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Threats of Trump trade stance

Threats of Trump trade stance

Increase in bilateral deals risks weakening US position

by Ben Robinson in London

Thu 8 Dec 2016

Like many of President-elect Donald Trump’s statements, it is unclear whether he really means what he says about withdrawing from the Trans-Pacific Partnership trade deal on his first day in office. It may be a ploy to shock America’s partners out of their perceived complacency and strengthen his hand ahead of a renegotiation of the terms of the TPP to be more beneficial to US manufacturers. However, Trump may be serious in his stated aim of replacing this mega-regional deal with a series of bilateral ones.

While withdrawing from the TPP altogether would be damaging to global trade and US leadership in Asia, Trump’s preference for bilateral deals instead raises its own problems.

International trade and production patterns are organised along global value chains in which intermediate inputs make up the majority of traded goods. Many countries specialise in performing roles in the production process rather than creating finished products in their entirety, adding value to imported inputs before re-exporting those inputs to a third country which assembles them for final export. The chain of importing, upgrading and re-exporting intermediate inputs can involve a long list of countries before the final product is assembled.

This creates problems for Trump’s plan to renegotiate the TPP as a series of bilateral trade deals. The resulting network of agreements would slice through existing supply chains. Complex rules of origin would mean that two countries in a supply chain for a US company may not be able to enjoy tariff-free trade between themselves even though the US has a bilateral free trade agreement with both.

The aim of protecting American manufacturers by imposing tariffs on final exporters like China and Mexico is also based on faulty economic logic. First, goods imported by the US from countries not subject to US tariffs, but which use Chinese or Mexican inputs in their products, are unlikely to be covered by this arrangement. This would mean a large part of US imports of Chinese or Mexican exports would be missed.

Second, China has drawn more of its own supply chain into its domestic economy over recent years, seeking to produce the higher value-added components of products, such as research, design and electronics, domestically. It is offshoring the lower-value processes that it used to perform, including assembly, to low-wage centres elsewhere in Asia and further afield. Chinese companies may increase their exports directly from these final assembly stages, perhaps under joint ventures with local companies, in order to get around US tariffs. Short of starting a global trade war, this will be difficult to counter.

Third, China and Mexico are large importers of US goods and components that go into the products they eventually re-export to the US. Raising tariffs on these countries in order to reduce imports from them is therefore likely to reduce their imports of US parts. This would negatively affect US exports, even before any reciprocal tariffs were raised against the US.

Rejecting the TPP may also frustrate some of Trump’s key goals, including strengthening his hand in negotiations with China over its currency. China is attempting to step into the void left by America’s rejection of regional free trade deals with its own Regional Comprehensive Economic Partnership and Free Trade Agreement of the Asia Pacific.

These China-led deals are not as deep as the TPP and mainly cover tariffs on manufactured goods rather than the more complex non-tariff barriers that are vital to boosting trade in services. Nevertheless, an expansion of Chinese trade deals would increase China’s dominance in regional trade and supply chains, boosting the use of renminbi in international pricing, transfers and investment.

A growing dependence of regional economies on China and the renminbi would give Beijing significant support in a confrontation with the US. It would reduce the ability of the US to pressure China into revaluing its currency, weaken the dominance of the dollar in Asia and limit the impact of US threats over retaliation. It would also hinder US attempts to pressure China over other issues such as territorial expansion in the South and East China Seas. Trump’s pursuit of protectionism combined with selected bilateral deals will end up weakening his hand, with consequences for stability in the whole Asia Pacific region.

Ben Robinson is Economist at OMFIF

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