Wednesday,19 September, 2018
Current issue | Issue 1330, (2 - 8 February 2017)
Wednesday,19 September, 2018
Issue 1330, (2 - 8 February 2017)

Ahram Weekly

Trump and trade

What trade policies can the world expect from US President Donald Trump?

 Trump and trade
Trump and trade

Trade and trade-related issues figured prominently in US President Donald Trump’s electoral campaign.

He heavily criticised the North American Free-Trade Agreement (NAFTA), which in the 1990s established free trade among the US, Canada and Mexico, and he announced his intention to “immediately renegotiate the terms of that agreement to get a better deal for our workers”.

He also attacked the Trans-Pacific Partnership (TPP), the yet-to-be-enacted deal the former Obama administration in the US negotiated with 11 Asia-Pacific countries. Trump’s plan, actually the first point on a seven-point trade agenda, is to fully withdraw from the agreement.

More specifically, Trump announced during his campaign that he would impose penalties on companies that moved American production offshore, notably to Mexico. Another central element of his campaign was the imposition of punitive tariffs on China.

He finally declared that the US could even leave the World Trade Organisation (WTO), calling it “a disaster”, which marked a new level of attack on the global trading system.

Unsurprisingly, trade liberalisation did not figure prominently on Trump’s electoral agenda. Although his programme pretended to be about “fighting for free trade”, there was no mention of further opening up the US service sector to foreign suppliers, cutting tariffs, or reducing generous subsidies for US farmers. Nor was there any desire to advance any ongoing regional or multilateral trade negotiations.  

Judging by the election’s result, it appears that Trump’s aggressive trade rhetoric and economic nationalism caught on. In particular, it reached the target group in the US rust belt states by channelling blue-collar anger.

In a certain manner, many of Trump’s positions on trade fit nicely into a long-standing American policy practice: protectionism. It is a widespread myth that the United States, although often dubbed the motherland of capitalism, is and has always been an ardent free-trader.

One of the country’s founding fathers, Alexander Hamilton, was a fierce proponent of tariff walls and, together with German economist Friedrich List, developed the infant industry argument for protection. The first major act passed in the history of the United States, adopted in 1789, was on tariffs, and it imposed charges on selected goods of up to 50 per cent.

Until 1945, tariffs in the US were among the highest in the world. The Smoot-Hawley Tariff Act of 1930 and the ensuing global retaliatory tariffs undoubtedly contributed to the depth and length of the Great Depression.

Only after World War II did the United States engage in substantial trade liberalisation, mainly in the context of the various GATT rounds, the General Agreement on Tariffs and Trade that was the forerunner of the WTO. Even today, at an average of 4.8 per cent US tariffs are not particularly low by international standards, when one considers the figures of 2.5 per cent in Australia and 0.2 per cent in Singapore.

Now that Trump has taken office as the 45th US president, questions are being asked about which of his announcements were mere propaganda on the campaign trail, and which ones have a realistic chance of being implemented.

The US withdrawal from the TPP last week was done easily, but it comes at the cost of giving up a unique opportunity to ease market access for US companies in countries where barriers to trade and investment are high such as Vietnam and Malaysia.

It also comes at the geo-political risk of China stepping into the void left by the United States. Australia, for example, has already signalled its support for Chinese-led trade deals to replace the TPP. A renegotiation of the TPP is unlikely, as the other countries involved are not keen on unravelling an already negotiated package.

With regard to NAFTA, a review of this more than 20-year-old agreement is probably a suggestion Canada and Mexico would not oppose, but Washington will have to keep in mind that any of its demands to raise regional import barriers would be countered by similar demands from its neighbours.

Ironically, in the past Canada was subject to more complaints under NAFTA rules than Mexico, and given that it still levies high tariffs on some agricultural imports from the US it could continue to be so.

LITTLE PROSPECT: There is also little prospect for progress on free-trade talks between the US and the European Union, which had already stalled before the US presidential election.

Furthermore, two recently launched multi-lateral initiatives — the Trade in Services Agreement (TISA) and the Environmental Goods Agreement — now face an unknown future.

On the other hand, stronger use by the US of contingency measures against imports that are perceived as “unfair” is a very probable scenario, in particular on goods such as steel. Such measures, like anti-dumping or countervailing duties, are allowed under WTO rules, and they would have the advantage of satisfying constituents in rust belt states.

In mid-2016, the US had 102 anti-dumping measures in force against China, and this number will probably increase. Also, the Trump campaign programme’s specific reference to “China’s unfair subsidy behaviour” could indicate a strong increase in countervailing measures against China, which currently stand at 34.

The US may even test the limits of WTO rules and see to which extent this would lead to disputes in the near future. It is fortunate for Egypt and other countries in the Middle East that so far they have hardly been affected by these measures.

To please rust belt and other dissatisfied voters in the US, Trump may also scale up support from the tax-funded Trade Adjustment Assistance Programme. Under this programme, workers, firms and farmers in the US that are adversely affected by imports are eligible for benefits. Already under the Obama administration, the programme was expanded to include service-sector workers and workers whose jobs were adversely affected by trade with non-FTA partners of the United States.

Complete withdrawal of the US from the WTO, however, is highly unlikely. This could bring low-tariff market access by US exporters to the rest of the world to an immediate halt, potentially exposing US exports to steep levies from a host of trading partners. The US would also lose the leverage that comes with challenging other WTO members over breaking trade rules.

By the same token, it is also unlikely that the US will substantially violate any of the commitments it has made as a WTO member. Against this background, the general 45 per cent tariff on Chinese exports to the United States that Trump favoured during his campaign is very unlikely to materialise.

There is little room for manoeuvre on tariffs as they are already at the upper limits of the ceilings allowed by WTO rules. In this context, the WTO system of legally committing tariff bindings will act as a safeguard against any fall-back into hard-core protectionism.

One open question is how Washington will satisfy those important parts of the US business community that are export-oriented and want further liberalisation, be it through the TPP, TTIP, or progress in the WTO Doha Round of talks. A trade agenda that builds exclusively on defensive interests may be difficult to defend in the long term, notably in the presence of a business-friendly Republican Party-dominated Congress. Trump might not be the first US president to flip-flop in this regard.

Finally, it is questionable whether Trump’s trade narrative makes economic sense. Any rise in US tariffs would lead to price increases and harm American consumers. They would also threaten the competitiveness of down-stream industries and the status of workers employed there — for example, any additional cost of imported steel would negatively affect the entire US car sector.

Many US industries are deeply integrated into global supply chains and would suffer from higher import costs. In the long run, any massive taxation of imports would lead to productivity losses and inflation rather than national greatness.

In sum, there are a number of limits on the implementation of an aggressively protectionist trade agenda: by the interest of trading partners, existing international commitments of the US, its own business interests, and basic economic principles.

As a result, Trump is likely to adopt a much softer line on trade than the one he flagged during his raucous campaign. This is good news for the US and for the rest of the world.

The writer is a WTO visiting fellow at the Institute for international Trade at the University of Adelaide in Australia. He writes in a personal capacity.

add comment

  • follow us on