The alternative paths of multilateral trade deals

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Trump's tweet for Labor Day

Perusing the coverage of President Donald Trump’s first ten months in office, a reader could easily conclude that the global trading system, which has been in existence essentially since 1945, is on the verge of collapse. Trump and his advisors have launched renegotiation talks of the North American Free Trade Agreement and have pulled the United States out of the planned Trans Pacific Partnership (TPP). They are supposedly drawing up a list of alleged trade violators that includes many close partners of the United States as well as competitors, and may impose trade sanctions against China, now that the president has come and gone from China. Trump’s China actions could well spark a significant trade battle between the world’s two largest economies. Trump himself frequently talks about trade in a way that sounds more like mercantilist princes of the 16th century, or the economist nationalists of the 1930s, than all the post-World War II presidents of the United States.

With Washington, historically a driving force behind multilateral free trade deals and a staunch defender of liberal trade, turning mercantilist, global trade seems endangered – unless you look a little deeper at the facts.

The post-World War II multilateral trading system may not yet go the way of the dodo. In fact, multilateral trade deals could happen and are still happening – just, in many cases without the United States at their center. In September, the World Trade Organization raised its projection for global trade growth for 2017 from 2.4% to 3.6%.

Instead of the United States necessarily leading multilateral trade, other very large economies, like Japan, that were once skeptical of multilateral trade negotiations, are stepping forward to lead trade integration, jettisoning their past preference for bilateral deals and their willingness to take cues from Washington. And ultimately, the fact that the world will continue trading – lowering trade barriers, making new multilateral deals, and witnessing corporate expansion plans predicated on growing trade – will force Washington to abandon its most strident plans. And if it doesn’t, not only Japan but also China will step into the trade void.  

Given Trump’s incessant (and often factually incorrect) talk about how many trade deals are “unfair” to the United States, worry about the health of global trade is not unfounded. The Trump administration is clearly trying to abandon Washington’s role at the center of the multilateral trading order - even if it alienates longtime allies like Japan, Canada or the EU in the process. At multiple multilateral events, Trump trade negotiators have refused to condemn protectionism in joint statements with other parties. At the G-20 meeting in March, for instance, leading economic powers dumped their pledge, initially made in 2008, to combat many different types of protectionism; this change was reportedly pushed by the Trump administration

In addition, the Trump administration’s trade strategy vis-à-vis China could easily escalate. The Trump administration’s Commerce Department also is investigating China’s (and other countries’) steel exports to the United States, searching for potential violations of US national security, and potentially ready to restrict steel imports. The administration may also pursue trade actions against China under Section 201 of the US Trade Act, as well as Section 301. Eventually the White House could impose tough countermeasures against Chinese solar firms and companies in many other sectors under these sections.

Although the Trump administration withdrew the United States from the TPP in January, eleven other Asian economies vowed in Vietnam in late May to push the deal forward, and then confirmed, at talks in Japan in July, that they intend to move on and complete the TPP. In November, shortly after Trump gave a major speech in Vietnam blasting multilateral trade and calling for Asian countries to make bilateral trade deals with the United States, the nations left in the TPP announced that they had come up with a framework to put the deal into place. The eleven remaining TPP members are working to finalize the deal and put it into action within the next year. Meanwhile, despite Trump’s advocacy for bilateral trade deals during his trip, no country expressed interest in a new bilateral agreement with the United States.

Not only are most nations now uninterested in bilateral deals with Washington - the United States’ sharp shift on trade has led other countries that once preferred bilateral negotiations to become major leaders on multilateral deals.

Japan is the most obvious example. As CNBC has reported, Japan's Minister for Economy, Trade and Industry, Hiroshige Seko, has played the central role in keeping the TPP alive. Japan was not even one of the original TPP members, and its ministers, in the past, have not typically played a public arm-wrangling role on trade deals. In fact, Japan historically preferred bilateral deals to multilateral agreements. That has begun to change.

The remaining TPP members have, collectively, publicly left the door open for Beijing to join the TPP, though US negotiators have pushed Tokyo hard to work on a bilateral deal with the United States rather than focusing on TPP – let alone a TPP that could eventually welcome China. In fact, Japan’s Deputy Prime Minister publicly slapped down the Trump administration’s call for Tokyo to focus on a (far in the future) bilateral deal with Washington, showing that Japan and other major powers are not simply going to cave to Washington’s nationalism and bilateral deal agenda. Last January, Prime Minister Shinzo Abe said that TPP “would be meaningless without the United States.” But the White House’s bellicose rhetoric on trade seems to have convinced Tokyo that it needs to move forward with or without an American presence in the TPP.

Although China was pushing forward free trade deals before Trump was elected, Beijing is now clearly positioning itself as a protector of global free trade. Chinese President Xi Jinping became the first Chinese leader to visit the World Economic Forum in Davos last winter. There, he used his appearance to warn countries against a rush to protectionism, which he compared to “locking oneself in a dark room.” Of course, to some extent China’s positioning itself as a defender of free trade is just posturing; the Xi Jinping government actually has put up many new barriers to foreign investment and commerce in China, according to both the European and American Chambers of Commerce. Yet it is certainly better, for the global economy, to have Beijing actively engaged in, and even leading trade deals, than for China, the world’s second largest economy, to stay on the sidelines.

China, meanwhile, is pushing another multilateral trade deal in Asia, the Regional Comprehensive Economic Partnership (RCEP, whose negotiations were formally launched in 2012), and many Asian nations ultimately could wind up joining both, although the RCEP is a looser and weaker deal, with weaker standards, than the TPP.

In addition, the European Union is pushing forward on major trade deals, again in part as signals to the Trump administration. Canada and the European Union have finalized their trade deal, and it has been put into force on a provisional basis. (The election of Emmanuel Macron as President of France put in office in Paris the only presidential candidate who clearly supported the Canada-EU agreement.) And, in July, just before the G-20 summit in Germany, Japan and the European Union announced a Japan-EU trade deal – which, if successfully completed, would create one of the largest free trade areas in the world.

Announcing the deal with Japan, the world’s third-largest economy, Donald Tusk, President of the European Council, pointedly highlighted it as a counterexample to rising protectionism. “Although some are saying that the time of isolationism and disintegration is coming again, we are demonstrating that this is not the case,” Tusk said, according to the New York Times. “The world really doesn’t need to go a hundred years back in time. Quite the opposite.”

Other large regions, following Asia’s example, are also considering greater internal trade integration or free trade linkups with other parts of the globe. African leaders have discussed joining the continent’s regional economic zones into one common market, while Latin American nations are considering new trade agreements. Beijing already clearly sees Washington’s withdrawal from trade leadership in the Western Hemisphere as an opportunity for China. And Latin American nations in the Pacific Alliance, a four-country trade grouping of Chile, Colombia, Mexico and Peru that is the eighth largest free trade zone in the world, are looking to expand that group. The Pacific Alliance nations want to expand their bloc to include Asian nations, in large part because these countries in Latin America want to be less dependent on trade with an increasingly mercurial United States. In June, Australia and New Zealand embarked upon talks with the Pacific Alliance, and the Pacific Alliance is also talking about trade deals with Singapore and Canada.

To be sure, the United States is still the world’s biggest economy, and other major powers like Japan and China do not yet have the experience, the reserve of global trust on economic issues, and the bench of personnel that Washington historically has boasted. But even without US leadership, major deals will almost surely be finalized  in the next year in Asia, Latin America, and even Europe, and powers like Japan, China, and major European nations will eventually obtain the experience and trust that Washington once enjoyed. The White House clearly cannot bully these countries into doing nothing, or just signing bilateral deals, either. The fact that the Trump administration, consumed with in-fighting and continuing investigations in links to Russia, could not even get close ally Japan to abandon multilateral deals like the TPP, shows that the administration’s sway, on trade issues, is far less than Trump and his advisors imagine.

What’s more, US leaders outside of the President’s office may well understand the damage being done to American strategic interests from the administration’s mercantilist policy. After all, most Republicans on Capitol Hill backed US participation in the TPP, and other trade deals, and will have to watch as the US cedes leadership on this critical economic issue to Europe, Japan, and China. Now, the better China looks on trade and the global economy, the easier it is for Beijing to make hard power gains too - in places critical to the United States like Northeast and Southeast Asia.




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