Global Trends by Martin Khor

Monday 5 December 2016

New protectionism in the Trump era?

There are fears that the Trump presidency will usher in a new era of trade protectionism, and a danger that existing trade agreements will be replaced by even more imbalanced ones. 


How will the United States under President Donald Trump deal with trade and trade agreements?

Because of his pronouncements on trade issues, Trump has kept the world on tenterhooks on what policy he will adopt.

It looks like he will keep his campaign vow to take the US out from the Trans Pacific Partnership  Agreement (TPPA) and renegotiate the North American Free Trade Agreement (NAFTA).

He called them a disaster for the US.   He was probably referring to claims that the FTAs caused the US to lose millions of jobs and to have huge trade deficits.

There are fears that his “Put America First” slogan, when applied to trade, will lead to protectionist policies.      

Trump has threatened to raise tariffs on products from Mexico and China by as much as 45%.   To create the ground, Trump says he will label China a “currency manipulator”.

President Obama resisted doing that to avoid a very nasty trade war.  There are good reasons why Trump may also climb down on this.  For a start, China’s currency is not under-valued and currently its government is trying to prevent (not encourage) the yuan from further sliding.

Secondly, taking trade action on currency grounds would be against WTO rules of WTO, and China would successfully take a WTO case against the US.  

Finally, China has warned it will retaliate.  An article in a Chinese newspaper spelled out how China would cancel its orders of Boeing aircraft, restrict US auto and I-phone sales in China and halt US soybean and maize imports.

Instead of an across-the-board tariff hike, Trump could use trade-remedy measures against several products from China and other countries by claiming they are being dumped or unfairly subsidised. 

Loopholes in the WTO rules make these a favourite protectionist tool.  A country can slap on high tariffs against an imported product, claiming that its low price is due to “dumping” or unfair subsidies.

But if a WTO panel finds these actions were wrongly taken, there is no penalty imposed against the offending country.  Meanwhile the aggrieved country has lost many years of export earnings.  Moreover, the same actions can be taken again, thus perpetuating the protection.   

We may see a rise in such trade-remedy actions under President Trump. But we can also expect tit-for-tat counter-action, leading to a global protectionist spiral.  That will be in nobody’s interest.

The new Trump presidency is expected to usher in a sea-change in US policy on FTAs.  Trump’s objection to the TTPA and NAFTA seems to be on the trade effects, that these FTAs favour the exports of the partner countries at the expense of the US.

Trump said he would instead “negotiate fair bilateral deals that bring jobs and industry back.”  This sounds neo-mercantilist and against the free-trade principle, but is in line with his “America-first” populism.

However the FTAs are much more than trade and they became unpopular with the public in the US and elsewhere not only because of the fear of cheap imports displacing local products and jobs, but also because of the other non-trade issues in the FTAs.

These other issues include investment rules (including giving rights to foreign investors to take cases against the host government in an international tribunal), intellectual property rules that boost medicine prices by curbing cheap generic drugs; opening up government procurement to foreign firms, thus reducing the share of local business; and the liberalisation of services sector (which in some countries may raise the cost of basic services). 

Through the FTAs, sensitive areas that were previously solely under the purview of the national government are now subjected to new and intrusive rules that cramp the space that countries normally have to set their own policies.         

Thus the FTAs became highly controversial, firstly in in developing countries, and then the public in developed countries including in the US and Europe became outraged. Trump rode on the anti-FTA public frenzy towards his victory.

This is thus a good time to review the FTAs on what works and what does not work for the public interest.  These agreements have become seriously overloaded with many non-trade issues which do not belong to what was originally designed only for trade in goods.

For example, there is a history and logic to the “non-discrimination” and “national treatment” principles established for trade in goods.  The same principles and template are often inappropriate when applied to non-trade issues which they were not designed for.  

However in recent years the scope of trade agreements has grown to include more and more issues, leading to more and more contention and unpopularity.

The overloaded agenda in FTAs gives trade a bad name.   Many people who are disgruntled with trade agreements also become unhappy with trade per se, and the benefits that trade can bring get overwhelmed by the contentious non-trade issues, and end up being condemned as well.        

It is important to clarify the difference between trade and trade agreements, and to rethink trade policy as a whole.

A good outcome would be to make new agreements that are mutually beneficial in trade to all partners, whilst removing the controversial non-trade issues from the agenda, a good basis for a pro-development trade agenda.

The danger is that the new agreements being envisaged may even be worse than existing ones.   We risk slipping into a new era of extreme trade protectionism by developed countries which at the same time want to retain the unpopular non-trade issues.

We might end up with a new type of “America first” agreements, in which a Trump administration  ensures that the US can curb imports whilst championing its exports, thus reducing the trade benefits to its  partners;  while at  the same time strengthening the rules in non-trade issues like intellectual property and liberalising financial services that favour US corporations but are against the partners’ interests.     

That would be the worst of both worlds, at least for developing countries.