Christopher Smart 26 Jun 2017 11:01am

Trump's trade illogic

With all the public attention in the United States focused on health care, immigration, and Russia, the Trump administration’s trade policies have flown largely under the radar

Caption: Trump’s belief that bilateral negotiations give the US more leverage misses the mark.

But the underlying logic of president Donald Trump’s approach to trade is about to receive prime-time scrutiny, because the landmark North American Free Trade Agreement (NAFTA) will come up for renegotiation later this summer. When it does, three fundamental flaws in Trump’s thinking will be exposed.

For starters, there is Trump’s false premise that bad trade deals have cost US jobs. Automation and robotics led to the decline in manufacturing jobs in developed economies long before any major trade agreements were concluded. The forces of globalisation may have aggravated these trends, but the point so often lost in the debate – and dismissed by so many on all sides – is that trade agreements are meant to tame the forces of globalisation, not accelerate them.

With world tariffs declining for decades, today’s negotiations focus mostly on the rules that govern international commerce. The Trans-Pacific Partnership (TPP) trade agreement, which Trump abandoned with such fanfare after taking office, spelled out a range of enforceable commitments intended to level the playing field for US workers.

Countries as diverse as Peru, Vietnam, and Mexico would have signed on to labour laws enshrining workers’ rights to form independent unions and engage in collective bargaining, as well as intellectual property protections to defend against counterfeiting and unfair subsidies to state-owned enterprises. Violations of these commitments would have subjected signatories to binding arbitration. Trump’s knee-jerk withdrawal from the deal eliminated opportunities to improve global labour conditions and make trade more fair for American workers.

The second flaw in Trump’s approach is the assumption that bad negotiators make bad deals. That suggests willful ignorance of the negotiating process. US trade policy today is not the work of a single party or entity. It encompasses free-trade agreements with some 20 countries, all hammered out over decades under intense bipartisan review.

President Barack Obama, for example, made the TPP a centerpiece of his second term, but it was first proposed by president George W Bush years earlier. Similarly, George H W Bush’s administration did most of the heavy lifting on NAFTA, before Bill Clinton signed it into law in December 1993.

While different negotiating styles might have secured different results, it is hardly credible to suggest that the US has suffered a shortage of first-rate representatives in trade talks. But Trump’s claim is consistent with his intense focus on “deals,” as if trade negotiations were a one-off transaction for the next luxury property or package of distressed debt. They’re not: If trade negotiators don’t like their Chinese counterparts’ tone, they can’t simply go looking for a more reasonable or more eager partner who can open up China’s markets for US farmers. The same is true for any other country Trump hopes to do America’s business with.

Finally, Trump’s belief that bilateral negotiations give the US more leverage misses the mark. In his Senate confirmation hearing, commerce secretary Wilbur Ross told lawmakers that a central flaw with the TPP was that it required multilateral negotiation. “If you negotiate with 12 countries, the first one…says, ‘Yes, we’ll give you a concession, but we want something back,’” Ross explained. “The next country, they take a little nick. After 12 times, you get a lot of nicks. Other countries get the benefit of things they didn’t even ask for.”

Ross’s warning sounds troubling, but it reveals a fundamental misunderstanding of modern trade policy. If trade agreements in the twenty-first century are about setting rules that raise the standards of international commerce, it does little good to establish those rules one treaty at a time. In fact, by offering TPP partners access to a larger club, the US had secured additional leverage. For most countries, trade with the US was the biggest prize, but the fact that the TPP granted access to 40% of the world economy gave the US more bargaining power, not less.

Consider Mexico, where officials were more willing to engage in a conversation about modernising NAFTA when the prize included US-backed access to Asian economies through the TPP. Now that the TPP is off the table, Mexican enthusiasm for a new NAFTA could dim. More generally, the multilateral approach created a bandwagon effect, with a number of countries already positioning to join the TPP once the initial deal was struck.

South Korea, Thailand, and Colombia were likely to be at the head of the line. All were ready to sign up, knowing that there would be little or no room to alter rules that had already been agreed. Now the other TPP partners are discussing moving ahead without the US, in order not to lose out on the agreement’s benefits.

When the Trump administration’s renegotiation of NAFTA ultimately takes shape, some time after 16 August, it will be interesting to see just how many commitments regarding labour, patents, and subsidies are included. It will be a shame that so much effort and political capital is about to be poured into a deal that could have been much larger. The greater shame, however, will be when Trump’s “fabulous” negotiators ultimately get around to discussing “America first” deals with other countries in Asia and beyond, only to find that China has already locked them into its own set of rules.

That will be the true price of Trump’s flawed trade logic.

Christopher Smart, a senior fellow at the Mossavar-Rahmani Center for Business at Harvard University’s Kennedy School of Government, was special assistant to the president for international economics, trade, and investment (2013-15), and deputy assistant secretary of treasury for Europe and Eurasia (2009-13).

Copyright: Project Syndicate, 2017.