Expect Trump's demands, not rules, to govern US trade policy

Alan Wolff, PIIE, 5 de diciembre de 2024

President-elect Donald Trump has introduced a momentous change to international trade relations. For the last 80 years, negotiations were about lowering trade barriers and improving the rules governing trade. Now, for the United States, it is about the demand of the day—halt fentanyl shipments and the movement of migrants (directed at Mexico and Canada) and drugs (China) or keep using the dollar as the currency for international exchange (emerging countries, “BRICS”[1] ). It does no good for the other countries to cite prior trade agreements with the United States, not even Trump’s updated North American Free Trade Agreement (USMCA[2]). The applicable standard in these negotiations is not what was previously agreed between nations; it is a world governed by power politics. As opposed to the rule of law, the operative principle for countries engaged in trade with the United States is (using a French phrase) sauve qui peut, or in plain English, “each who can, save yourself.” This is the advice the captain of a sinking ship might give to remaining passengers when there are no more lifeboats.

Under the rules of the trading system the United States created in 1947 in the post-World War II world, every country received MFN (“most favored nation” or nondiscriminatory) treatment if it accorded that treatment to the trade of others. One hundred sixty-six nations joined the World Trade Organization (WTO) and pledged not to use tariffs as a weapon but to contractually bind them at agreed (mostly low) levels, and not to discriminate among suppliers, unless it is to eliminate tariffs altogether and to aim for free trade.

The idea was, the more trade was unrestricted, under a policy of (another bit of French here) “laissez-faire,” or “hands-off” to the extent possible, all would benefit in a robustly growing world economy. And, overall, this is what happened (albeit not for all participants, a failing for which the United States and the WTO are paying a price). The assumption (and policy) that more open trade would be beneficial began to evaporate when the Congress failed to approve the Trans-Pacific Partnership under President Obama and Trump cancelled US participation in it as soon as he took office. Then the world got a taste of Trump tariffs—against steel and aluminum and on products from China. The Biden administration kept the Trump tariffs largely in place and added some of its own on China trade, particularly for semiconductors, batteries, solar panels, and a relatively short list of other goods.

The 17th century French minister of state, Jean-Baptiste Colbert, set the stage for "Make America Great Again" (MAGA) trade policy when he conducted France’s trade based on mercantilism: Imports were to be discouraged and domestic manufacturing supported while seeking to eliminate large trade deficits. Friend-shoring was not mentioned by Colbert from what we know, just as it is clearly not embraced by the incoming US administration.

The United States is not the first country in modern times to deploy power as a basis for trade relations, just the first to do so openly. China has practiced trade coercion repeatedly—against Korea for deploying Terminal High Altitude Area Defense (THAAD) missiles, Australia for questioning the source of COVID-19 in Wuhan, and Lithuania for welcoming a Taiwan office, as well as by bringing retaliatory cases before the WTO when WTO trade remedies have been invoked against it. China’s “wolf-warrior” approach to diplomacy fits best with an autocratic form of government organization. A strong man at the helm has been spoken of admiringly by the US president-elect. While the United States has employed economic sanctions on numerous occasions, it has not done so for commercial gain. With his threats, Trump is now obliterating the boundary the United States has maintained between commercial affairs and sanctions for foreign policy objectives.

The world is only a few weeks into the process of getting used to a second Trump presidency. Unquestionably there has been a paradigm shift in policy, even though Trump has not yet taken office. Reactions from Ottawa, Mexico City, and prominent European institutions indicate that it is not the rule of law, nor contractual obligations or a nation’s giving its word that foreign officials are relying upon, , as these have little or no meaning in the new Washington. Canadian prime minister Justin Trudeau and Mexican president Claudia Sheinbaum reached out to Trump to find what special deals might assuage the United States come January 20 when Trump takes office. The same approach is evident in European Central Bank president Christine Lagarde's remarks.

The world trading system survived special deals in the China Phase I agreement in the first Trump administration, and it would survive a special deal with more European purchases from the United States of liquefied natural gas or military equipment. These purchases in any case would be of mutual value for other reasons.

What should be of more concern is the spread of one-off trade deals as the new normal. A deal acceptable today might not be tomorrow. Business at home or across borders thrives on certainty. The world economy had unprecedented growth over the last 80 years on this basis. The certainty came from the existence of rules that would be largely obeyed. There were major flaws. Trade officials in both incoming and prior US administrations readily cite them. Trying to fix them should be the preferred approach. Ignoring or discarding the system is the alternative, and the damage is likely to be extensive. It may start with tariffs, but a myriad of measures, visible and invisible, could also be employed. Tariffs are proclaimed; they are obvious. Trade can most often continue even at a depressed level. Standards, procurement practices, subsidies, favoritism—there are innumerable ways in which trade can be distorted or simply prevented, and many of these are hard to identify and understand.

Power can be used to build something or to destroy something. In 1971, President Nixon imposed a 10 percent import surcharge. It led ultimately to the reform of the international monetary system and to a major round of multilateral trade negotiations. Power, however, can equally bring chaos, in which case, no economy will benefit.

NOTES

1. Brazil, Russia, India, China, and South Africa, along with Iran, Egypt, Ethiopia, the United Arab Emirates, and perhaps, Saudi Arabia.

2. US-Canada-Mexico Free Trade Agreement (2020).