Thursday 28 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly, on January 30 - February 5, 2017.

 

US President Donald Trump signed an executive order to withdraw the US from the Trans-Pacific Partnership (TPP) agreement on the first day of his presidency. Now, it is widely expected that Trump’s presidency will increase US trade protectionism and, consequently, protectionism by others in retaliation, possibly triggering serious trade conflicts with difficult to predict consequences.

After decades of denial by “free trade” advocates, it is now widely agreed that many manufacturing jobs in the US have been lost to both automation and offshore relocation by US corporations. Free trade agreements (FTAs) are also being blamed for the US’ large trade deficits.

 

Trump trade strategy?

With the global economic slowdown of the last eight years associated by many with the slowdown of trade expansion, the surprise election of Trump has become the subject of much speculation and some dire predictions. Many are concerned that he has made various contrarian pronouncements on FTAs, while his appointments to trade-related portfolios seem to contradict his trade rhetoric.

If Trump lives up to his campaign rhetoric, other plurilateral FTAs will also be affected. Trump has referred to the TPP and the North American Free Trade Agreement (Nafta) as disasters for the US, and has vowed to renegotiate Nafta. His announced preference for negotiating “fair” bilateral trade deals favourable to the US has not given much comfort to prospective negotiation partners.

And while Trump’s main preoccupations have been with US manufacturing jobs and the related international trade in goods, he is also expected to promote US corporate interests more generally, for example, on intellectual property, financial liberalisation, investor rights and dispute settlement.

Already, most US FTAs include “non-trade issues”, many of which have raised costs to consumers, for example, by further strengthening intellectual property monopolies typically held by powerful transnational corporations, whose chief executives seem likely to be very influential in the new administration.

 

Currency manipulation

During the presidential campaign, both Hillary Clinton and Trump accused China of being a “currency manipulator”, despite market consensus that the renminbi has been reasonably aligned for some time. Under US law, evidence of currency manipulation could be grounds to impose additional tariffs on imports from a country so deemed by the Treasury Department. Aware that this could exacerbate trade conflicts, President Barack Obama avoided pressure to do so from many Congress members, lobbyists and economists.

However, Trump can easily revise this position on some pretext or other, by taking trade or other retaliatory actions against China on the ostensible grounds of alleged currency manipulation, which would contravene World Trade Organization (WTO) rules, allowing China to successfully take a case against the US to the WTO for such an illegal action.

 

WTO trade rules abused

Trump has also threatened to impose tariffs of as much as 45% on imports from China and Mexico. But while an across-the-board tariff hike is unlikely, as it is prohibited by the WTO, the new administration is likely to consider invoking WTO trade remedy actions on products from China, Mexico and other countries by claiming they are being dumped or subsidised. This has already happened, for example, with solar panels and wind turbines from China, raising the costs of renewable energy, and thus undermining efforts to mitigate global warming.

To be sure, WTO trade remedy rules have long been widely abused for protectionist purposes. A country can impose high tariffs on an imported item from another country by claiming its price has been artificially depressed or subsidised by the government in order to export — or “dump” — them at a price lower than the domestic price.

No deterrent is imposed against the offending country even if a WTO dispute settlement panel rules that the ostensibly anti-dumping tariff-raising action was wrongly taken, even though the exporting country has lost considerable export earnings in the interim.

Furthermore, similar actions can be repeated without impunity with no threat of penalty. Such ostensible trade remedy actions are more likely than blatant tariff walls. These may, in turn, trigger retaliatory counteractions by aggrieved governments, potentially leading to a spiral of trade protectionism — trade warfare.

 

Fair trade?

It is unclear how the new administration views FTAs more generally. Trump’s objection to the TPP and Nafta focuses on the goods trade and the loss of manufacturing jobs due to cheaper imports, often brought in by the same companies that have chosen to relocate production capacities abroad, and are already mobilising to resist actions which may jeopardise their profits.

This view does not seem to recognise that technological change, particularly with automation, has been the major source of job losses. Many jobs remaining in the US have higher skill requirements, with fewer employees producing more goods with less labour-intensive techniques.

“Fair trade” will be subject to self-serving interpretations by the governments concerned, arguably further undermining trade multilateralism. While freer trade has undoubtedly improved consumer welfare with cheaper imports, it has seen some deindustrialisation in the North and industrialisation in the South in recent decades with important employment consequences, which have been a major source of the current discontent over globalisation.

 

Trade growth slower

To be sure, the trade growth slowdown following the 2008 financial crisis suggests that the U-turn has already taken place after an extraordinary period of trade expansion due to much greater international specialisation with the popularisation of international value chains.

In December 2015, former President Barack Obama’s US trade representative Michael Froman threatened the already difficult Doha Round of WTO trade negotiations by trying to introduce TPP issues, which had been kept off the agenda from the outset of the ostensible Development Round after the Seattle WTO ministerial walkout of 1999.

Perhaps most worryingly, there has been no indication so far that the new US administration will not undermine multilateral trade negotiations under the auspices of the WTO. Trump’s much-trumpeted preference for bilateral deals favourable to the US is likely to test trade multilateralism as never before.

But Trump also has a penchant for the unpredictable and may yet surprise the world with a new commitment to trade multilateralism to advance consumer, producer and development interests for all.


Jomo Kwame Sundaram, a former economics professor, was United Nations assistant secretary-general for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007. Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior United Nations positions from 2008 to 2015 in New York and Bangkok.

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