Commentary | 23 February 2018

Donald Trump, trade, and Malcolm Turnbull in the middle

Originally published in the Australian Financial Review (Photo: Alex Wong/Getty Images).

Originally published in the Australian Financial Review (Photo: Alex Wong/Getty Images).

Trade and the increasingly rivalrous relationship between the US and China featured heavily in discussions overnight between Prime Minister Malcolm Turnbull and President Donald Trump.

While the Turnbull government has been taking a much tougher line with China on security issues, care has been taken not to conflate this with the economic relationship.

That stands in awkward contrast to the Trump administration, which has made clear it sees issues of geo-strategic and economic competition as inextricably intertwined.

This tension in views is set to intensify as the US appears to ready itself for much stronger action against what it sees as the unfair trade practices of China (and others).

Already the US has increased tariffs on solar panel imports and is ratcheting up its use of anti-dumping and other enforcement measures. The Commerce Department has finished its national security review into steel and aluminium, recommending protection measures to sharply curtail imports of these metals.

The administration’s investigation into technology theft by China will also soon conclude and could result in wide-ranging retaliatory measures.

Finally, by blocking the appointment of new WTO appeals judges, the US risks sending the institution at the centre of the global trading system into crisis by later this year.

Where does this all lead? The last time America engaged in such unilateral action was the 1980s, when similar provisions in US trade law were actively deployed, particularly against a rising Japan but also many others.

The eventual result was the 1994 establishment of the WTO which, with its dispute resolution body and broader coverage of issues, addressed many American concerns while the threat of aggressive action saw Japan agree to voluntarily curb its own exports.

The Trump administration appears to be trying something similar today to force reform at the WTO and extract Chinese concessions.

Tall order

The latter however seems a tall order. China is not Japan in the 1980s. Beijing is not an American ally and there are clear geostrategic tones to the current economic tensions.

American complaints today also focus on more difficult issues, like informal pressure for foreign firms to transfer technology, a misguided fixation with trade deficits, and issues which challenge the very nature of China’s state-led development model.

If nothing else, China’s own nationalistic politics will be a barrier to making any significant concessions to obvious American pressure, especially since Trump has chosen to pursue US grievances outside the WTO dispute process, which would have at least helped de-politicise the situation. Tit-for-tat retaliation thus seems likely and it’s not clear where the restraint to avoid a full-blown “trade war” might come from.

A more viable strategy, though a longer term one, is to work to reshape the existing rules of the game. Trump for his part has said he wants to work with like-minded countries in pursuing this. It is ironic then that a key discussion point for Turnbull will have been trying to sell the revived Trans Pacific Partnership (TPP) to Trump.

This is a deal that was always seen as a way for America to write the rules of international commerce in the region, use this to set the basis for broader negotiations at the WTO, and shape how China’s economy might evolve over time. While some of its contents are questionable, it does do exactly what the more constructive parts of America’s trade agenda says it wants.

Trump’s comments at Davos left the door open to re-joining the TPP but only on “substantially better” terms. Yet Turnbull and the other TPP members are already offering him a good deal.

Rather than take the opportunity of US withdrawal to make the TPP more favourable to the remaining members, a handful of clauses, mostly of pertinence to the US, have simply been suspended until further notice.

Despite pulling out, the US is essentially being offered the same terms with potentially no penalty. Other countries are unlikely to get such favourable treatment when seeking future accession. Yet, true to his deal-making style, the clear risk is that Trump simply pockets this concession and demands more.

Therein lies the rub. A priority for Turnbull and Australia is to work as constructively as possible with the Trump administration on common concerns and, in this case, shaping the future of the global trading system.

But Trump’s own sales pitch to US partners says it all, “America first does not mean America alone”. Convincing Trump of the inherent contradictions with that statement will not be easy.