.130 If services achieved the same export performance as manufactured goods, total US exports could rise by $800 billion a year.131 Bringing down barriers to trade in services is especially important, as the services sector provides 80 per cent of jobs and generates approximately 70 per cent of economic output.132
Future trade negotiations should focus on areas in which the US has a lead, such as financial and insurance services, telecommunications, the use of intellectual property rights, and business services such as engineering and architectural design. Resisting efforts to reduce foreign trade barriers in those sectors would disadvantage the most competitive US industries and miss a significant opportunity to reap the benefits from trade.
The US should also encourage the participation of small and medium-sized enterprises (SMEs), as well as microenterprises, in trade. New opportunities arise with the evolution of e-commerce and global value chains. Significant hurdles remain, however, including the logistics and costs of shipping goods or delivering services, security and data protection issues, payments, and regulatory uncertainty.133 Already the country’s 30 million SMEs account for almost two-thirds of net new private-sector jobs created in the US in recent decades;134 and by tackling these issues via trade agreements, the boost to the participation of SMEs in global trade could help to further stimulate employment.
At the bilateral level, the US should consider entering into trade negotiations with Japan and, in due course, the UK. Using the TPP concessions as a starting point, a US–Japanese agreement may be achievable even if significant obstacles, including addressing the large US trade deficit, remain. Given the sheer volume of trade between the two countries – with Japan the fourth largest trade partner for the US – reducing barriers to trade would in itself provide mutual economic benefits. Japan is, moreover, an important US ally in the Asia-Pacific region, and a crucial partner in defending the rules-based international order.
Before the Brexit referendum and the election of Donald Trump in 2016, the US was on track to create a formal trade partnership with the UK through the TTIP negotiations with the EU. President Trump has already made it clear that he would favour a US–UK free-trade agreement. Despite the known barriers that preclude a quick deal, this opportunity should be seized after the UK’s withdrawal from the EU. The two economies are deeply integrated – with the UK the seventh largest trade partner for the US, and the US ranked as the UK’s second largest – and both would further benefit from a discrete trade agreement.
Efforts to strike trade deals with Japan and the UK would send a critical message that the US under President Trump is not against free trade per se. It would also be a positive step, and could potentially pave the way for further trade liberalization more widely. Overall, understanding where the competitive advantage and future trends in trade are, and leading negotiations in those areas, will help to ensure that trade will create more winners in the US.
A critical juncture for US trade policy
Trade will remain a key topic in the US mid-term elections in 2018 – where it will likely be a factor in states that have overtly benefited or lost from it such as border states or the rustbelt – and the presidential election due in 2020. Given the centrality of trade to Trump’s campaign in 2016, his supporters and opponents will ask whether he has delivered on that front.
Although Trump’s campaign rhetoric suggested a fundamental change to trade policy, his administration thus far seems to be taking a much more moderate and conventional approach. Despite the significant presidential powers on trade, Trump is also faced with constraints ranging from the role of Congress to infighting between major Republican factions, the involvement of the cabinet and agencies, economic considerations, voter preferences and the prevailing international environment on trade.
The key guiding principles of reducing the trade deficit and enforcing trade laws suggest that the administration’s policy will take a more protectionist turn compared with previous ones, through actions such as focusing on renegotiating NAFTA, moving from mega-regional to bilateral deals, making more aggressive use of trade remedies and tackling unfair practices, and discouraging offshoring of jobs.
This new trade policy will have wide-ranging economic and strategic implications. It will impact how the US engages in international forums such as the WTO or G20. It will diminish the US’s leadership in international trade and its ability to set the rules, and will deal a blow to deepening key relationships with trade partners in strategically important regions of the world. Without the US as its champion, the global trade agenda risks faltering.
US trade policy has reached a critical juncture. The old approach no longer works. But broad protectionism cannot be the answer; nor can retreating from international trade be a viable solution. Neither would address the core concerns.
Instead, a new US trade policy framework is needed. Crucial elements of this could be better strategies to help those whose jobs and livelihoods have been disrupted (whether because of trade or technological change), better enforcement of existing agreements and discouragement of unfair practices, modernization of NAFTA, and new deals in areas where the US has a competitive edge and with countries that are economically as well as strategically important. But the case for trade must also be made differently: busting myths and highlighting the benefits of trade need to go hand in hand with acknowledging legitimate fears.
If a new trade policy framework can be developed, then Trump’s presidency could offer a chance to move the debate forward and actually strengthen global trade.
120 This section draws on Schneider-Petsinger, M. (2017), ‘Policy Recommendations for Strengthening Transatlantic Trade in Challenging Times’, in Dreher, V., Kantel, A. J., Kirchner, M., Langenbacher, E., Rizzo, R. and Schneider-Petsinger, M. (2017), The Specter of Uncertainty: Policies for Strengthening the Transatlantic Relationship from the Next Generation of Leaders, Washington, DC: American Institute for Contemporary German Studies, http://www.aicgs.org/site/wp-content/uploads/2017/06/PR65-ERP-Next-Gen-FY17-1.pdf (accessed 16 Jun. 2017).
121 Sapiro (2017), ‘Trade’.
122 Alden, E. and Litan, R. E. (2016), A Winning Trade Policy for the United States, New York, NY: Council on Foreign Relations, http://i.cfr.org/content/publications/attachments/Discussion_Paper_Alden_Litan_Trade_Policy_OR.pdf (accessed 16 Jun. 2017).
123 Ibid.
124 This executive order aims at ‘[e]xpanding apprenticeships and reforming ineffective education and workforce development programs’. It directs the Department of Labor to take steps to expand access to and promote apprenticeship programmes, and calls for the establishment of a taskforce to coordinate such efforts. The White House (2017), ‘Presidential Executive Order Expanding Apprenticeships in America’, 15 June 2017, https://www.whitehouse.gov/the-press-office/2017/06/15/presidential-executive-order-expanding-apprenticeships-america (accessed 18 Jul. 2017).
125 European Commission (2017), ‘The EU is changing its anti-dumping and anti-subsidy legislation to address state induced market distortions’, 4 October 2017, http://europa.eu/rapid/press-release_MEMO-17-3703_en.htm (accessed 15 Oct. 2017).
126 Ibid.
127 The IMF prohibits countries from manipulating their currency for the purpose of gaining unfair trade advantage, but it does not have the mechanism to force a country to change its exchange rate policies. While the WTO has an enforcement mechanism, the concept of currency manipulation is not well defined. The WTO has rules against subsidies, but it is not clear whether an intentional undervaluation of a country’s currency classifies as an export subsidy under the organization’s current definition. See Sanford, J. E. (2011), Currency Manipulation: The IMF and WTO, Washington, DC: Congressional Research Service, https://fas.org/sgp/crs/misc/RS22658.pdf (accessed 18 Jul. 2017).
128 Fred Bergsten has, for example, suggested addressing currency manipulation in TPP. See Bergsten, C. F. (2014), Addressing Currency Manipulation Through Trade Agreements, Washington, DC: Peterson Institute for International Economics, https://piie.com/sites/default/files/publications/pb/pb14-2.pdf (accessed 16 Jun. 2017).
129 Esposito, A. and Daniel, F. J. (2017), ‘NAFTA negotiators seek to enshrine Mexico’s energy reforms’, Reuters, 2 September 2017, https://uk.reuters.com/article/us-trade-nafta/nafta-negotiators-seek-to-enshrine-mexicos-energy-reforms-idUKKCN1BD0TS (accessed 29 Sept. 2017).
130 US Census Bureau, Economic Indicators Division (2017), ‘U.S. Trade in Goods and Services – Balance of Payments (BOP) Basis’.
131 Executive Office of the President of the United States (2015), The Economic Benefits of U.S. Trade, Washington, DC: Executive Office of the President of the United States, https://obamawhitehouse.archives.gov/sites/default/files/docs/cea_trade_report_final_non-embargoed_v2.pdf (accessed 16 Jun. 2017).
132 US Department of Labor, Bureau of Labor Statistics (2015), ‘Industry employment and output projections to 2024’, https://www.bls.gov/opub/mlr/2015/article/industry-employment-and-output-projections-to-2024.htm (accessed 16 Jun. 2017).
133 World Trade Organization (2016), World Trade Report 2016 – Levelling the trading field for SMEs, Geneva: World Trade Organization, https://www.wto.org/english/res_e/booksp_e/world_trade_report16_e.pdf (accessed 16 Jun. 2017).
134 Office of the United States Trade Representative (undated), ‘Small- and Medium-Sized Enterprises (SMEs)’, https://ustr.gov/trade-agreements/free-trade-agreements/transatlantic-trade-and-investment-partnership-t-tip/t-tip-12 (accessed 16 Jun. 2017).