President-elect Donald Trump has become a master of the pirouette since his election was confirmed in the early hours of November 9. He has softened his position on many of his promises, but considerable uncertainty continues to surround his positions on trade.
It seems clear from the first week post-election that while President-elect Trump fought the election on the need for change – and “draining the swamp” – someone overlooked the alligators in the swamp.
The European Centre for International Political Economy (ECIPE) considers that US self-interest will preserve the international trading system. The message ignores the BREXIT disease evident in “fly-over” America. The proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US – which was already wounded — will be more difficult to conclude.
Will the E.U. take over US leadership on trade?
Will President Obama hand over the leadership of the Free World to German Chancellor Angela Merkel? Don’t hold your breath. Ms. Merkel has her own problems. And President Obama is becoming the lamest of lame ducks.
The E.U. is all over the lot about whether to grant market economy status to China in trade remedy cases. European concerns about possible Chinese retaliation has brought on a serious case of “the dithers”.
The Wallonian mouse that roared on CETA approval shed new light on the real extent of the E.U. Commission’s powers and its ability to deliver. This was not an inspiring signal for those pursuing bigger deals like TTIP.
President-elect Trump met with Brexit architect Nigel Farage, who wants to be an intermediary with the new President. During Mr. Trump’s telephone chat with U.K. Prime Minister Theresa May he told her that he would like to re-create the Reagan-Thatcher relationship with Ms May. Where does Mr. Farage fit? Nowhere it seems — Prime Minister May shot the would-be interloper down with her comment that there were no third parties in the Reagan-Thatcher relationship. Watch for early signs of discussions about a US-U.K. Economic Partnership Agreement.
Japan’s Prime Minister Shinzo Abe will visit President-elect Trump in New York today – an astute move. Mr. Abe wants to shore up and enhance the US-Japan relationship. Will the result be real progress or strategically packaged optics? Watch for negotiations as Kabuki Theatre.
Chinese Premier Xi Jinping has spoken to President-elect Trump about helping to make America great again. China will follow up and keep talking. The lobbying for normal WTO trade treatment is a complicated process. In Canada, Chinese lobbying on this issue and free trade began the week following the October 2016 election.
While Premier Xi is talking the talk, China has let it be known it will not tolerate trade discrimination. The English version of the People’s Daily warned that if President-elect Trump launches a silly season of trade retaliation, China will respond tit-for-tat, targeting Apple and others.
China already has free trade with 10 ASEAN (Association of Southeast Asian Nations) members. Meanwhile, the Regional Comprehensive Economic Partnership (RCEP) – an alternative to the Trans-Pacific Partnership (TPP), notably including China and India — is still in play and moving towards closure. This agreement — less intrusive than TPP — will help Chinese trade and spread their influence. Depending on how negotiations conclude, RCEP could end up encompassing 45% of the world’s population and 40% of world trade. Japan is in RCEP and Prime Minister Abe will no doubt explain to President-elect Trump the economic risks of the US being left outside this massive trade tent.
How long will it take Washington to find that membership in the China-led Asian Infrastructure Investment Bank (AIIB) was a good idea and that the US has missed an important opportunity? Canada saw the light and has joined AIIB – a good signal to Beijing. The AIIB is doing well and will not fail simply because the US is not on board.
Taiwan, too, wants to enhance its relationship with the new US Administration. Its mutual defence concerns are very real – and important to Washington. Taiwan wants to keep out of the crosshairs of the return of Smoot-Hawley, the infamous 1930 Act of Congress which hiked tariffs on imports in an effort to protect America’s agricultural sector. Indeed, the other Asian partners in TPP do not want to be marginalized in the US market, but how much will they be willing to ‘pay’ to enable a Trump Administration to declare victory? Will the deal-maker be prepared to do win-win deals?
Canada and Mexico have already offered to re-negotiate NAFTA. In fact, most of what the US wanted from NAFTA has already been conceded in the Trans-Pacific Partnership. CNN reports that analyzing the costs and benefits of NAFTA will be a Day One issue for the Trump Administration.
What else does President-elect Trump want and is Canada inviting itself to a party focussed on Mexico?
Apparently the NAFTA issues that Trump’s Administration will want to address include currency manipulation (of the kind the US used to support stimulus policies), lumber (managed trade forever), country of origin labelling (which the US lost at the WTO after a 6 year fight), and environmental and safety standards (will Canada be able to demand that Washington impose carbon taxes?).
There will be other issues on the shopping list – driven by Minority Leader Senator Chuck Schumer, Paul Ryan and others. All the old chestnuts will be resurrected and roasted again.
Canada does not have a special relationship with the United States on trade. This was clear with the Nixon Shock in 1971. President Obama was no real help with Softwood Lumber, and Keystone XL was sacrificed for the Obama legacy. Our relationship with the US has been and will continue to be one of give and take. We give and the US takes.
I do not share the view that negotiations between the US and Canada will be a Godzilla vs. Bambi affair. Many of the bilateral irritants have been addressed. Our trade numbers with the US are much more balanced. Canada is the largest export market for 35 US states and US exports to Canada account for many millions of jobs. We have leverage and experienced negotiators who know how to use it.
The Trump transition team suggests the new Administration will reverse decades of conciliatory trade policy. Anyone who has been on the receiving end of USTR efforts would be hard-pressed to agree with the description of US comportment over the years as ‘conciliatory’. American negotiators tend to be tough and inflexible, and unwilling to compromise unless there is no other option.
The last day of TPP negotiations in Atlanta was one of the few examples of conciliatory US trade policy that I have experienced. In order to close the deal, the US team capitulated on a handful of issues which were important to Congress. This was done only as a last ditch attempt to close the deal in time to pass the implementing legislation on President Obama’s watch.
Trans-Pacific Partnership (TPP)
The consensus among observers is that the TPP is dead in its current form. How much would it take to revive it? It would be wrong and imprudent to throw out all of the good in the TPP to deal with a few problems which can be massaged and repackaged. Cynical you say? I have been living with trade negotiations for many years.
How will the Trump team deliver on its promises to the blue collar factory workers and ex‑factory workers without shooting off both feet? It will take time and mutual understanding. Face is important – no one can lose face.
Key Republican legislators support trade liberalization. There is overwhelming support for TPP among farm groups located in states which President-elect Trump won. The realities of global supply chains will be understood by many in Congress and the stock market.
President-elect Trump will have some support in Congress for his tough stance on trade, but not to the point where overreaching and belligerence puts existing American jobs at risk. There is a point of no return – where other countries’ politics will say it simply isn’t worth it.
Rebalancing efforts will likely be surgical
Steel trade will be a primary target – but overcapacity in steel, and to a lesser degree, aluminum, are global problems requiring global solutions. As noted, Europe is waffling on how to deal with China, and USTR Froman has signalled the US is undecided on whether or not to grant China market economy status.
If former Nucor CEO Dan DiMicco emerges from the transition as USTR, it will be a worry – but DiMicco will be focused on steel and aluminum. Global action to deal with overcapacity in these industries is inevitable. The challenge for Mr. DiMicco will be to create jobs and bring them back to the United States. This will require sophisticated and focussed trade diplomacy, not thuggery. There seems to be a willingness to rebalance – but the willingness is not unlimited.
If NAFTA talks fail and the TPP cannot be rebalanced, bilateral trade negotiations will become a priority later in 2017. The principal targets will likely be the UK, Japan and even Canada and Mexico. Don’t these guys remember the Canada-US FTA?
My predictions for the near future:
- NAFTA and TPP will be re-negotiated, not torn up – success will depend on US demands;
- trade remedy actions to combat dumping subsidies and China’s overcapacity will be more frequent and more disruptive – and this will occur around the world;
- enforcement of dumping and countervailing duty will be intensified, in both North America and Europe, with very strong anti-circumvention and anti-avoidance rules;
- the US and others who feel challenged by Chinese exports will not be constrained by WTO rules. China will challenge at the WTO, where strict interpretation of existing rules will favour China – creating chaos;
- infrastructure spending in the US – to the extent Congress is prepared to fund it – will have very tight Buy American provisions;
- improved US relations with Cuba will be put on a very slow track;
- US-Russia trade relations will improve – though they could not be much worse. This will be an uncomfortable initiative for many in Congress – and in Europe. Sanctions will likely be removed. And Europe, where farmers are suffering, will soon follow.
Too pessimistic? Some might say extremely optimistic. Optimistic only if you believe that President-elect Trump’s threats of extreme belligerence on trade are real. I consider that they are designed to get attention, and bring willing, more flexible trading partners back to the table.
Peter Clark, president of Grey, Clark, Shih and Associates, is one of Canada’s leading international trade strategists. His clients in Canada and around the world include governments, corporations and trade associations. He is a frequent media commentator and columnist. Follow him on Twitter at @jpclark14