Is Trump choking off free trade and decimating WTO?
Two recent trade pacts—one between the US and China, and the other among US, Mexico and Canada—have given the economists plenty of reasons to worry. Both of these treaties are meant to promote trade between the signatory countries and accelerate economic growth in each but they have two major flaws. First, they were negotiated under very "surreal" circumstances which I will explain in a moment. Second, the trade pacts have been drawn up to appease the current US administration and to bolster Trump's election chances. Both pacts also deal a crippling blow to the notion of free trade and signal a further diminished role for World Trade Organization (WTO).
The trade negotiations between the US and its trading partners were being carried out in somewhat extraordinary or unconventional circumstances. US negotiators have an upper hand in both of these parleys because of the sheer economic, political, and military power that the US can, and sometimes does, bring to bear on the other parties. In the theory of international trade, the role of leverage or "force" is never explicitly fully factored in. As we all know, the gains from free trade are mostly discussed in the context of a small country, or trade agreements are conducted by parties of equal size. However, in the case of US-China trade talks, the former has been open about its ability to strike first and impose incrementally higher rates of tariffs on imports of Chinese goods and these could potentially harm Chinese manufacturing and technology sectors.
The just-concluded trade agreement among three big North American countries—the United States, Mexico, and Canada—will now replace the North American Free Trade Agreement (NAFTA). As the name NAFTA implies, the trade agreement went into effect in 1994 and was designed to remove tariff barriers among the three countries. According to the International Monetary Fund (IMF), trade among the three NAFTA countries more than tripled between 1993 and 2007.
During his election campaign, President Trump promised to renegotiate it, and the new agreement to replace NAFTA will be named United States-Mexico-Canada Agreement (USMCA). In an announcement on its website, the office of the US Trade Representative (USTR), which is responsible for all trade negotiations with foreign countries, claims that USMCA will "support mutually beneficial trade leading to freer markets, fairer trade, and robust economic growth in North America." However, in the very next paragraph, it does not hesitate to imply that some of the provisions will provide support for American jobs.
It is well-known that the intense bargaining leading up to the new treaty was weighted in favour of the US, the party with more clout. It focused largely on auto exports, steel and aluminium tariffs, and the dairy, egg and poultry markets. It gives the United States more access to Canada's dairy market, imposes a quota for Canadian and Mexican automotive production, and increases the duty-free limit for Canadians who buy US goods online from USD 20 to USD 150.
The agreement also provides updated intellectual property protections in line with the promises made by President Trump during the last election campaign. One provision of USMCA "prevents any party from passing laws that restrict the cross-border flow of data." Jim Balsillie, co-founder of Research In Motion (RIM), the company that created BlackBerry phones, was openly critical of the data and IP provisions of USMCA. In an op-ed in 2018 in the Toronto Star, he lambasted the Canadian policymakers and negotiators for their "colonial supplicant attitude" towards the US.
US Senator Pat Toomey, a Republican, said that USMCA "is the only trade pact ever meant to diminish trade", and labelled it "protectionist". He was aghast that the US will pay Mexico up to USD 45 million a year to enforce Mexican labour laws, under the penalty of raised tariffs and embargoes. "I still believe that free trade is far better for my constituents than restrictive, managed trade, and hope USMCA's protectionism doesn't become the template for future trade agreements," Toomey added.
The details of the Phase I agreement with China still remain under wraps. There is uncertainty about the actual provisions and the possible impact on individual products. The US cancelled a planned increase of tariffs on USD 156 billion of goods that it imports annually from China including smart phones, toys and consumer electronics. In addition, the US will reduce tariffs by 50 percent on USD 120 billion of goods that were affected by increased tariffs on September 1. These will go down from 15 percent to 7.5 percent. However, US tariffs of 25 percent will remain on USD 250 billion of imports from China on diverse products including machinery, electronics, and furniture.
In return, China agreed to increase imports of American agricultural products by USD 32 billion over the next two years, and this could total USD 50 billion. Total imports from the US would be boosted by USD 200 billion during the same period.
In spite of these potential gains by its agriculture and manufacturing industries, diverse segments in the USA have voiced their concerns. Robert B Zoellick, former president of the World Bank and former USTR under George W Bush, has come out with a scathing editorial in the Wall Street Journal against the US negotiating strategy.
The American farmers were hit hard by the trade war as China raised tariffs on imports of soybean and pork. However, the farm lobby has voiced scepticism about the end result of Phase I. "They need US pork, they need US soybeans. Do they need USD 50 billion of agricultural goods? Absolutely not," according to Dave Marshall, a farm-marketing adviser with First Choice Commodities.
The bottom line is: "investors are still grappling with the winners and losers from trade policy shifts heading into 2020." There is considerable uncertainty about the next steps in the US-China trade spat.
How do all these affect the WTO and its trade court? "President Trump drew concessions from Mexico and China last week while stripping the World Trade Organization of its powers to restrain the tactics he used to secure them, in a series of moves reshaping long-time US trade policy," according to Jacob Schlesinger, a respected journalist of the WSJ Washington team. The US had blocked the appointment of new nominees to the WTO Appellate Body which no longer has the minimum of three judges required to issue decisions and enforce WTO rules.
In these uncertain times, for the smaller countries which are waiting to see the outcome of the realignment of the global trade map, and the future of unfettered trade, the moral of the story is not very encouraging. Powerful countries can challenge and rewrite the tenets of established practices. One powerful or whimsical ruler can redefine the rules of the game. It is good to be a small country as long as you can escape the wrath of the establishment ensconced in Washington. Who will the US target next? Germany? India? Or Bangladesh?
Dr Abdullah Shibli is an economist and Senior Research Fellow at International Sustainable Development Institute (ISDI), a think-tank based in Boston, USA.