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The global trading system will survive President Trump’s tariffs
US Presidents have always had ample time to fiddle with trade policy. There are two reasons. First, by the early twentieth century, US prosperity depended less on trade than a flourishing and innovative domestic market. And when the US realised after World War Two it was globally competitive, Congress still regarded trade as a second-order issue even though the Constitution decrees Congress,[^1] not the presidency, is responsible for trade policy.
Donald Trump has taken full advantage of this situation, threatening to turn over the key premise which has shaped US trade policy since the end of World War II — that free markets build prosperity.
America’s evolving view of free trade
There is deep history here. Following independence, wrangling between southern states keen to export their primary produce to the UK and northern states keen to protect their higher-cost manufacturing industry from cheaper UK manufacturers, was resolved with the constitution determining that Congress, not the administration, set trade policy.
The United States in fact did not become a free market economy until after the Great Depression and World War II. As part of its contribution to rebuilding Western Europe, the United States led — with UK support — the establishment of the General Agreement on Tariffs and Trade (GATT). It laid down a regulatory foundation to rebuild a devastated Western Europe by progressively reducing trade barriers. The idea was to build an integrated European economy which so depended on itself, Western Europe would never war against itself again.[^2]
By the 1980s, booming growth in Asia and democratisation of key Latin American economies reshaped global commerce. Members of the GATT followed the leadership of the United States and the European Union to modernise and extend its ambit. The result was the World Trade Organization (WTO), finalised in the mid-1990s. It modernised key areas of the GATT agreement and crafted new provisions to liberalise trade in services, bring coherence to intellectual property law and streamline the disputes settlement system.[^3]
Extending trade liberalisation
Leading economies, particularly the United States, saw building the GATT and then the WTO as preliminary steps to greater liberalisation. As tariffs on goods fell (except in agriculture) and initial rules to liberalise services were adopted, there was a clear need to steadily broaden the opening of new areas to expand trade. This was to be a key purpose of a further round of global negotiations that began in 2001, known as the Doha Round. But the process stalled.
Seventeen years later, that objective of the Doha Round remains unmet. The majority of developing economies, led by India and South Africa, continue to block further market reform and liberalisation in the WTO. The most important development in the WTO since then has been China’s accession in 2001.[^4] This was no light chore; the negotiations ran over a decade until China could demonstrate it could comply with the basic rules on trade in goods.
But China today has other constraints. It does not have the regulatory systems which enable it to liberalise services or guarantee protection of foreign investors which is a feature of modern Free Trade Agreements like the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
Among most economies that trade substantially, tariffs today are low. The new drivers of growth are services industries (e.g. transport and health services) and foreign investors. These markets are opening in most industrialised economies but remain constrained in developing economies, including China.
The Obama administration elected to enhance its strategic presence in the Asian Pacific region and impel China to liberalise its services by leading the formation of a new free trade agreement among 12 Asian Pacific economies, known as the Trans-Pacific Partnership (TPP).[^5]
This was a particularly important agreement. It picked up where the WTO had stalled. It most notably advanced commitments to liberalise services and ecommerce, measures which would measurably foster economic growth. New standards were also set to foster investment and strengthen intellectual property. Then Donald Trump was elected and he withdrew the United States from the TPP agreement.
Trump’s zero-sum views on trade
Long before Trump declared he would run for president he authored “The Art of the Deal”, where he made clear that negotiations were about winning, not finding common ground. This clearly informs his approach to trade policy.
Trump turned this zero-sum view into an election tool — he contended China “cheated”; the only good trade agreement was one where the United States had a surplus in traded goods; and he would get jobs back for American steel workers by restricting imports. In his view, "bad" trade agreements — namely, where the United States was in deficit in trade — should be scrapped. Upon election he wanted to step away from NAFTA[^6] — and was persuaded to consider instead negotiating an improvement — then he took aim at China.
The president is also economically ignorant about trade. Another policy he brought to office was the contention trade was only useful if the United States had a trade surplus with its trading partners. But a trade deficit does not mean the economy is failing. In most economies, more wealth is generated by domestic industry than trade. Australia at large has been a successful economy but for most of that time, it had a deficit in trade. There are almost daily reports about President Trump blocking or threatening to block imports of specific products. While this is news in Europe, Asia and Australia, it is not front page news in the United States.
While it is the world’s second biggest trader after China, “trade” in the United States gets only passing attention. Trump came in to office on a growth wave which attracted more attention. He buoyed that with corporate and personal income tax cuts. This year (and analysts posit for next) the United States will be the world’s leading growth economy among industrialised economies. The second quarter of 2018 showed the US economy in full flight, illustrated by 4.1 per cent GDP growth, bringing first half growth to 3.1 per cent.
The strength of the US economy is giving the Trump administration leeway to hit China without worrying as much about blowback on US households or businesses caught in the crosshairs. China’s President Xi, presumably expecting a deal with Trump for ceasing to require US businesses setting up in China to hand over their Intellectual Property, now finds Trump increasing demands for trade balance with the United States. President Trump has listed a wide range of Chinese exports to the United States which he plans to restrict. He had deferred finalising that action until after the congressional midterm elections.
Administration officials also argue that China’s economy, which grew at a 6.8 per cent rate in the first quarter, is more brittle than commonly understood, making Beijing vulnerable to US trade actions.
As well, the president’s trade team is holding the WTO to a form of ransom. The WTO has a panel of judges to hear disputes about whether or not other members of the WTO are complying with WTO rules. Their decisions are legally binding. The judges have fixed terms. The majority have retired but the Trump administration is refusing to agree to new appointments. There is a large backlog of unresolved trade disputes.[^7]
While agricultural leaders moan that blocking exports to China hurts, polling has shown Trump is still popular with US farmers.[^8] To balance losses in farm export sales he has indicated provision of 12 billion dollars to support US farmers. This will please them but risks loss of competitiveness.
How the WTO survives
Is this the beginning of the dismantling of the open global trading system? The answer is no, although it is taking a beating.
First, its capacity to advance reforms to the rules of the global trading system is impeded because its numbers are now dominated by developing economies who are disinterested in trade liberalisation. Of the total of 164 members of the WTO, 50 in fact account for most of world trade.
Secondly, the organisation needs to be rejigged so members with significant trade interests can set different standards for liberalisation than the rest of the system. This cannot be achieved without support from the United States. However the areas where trade reform can be advanced are of little interest to President Trump. His view of international trade is that the only thing that matters is if the United States is positioned to have a surplus of trade with trading partners.
So reform of the WTO is necessary; but failure to reform now and the deliberate action by the Trump administration to hinder the operation of the dispute settlement arm of the WTO does not mean the WTO will fall apart. It will remain in limbo until either the term of the Trump administration expires, or the president himself is eased out of office.
But the WTO is not the only, or even the leading, trade issue as far as the Trump administration is concerned.
It is highly likely Trump will tune his position on tariffs and relations with trading partners under the gun according to the electoral value of that in the midterm elections in November 2018.
Are we seeing a radical reshaping of the global trading system? No, this is merely a regrettable extension of the malaise that the WTO has been facing for over two decades. The WTO will remain a most important institution, regardless of the problems Trump is causing and the overdue reform of some of its key processes. After all, the WTO remains the bedrock of global trade policy.
Despite President Trump’s threats to the contrary, USTR officials privately remain adamant the United States will remain in the WTO. One prospective upside of Trump policy is a reordering of how the WTO functions. It is increasingly the practice in the WTO for groups of members to set new standards for specific issues, sidestepping the standing principle every member has to have a say on every issue. In 2012, 50 of the WTO’s 180 odd members collaborated to set new standards for trade in services. The program was entitled TiSA — Trade in Services Agreement. Negotiations are not complete. They may be if services attuned to the Trump strategy, but they are not on his radar.
What we can expect moving forward?
To maintain some momentum in global action to advance trade liberalisation, it is highly desirable that the latest iteration of the Trans-Pacific Partnership Agreement (now the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — CPTTP), come into force, even without the United States. This would demonstrate trade liberalisation is still active. That appears to be progressing with the expectation it will come into effect by the beginning of 2019.
The CPTPP agreement contains the elements which are essential if US businesses are to tap into the patterns of growth which will continue in the Asian Pacific region, regardless of embellishments by the Trump administration. Tokyo and Canberra believe there is a substantive enough policy component in the agreement for Washington, DC to seek to reconnect the United States to that agreement in a post-Trump period.
This will require endorsement by Congress, which is classically fickle on trade issues.
Ultimately, we should expect no grand strategy or re-engagement in the global and regional order of open markets from President Trump. Apart from the occasional good idea, such as lowering corporate and personal income tax, we have had enough time to get a clear idea of his political modus operandi. It is the House of Cards revisited with an endless story line, episode after episode. Stay tuned for entertainment.
The global trading system will NOT survive President Trump’s tariffs
The global trading system is unlikely to survive the Trump administration’s increasing use of tariffs as an instrument of international economic policy. This is not just because the tariffs are harmful in themselves. It is because the tariffs represent a rejection of the idea that international trade is mutually beneficial. If the world’s leading economy conducts trade policy on the basis of the mercantilist notion that trade is a zero-sum game, it will become increasingly difficult for the existing global trading system to function, much less for new free trade agreements to be struck.
The beginning of the end
It is worth reviewing the damage the Trump administration has already done to the global trading system nearly half-way through its first term. On day one, President Trump withdrew from the Trans-Pacific Partnership (TPP), dramatically reducing the scope of this free trade agreement from 40 per cent of world output to just 13.5 per cent.[^9] While the remaining TPP partners, including Australia, were able to salvage an agreement, the TPP-11 falls short of the aspirations originally held for it.
The TPP was potentially a vehicle through which the United States could lead regional efforts to foster a free and open Indo-Pacific, giving increased economic content to its security alliances within the region. It was also a vehicle through which member economies could have directly challenged China’s increasingly discriminatory, state-led economic development model by setting higher standards for trade and investment. Having withdrawn from the agreement, the political, legal and other obstacles to future US accession will be difficult to surmount.
The high-profile demise of the original TTP overshadowed the demise of the less well-publicised but equally important Transatlantic Trade and Investment Partnership (TTIP) negotiations between the United States and the European Union, notwithstanding recent efforts to re-start these trade talks.
How we got here
Starting in 2018, the administration has introduced tariffs on imports of solar panels, washing machines, steel and aluminium, as well as a broad range of imports from China. It has further threatened higher tariffs on automotive imports, as well as higher tariff rates encompassing almost the total value of Chinese imports to the United States.[^10]
While the individual measures are not in themselves unprecedented, the rationale and policy instruments applied are significant departures from the spirit and letter of both US and international trade law. Invoking national security as a justification for imposing tariffs on steel and aluminium imports is an abuse of both domestic and international trade law. If the World Trade Organization (WTO) is forced to rule on the legality of the national security justification in these cases, it could set a dangerous precedent. In the future, other countries could invoke this exception in bad faith or the United States could ignore the WTO’s ruling or even withdraw from the WTO.[^11]
Other countries have retaliated against the US tariffs with their own measures, compounding the damage to America and the world economy. China’s announced retaliation alone covers around 85 per cent of its imports from the United States[^12] and has largely unwound the significant reductions in the average level of tariffs on US imports since China became a member of the WTO in 2001. The retaliation seen to date discredits the idea that higher tariffs will lead other countries to enter negotiations to lower their trade barriers.
The Trump administration’s deal(s)
The Trump administration has engaged in trade talks with China and Europe while also renegotiating the North American Free Trade Agreement (NAFTA) with Canada and Mexico. Yet all of these talks have so far ended in failure, largely because the administration approaches them with a mercantilist, zero-sum mindset that is fixated on economically-irrelevant measures such as bilateral trade balances, making agreement difficult if not impossible to achieve.
The only trade agreement the administration has successfully concluded is a minimally-renegotiated Korea-US (KORUS) agreement that included quotas that violate world trade rules. This undermined an important principle of the international trading system and reduced rather than increased trade.
The Trump administration says it supports bilateral trade agreements but only because it believes it can strong-arm individual countries more effectively than groups. Yet this is unlikely to provide a fruitful basis for the conclusion of even bilateral agreements, much less plurilateral or multilateral ones.
Senior administration officials are openly hostile to the WTO, seeing it as a failure. While the WTO has issues, these should not be seen as detracting from its overall success in creating principles of non-discrimination in international trade and providing a mechanism for resolving trade disputes without resorting to trade barriers. Although the United States continues to make use of the WTO, it has also sought to undermine its functioning. The United States continues to block appointments to the appellate body that adjudicates appeals against WTO rulings. If this continues an important element of the WTO dispute resolution process will soon cease to function. Rather than adjudicating disputes through the WTO, members are more likely to resort to punitive trade restrictions, leading to higher trade barriers.[^13]
According to media reports, President Trump has prepared legislation to withdraw the US from the WTO.[^14] While this would require congressional approval, Congress has to date shown little appetite to resist Trump on trade, shirking its constitutional authority over trade policy. Existing US law allows Congress to vote on WTO membership every five years, with the next vote due in 2020, a presidential election year. While previous congressional votes have overwhelmingly endorsed continued membership, future votes cannot be taken for granted.[^15] The WTO could continue to function without the United States, but its effectiveness would be greatly impaired.
Some have argued that the global trading system is resilient enough to withstand four years of President Trump. Foreign governments and international businesses have sometimes suggested they just need to sit out Trump’s current term and wait for sanity to return to the White House. But this would be dangerously complacent, as Trump’s trade policy may lead to a fundamental US political realignment behind protectionism. It seems unlikely the Democrats will run a liberal internationalist against Trump in 2020. A more likely scenario is a left-wing populist who will compete with Trump to raise tariff and other trade barriers, continuing the cycle of international retaliation.
The long-lasting impact
The real damage to the global trading system is not just the tariffs but the administration’s repudiation of the long-standing US commitment to promoting international trade as mechanism for fostering global economic growth and development. Whereas previous administrations saw such growth as a positive for the US economy and its national security, President Trump sees growth in other countries as subtracting from US leadership and international trade as a vehicle for the relative decline of the United States.
Before Trump the international trading system was already confronting significant challenges. China’s more authoritarian turn since 2012 and embrace of a state-led development model that seeks self-sufficiency in key sectors is also a challenge to an open international trading system. The WTO now sits at the intersection of two economic systems, the United States and China, that had been converging but now look set to diverge. This is evident in the changing pattern of litigation before the WTO. Whereas such litigation previously involved mainly the United States, the European Union and Japan, increasingly it has been the rest of the world litigating against China.[^16]
China’s growing departure from international norms was always going to require a response from the rest of the world and that response needs to be led by the United States, in conjunction with its economic and security partners. The WTO and TPP provide important vehicles through which the United States and the rest of the world could exemplify an economically successful model of economic and political openness, repudiating Beijing’s model and disciplining China’s behaviour.
Instead, the current administration has sought to push back against China by embracing similar mercantilist notions and discriminatory trade practices that inform China’s approach. This in turn validates the Chinese Communist Party’s world view and encourages China to double-down on its state-led development model. The United States has pushed China further in the direction of managed trade through its demands for China to buy more US exports.
In seeking to ‘out-China China’, the United States undermines some of its own economic advantages. The US economy was built first and foremost on institutions such as the rule of law, open capital markets and relatively free mass migration. The global trading system was one of the many ways in which the United States promoted these institutions and values to the rest of the world, improving its own welfare and security. One of the most import US exports is not goods and services, but better ideas.[^17] The United States has gone from exporting the idea of competitive trade liberalisation to populism and economic isolationism.
What is at stake
That China has not embraced these norms and values is no reason for the United States to abandon them. If anything, it reinforces the need for the United States to improve its economic and security ties with the rest of the world to counter a China that is largely without important friends and allies.
Trump’s tariffs directly undermine these economic and security ties, enlarging China’s freedom of action in the international system and increasing Beijing’s ability to shape the rules of the international economy.
With the “indispensable nation” taking an inward turn, the global trading system is under greater threat than at any time since the 1930s, when US tariffs deepened the Great Depression by triggering a downturn in global trade. While it is possible for the system to survive without US leadership, the more likely outcome is a reversal of the international trend towards trade liberalisation.