Tag: trade policy

Alicia Nicholls

Few other aspects of President-elect Donald Trump’s proposed policy platform have attracted as much attention and scrutiny as have his trade policy proposals. In often colourful language, Mr. Trump has charged that current United States (US) trade policy is disadvantageous to American workers and interests and that other countries are taking advantage of the land of the free.

In October before the vote, Mr. Trump outlined his broad trade policy proposals in his first 100 days action plan to “Make America Great Again”. The guiding principle of Mr. Trump’s trade policy is to protect American workers and address the country’s trade deficit. The President-elect has proffered the plan as a contract between himself and the American voter. Many of these proposals he had previously outlined in his Trade Policy speech on June 28, 2016.

Here are the broad policy guidelines of President-elect’s Trump trade policy according to his first 100-days plan in a nutshell:

1.Renegotiate or Withdraw from NAFTA

Mr. Trump has called the trilateral North American Free Trade Agreement (NAFTA), consisting of the US, Canada and Mexico “the single worst trade deal in history”. He has vowed to renegotiate it to make it better.

Truth be told, NAFTA has been controversial from its inception. The Agreement was negotiated and signed under Republican president, George H.W. Bush, in 1992, but the task of pushing for congressional approval and signing it into US law was left to his successor, Democratic president, Bill Clinton in 1993. In 1992, even before the agreement came into effect, then independent presidential candidate Ross Perot made his famous “giant sucking sound going south” quotation by which he argued that NAFTA would result in the relocation of American companies (hence American jobs) to Mexico where labour is cheaper and there are less environmental and workers’ protections. Back in the 2008 presidential campaign then Senator Obama made a campaign pledge that he would renegotiate NAFTA.

Views on NAFTA remain divided to this day. Besides its criticism as an American job killer, NAFTA’s Chapter 11 (Investment Chapter) has seen all three countries paying out large sums of money in compensation to investors who utilised the investor-state dispute settlement (ISDS) provisions.

But has NAFTA been as bad for the US economy as Mr. Trump claims? A report by the Congressional Research Service in 2015 found it is not so simple:

In reality, NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters. The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP.

It is not yet clear what aspects of the Agreement Mr. Trump intends to re-negotiate or how he intends to go about this.

Mr. Trump has also floated the option of withdrawing from NAFTA if Mexico and Canada do not agree to renegotiate. Under Article 2205 of the NAFTA Agreement, a State may withdraw from NAFTA six months upon giving written notice of same. It will be uncharted territory as no state has withdrawn from NAFTA before and it would mean that trade between the US and Canada and Mexico, its second and third largest bilateral trading partners (by merchandise trade) would be left in a state of uncertainty. This would be disadvantageous to American businesses which conduct trade with Canada and Mexico.

2. Withdrawal from the Trans-Pacific Partnership

Equating the Trans-Pacific Partnership with “rape” and calling it a “deathblow for American manufacturing“, Mr. Trump has stated that he will withdraw the US from the agreement.

The TPP is a mega free trade agreement involving twelve Pacific Rim countries. The US signed the Agreement in February 2016 but ratification requires Congressional approval which it is yet to receive. After Mr. Trump’s election, President Obama announced he was suspending his efforts to win congressional approval of TPP before Mr. Trump assumes office. A significant amount of popular, political and civil society resistance to TPP has been against the secrecy in which it was negotiated and its ISDS and intellectual property provisions.

Since the TPP has not been ratified by the US, it is probable that President Trump may simply not bother to let it be ratified, which means it will die a natural death as far as the US is concerned.

3. Direct his Secretary of the Treasury to label China a currency manipulator

According to US Census Bureau data as at September 2016,  China is now the US’ largest  bilateral trading partner in terms of the total volume of merchandise trade between the two countries. The US has a large trade deficit with China ($79.3 bn in exports to China versus $337 bn in imports year to date, according to US Census Bureau data), something which Mr. Trump has constantly criticised during the campaign.

Another issue Mr. Trump has raised is “currency manipulation” by China. In a Wall Street Journal op-ed in November 2015, Mr. Trump wrote that “the worst of China’s sins is not its theft of intellectual property. It is the wanton manipulation of China’s currency, robbing Americans of billions of dollars of capital and millions of jobs”.

So what is this currency manipulation business? China’s currency exchange rate policy uses a trading band, that is, the exchange rate  of the Renminbi (China’s official currency) is allowed by the People’s Bank of China to appreciate or depreciate only 2% against a basket of currencies, including the US dollar. It is not uncommon for governments to intervene to influence their exchange rates and it is a country’s sovereign right to determine its own exchange rate regime. The only possible WTO guidance on the subject is in the General Agreement on Tariffs and Trade (GATT), namely Article XV(4) which is  quite vague.

The main argument made against China’s exchange rate regime by the US is that the Renminbi’s undervaluation gives China an unfair trade advantage as it makes Chinese exports more price competitive than American goods. Bear in mind that large bilateral trade deficit we discussed earlier. It should be noted that this concern is not unique to Mr.Trump as in the 2012 presidential election, former Massachusetts Governor Mitt Romney, the then Republican nominee, promised to label China a currency manipulator. Criticism of China’s intervention in the currency market by US administrations is not new, including under the Obama Administration.

In highlighting the perceived injustices of China’s actions, Mr. Trump noted in the same op-ed that “[t]hrough manipulation of the yuan, the Chinese government has been able to tip the trade balance in their direction by imposing a de facto tariff on all imported goods.

The President-elect has stated that he would impose a countervailing 45% tariff on Chinese imports because of China’s “currency manipulation. Many commentators have warned that such an action would likely trigger a trade war with the US’ most important bilateral trading partner, to which Mr. Trump promptly quipped that the US was already in a trade war with China.

It should be noted that in its Article IV Report of 2015 the IMF noted that “our assessment now is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued”, although in the 2016 report it noted “[a]fter appreciating 10 percent in real effective terms through mid-2015, the renminbi has depreciated some 4.5 percent since then and remains broadly in line with fundamentals”.

4.Direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses

Mr. Trump has promised that he will direct the Secretary of Commerce and the U.S. Trade Representative “to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately”.

Defending her trade interests against perceived unfair trade practices by other states is an American tradition, including under the Obama administration, and would be nothing new. In the Caribbean we have had an unfortunate taste of this with the banana disputes successfully brought by the US and Latin American countries on behalf of big US banana producers against the European Union over its preferential import regime for bananas from African, Caribbean and Pacific (ACP) countries.

Indeed, if one looks on the WTO’s website, one can see a long list of WTO disputes brought by the US as a complainant against other WTO members. More specifically, 19 of those cases the US has brought against China.

5.Ending Offshoring by establishing tariffs

Mr. Trump has promised to “discourage [American] companies from laying off their workers in order to relocate in other countries and ship their products back to the U.S. tax-free”. To this extent, he has indicated on several occasions his willingness to impose a 35% tariff on goods coming into the US which are produced by American companies which had moved offshore. This promise in particular appealed to blue collar workers in Rust belt states where manufacturing jobs have declined as some American manufacturers have either offshored or outsourced aspects of their production to more cost effective locales, including Mexico and Asian countries.

Critics of Mr. Trump’s plan to place a tariff on those imports argue that the tariff will raise prices for American consumers and negatively impact the working class. Additionally, there appears to be some trend of reshoring, that is, relocation by American manufacturers of plants back to the US, although this Deloitte report notes that it is too early to tell whether this is a permanent trend.

6. Other Trade Statements made on the Campaign Trail

In his 7-point plan on trade, Mr. Trump also promised to “appoint tough and smart trade negotiators to fight on behalf of American workers” to ensure America signs deals which benefits American jobs. It is not clear what criteria will be used to select these negotiators. Mr. Trump also supports the continuation of the US’ long-standing trade and economic embargo against Cuba. Although only Congress can end the embargo, President Obama had through a series of executive orders loosened some of the restrictions since 2014 in hopes of a future normalisation in US-Cuba relations. It is likely that Mr. Trump will reverse those orders.

Some of President-elect Trump’s trade policy proposals such as aggressively defending America’s interests against unfair trading practices and challenging China’s perceived currency manipulation are already mainstream to existing US policy. What is different, however, is his rhetoric against free trade agreements which he views as “job-killing” and his tariff-happy rhetoric. I have already discussed the implications of this for US-Caribbean relations in a previous post.

His zero-sum approach to trade policy has been strongly criticised in many quarters as being protectionist and anti-growth. For instance, an empirical study by the Peterson Institute for International Economics had found that if implemented, Mr. Trump’s trade proposals “could unleash a trade war that would plunge the US economy into recession and cost more than 4 million private sector American jobs”.

If he does decide to implement tariffs on countries deemed to be “unfair”, this is also likely to lead to more WTO trade disputes as countries may decide to take pre-emptive or retaliatory action against US goods in order to protect their own interests. Such an outcome from Mr. Trump’s proposals are particularly concerning in the context where global trade growth is sluggish and there are concerns about creeping protectionism, which has prompted some concern expressed by IMF and WTO officials.

As evidenced by his electoral win, Mr. Trump’s protectionist promises successfully appealed to blue collar workers  in the “Rustbelt” states and is symptomatic of the anti-trade populism which has been sweeping through western countries. However, the implementation of some of his more controversial proposals might not be as simple as one might think. Needless to say, some of these proposals, if implemented, will likely be judicially challenged in the domestic courts by American businesses which are adversely affected, in the WTO dispute settlement system by affected countries. Mr. Trump has hinted that he may withdraw the US from the WTO, when the suggestion was made that some of his proposals might be contrary to WTO rules if implemented.

The specifics of the President-elect’s policy proposals have not yet been elaborated. It is also not yet known who Mr. Trump will pick to lead his trade team. As trade is high on the incoming President’s agenda, one can expect to see more elaboration of his trade proposals in the coming weeks and after he takes office in January 2017.

Alicia Nicholls is a trade and development consultant with a keen interest in sustainable development, international law and trade. You can also read more of her commentaries and follow her on Twitter @LicyLaw.