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posted on 23 January 2017

Trumping World Trade

Written by , Difference Group

After the inauguration, President Trump has begun to reset the White House trade policies. But the consequences of “America First" stance in world trade are wrought with threats.

Recently, President Xi Jinping gave a strong speech about the need for more inclusive globalization at Davos. World trade is a case in point. In 2015, world export volumes reached a plateau. World trade is no longer growing. Any major protectionist initiative has potential to make a bad situation a lot worse.

trump.card.360x200

Trump’s trade appointments and tariff plans

In the early 2010s, the Obama administration touted the Trans-Pacific Partnership (TPP), which excluded China. On his inauguration day, Trump announced US withdrawal from the TPP and promised to renegotiate NAFTA; if Mexico and Canada would refuse a negotiation, he would have US withdraw also from NAFTA.

Trump has promised to renegotiate or reject other US international commitments. And he has threatened to use 35-45% import tariffs, while his team has floated 10% tariffs. The goal is to force some countries, particularly Mexico and China, to change their trade practices, which he has vowed to challenge with “cease and desist" letters and greater pressure for intellectual property rights (IPRs).

Trump's appointments suggest potential for serious trade friction. He selected Peter Navarro, the author of sensationalist China-bashing books (The Coming China Wars, 2005; Death by China, 2011; and What China’s Militarism Means for the World, 2015), to head the new National Trade Council (NTC), which will oversee industrial policy in the White House.

Navarro's anti-China buddy Dan DiMicco, former CEO of largest US steel company Nucor and vocal free trade critic, became Trump's trade advisor and former Reagan administration trade hawk Robert Lighthizer, his US Trade Representative.

The three will work with Secretary of Commerce, billionaire Wilbur Ross, who made a fortune by offshoring American jobs and as bankruptcy expert. He calls China "the world's most protectionist country".

Targeting US deficit

Targeting the US deficit Trump has also named Japan as one of the deficit contributors, which Japan’s Finance Minister Taro Aso has considered inappropriate. In terms of trade imbalances, “China is No 1," Aso says.

In protectionist initiatives, the blame is in the eye of the beholder because one country's deficit is another's surplus. Trump’s trade warriors will begin by singling out nations that have large trade surplus with the US. That makes big trading economies obvious targets. In 2015, the list was topped by China ($367 billion), Japan ($69) and Mexico ($61 billion), and Germany ($60 billion).

However, they are likely to ignore the size of these surpluses on a per capita basis. If we take into account the population size, Germany ($720) is the deficit leader followed by Japan ($543), Mexico ($488), but China ($262) is far behind.

Now, if the Trump administration really is serious about targeting deficit leaders, it should probably consider a trade war with Ireland. After all, US has a deficit of $30 billion with Ireland, which translates to $6,380 in per capita terms - that's 9 times the German and 24 times the Chinese figure, respectively.

In reality, trade deficits are likely to serve as pretexts for protectionism - even if such policies penalize the rest of the world.

Regional trade deficits, nationalist tariffs

Trump's goals may well be dictated by realpolitik. Deficit criticism serves largely as an effort to undermine European unity (hence his anti-Merkel tirade), the rise of China and Mexico, and Japanese reforms. In such a win-lose world, "America First" is not possible through cooperation or even competition, but only by winning and harming perceived adversaries.

And yet, historically, US trade deficits did not start with China, or any other single country. Rather, they are regional and have prevailed for more than 41 years with Asia - first with Japan, then with newly-industrialized Asian tigers and recently with China and emerging Asia.

A single-minded focus on trade deficits ignores the fact that global economic cooperation is not just about trade in goods, but about trade in services and hightechnology. It also includes investment, which Trump would like to attract from the very same countries that he risks alienating with his trade policy.

And it includes migration flows, which Trump would like to restrict dramatically, which would hurt US long-term growth, reduce remittances to poorer nations and boost anti-US resentment particularly in the Middle East.

Smoot-Hawley Tariff Act Déjà vu

Trump’s stated protectionism does have a historical precedent. In 1930, the US Congress passed the notorious Smoot-Hawley Tariff Act, which sharply raised the cost of foreign imports.

While the Tariff Act seemed to work initially, it soon caused other nations to retaliate. As rounds of tit-for-tat retaliation contributed to the Great Depression, the way was soon paved for another world war. Trumping world trade is a bad idea, but its timing is even worse.

An earlier version of this article was released by China Daily 23 January 2017.

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