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U.S. Foreign Trade Policy


Paul  Marer, Emeritus professor of economics and business, CEU Business School

Campaign Rhetoric

Donald Trump had campaigned for the presidency by blaming trade agreements being perennially unfair to the United States, saying that these – along with globalization – were significant causes of the loss of manufacturing jobs and the hard times being faced by America’s blue-collar workers. He cited as evidence the USA’s persistently large trade deficits with China, Mexico, Japan, and South Korea.

He promised to “fix” the problems by abrogating or renegotiating existing trade agreements, by moving trade negotiations from multilateral to bilateral channels, and by putting “America’s interests first”. He threatened to impose punitive tariffs on “unfair” imports, to force others to open market segments where U.S. firms face discrimination, and to penalize U.S. firms investing in manufacturing abroad.

Trump’s First Five Months

President Trump had taken several headline-grabbing actions on trade during his first five months in office (January 20 - June 20), enabling him to claim that he is making good on his promises. Trump denounced, and has withdrawn from Congress, the U.S.-led Trans-Pacific Partnership (TPP) that President Obama signed in  February 2016,  along with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The TPP’s two-fold purposes were to counterbalance China’s increasing economic and political dominance in Southeast Asia and to allow this U.S.-led coalition (instead of China) to modernize the rules of trade and investment that go beyond those already agreed under the auspices of the WTO. Trump’s action were/are motivated by U.S. domestic political considerations (such as being a prisoner of his own rhetoric as well as heeding the opposition of organized labor), even though approving TPP would clearly have been in America’s global trade and political interests. Abandoning it is a clear win for China. 

The Transatlantic Trade and Investment Partnership (TTIP) – an agreement between the USA and the EU’s (pre-Brexit) 28 members – had been nearly finalized in 2016. It would remove tariffs, cut red tape, and reduce restrictions on investment – many of its details similar to those in the TPP. To be sure, there has been some opposition to TTIP on both sides of the Atlantic. In the wake of Brexit and President Trump’s opposition to multilateral trade agreements, TTIP negotiations have stopped; the draft treaty is in “deep freeze”. It is important to note, however, that it has not been formally abandoned, as TPP was.

The North American Free Trade Agreement (NAFTA), signed by the United States, Canada and Mexico in 1994,  was the focus of much of Trump’s ire during the campaign. He said that he would withdraw America and renegotiate bilaterally with each partner, on terms much more favorable to the USA. In April, Trump was about to sign an executive order to withdraw the States from NAFTA when Mexican President Enrique Pena Nieto and Canadian Prime Minister Justin Trudeau called on him to back off, arguing that NAFTA’s sudden collapse would be a huge economic shock to the many firms engaged in cross-border trade. Trump complied with their request. 

U.S. businesses are divided on renegotiating NAFTA. While some industries are eager to rewrite it, NAFTA is working just fine for others. Realizing this, Trump’s Secretary of Commerce, Wilbur Ross, said that the first trade-policy principle of the new Administration is to avoid doing unnecessary harm – a welcome voice of reason in the face of the mercurial President’s bombastic and often inconsistent pronouncements.

Experts agree that there is a ready recipe for revising NAFTA quickly to improve it. NAFTA’s three members had already agreed with the nine other signatories of the (now abandoned) TPP on new trading rules. Basically, all that would be needed is for the three NAFTA countries to agree among themselves to implement the already agreed provisions of the TPP.

The most consequential protectionist action to date has been Trump’s announcement that he will soon restrict in a major way steel and aluminum imports – mainly from China – on the WTO’s rarely invoked “threat to national security” grounds. Supposedly unfair global competition in these metals has left only a small number of plants still operating in the United States, endangering the supply of these metals needed to build ships, tanks and other military supplies, according to the legislation about to be submitted to Congress.

It is hoped that Trump’s need to obtain China’s cooperation vis-a-vis North Korea will moderate the nature and extent of his protectionist steps, stopping well short of triggering a global trade war.

Conclusion

President Trump has realized that while campaign rhetoric is easy, you often face severe constraints when trying to implement those promises. It is fortunate that – so far – President Trump’s bark on foreign trade and investment has been worse than his bite. Most of us economists hope that this will continue, for the benefit of maintaining a reasonably orderly global trading system.

This column is part of a series of opinion pieces from experts at the CEU Business School in Budapest. The opinions stated here do not necessarily reflect those of the BBJ. 

Economists’ Views on the Issues 

There is near consensus among economists that:

1. U.S. manufacturing output is at a record high. But large improvements in productivity over decades have shriveled the number of workers needed to produce it. This is similar to U.S. agriculture, feeding a population much larger than America’s, with only a tiny fraction of its workforce. Job growth is in service sectors.

2. Focusing on bilateral trade balances, or even on a country’s overall trade balance with the rest of the world, is not meaningful for a large economy with floating exchange rates, like that of the United States. While it is true that the States annually imports about USD 500 billion more than it exports, the rest of the world acquires the equivalent in U.S. assets. This net inflow of foreign capital allows U.S. domestic investment to exceed its level of domestic savings, fueling productivity and growth.

3. If the United States were to unilaterally impose tariffs on a wide range of imports, the other countries would surely retaliate, moving the structure of global trade away from comparative advantage. To give just one example: China could drastically cut its large imports of Boeing airplanes. More importantly, the States would thereby abrogate the 1994 Uruguay Round Agreements Act, which pledged that the country would play by World Trade Organization (WTO) rules. Trust in any international agreement the USA had signed or offers to sign – not only on trade but in any area – would plummet; the negative consequences for the USA and for the world would be obvious.