If there is one area in which 2017 is going to be a momentous year, it is in trade.
The incoming Trump administration campaigned on and has, since winning the election, robustly promoted an anti-free trade platform saying the North American Free Trade Agreement is “the worst trade deal maybe ever signed anywhere,” bullying GM, Ford Motor Company and various other multinationals into rethinking strategic investments planned for Mexico and forcing them to be shelved or amended.
Trump also announced shortly after the election that his first action in office would be to reject the Trans-Pacific Partnership (TPP). The rhetoric is part of an America First policy that takes an aggressive stance against countries running trade surpluses with the U.S., particularly China, and seeks to encourage job repatriation, particularly of positions that might have been lost in the process of globalization. The Trump view eschews free trade deals, it would appear, almost as a matter of principal.
Free Trade? Or Fair Trade?
The team president-elect Trump is building around him has many ardent campaigners against globalization with a core triumvirate of: Robert Lighthizer, the man Trump picked for U.S. trade representative; Peter Navarro, an outspoken China hawk set to lead a new National Trade Council; and Wilbur Ross, the president-elect’s pick for commerce secretary.
Hopes last year that campaign rhetoric would be softened in office have been squashed as the team has come together so businesses with a global reach had better buckle down for a rough ride in 2017 as policies are developed and applied by the new administration.
Trans-Pacific Bucket of Nope
First up, TPP is dead in the water. It is possible, in the absence of any alternative, the region may adopt a China-sponsored Regional Comprehensive Economic Partnership (RCEP). It excludes the U.S. but includes Australia, New Zealand, Japan and 12 other Asian countries. Fears that it passes global trade leadership to China are overblown, but it certainly signals clearly that America is adopting a more inward-looking, less engaging, trade policy at least for the duration of the incoming administration. Many see America’s withdrawal from TPP as a backward step, more because it was a rules-based system with the rules written to an American standard that many would have welcomed, RCEP will not seek the same level of accountability and standards.
Do Canada, Mexico Want to Renegotiate?
Next up, could be renegotiation of NAFTA. The new president has already backtracked on suggestions NAFTA would be ripped up. As the New York Times observes, after two decades the NAFTA economies are too tightly braided together for that to happen without profound consequences for all parties.
Goods manufactured by companies operating in Mexico, the U.S. and Canada — whether speakers, cars or airplanes — cross the border multiple times during production. That’s a shared manufacturing process that, if destroyed, would mean shared job losses. Interestingly, Canada and Mexico have said they would be willing to discuss updating Nafta. All three countries have things they would like to change, but all attempts to negotiate those have failed in the past probably reflecting the things they would like to change are rarely the same things across all three countries.
But, possibly in recognition that the threat to withdraw from NAFTA would present a huge blow to the U.S. economy, Trump has switched to publicly bullying corporations via Twitter to change investment decisions and eventually corporate priorities toward investment and jobs.
Where Will New Jobs Come From?
Not that NAFTA has been great for Mexicans, but since 1994 it has resulted in billions of dollars of inward investment and contributed the most to Mexico’s rise in exports. Still, Mexican wages have stagnated for years and, like their counterparts in the north, jobs are being lost to automation.
U.S. concerns about job losses are not one-sided. Nearly 2 million Mexican jobs in agriculture have been lost since the treaty, which benefited highly subsidized industries in the U.S. such as corn production to the detriment of Mexican farmers. Ultimately, if NAFTA is to be rewritten it will need to be done with the agreement of all three countries and that will take a long time. In the short-term, Trump is probably right to think that public criticism of corporations is likely to be more effective in grabbing the headlines even if the sum total of jobs “saved” will only amount to a tiny fraction of those employed in U.S. manufacturing.
The new administration’s relationship with China, though, will likely be even more strained. The adoption of Lighthizer as U.S. trade rep shows they intend to adopt a radically more aggressive stance and raises the prospects of challenges on many fronts but particularly China’s currency policy. Lighthizer believes China is a currency manipulator.
According to the Financial Times, though, while much of the discussion about Trump’s trade plans has focused on his threats to impose punitive tariffs, Republican lawmakers are already considering an alternative.
Under a radical overhaul of the U.S. corporate tax system proposed by Republican leaders in the House of Representatives, imports would be taxed while exports would not. The “border-adjusted” tax would come alongside a cut in the corporate tax rate to 20% intended to encourage more U.S. production of goods. It is not clear how this would pass scrutiny at the World Trade Organization but Trump has indicated an about face on U.S. policy regarding the WTO, a body the U.S. has long supported and helped develop its rules. Now, Trump has threatened to pull the U.S. out of the trade body and may simply ignore challenges if he were to adopt the House of Representatives’ plan.
Trump on Trade
Many would argue, and half the population voted, that something needs to be done about the U.S. balance of trade, basically that nation imports too much and exports too little. It’s not alone as a mature economy in this respect, of course, much of Europe is the same, but not all.
Germany, like China, runs massive, and for its trade partners, damaging trade surpluses. We tend to say with Germany that it structures its economy and indeed controls the E.U. as a region to facilitate this (for Germany, at least) happy state of affairs, whereas with China we say it manipulates its currency, interest rates and banking system to achieve the same thing. The outcome is pretty much the same, both countries enjoy a strong balance of trade surpluses regardless of the impact it has on their trade partners. Over the next four years, though, Beijing is likely to come in for more criticism than Berlin.
For companies with overseas suppliers, customers or with a global element to their supply chain 2017 is likely to be a year like no other