Festering challenges threaten international trade
From an international trade standpoint, the year 2017 will go down as one of the most complicated during the past 20 years.
The European Union continued to deal with internal issues, as Germany, its economic leader, tried to advance its goal of increased economic integration for the organization. In Asia, China’s economy continued to hum along.
Here in North America, everybody monitored the moves by the Trump administration and the trade stance the U.S. will eventually take with its two North American neighbors.
As we bid adieu to 2017 and head into a brand-new year, several issues that have been percolating during the past year will become even more prominent in 2018.
On June 23, 2016, the United Kingdom voted to leave the European Union, which is slated to take effect on March 29, 2019. This move is referred to as Brexit, interpreted to be part of a wave of nationalistic sentiment that has embedded itself in many European countries. The vote triggered heated discussions by UK and EU officials pertaining to developing the protocol for separation.
Many economists are predicting the move could cause a decrease in the UK’s GDP, thus affecting every UK citizen. Both sides will scramble in 2018 to figure out how to separate one of Europe’s largest economies from the rest of the continent, and what this will mean for trade and financial markets.
In Asia and Latin America, major economies are forging ahead to try to salvage the proposed trade agreement previously referred to as the Trans-Pacific Partnership (TPP), after President Donald Trump, as one of his first acts as president, decided to pull the U.S. out of any future negotiations. Renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), after U.S. withdrawal and Trump’s repudiation of the multilateral trade agreements, the remaining partners committed to making the agreement a reality, without U.S. participation. The 11 members are Mexico, Canada, Australia, Japan, Chile, Brunei, Malaysia, New Zealand, Peru, Vietnam, and Singapore. If they are successful in establishing a working trade format for CPTPP, they will have formed one of the most powerful trade blocs in the world.
Closer to home, the fifth round of the North American Free Trade Agreement (NAFTA) renegotiation talks will continue in January. The Trump administration demanded the renegotiation talks after the president lambasted NAFTA as the “worst agreement ever,” during his presidential campaign. Four rounds of negotiations have been held in the U.S., Canada, and Mexico, and the fifth is planned sometime in January. Negotiators had hoped to finish talks by the end of 2017, but this did not happen. Serious impasses remain, as negotiators have been vocally critical of the amount of good faith negotiating that each is bringing to the table.
As the negotiations come to a close, more and more pressure will be brought upon the Trump administration to preserve NAFTA by the U.S. agricultural, manufacturing and raw materials sectors, which have benefited from the agreement during the past 23 years. There is a great fear that if nothing substantial comes out of the NAFTA renegotiations, Trump will have backed himself into a corner by asking for the renegotiations in the first place, with no alternative left than to withdraw the U.S. from the agreement for facesaving purposes. NAFTA will either continue, albeit in a modified format — the extent of which cannot be predicted at this point — or rescinded in 2018.
Finally, a heavy focus should be on China in 2018. This year, the Trump administration locked horns on trade with traditional trade partners in Europe and the Americas. If the U.S. continues to move toward a more isolationist stance as pertains to geopolitical affairs and trade, China seems poised to step in to fill the void.
With its massive production base, large national market and ample capital to inject into foreign countries, China could become an attractive alternative to trading partners who feel like they are being abandoned or spurned by the U.S.
From a trade standpoint, the U.S. is at a crossroads with the direction it could take on expanding its presence and influence across the world. As the Trump administration enters its second year, the cleverness or folly of its policies will start to show, and trade is no exception. An old proverb — “May you live in interesting times” — can be interpreted as both a wish and a curse. The next 12 months will provide us the answer as to which 2018 will be.