News Analysis: On Trade, a Politically Feisty Trump Risks Economic Damage

2017-04-30 13:55:02

 

News Analysis: On Trade, a Politically Feisty Trump Risks Economic Damage

As political theater, the threat last week from the Trump administration that it would pull the United States out of the North American Free Trade Agreement effectively enhanced the White House story line. From the campaign through his first 100 days in office, President Trump adroitly exploited the most conspicuous downsides of trade in portraying himself as a hero to those who go to work in coveralls.

But as economic policy, the feisty words — quickly downgraded to a pledge to “renegotiate” terms of trade with Mexico and Canada — potentially imperil significant swaths of the American economy.

A rupture to trade with those two countries would disrupt the global supply chain, jeopardizing factories in the United States that depend on imported components in making their wares. It could raise the costs of shoes, clothing and other consumer goods, while discouraging investment amid the uncertainty. It would threaten reprisals from trading partners, risking barriers to American exports.

It could cost jobs in the name of saving them.

“Re-creating trade barriers between the United States and Mexico will hurt many of the people Trump is ostensibly trying to help,” said Pietra Rivoli, a trade expert at the McDonough School of Business at Georgetown. “We can expect higher prices for many consumer goods, and we can expect negative effects for our many firms that rely on Mexico for inputs.”

Not that Nafta is sacred. Economists and advocates across the ideological spectrum have long criticized the landmark agreement with Canada and Mexico as being in need of updating.

Nafta was negotiated in the elder George Bush’s administration and signed into law by President Bill Clinton in 1993 — before the web was a commercial force. It lacks rules for e-commerce. It is weak on labor and environmental protections, relegating them to unenforceable side agreements. It gives multinational companies rights to sue for compensation when local regulations damage their profits, tripping concerns about national sovereignty.

An earnest renegotiation would afford an opportunity to address gaps.

The Obama administration renegotiated some terms of trade with Mexico and Canada as part of a regional pact, the Trans-Pacific Partnership. That deal enhanced the ability to enforce labor and environmental standards while adding rules for the digital age, though it maintained mechanisms allowing multinationals to sue.

Mr. Trump revoked American participation within days of taking office.

Whatever the merits, Mr. Trump has accelerated a fundamental reordering of global trade policy. Big trade deals involving multiple countries — long championed by reigning elites as a key to expanding prosperity — have become political liabilities shunned as toxic to the public interest.

Britain’s vote to abandon the European Union — a step that Mr. Trump has praised — will remove the world’s fifth-largest economy from Europe’s vast single marketplace, which allows companies to sell products from Ireland to Greece free of duties.

Even before Mr. Trump took office, a mammoth deal negotiated by the Obama administration liberalizing trade with Europe, the Transatlantic Trade and Investment Partnership, appeared doomed.

Labor groups in the United States and across Europe attacked it as a threat to job security. European watchdogs intoned that it would open the region to a flood of genetically modified Frankenfoods. On both sides of the Atlantic, those concerned about rising corporate power argued that the deal undermined national sovereignty by giving multinationals rights to seek compensation for costly regulations.

Similar contentions fueled opposition to the Trans-Pacific Partnership, which the Obama administration championed as a means of expanding commerce while checking China’s growing stature.

In place of these arrangements, Mr. Trump favors bilateral deals, those forged between two countries. This is a return to a previous era. During the administration of George W. Bush, the United States struck bilateral deals with smaller countries — among them Colombia, Panama and Peru.

Those deals entailed major political acrimony for minimal economic gain. Whether the trading partner was South Korea (home to 50 million people, meaning a potentially large customer for American goods) or Panama (population four million), unions and industries vulnerable to competition waged war.

President Barack Obama shifted the focus to multilateral deals, seeking to extract maximum expansion of markets for the political pain of trade negotiations.

Mr. Trump’s preference for bilateral trade pacts is in keeping with his deal-making style, cultivated in the rough-and-tumble world of real estate. In the Trump realm, negotiations are like boxing matches in which one side emerges with the golden belt.

In any bilateral deal, the United States possesses unrivaled leverage because it owns the world’s largest economy. Every country has greater incentive to gain expanded access to the American market than the other way around.

“He starts off by thinking about any negotiation as zero sum,” said Chad P. Bown, a trade expert at the Peterson Institute for International Economics. “If he’s the big player, the bully, he’s going to get a better deal by negotiating with one other country.”

In another sign that he intends to press American advantages, Mr. Trump threatened on Thursday to scrap what he called a “horrible” trade pact with South Korea. “We are going to renegotiate that deal or terminate it,” he told Reuters.

But trade is not zero sum. More trade tends to enhance growth, yielding greater spoils.

Trade does generate losers along with winners. The losers stand out, making them tempting fodder for politicians.

When the United States opens its markets to dishwashers manufactured in Mexico, people who make appliances in Michigan become vulnerable to increased competition. When a factory transfers jobs to Mexico, the spectacle lends credence to the notion that trade is malignant. Abandoned workers have bills to pay and children to feed. Trade is a handy villain.

The beneficiaries of trade are vastly more numerous, yet also diffuse.

Homeowners who buy cheaper dishwashers may spend extra dollars on local contractors and restaurants. Auto parts imported from Mexico enable American workers to continue making cars in Michigan.

But these realities can be hard to spot in the vastness of the American marketplace. Abandoned factory workers, on the other hand, are easily recognized. They appear on sidewalks waving placards, on television and — if they are fortunate — in the Twitter feed of @realdonaldtrump.

The backlash to trade that helped deliver Mr. Trump to the White House is in part the legacy of government failure. For decades, dogmatic free traders wielding the policy levers in both Democratic and Republican administrations made extravagant promises about the magical, wealth-enhancing powers of liberalized markets while largely neglecting those thrown out of work by an influx of cheap imports.

When China entered the World Trade Organization in 2001, gaining access to markets worldwide, millions of Americans suffered a shock. Entire communities absorbed the consequences — mass joblessness, bankruptcies, depression. Many have yet to recover.

“There has been this bipartisan orthodoxy that has some huge problems,” said Susan Helper, an economist at the Weatherhead School of Management at Case Western Reserve University and a member of the White House Council of Economic Advisers during the Obama administration. “It’s great to have a dialogue about trade policy.”

Mr. Trump is advocating policies that would make it harder for those who absorbed the economic blow. If he succeeds in repealing the Affordable Care Act, that will eliminate medical insurance options for laid-off factory workers. His proposed tax cuts would lavish breaks on the wealthiest households, while his budget plans would trim public services aiding those in distress, from housing support to food stamps.

Mr. Trump has also reversed a frequently voiced campaign pledge to accuse China of manipulating the value of its currency, citing a need for Chinese cooperation in pressuring North Korea to yield on developing nuclear weapons.

Now, Mr. Trump promises to deliver on a central trade promise: renegotiating Nafta.

He may find agreement with Mexico and Canada in one area that could be meaningful — tightening so-called rules of origin, which specify the percentage of a finished product that must be made within North America to qualify for duty-free access within the region. That would prevent China from exploiting loopholes in Nafta, playing well to a blue-collar base.

But the trouble with assessing Mr. Trump is that he has been stridently critical of decades of American trade deals while maddeningly nonspecific about what he would change. While Mr. Trump’s election was propelled by his catering to the anxieties of Rust Belt workers, his time in office has seen greater emphasis on the concerns of groups that traditionally wield influence in American politics: major corporations, wealthy households and other interests with a clear stake in expanded trade.

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