The author of The Art of the Deal may be posturing to force US trading partners back to the negotiating table over the Trans-Pacific Partnership (TPP).
On his first full day in office, President Trump signed an executive order removing the US from the Transpacific Partnership (TPP). From an economic standpoint, this was the right thing to do, as the TPP was a disadvantageous trade agreement for the US. From a strategic standpoint, however, leaving the TPP may inhibit the US ability to exert influence in the Asia-Pacific region and may alienate US trade partners and allies. Additionally, one of the primary reasons for the TPP was to counter China’s regional economic dominance. Now that the US has pulled out, one of the options left for the remaining country members is to allow China to fill the vacant seat.
Across the globe, people are wondering why the US, usually the leader in free trade, is now taking such a protectionist stance. To understand Donald Trump’s policy changes, one need only read this quote from Washington Post journalist, Simon Denyer: Trump “sees trade as a zero-sum game, and sees anyone ‘beating’ the United States as a threat.” Donald Trump obviously believed that the TPP partners were “beating us” on trade, and so he voted to leave. Furthermore, leaving the TPP will most likely be only the first of many steps in the new Trump-lead American protectionism, under the slogan “America First”.
In addition to exiting or renegotiating US participation in trade agreements, Donald Trump has stated that he plans to raise tariffs on imports. The US already runs a trade deficit with most of its TPP partners. The TPP would simply have given them tariff-free access to lucrative US markets. Threats of import tariffs, while largely targeted at China and Asia, have also become a threat for European companies, particularly auto manufacturers. The US trade deficit with Germany illustrates what Donald Trump is referring to as unfair deals. President Trump is reported as having said there are more BMW and Mercedes on Fifth Avenue than there are Chevrolets in Germany.
Transnational trade agreements such as TPP or North American Free Trade Agreement (NAFTA) not only have implications for exports and GDP growth, but also for employment. Monthly wages in a TPP partner countries, such as Vietnam, can be as low as $120 USD per month, and in NAFTA partner, Mexico, the average wage, according to Business Insider, was $4.35 per day. US factory workers earn around $2,000 a month, making it very tempting for US companies to move overseas and take advantage of lower labor costs. As a result, US labor unions have praised Trump’s decision to leave the TPP, while supporting his plan to reconfigure NAFTA and other international trade agreements.
Lori Wallach, Director of Public Citizen’s Global Trade Watch, published a statement calling for the end of the TPP and NAFTA, claiming “NAFTA is packed with incentives for job offshoring”. The AFL-CIO, America’s largest federation of labor unions, was similarly opposed to the TPP. A message published on the Federation website read “We are doing all we can to make sure America’s working families are educated about the TPP and organized to fight against it.” The message went on to explain that one of the many reasons the AFL-CIO disliked the TPP was because they didn’t believe the agreement would raise the wages of workers in member countries, and because rules designed to improve employment conditions were “vague”.
Historical precedent exists which justifies fear of the loss of American jobs through international trade deals. Eduardo Porter of the New York Times reported that immediately after China entered the WTO the country received a flood of investment, as factories opened to sell products to the American market. According to the International Business Times this has cost the US 2.8 million manufacturing and high-tech jobs.
A Roosevelt Institute report questioned the economic benefit of the TPP. The report points out that since 2011 the US dollar is up 26%, essentially making US products 26% more expensive on foreign markets and making foreign imports cheaper at home and abroad. Removing the tariffs on US products in Asia still wouldn’t bring their price in line with local products. Conversely, Asian products are already cheap in the US. Reducing current tariffs wouldn’t make them that much more attractive. And of course, US local industries would be better served by making foreign imports less, not more, attractive. The Roosevelt Institute went on to analyze the tariffs that were being removed from US exports and found that among about half of the 18,000 categories of goods, the US had sold none to TPP partners. In most of the other categories the US had sold very little. Examples of dubious benefits to US GDP included the removal of tariffs on US pork exports to Muslim Malaysia and Brunei, as well as skis to tropical Vietnam.
The Congressional Research Service analyzed a number of TPP economic reports produced by institutions ranging from The World Bank to Tufts University. While conclusions about the potential benefits to US trade and GDP differed across the various studies, most found that the increases to trade and GDP would be rather small and would be easily negated if TPP resulted in greater than expected job loss or by continued appreciation of the US dollar.
The results in detail: U.S. International Trade Commission (USITC) determined that GDP would increase by 0.15% and trade by 1%, and U.S. annual employment would increase by 128,000. Peter A. Petri and Michael G. Plummer (Peterson Institute for International Economics) estimated that GDP would increase by 0.5% and U.S. exports would increase by 9.0%. The World Bank: projected an increase in GDP of 0.5% by 2030. A study out of the Global Development and Environment Institute at Tufts University by Jeronim Capaldo and Alex Izurieta “estimated that all TPP participants would lose 770,000 jobs and non-TPP developing economies would lose 4.5 million jobs” (Jackson, 2016 p. 2).
A Possible Trade War
Apart from Job loss and trade deficit, one reasons Donald Trump has cited unfair trade practices as a reason for his protectionist measures. In the case of China, points of legitimate concern identified by Business Insider included “state-owned enterprises, heavy industrial subsidies, intellectual property theft and piracy, indigenous innovation policies, rare earth mineral export restrictions and other trade-distorting practices”. Many of these complaints apply to TPP member countries as well. Most TPP partners have state owned enterprises and impose more restrictions on US investment in their country than the US does on foreign investment in the United States.
Some have argued that the US should remain in the TPP for economic reasons, while others think the US should leave for economic reasons. Yet another camp argues that weather the TPP is economically good or bad, the US should not leave the TPP or raise tariffs for fear of starting a trade war.
A very concrete negative outcome of a trade war would be that it would make it difficult for US companies to export to Asia, the fastest growing market in the world. On the other hand, the US already runs a trade deficit with those countries. The threat of a trade war would most likely hurt the surplus countries more. Additionally, much of the US trade deficit with these countries derives from US companies operating abroad, exporting products back to the US. Increased tariffs may cause these companies to relocate to the US. If they chose to go out of business, or to seek new markets, rather than moving home, US demand for these products would remain the same and the void would be filled by US domestic companies, producing in the US, albeit at a higher price.
Similar logic applies to European countries producing US bound goods in Mexico. Euro News reported that BMW, Daimler and Volkswagen, all have production facilities in Mexico to build cars and parts for the American market. President Trump’s proposed 35% tariff would most likely render this business model untenable. German auto industry spokes people said that the US would suffer from the tariffs because, between dealerships and automotive suppliers, over 100,000 US jobs depend on the German carmakers. This argument seems spurious, however, because the number of people employed in the auto industry is dependent on the demand for cars. And there is no reason to believe that the demand for cars in America would drop simply due to the absence of the German carmakers. Ostensibly, American carmakers would simply increase production to meet consumer needs, which would generate jobs. And of course, the supply chains and business service chains supporting this increased production of cars would all be inside of the US, creating a positive ripple effect in the US economy.
Strategic Benefits of the TPP
While admitting the economic benefits of the TPP for the US were minimal, CNBC’s Everett Rosenfeld called the TPP “a key component of the American geopolitical ‘pivot’ toward the Asia-Pacific region.” This statement echoes the viewpoint of many TPP proponents who supported the agreement because of the strategic benefits they believed the US would obtain.
The TPP, unlike other free trade agreements, includes a wide variety of governance rules such as regulations on pollution, anti-dumping, and currency manipulation. Through the TPP, the US could have helped its Asian trading partners increase their good governance by stipulating strict rules regarding labor, the environment, and copyright protection. The TPP would also have been a way of reaffirming the US interest in the region. Leaving the TPP means that the US will not get to control the rules of trade or help guide the corporate governance development of its trading partners.
While the governance argument holds some merit, opponents of TPP found the governance rules insufficient. Critics pointed at a lack of pharmaceutical patent protections, investor-state dispute settlement (ISDS) procedures, local content requirements for autos and parts, and exceptions to full or partial liberalization of trade barriers.
Leaving the TPP may still represent a loss of US influence in Asia. Japanese Prime Minister Shinzo Abe told CNBC that the US pulling out of the TPP will cause Asian countries to join the China backed Regional Comprehensive Economic Partnership (RCEP). In addition to RCEP, China is proposing other transnational trade deals such as the Free Trade Area of the Asia Pacific. In addition to these deals potentially increasing China’s regional power, at the expense of the US, the China backed agreements also do nothing to improve corporate governance. The China backed initiatives are primarily focused on trade and tariffs, without the governance components of the TPP.
Why the Shift in US Trade Policy?
Since World War Two, use foreign policy has been dominated by defense strategies, with trade being used to help increase the economic power of US strategic allies. The Trump administration seems to be putting trade first and defense second. The decision to leave the TPP and other organizations is based on trade, but it may feel like an act of betrayal for US allies such as Japan, Thailand, and Vietnam.
At the same time that the US appears to be abandoning old friends, the Trump administration seems to be moving closer to Russia. And this may also be seen as a strategic alignment. One explanation for a shift towards Russia while taking a more antagonistic stance toward China was suggested by Washington Post journalist, Simon Denyer. He explained that, as President Trump’s foreign policy seems to be dominated by trade, rather than defense, he sees China, the country with the largest trade surplus, as a threat, rather than Russia, a country which has always run long on guns, but short on butter. The same logic may lead President Trump to view Mexico, Japan, and Germany as opponents, because of their trade surpluses with the US. Although the US runs trade deficits with numerous countries, with whom US relations may become less friendly, China is singled out for special animosity because China alone accounts for nearly half of the US total trade deficit. Indeed, even Japan, the closest Asian ally of the US has also been threatened with tariffs on the import of Toyota cars.
A trade-first policy would mean that in spite of a lot of blustering and rhetoric, issues such as Taiwan and the South China Sea are unimportant to Trump as they have very little to do with trade. Such issues are, however, important to China, and the US president may be planning to use them as bargaining chips to gain advantages in trade with China.
If America, or Trump, now sees China as an adversary, leaving the TPP has created an avenue of opportunity for the dragon from the east. Many people saw the TPP as a counter to China. For example, the electronics industry saw the TPP as protection from cheap Chinese imports. The TPP would also have given US companies new sourcing and supply chains, as well as creating transparent trade between America and its overseas trading partners, simplifying customs and importation procedures. Now it may be China that will be reaping the benefits of these opportunities.
At the World Economic Forum in Davos, Switzerland, in January 2017, Chinese President Xi Jinping promised to uphold the ideals of free trade in the world. And he has a number of vehicles by which to do this. Whether the TPP lives or dies, China has RCEP and several other acronyms for the countries of Asia and the Pacific to join. If the US had remained in and helped enforce the rules of TPP, there would have been rules encouraging collective bargaining and forbidding forced labor. The Chinese lead trade agreements would lack such provisions. Obviously, it would not be in China’s interest to push for rules barring state owned enterprises, currency manipulation or illegal subsidies. As a result, the alternative trade organizations will not have the same benefits to global partners as TPP aspired to.
Meanwhile, Australian Prime Minister Malcolm Turnbull is in discussions with other TPP nations to form the “TPP 12 minus one”, which would include China, but not the US. Although China has positioned itself as championing free trade, they have been noncommittal about joining the TPP, promoting instead the Regional Comprehensive Economic Partnership (RCEP). One reason why China may not be too quick to join the TPP is the long list of regulations. Jefferey Schott, a Senior Fellow, at Peterson Institute for International Economics, doubted if China were ready to accept a broad array of TPP obligations on transparency and restrictions on government market interventions, labor rights, freedom of data flows, and intellectual property.
The economic reasons for the US to leave the TPP and renegotiate other transnational agreements seem fairly compelling. From a strategic standpoint, however, the US may be giving up much of its dominance in Asia. It is this author’s opinion, however, that President Trump may just be playing a very long game. It is possible that all of his posturing and tough talk was a negotiation strategy designed to force US trading partners back to the negotiation table, where he hopes to secure better deals.
It is important to remember that Donald Trump is literally the author of The Art of the Deal.
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Statement of Lori Wallach, Director, Public Citizen’s Global Trade Watch, http://www.citizen.org/tradewatch.