Donald Trump’s presidency has never been short of controversy and antagonism particularly in the field of trade. His tweets have displayed particular ire at so-called terrible trade deals.
The growth of global trade has been one of the successes of the global economy in recent decades. Between 1980 and 2011 trade between developing countries more than tripled. Today the sum of exports and imports across nations is higher than 50% of global production.
It is then quite disappointing that the President of the United States the world’s largest economy should embark on a series of provocative moves to withdraw or disassemble trade agreements that had generally served the world well. How much the Administration disrupts global trade through re-negotiation may have far-reaching consequences for individual sectors and countries, and global growth
The TPP was an expansion of the trans-pacific strategic economic partnership agreement signed by Brunei, Chile, New Zealand, and Singapore in 2005. Other countries joined over time, including the United States. However, in 2017 the US withdrew from the agreements leaving the original four countries plus Canada, Japan, Malaysia, Mexico, Peru and Vietnam to sign an agreement in January 2018.
Trump’s disruption to TPP
The US has withdrawn from the Transpacific Partnership (TPP), a deal which would have governed the trade rules and practices of 12 countries and 40% of global GDP. Ironically commentators often saw it as a back-door route for the US to limit the influence of China over Asian trade.
Consequences of Donald Trump’s disruption – China takes the lead
The APEC meeting decided to press ahead with TPP. It now covers 11 members accounting for 15% of global GDP.
Separately, China has pressed ahead with a 16-country trade deal called Regional Comprehensive Partnership (RCEP). Discussions have been ongoing since 2012 and included mostly countries from Asia and Oceania. RCEP Includes countries that account for 3.5 billion people and 24% of the global economy. Six of those countries Japan, Australia, New Zealand, Brunei, Malaysia, Singapore and Vietnam are also part of TPP.
RCEP is complimentary to China’s “One Belt One Road” (OBOR) strategy. OBOR provides the network of physical infrastructure while RCEP will generate the trade agreements that should allow for products to flow freely through that infrastructure.
The agreement aimed to eliminate trade barriers between the U.S. Canada and Mexico. The parties implemented the agreement on January 1, 1994. While Donald Trump’s bellicose comments have disrupted the agreement, there was already a widespread feeling that the trade policy needed updating. NAFTA renegotiations have reached their sixth and penultimate round.
Trump’s disruption to NAFTA
“worst trade deal ever made” – Donald J. Trump August 2017
- The Trump administration wants to lower the trade deficit between the United States and Mexico.
- Trump wants products that are traded duty-free between the three countries to be produced with a greater US content.
- The Trump administration has proposed a 20-35% border tariff with Mexico
- The administration wants an end to the dispute resolution panel
- They wish to see a five-year sunset clause that would necessitate renegotiation of the agreement every five years.
- Trump has asked for the end of the maquiladora program. The program allows US companies to set up manufacturing in Mexico to assemble and finish products that are then re-exported back to the US. The maquiladoras program is thought to be responsible for 65% of Mexican exports and employ 30% of Mexico’s workforce.
- It is possible that President Trump could unilaterally pull the US out of the agreement without congressional approval.
Consequences of Donald Trump’s disruption– still hope that sense will prevail
In Canada, the uncertainty about the future direction of NAFTA has led to business worry. However, commentators believe that were NAFTA to collapse; there would be six months grace during which Canada could negotiate most favourable nation status with the US. MFN would lead to an average 3.5% tariff on goods and services from Canada to the US something unlikely to materially change Canada’s competitiveness.
In January 2018, there were noises that Donald Trump would unilaterally pull out of NAFTA. However, with the stock market recently wobbling, he may now be more circumspect at pulling out given that many believe it could lead to further downside risk in financial markets. The US is mindful that Mexican politics could get in the way of the negotiations if the talks drag on until summer. The Mexican election is on 1st July 2018 and the Presidential election in December.
Should the worse happen, trade experts expect that Mexico would turn to agreements with other South American countries to increase trade. However, the immediate impact on the Mexican economy could be devastating with higher inflation and significant job losses.
A recent Reuters poll found that only 4 out of 45 economists thought the deal would be terminated.
More recently the Trump administration has imposed some unilateral focussed tariffs on Chinese solar panels and South Korean washing machines.
As a final thought, note that the starting point for Donald Trump’s aggression on trade is his supposition that the high trade deficit the US continues to run is because the rest of the world is unfairly exporting goods and services to the US. But as Steve Hank points out, in a very pointed article in Forbes, that the trade deficit is domestically generated not by those supposed unscrupulous companies people in other countries. The US has for decades run a domestic surplus where domestic spending outstrips domestic incomes. If the country wants to spend beyond its means and fund it with borrowings from abroad it might have the courtesy of buying their goods and services!
Some useful links
This article was attributed and provided by PG International