Trump trade deal pullout would hurt US most
The election of Donald Trump as the next US president has sent shockwaves around the world. Now everyone must consider seriously what Trump has said about future policy and determine which of his pronouncements may come true.
China must be especially attentive since some of Trump’s pronouncements were directed squarely at them.
Begin with the currency manipulation issue. The US Treasury makes a biannual report in October and April concerning foreign exchange policies of its major trading partners. In the most recent report in October, China only met one of three criteria used to determine if currency manipulation was occurring; Japan, Korea and Germany, on the other hand, met two of the three. It will be difficult for Trump to force legal action on this issue unless he could somehow change the criteria used to define manipulation.
Next, consider Trump’s threat to raise tariffs against China to 45 percent. Trump would have some power to do this because there are various US laws that allow the president to impose tariffs under specified conditions, such as a national security threat.
A more direct approach that Trump could take is to initiate and encourage many more trade remedy actions. These actions, such as antidumping, countervailing duties and safeguards, are allowable under the WTO agreement. Trump may demand many more of these actions against China and others, but the amount of trade that can satisfy the conditions may still remain small and have a limited effect.
There is concern that greater trade actions against China and others may inspire other countries to do the same. In the aftermath of the US Smoot- Hawley tariff act in 1930 dozens of other countries tried to protect their own workers and markets by raising tariffs. The effect was a dramatic reduction in global trade that most economists believe contributed to the lengthening and deepening of the Great Depression.
Unfortunately, the world is suffering from an economic malaise which is inspiring the rise of populist leaders who talk tough and promise quick and immediate solutions. Trump’s narrow victory is a sign that economic conditions have worsened enough in the US to induce voters to take a chance on someone with little experience but who promises to shake up the system.
I think most Americans agree that some shaking up of the system is cer-
tainly needed, but people differ significantly on how it should be done. Protectionism has been shown many times in the past to worsen economic outcomes in the long run even though it offers some immediate and obvious improvements for a small group of people in the short- run. Thus, most of Trump’s protectionist proposals should be resisted. But how?
Perhaps the best way is for all governments to insist on and continue to hold themselves to their past trade commitments. The WTO and regional free trade agreements are designed to reduce economic uncertainty by assuring that national trade policies will be transparent and consistently applied despite changes in leadership. Renegotiation of a trade agreement is acceptable because before any new deal can go into effect it will require the consent of all the negotiating countries. Thus, if Trump refuses to accept the TransPacific Partnership ( TPP) in its present form, that will clearly prevent a step toward trade liberalization in the near term. However, if he wishes to renegotiate the TPP, then future trade liberaliza- tion via mutual agreement remains a possibility.
If Trump does initiate many more trade remedy actions, China can closely monitor these actions and if they do not conform to allowable WTO provisions ( provisions that were agreed to by the US), then China can and should initiate WTO dispute procedures against the US.
Finally, if Trump does attempt to pull out of trade agreements, the most effective deterrent for such a serious slide toward protectionism may be continued trade bloc formation in the rest of the world. If the US decides to protect its trade while others around it continue to liberalize theirs, it may not take long for Trump to realize that the US will lose more because it is not participating.
Finishing on a positive note, in the first few days after the election, Trump has already softened some of his statements relative to his hard- line pronouncements made during the campaign. The Republican majority in Congress has mostly been in support of freer trade, the TPP and the TTIP with the EU. Many have argued that these trade agreements already incorporate many of the safety provisions that Trump espouses and enables the US to be a leader in setting the rules of trade and investment that countries will follow.
Hopefully Trump will recognize the importance of adhering to our current trade agreements and uses his trade threats mostly to motivate international dialogues that may ultimately lead to freer trade agreements that all sides may also judge to be fair.