Trade Under Trump
Phil Levy is senior fellow on the global economy at the Chicago Council on Global Affairs. This piece is part of a special RCW series on America’s role in the world during the Trump administration. The views expressed are the author’s own.
For several decades it has been reasonably easy to predict the direction of U.S. trade policy, even across changes of presidential administration. One could always expect more of the same. There were hiccups -- Bill Clinton raised questions about the North American Free Trade Agreement, and Barack Obama initially tabled the Trans-Pacific Partnership -- but ultimately successors followed the lead of predecessors. With the accession of Donald Trump to the presidency, the world faces the greatest chance of a sharp break in U.S. trade policy since the Second World War. Indeed, one of President Trump’s first acts in office was to sign an order withdrawing the United States from the TPP altogether.
There are at least two broad explanations available for the remarkable constancy in U.S. trade policy. One, presumably favored by trade critics, is that Democratic and Republican administrations have both been captured by a blind ideological devotion to free trade (though none of them ever quite seemed to implement free trade). The alternative explanation is that successive administrations have faced the same constraint: the national economy is dependant on the global economic order, so they could either pursue economic gains through trade negotiations, or risk serious national losses through a breakdown of that economic order.
Which of these explanations one favors can go a long way toward predicting the trade policy of the next few years. If trade skepticism is warranted, the Trump team seems well-equipped to challenge the status quo. The president-elect has been quite explicit in his denunciation of U.S. trade deals, and he has empowered advisers Peter Navarro and Robert Lighthizer, each of whom has a history of doubting the virtues of U.S. trade policy.
Yet we have seen West Wing conversions before. Bill Clinton questioned the recently negotiated NAFTA in 1992, but he decided it could be fixed with the addition of labor and environmental side agreements. Barack Obama campaigned against NAFTA in 2008, but ended up staking his trade legacy on the Trans-Pacific Partnership, or TPP, which he inherited and which encompassed the NAFTA countries (Canada and Mexico) in an even more ambitious, expanded agreement.
There are a few broad reasons why campaign-trail trade critics become trade converts when they reach the White House.
- Domestic interest groups. Take a look at the electoral map. Donald Trump’s surprise capture of the industrial Great Lakes states and Pennsylvania only gave him the presidency because it came atop broad red-state support in the middle of the country. Those interior states often have large agricultural sectors that depend heavily on exporting. Farm groups saw the TPP as a means to pry open key foreign agricultural markets, like those in Japan. President Trump has to weigh the interests of these ag supporters against the segments of the manufacturing sector demanding protection (e.g. steel).
- Trade facts. The real world of trade agreements often bears little resemblance to campaign trail depictions. One can rev up a crowd by calling for cars to be made in Michigan rather than Mexico, but the reality is that any given car is likely to have been made in multiple places. Modern production is based on global supply chains. Seat cushions, chassis, engines, assembly -- all can be done in different countries. One implication of this is that top U.S. importing companies are often simultaneously top U.S. exporting companies. Blocking imports would hamstring U.S. industrial success, not promote it. A second, little-discussed fact is that these trade agreements are often lopsided in favor of U.S. market access. Before NAFTA, U.S. tariffs on Mexico averaged roughly 3 percent; Mexican tariffs on the United States averaged about 15 percent. Even if one only cares about market access, these deals look pretty good.
- Foreign policy. Critics often claim that U.S. economic interests are sacrificed in the interest of currying favor with partner countries. While the claim of sacrifice may be misguided, the foreign policy benefits of U.S. trade leadership are real. That was one of President Obama’s early discoveries in 2009. Obama had campaigned as a trade skeptic, but he also spoke of redirecting U.S. foreign policy toward Asia. Toward the end of his first year, when he headed off for his inaugural round of Asian summitry, he discovered that the business of Asia is business. Even if President Obama was not enamored of trade agreements, the other countries were. So he resuscitated President Bush’s TPP, which had lain dormant since Obama took office.
President Trump is likely to face all of these pressures. How much he will care is an open question. Will he feel the need to deliver for his agricultural supporters? Will he worry about the damage done to American business if supply chains are disrupted and access to foreign markets disappears in a trade war? Will he care about the U.S. ability to influence and partner with other countries?
As he considers these pressures, Trump inherits a fuller trade agenda than most of his predecessors, largely because the Obama administration was far more successful at launching trade talks than seeing them through to fruition. The new president has a lot on his plate, and he has wasted no time in addressing it:
- The TPP was the most salient campaign target among the pending trade agreements and had reached the most advanced stage. It binds 12 countries across the Asia-Pacific in a sophisticated agreement that was largely seen by other countries as catering to U.S. interests. The Obama administration signed the agreement in February 2016, but it never advanced through Congress. Trump has signed an order withdrawing from the accord.
- The Trans-Atlantic Trade and Investment Partnership (TTIP) was at the heart of the relationship between the United States and Europe. It was always going to be difficult to enact: The United States and the European Union had worked through the simple matters in earlier rounds of trade liberalization. The process became harder as national elections began to approach (not just in the United States, but in major European countries in 2017). It became harder still when Brexit introduced new uncertainties.
- The World Trade Organization (WTO). Under President George W. Bush, a major round of WTO negotiations, known as the Doha Development Agenda, kicked off in 2001. This round was supposed to conclude during the Bush term, but it stalled in 2008. Under President Obama, Doha effectively died, with a less ambitious agreement on trade facilitation coming to pass. There are also important talks under the WTO on a Trade in Services Agreement that sit incomplete.
- Bilateral Investment Treaty (BIT) with China. China was not a party to TPP talks. The main active negotiation between Washington and Beijing is a treaty to regulate the treatment of investment. (Such a treaty is often a precursor to broader trade talks.) While this could certainly be a vehicle for Trump to make demands of the Chinese, they are sure to demand reciprocity.
President Trump, upon taking office, can modify, stall, or reject these agreements. Clinton modified NAFTA with side agreements. Obama stalled by tabling the TPP. Trump’s outright rejection is something new.
As a candidate, President Trump spoke of seeking better deals and seemed more inclined to bilateral agreements in lieu of multi-party deals. That is likely to prove challenging as an alternative. Two of the top candidates for bilateral deals -- the United Kingdom and Japan -- each have their own obstacles. The United Kingdom is still a member of the European Union; it cannot negotiate a bilateral trade deal until it figures out how it will exit. Japan has invested serious political capital in reaching a TPP deal; it is unlikely to embrace the idea of trashing it and starting over. (Officials have in fact publicly rejected the idea.)
In most administrations, key early appointments would give a clearer idea of where the administration was likely to go. However, the trade apparatus proposed by the Trump team merely clouds the situation further. There will be real pressures to stay the course on trade policy, but the odds of a sharp and economically damaging break appear higher than they have been for many decades.