[SCMP Column] Litmus Test for Trump

August 21, 2017


And so it begins. After eight months of faltering progress on so many of his policy priorities, and staffers joining and resigning from the White House at accelerating speed, Donald Trump’s “America First” trade agenda is being edged to centre-stage. How he and his trade team progress has the potential over the next six months to change the shape of world trade – possibly not for the better.

First, and most visibly, negotiations between the US, Canada and Mexico on updating and upgrading the North American Free Trade Agreement (Nafta) began in Washington last week. Robert Lighthizer, the US Trade Representative and the US’s key negotiator, set the tone by saying that Nafta had “fundamentally failed many, many Americans… We cannot ignore the huge trade deficits, the lost manufacturing jobs, the businesses that have closed or moved because of incentives.” Such acrimonious posturing at the outset augurs ill.

More quietly, the US has also launched talks in Seoul to renegotiate the US’s five-year-old free trade agreement with Korea. During the agreement’s comparatively short life, US exports to Korea have fallen, and the US trade deficit has more than doubled to US$27.6bn – not quite up there with the US’s main trading “bad guys”, China, Japan and Germany, but big nevertheless.

Most ominously, the ground is being laid for multiple assaults on trade with China, focused on alleged steel and aluminium dumping, on China’s intellectual property regime, and on Chinese exports of silicon photovoltaic cells and panels. China’s Commerce Ministry has been terse: “If the US side takes actions that impair mutual relations, disregarding the facts and disrespecting multilateral trade rules, China will not sit idle.”

The stage is set for some serious fisticuffs in coming months, with normally-dull trade spats potentially spilling over into the mainstream news agenda. Even the carefully-choreographed APEC leaders’ meeting, now being planned for early November in Da Nang in Vietnam, could attract fireworks if, as currently promised, Trump agrees to join.

In the short term, it is renegotiation of Nafta that is likely to attract the most colourful headlines. Trump says he wants a fast deal, so he can boast some “America First” achievements as Republicans prepare for the Mid-term election campaign season through next summer. Mexico’s general elections in July next year will make Mexico’s negotiating positions on Nafta progressively more brittle and uncompromising if a deal is not completed quickly.

Already, at least three bruising battles are in prospect. First, Canada and Mexico are bristling fiercely over US efforts to put trade rebalancing at the heart of the negotiation, not least because US complaints over what it believes are unacceptable trade deficits are implausible. In a US$1 trillion trading relationship – three times the trade in 1994 when the Nafta deal was signed – imbalances are tiny, and take no account of the complexity of trading relationships along long and complex Nafta supply chains.

For many goods traded intensively across Nafta, like autos, raw materials, parts and components cross borders several times, with value-added accumulating at each stage. So long as the US remains the principle final consumption market, then the price tag as a car or car-component crosses the Mexico-US border for the last time must inevitably be higher than the price tag at earlier stages in the production chain. Given how import and export earnings are measured by customs officials each time items cross the border, it is structurally inevitable that the value of those items will be highest when they cross the border for the last time.

As long as the US remains a richer, higher consuming market than Mexico, so it must inevitably record a bilateral deficit with Mexico. Reflecting this, a major study on renegotiating Nafta published by the Washington-based Peterson Institute in July commented: “The most reliable way to expand US exports to Mexico and to reduce the imbalance is to strengthen the Mexican economy.”

The second “deal breaking” argument will be over “Chapter 19”. This is the part of the original Nafta deal that set up a special panel to review whether or not anti-dumping or countervailing duty rulings between the three Nafta members were justified. The US wants the panel disbanded because it is tired of its dumping rulings being reversed – in particular in sensitive competitive sectors like timber. Canadian and Mexican companies have valued the role the panels have played in protecting them from the capricious rulings of the US legal system, and will not willingly see them disbanded.

The third explosive area is over rules of origin. Nafta already has strict rules to block import (in particular in the auto sector) of parts and components that don’t originate within one of the three Nafta economies. Lighthizer’s team wants to make them more strict, to force more parts and components to be produced in the US. This has created panic among US auto-makers, who fear this will result in higher production costs, and will harm their competitiveness versus foreign car makers.

Alongside the grandstanding antics around these contentious issues, there are many who believe that a genuine update of Nafta is no bad thing – in particular dealing with labour movement, environmental issues and E-commerce and new technology issues. Many of these updates were created for the Trans-Pacific Partnership (TPP) which Trump withdrew from just three days into his Presidency, so there will be rich irony if they are now brought back to life through the back door in Nafta.

With so many of Trump’s priorities going nowhere – like the reform of “Obama care”, tax reform, and infrastructure-spending – there will be much to be gained by Trump in a Nafta “victory”.

But what prospect of a successful conclusion? The Peterson Institute, long an advocate for Nafta, believes yes. But its meticulous report is cautious: “There can be no place for “America First”. It must be about improving competitiveness in an increasingly competitive world economy… Abandoning Nafta would degrade regional competitiveness and terminate jobs across North America, undoing integration achieved since inception.”

Since the next – and more bruising – trade battles are likely to be with China, Trump’s incentive to get Nafta right must be strong. Better to have Mexico and Canada as allies, and the North America market strong and competitive. But Trump may not see things that way. For him, if I remember correctly, Nafta was a “jobs killer” and a “disaster”. These are interesting months ahead.
 
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own. 
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