How Trump’s Views On Trade Deals Can Hurt Americans
Since President Trump’s first day in office a little more than 100 days ago, he has not softened any of his anti-trade rhetoric, starting with his move to withdraw the US from the 12-nation Trans Pacific Partnership, a trade deal that covers 40% of the world economy. It’s likely Trump won’t change his views much from here, especially since the President last Saturday called for a six-month review of all of America’s trade agreements. During the signing with US Secretary of Commerce Wilbur Ross, Trump went off script and said that if the trade deals can’t be renegotiated, “Wilbur will end the trade agreements. Do you agree with that?”, to which Ross replied “Yes sir.”
Two days earlier, Trump said that he had wanted to terminate U.S. participation in the North American Free Trade Agreement (NAFTA), but after talking to the presidents of Mexico and Canada, Trump announced he was reversing course, but then later Tweeted: “….subject to the fact that if we do not reach a fair deal for all, we will then terminate NAFTA.”
Trump last week also called the U.S. trade agreement with Korea a “horrible deal,” saying he would either terminate or renegotiate the terms.
If Trump followed through on his threats, the impact on the global economy would be catastrophic. Total U.S. trade in goods amounts to about $3.75 trillion a year. Mexico and Canada, America’s two largest trading partners, account for over a quarter of U.S. trade in goods. Terminating NAFTA would cause enormous uncertainty for companies that believed the U.S government when it pledged itself to North American economic integration 20 years ago.
The U.S. Korea Trade Agreement (known as KORUS) accounts for another $112 billion in trade in goods and it is only five years old. Add to trade with these three countries the statement Trump ad-libbed on Saturday to Ross, and that could rip up another 18 free trade agreements. But that is not all. The set of agreements under the World Trade Organization (WTO) is also being reviewed. If the termination threat extends to America’s WTO commitments, that puts at risk all $5 trillion of annual U.S. imports and exports of both goods and services.
What happens then? Under the country’s trade laws, the President can attempt to set pre-agreement tariff rates but that may exceed his authority. The alternative is that the issue goes back to the Congress. The last time Congress worked on the U.S. tariff, it created a wall against foreign trade. This was in 1930, and the result deepened and prolonged the Great Depression. America’s trading partners did the same. Of course, we do not expect that to happen, but these are uncharted waters.
Terminating agreements could all be a bluff to gain negotiating leverage. But sometimes threats have to be made real to keep any credibility.
The US economy has thrived in a rules-based international trading system built up over 70 years. The U.S. economy is 17 times larger than it was in 1947 measured in current dollars since that process began in 1947. At current exchange rates, the total market value of all final goods and services produced in the United States place it as number one, accounting for 25% of the world economy. The trading system has worked well for the country. How the benefits are shared within the United States depends heavily on domestic policies. Of course there can be improvements in trade agreements, but there is only so much that improvements in trade agreements can do.
Trump as a developer may have been able to gain the upper hand in one-on-one negotiations by issuing threats. But now he is President of the world’s greatest trading nation. A threat to terminate the WTO agreements takes on 163 other sovereign countries. There is more than a small risk that they would unite in not backing down. Then what?
Alan Wolff is a Senior Counsel with Dentons LLP and is Chairman of the National Foreign Trade Council. He served as a senior trade negotiator in Republican and Democratic administrations.