The fallout from Trump’s new trade policy

Alok Ray | Updated on March 09, 2018 Published on April 11, 2017

One-way street Not such a good idea   -  Mikhail Leonov/shutterstock.com

It’s hardly cost-effective to bring manufacturing jobs back to the US by renegotiating trade agreements

The Trump administration recently released a document: The President’s 2017 Trade Policy Agenda. Though it is in line with Presdint Donald Trump’s ‘America First’ philosophy and insistence on ‘fair trade’ as opposed to ‘free trade’, the document adds more specifics.

The most important is that the US would not be bound by WTO rules and rulings by WTO courts if these run counter to US interests. Thus, if implemented, it would hit at the foundation of a rule-based multilateral trading system and may potentially unleash a trade war between nations if other countries also follow suit. Items on the agenda include renegotiating/revising existing trade agreements like NAFTA and the US-Korea Free Trade Agreement apart from the Trans-Pacific Partnership (TPP). Henceforth, US would prefer to negotiate bilateral trade deals, instead of multilateral or plurilateral ones.

What is the logic behind this changed US position? The document emphasises unfair trade practices such as currency manipulation (China and Germany have been running huge trade surpluses against the US that the Trump administration believes are largely the result of undervalued yen and euro); non-transparent legal and regulatory regimes (China); prevalence of ‘dumping’ (China, Japan, South Korea and India); hidden subsidies (remember, explicit export subsidies are banned by WTO rules); and rampant violation of patents and copyrights (China). In addition, it points out that liberalised trade with Mexico and Canada (under NAFTA), China (after its entry into WTO), and Korea (US-Korea FTA) has caused huge job losses, specially in the manufacturing sector.

What’s okay, what’s not

Counteracting some of these alleged unfair practices are permitted under WTO rules. For example, temporary anti-dumping duties (ADDs) to offset dumping margins, countervailing duties (CVDs) to neutralise subsidies by the exporting country, and special safeguard duties in case of sudden surge in imports are being routinely used by all countries including the US, China and India. Implicit subsidy to exports and tax on imports through undervalued exchange rate, however, are permitted under the prevailing WTO rules and hence, additional import duties to offset undervalued currency (‘currency manipulation’) proposed by the US on Chinese imports would not be WTO-compatible.

Small-scale violations of patents and copyrights (unauthorised copying of software, movies and music), though illegal under WTO rules, are difficult to enforce without the active cooperation of foreign governments. However, large-scale commercial violations of such rights or drug patents can be and are tackled. The problem is that the US has lost cases along with winning some when cases were fought before WTO dispute settlement bodies. It seems the Trump administration would like to decide which rulings it would abide by or reject. But if a county wants to do this, it has to come out of WTO.

Assuming the US follows the new trade agenda, what would be the consequences? Most analysts agree that it is not possible to bring back manufacturing jobs to the US to any significant extent by renegotiating trade agreements. In most cases, it would not be cost effective. Imposing high tariffs on imports would not be WTO-compatible, and would raise the cost to American consumers. The other option is to automate; this would cost jobs. A trade war with other countries would also mean loss of exports and jobs.

Further, manufacturing job loss is part of a long historical process. According to estimates by Brad Delong of UC at Berkeley, factory jobs as percentage of non-farm employment in the US declined from 32 per cent in 1953 to 16 per cent in 1990, before NAFTA or China. Currently, it is about 9 per cent. Even in Germany factory employment as percentage of total employment halved between 1970 and 2015.

It’s to do with skills

In other words, the bigger villain is skill-based technological progress (including automation) rather than globalisation. So, the primary solution has to be in terms of education and skills upgradation to take advantage of opportunities opened by new technologies, instead of trying to bring back unviable jobsby restricting imports.

At a more fundamental, macroeconomic level, a country’s current account deficit is a reflection of overspending. So long as the US continues to live beyond its means, it will runs an overall trade deficit. If China or Germany is forced to revalue its currency, the US trade deficit with these countries would go down but would correspondingly go up against other countries.

Is the US abandoning multilateralism and regionalism in trade agreements going to sound the death knell of WTO? As Arvind Subramanian points out, it may even strengthen WTO for others. Growing regionalism was the main reason behind the weakening of WTO. If the US and some European countries move away from mega regional agreements like TPP and EU, other countries may rely more on multilateral rules as enshrined in WTO. With public sentiment growing against ‘deeper’ integration, focusing on simple trade liberalisation under the WTO umbrella may gather momentum.

Abandoning of TPP and imposing tariffs on Chinese goods may push China to forge a mega trading bloc with Japan, South Korea, Asean, India and Australia, excluding the US. China will project itself as the champion of free trade and the US as protectionist. The mutual benefits of globalisation, though being increasingly questioned in the US and Europe, have not yet been lost in Asia and Australia.

The writer was a professor of economics at IIM-Calcutta

Published on April 11, 2017
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