Published daily by the Lowy Institute

The Trump trade agenda

Trump’s America may use its size and dominance to advance its interests with little regard for an economic rules-based order.

President Trump and Vice President Pence meet with Harley Davidson executives and Union Representatives on 2 Feb 2017 (Photo: Jabin Botsford/Getty Images)
President Trump and Vice President Pence meet with Harley Davidson executives and Union Representatives on 2 Feb 2017 (Photo: Jabin Botsford/Getty Images)
Published 7 Mar 2017 

Trade and migration were the two big economic issues in Donald Trump’s electioneering. As president, he has moved swiftly on migration but has done very little on trade so far. China has not been blacklisted as a currency manipulator; NAFTA remains untouched; and no tariffs have been imposed on countries running trade surpluses with America. All he has done is withdraw the US from the proposed Trans-Pacific Partnership. But these are early days in the Trump presidency. Will his anti-globalisation rhetoric be softened by the reality of incumbency, or will his America-First policy succeed in shifting the country to a far more autarkic model of self-sufficiency, undermining the rules-based global economic order at the same time? The just-released President’s Trade Agenda provides some clues about his post-election thinking.

For those who believe that President Trump’s bark is worse than his bite, the Agenda might provide some comfort. It suggests how America will respond to  the perceived deficiencies in the current global system of trade-dispute settlement by using American laws which have been on the books for decades, and which were used in the past without collapsing global trade. After all, President Reagan enforced ‘voluntary exports restraints’ on Japan, giving Harley Davidson (among many others) temporary protection against imports (yes, the same Harley Hogs were revved up on the White House lawn last month). Under George W Bush, similar measures were imposed against imported steel. All countries oppose dumping and unfair trade behaviour, and the language of the Agenda is mostly in terms of ‘fairness’ in defence of American interests. WTO rules allow the right to retaliate, and the Agenda simply sets out how America would do this.

The text, however, still leaves plenty of room for concern about the future of global trade governance. There is a clear assertion of national sovereignty over any dispute-settlement directives made by the WTO: ‘the Trump Administration will aggressively defend American sovereignty over matters of trade policy’.

Having asserted America’s right to protect domestic industry and the right to have its domestic rules prevail over rules administered by global institutions like the WTO, the Agenda goes on to say that America will use leverage to open foreign markets.

For decades, the U.S. government has engaged in efforts to break down such barriers and open foreign markets to US. competition. The Trump Administration recognizes that such efforts are inherently difficult, as foreign governments often have strong political reasons to protect certain industries in their home markets. However, the status quo is unsustainable – for too long Americans have lost business to other countries, in part because our businesses and workers are not being given a fair opportunity to compete abroad.

In practice, no country has the sort of openness implicit in this argument. Tariffs, quotas, administrative requirements (such as government tendering conditions), biosecurity regulations and laws always give the local producers some advantage. Governments everywhere routinely help home industries which get into trouble. There are often hidden subsidies and distortions in the supply of energy and finance. America is no exception (some examples of America’s trade advantages are mentioned here). This Agenda is written as if America’s own pure openness gives it the right to use leverage to force open foreign markets on the grounds of fairness.

The same section specifically identifies bilateral and plurilateral trade agreements as a common source of the kind of trade barriers which should be forced open. Certainly, a case can be made that such arrangements are intrinsically trade-distorting: these so-called ‘free-trade agreements’ are actually preferential trade agreements, giving the parties preferred access over outsiders who could often supply more cheaply. But bilateral trade agreements are specifically the way forward for global trade under President Trump.

Plurilateral trade agreements (such as NAFTA) are by their nature less distortionary than bilateral agreements: having more participants increases the likelihood that there is a low-cost supplier among the members. The Trump preference for bilateral rather than plurilateral deals suggests there is another motive. Perhaps country-by-country individual deals give America more leverage to maximise its own interests. Having done an advantageous deal with one country, it is easier to get the same terms agreed in another negotiation. In these bilateral horse-trading deals, third parties may be the main losers. Australia will, for instance, need to be watching the proposed American/Japan bilateral negotiations to see the impact on our existing beef quotas into the Japanese market.

The Agenda also notes sets out a narrative of America’s manufacturing decline:

  • Jobs in American manufacturing fell from 17 million in 2000 to 12 million in 2016.
  • Output in American manufacturing has grown much more slowly since 2000 than before.
  • Real median household income was lower in 2015 than it was in 2000.

What is not mentioned is that trade accounts for only a small part of this manufacturing decline. Most of the fall in employment reflects the increase in productivity thanks to computers and robots. Germany (where policy has strongly supported manufacturing) has experienced much the same fall. The global terms-of-trade, which had traditionally shifted inexorably in favour of manufactures and against commodities, have moved against manufacturing prices as China became factory to the world. It would be foolish for America to try to compete with low-wage countries for assembly-line factory work. The world has changed, and America (like others, including Australia) can benefit from globalisation by facilitating domestic flexibility and transition, not by reinstating last-century technology. The issue that should be addressed is policy failure to soften this transition, or to redress the egregious mal-distribution of income which has allowed the likes of Trump’s Wall Street cabinet-members to prosper so outrageously.

To hold out a revival of manufacturing as the answer to the shortage of traditional blue-collar jobs is fraudulent. To undermine the global trading system in this futile endeavour would be a tragedy. How this will play out in practice is still unclear, but the Agenda puts the rest of the world on notice that Trump’s America may use its size and dominance to advance its interests with little regard for an economic rules-based order.

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