First They Came for the TPP

President-elect Donald Trump has suggested alarming changes to American trade policy

23/11/2016 | by Claudia Schmucker, Rachel Herp-Tausendfreund

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It’s still too early to say which of American President-elect Donald Trump’s campaign promises will actually become policy – but with TPP, TTIP, China, and NAFTA all in the cross hairs, significant change is almost certain. Here’s how a few scenarios on the future of trade might play out.

The populist campaign that propelled Donald Trump to a shocking victory was as heavy on bluster as it was weak on detail and consistency – but if he did maintain one theme, it was his stance as an anti-immigration and anti-trade man of the people. His “America first” rhetoric resonated with many Americans on a number of different levels, tapping into cultural insecurity, economic malaise, fear of terrorism, and, of course, xenophobia. Indeed, the real genius of Trump’s campaign may have been his unequivocal break from the internationalist/globalist bipartisan consensus that free trade is a cornerstone of the “economic foundations of peace,” in the words of President Franklin D. Roosevelt.

Trump will now need to show that he is following up on his promise to “get a better deal for our workers.” Indeed, CNN has reported on a memo from Trump’s transition team that sketches out his administration’s trade policy agenda for the first 200 days. Though this is just preliminary, we should expect him to act on his trade and economic promises. What can he do, and what does this mean for the American and European economies?

The unsettling fact is that Trump will have the legal authority to make some dramatic systemic changes on day one. The separation of powers and tenuous party discipline in US politics constrain a president’s power domestically, but not when it comes to trade policy. According to the constitution, Congress has the power to regulate commerce between states and with other countries; however, through a number of different statutes Congress has handed this power over to the executive branch. The president can unilaterally stop all forms of commerce between the United States and another nation, seize or freeze foreign assets, impose tariffs, etc. So Trump can, in fact, withdraw the US from existing trade agreements or levy tariffs on China immediately. Congress could revoke these powers, but this would likely take time.

However, there are risks involved with using the full extent of executive powers against Congressional will. Trump will govern with a Republican majority in both the House of Representatives and the Senate, which means he will easily be able to push through policies that have wide GOP support (tax cuts and lower regulations, for example). Radical trade re-negotiations or tariffs, however, would likely provoke resistance from most Congressional Republicans, who could then decide to oppose Trump on those initiatives where he does need Congress. So what will happen? What if the next president…

…implements tax cuts and infrastructure spending?

Trump won the election with the pledge to support the US economy. During his campaign, he promised a fiscal stimulus of $1 trillion in infrastructure spending over ten years. In addition, he wants to cut corporate taxes from 35 to 15 percent. To do this, the Trump administration will need to convince the fiscal hawks in the Republican Party, but he seems likely to get his way.

In the US, this kind of fiscal stimulus coupled with tax cuts will lead – at least in the short-term – to higher economic growth. However, even though Trump vowed to finance these measures through private funds and by taxing profits repatriated by American companies, they will inevitably lead to higher budget deficits and higher debt in the long term. Olivier Blanchard, previous IMF Chief Economist, predicted: “If deficits take place, they will lead to higher spending and higher growth for some time. And with the US economy already operating close to potential, deficits will lead to higher inflation.”

What will these changes mean for Europe? Higher growth in the US is good for the world economy. The Chinese economy has lost its steam, and the outlooks for Europe, Latin America, and elsewhere are uncertain at best. Due to the interconnectedness of the world economy, all regions would profit from higher US growth and increased demand. The EU-US trade and investment relationship is the largest in the world, so increased US demand would give a boost to the slow-growing EU economies.

However, the positive impact would depend on the extent to which the US enacts the restrictive trade measures which Trump proposed at the same time.

… kills TPP?

Trump has a mercantilist view of world trade. Trade is a zero-sum game where countries with a trade surplus win and countries with a trade deficit (such as the US) lose. This attitude means that Trump will want to re-negotiate or stop existing and future free trade agreements.

The first casualty of Trump’s new trade policy will be the Trans-Pacific Partnership (TPP) – the President-elect has already announced he will withdraw from the pact. TTP was negotiated during the Obama administration together with eleven other Pacific Rim countries including Japan. It was one of Obama’s top priorities in Asia – for economic as well as for geostrategic reasons.

Trump denounced this agreement during his campaign as a “total disaster” which would let China come in “through the back door.” TPP is already signed and awaits ratification by Congress. However, Senator Jeff Sessions, a close Trump adviser and nominee for attorney general, earlier warned that “there will be blood all over the floor if somebody tries to move [TPP] through the Congress any time soon.”

Thus TPP is almost certainly dead. What will be the consequences?

Without TPP, the US will lose market access in the region, which will play into the hands of China. China is currently negotiating the “Regional Comprehensive Economic Partnership” (RCEP) with the ten ASEAN countries, as well as Japan, South Korea, India, Australia, and New Zealand. TPP was always seen as the rival US agreement. Without TPP, China will have much more influence and a competitive advantage in the fast growing Asia Pacific region. In addition, the US will no longer be able to establish new trade rules – such as investment protection, labor and environmental standards, standards for SOEs, and anti-corruption measures, which were all part of TPP. These will now be set by China.

Europe is not a party to TPP. It will now continue to focus on free trade agreements with ASEAN countries and Japan. If the EU succeeds, it will have a comparative advantage vis-à-vis US competitors. This is particularly important in relation to Japan, the third largest economy in the world. However, European trade policy also faces many obstacles at the moment.

… halts TTIP negotiations?

The second major trade agreement that is now on the verge of collapse is the Transatlantic Trade and Investment Partnership (TTIP), which has been in negotiations since 2013. TTIP was supposed to be another trade legacy of President Obama’s. In contrast to TPP, TTIP did not feature in Donald Trump’s presidential campaign. With the existing high European standards, it would have been difficult for Trump to blame the EU for US job losses. But given his tough stance on trade negotiations and his demand to balance trade and eliminate trade deficits (the US had a trade deficit with the EU of $103 billion in 2015, and with Germany of $77 billion), the outlook for the transatlantic negotiations remains bleak.

Even without Trump’s skeptical approach to trade, TTIP was already in troubled waters. Growing protests in the EU and the US combined with a lack of progress in the negotiations in politically sensitive areas such as investment protection (ISDS) or government procurement had led to a virtual stalemate before the elections. After the election, EU Trade Commissioner Cecilia Malmström remarked: “For quite some time, TTIP will probably be in the freezer. What will happen when it’s defrosted, I think we’ll just have to wait and see.”

The withdrawal from TPP and TTIP means that Washington will no longer want to play a leading role in shaping globalization. Both agreements were meant to be ambitious and comprehensive, including high-level rules in new areas. This development will now end. In addition, the US will not be able to reap the benefits from increased market access to Europe or the Asia Pacific.

For Europe, TTIP was particularly important: First, it was seen as a way to increase growth. But second, it was seen as an opportunity to shape global trade rules together with the US. These goals now have to be abandoned in the transatlantic context. Though Europe is still very actively negotiating agreements, examples with Singapore and Canada (CETA) show that EU trade policy is far from perfect. It needs to undergo reforms so that the EU can remain a relevant player in international trade. Given the various other challenges the EU is currently facing, it seems unlikely that this will happen any time soon.

But Trump’s election had a positive trade aspect for at least one European country: the UK. Trump stressed that he was willing to negotiate an agreement with the UK after the country formally withdraws from the European Union.

…withdraws from NAFTA?

The North American Free Trade Agreement (NAFTA) was a central target during the campaign. NAFTA, which Trump has called “one of the worst things that ever happened to the manufacturing industry,” was a convenient political target because it was signed by his opponent’s husband, President Bill Clinton (though launched and basically concluded by the George H.W. Bush administration) and because it provided an economic bookend to his promise to build a wall on the border to Mexico. Trump could unilaterally withdraw from NAFTA with six months’ written notice to the other parties. However, this would revert tariffs between the US, Mexico, and Canada to the WTO MFN default, which for most products lie below 4 percent, far from the 35 percent levels Trump has floated.

If he imposed higher tariffs against Mexico, it could trigger retaliation. Mexico could go to the WTO and impose counter-tariffs – which would quickly hurt major US industries, whose supply chains are partly in Mexico, and US consumers as well.

Trump could instead decide to renegotiate NAFTA; indeed, this is what he promised in his “7-point plan”. For this he would need the cooperation of Mexico and Canada and the approval of Congress. If Mexico and Canada wanted to play along and offer Trump’s negotiators some quick concessions, he might be able to come away with a symbolic victory at little cost to anyone – but Mexico and Canada could just as well call his bluff.

Trump’s long-term goal would seem to be to get US industry to bring those parts of its production currently in Mexico back to the US – one of his targets was Ford Motor Company, which is building a large car factory in Mexico. But such shifts take time, and would also hurt the competitiveness of the entire industry.

It is very likely that Trump will attempt a “quick” renegotiation of NAFTA. A small addendum to the existing NAFTA that he could claim as a victory would probably be the best case scenario for Trump, and that would likely be enough to pacify the majority of his voters. He would also get Congressional support for this. If the other North American countries do not play along, it is certainly possible that he would withdraw the United States from NAFTA entirely. This alone would not trigger a trade war, but it would dampen the American economy and is unlikely to bring any jobs back to the United States. The extreme version of 35 percent tariffs or import taxes seems unlikely. Trump has international business interests, so one would think he would understand the consequences of and avoid a trade war – and he would likely lose the support of Congress.

A minor renegotiation of NAFTA would not affect Europe or the global economy directly. A US withdrawal from NAFTA and reversion to standard (WTO) tariffs would have some effect, depending on how quickly and significantly it affected the US economy. In addition, without NAFTA, EU investment in Mexico (or Canada) would lose the preferential access to the US market. This would significantly hurt EU business.

…imposes sanctions against China?

China loomed large in Trump’s election campaign as an “enemy” that has “destroyed entire industries.” Trump accuses China of having “spied on our businesses, stolen our technology…and manipulated and devalued their currency” to hurt US exports and boost Chinese imports. He therefore promised – once he was president – to direct the US Treasury to declare China a “currency manipulator” within the first 100 days and impose punitive import tariffs of up to 45 percent on imported goods from China to level the playing field. If these policies are not successful, Trump threatened to leave the World Trade Organization (WTO).

The accusation of currency manipulation is a bit outdated. The US Treasury in its latest “Semiannual Report on International Economic and Exchange Rate Policies” to Congress from October 2016 put China on a monitoring list for large trade and current account surpluses, but stressed that China actually sold foreign currency assets from August 2015 to August 2016 to prevent rapid Renminbi depreciation.

It’s not clear what Trump will actually do once in office. Declaring China a currency manipulator would have few actual consequences other than potentially opening the door for negotiations. But China could see this as a provocation, which could lead to rising bilateral tensions and even to a serious trade war – with both applying targeted or blanket tariffs against each other.

Shortly after the election, Trump advisers played down the prospect of a trade war with America’s biggest trading partner. According to Wilbur Ross, a New York investor and leading contender for Trump’s commerce secretary, there will be no trade wars. Instead, Ross stressed that the threat of a 45 percent punitive tariff should be regarded as a negotiating tactic. While actual numbers will probably fall short of a blanket 45 percent, we should expect Trump to make some kind of stance against China. He will probably try to label China a “currency manipulator”. In addition, he will probably act on Chinese steel dumping, which has also been an issue for the Obama administration and for Europe. In addition, he will pursue some high-profile WTO cases against China. If a battle of escalating tariffs or other trade barriers ensues between the United States and China, the highly specialized supply chains of US multinational companies in China would suffer, as would American exports. Given the size and importance of the US and Chinese economies, the consequences would ripple far and wide.

The possible effects for Europe range between negative and disastrous. If Europe’s first and second external trade partners start warring, the continent will certainly get caught in the crossfire. It is hard to imagine that the Trump Administration would undertake the more dramatic options above, which would be certain to draw harsh retaliatory measures. However, this year has brought a number of events that conservative observers would have thought nearly impossible one year ago. It is a very real question whether the Trump administration will choose mostly symbolic and perhaps temporary trade-restricting actions or more significant measures with dramatic and widespread consequences. The prospects of such a scenario would be bleak, with estimates of a 5 percent job loss, reaching 7 percent in some areas. If the US withdrew from the WTO, the global economy could quickly revert to the beggar-thy-neighbor domino protectionism that brought down the global economy in the 1920s.

Moreover, there is a broader reason to be worried. Whatever the final measures and percentages are, Trump’s view of trade policy is a departure from US policy since the 1940s. US presidents, right and left, have believed that liberalized trade is good for global stability and economic growth and, thus good for the US economy. Trump clearly takes a narrower trade-balance view: America only wins from global trade if it comes out on top in the balance. This is the essence of Trump’s “America First” mindset, and if it spreads beyond this administration then the main support for the foundations of the global economic system will quickly erode.

Europe needs to be prepared to deal with a Trump administration. This means first and foremost that European unity is required so that Trump sees Europe as a strong partner with which to make “deals.” Apart from the “new” reality in the transatlantic relationship, Europe may be forced to quickly grow into the role of supporting the global economic system – together with Asia.

 
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