Trade Policy Under Trump: A Look Ahead
The President’s America First Strategy Will Have Meaningful Ramifications
Dentons, the global law firm, recently released its Global Regulatory Trends to Watch in 2017. In this five-part series, we are publishing excerpts from the report focusing on public affairs, anti-corruption, and economic sanctions and trade across the world, including the US, Europe, the UK, China, Canada and Mexico. Authors for these excerpts include: Paul Lalonde, Michael Zolandz, Jorge Jiménez .
International trade was a significant issue during the presidential campaign and one which President Trump returned to often on the trail. First, he promised that trade agreements would come under much greater scrutiny in his administration and that trade enforcement efforts would increase. He has already pulled out of the Trans-Pacific Partnership (TPP) Agreement and plans to renegotiate the North America Free Trade Agreement (NAFTA).
His inaugural remarks presage an America First strategy that is likely to have meaningful ramifications in the trade arena. His proposed appointment of John Lighthizer, a free-trade critic, further signals the president’s intent to address what were described during the campaign as imbalances in US trade. Lighthizer has endorsed limiting free trade where needed to protect domestic industries. Both during his prior tenure in the Reagan administration, and in private law practice thereafter, he worked to provide protection for US industries under siege from open trade policies. His appointment ties in directly with that of Commerce Secretary Wilbur Ross, who has both promoted and used trade remedies and trade restrictions to help insulate businesses he owns, first steel, then textiles.
The trade team that President Trump has assembled will likely develop a clear and coordinated strategy of revisiting existing agreements that they believe do not afford adequate quid pro quo protections for US industries, and using non-trade strategies to accomplish those means as well. In particular, President Trump’s team is likely to take an aggressive stance regarding China’s currency actions, and its desire to be reclassified as a market economy in the WTO.
On January 23, 2017, President Trump signed an executive order withdrawing the United States from the TPP. While the US had signed an agreement signifying its intention to implement the TPP Agreement, it had not been sent to Congress and had not been ratified by the required number of countries for it to go into effect. With significant Democratic and Republican congressional opposition, passage of the TPP, while supported by many in the business community, was never a foregone conclusion, so withdrawing from it will have little or no immediate impact on the US economy.
The bigger issue with TPP is what happens next. The remaining eleven countries may ratify the agreement without the United States. Alternatively, smaller subgroups—some involving China—may form. There will be future Pacific Rim trade agreements and the issue will be whether the US is part of those negotiations.
To counter China’s attempts to exploit discontent arising from the US rejection of the agreement, the Trump administration may launch an assertive agenda of bilateral agreements, or look for alternative strategies to keep China’s influence at bay. China’s desire to move these countries away from close relationships with the US will have to play a role in how the administration approaches these trade issues, which are integrally intertwined with important national security concerns.
President Trump spent much of his time on the campaign trail, especially in the Midwestern rust-belt states, expressing his dissatisfaction with NAFTA. He promised that his administration would renegotiate NAFTA to make it a better deal for US businesses and employees. While it is certainly an option for him to sign an executive order right away withdrawing from NAFTA, that would cause significant problems because many business models—including the location of manufacturing facilities—have been designed with the understanding that NAFTA would remain in force. Withdrawing suddenly from NAFTA would disrupt supply chains and could put manufacturers located in North America at a disadvantage compared to foreign producers, particularly those from China.
In addition, withdrawal from NAFTA would require Congress to pass legislation to address the implementing statutes it put in place after NAFTA was signed and ratified. Already, both the Mexican and Canadian governments have agreed to reopen the NAFTA negotiations and have indicated the priority issues that they would want to discuss. Given that his campaign pledge was to renegotiate NAFTA to obtain better terms for the US (with the threat to withdraw if Mexico and Canada refused to renegotiate), President Trump may focus his early discussions on identifying areas for renegotiation with Mexico and Canada.
While President Trump has reiterated his belief in free trade, he maintains his hardline stance on preventing jobs from moving into Mexico. Yet this simplified view does not recognize the impact of automation on the loss of jobs, or the number of jobs in the US economy that rely on exports to Mexico from the US. Trade between the two countries represents more than $1 million per minute. Nearly 20 US states count Mexico as their main trading partner. Texas alone sends as much as 40 percent of its exports to its southern neighbor. In strategic industries such as energy, the economies are too intrinsically linked: more than 70 percent of the gasoline and 55 percent of the natural gas consumed in Mexico comes from the US.
Further complicating US-Mexico discussions: President Trump’s proposed border wall, and questions over how it will be paid for. The president’s administration is seeking alternatives to his campaign promise to make Mexico pay for the initiative, including “border adjustment taxes.” These tax proposals raise serious issues not only with NAFTA, but also with the WTO.
Other trade priorities
As to other positions taken by President Trump, such as a 45-percent tariff on goods from China, there is a good chance that the new administration will ultimately back off. Imposing an across-the-board tariff increase—apart from its questionable legality—would be a disproportionate response, like using an axe where only a scalpel is needed. Many products imported from China are not produced in the United States, and the additional tariff would simply impose a large tax increase on American consumers.
That said, the focus on China will not go away. The more likely policy approach would be the use of existing trade laws to protect sensitive industries such as steel. There is already discussion of a Section 201 petition for import relief involving steel, and a similar action to address issues of overcapacity in aluminum could also be taken.
Overall, the Trump Administration could turn out to be more focused on managed trade as opposed to the traditional Republican free-trade position. A key issue for the new administration will be whether—given competing demands on the public purse—they can target sufficient resources to enforcement. The best trade agreement with the strongest enforcement mechanisms is ineffective without the manpower and resources to carry out their mission.
Unveiling 2017 Global Supply Chain Survey