Out with 2016
History will probably record that 2016 was a tough year for trade.
Old trade deals and new trade deals came under withering criticism during the 2016 U.S. Presidential election campaign and time will tell what trade policies the election of Donald Trump will bring. British citizens chose to withdraw from the European Union, reversing a generation of integration that defined EU trade policies and liberalization. At the same time, the World Trade Organization (WTO) reported that global trade grew in 2016 at its slowest pace since the financial crisis of 2009, and the most advanced developed countries in the G-20 continued to impose new trade restrictive measures at an alarming rate.
In with 2017
Regardless of which campaign promises on trade the Trump Administration seeks to deliver, we are at a natural inflection point. While the election was not about trade per se, it is clear that our new political leadership and many in the American public would like to look at trade differently – a change in perspective, if you will.
Who Should We Do Deals With: Bilateral or Multilateral?
Trump Administration officials have expressed a preference for bilateral deals to increase U.S. negotiating leverage. During the first few weeks after inauguration, several Pacific Rim countries were rumored candidates for trade deals, including Japan (presumably to replace U.S. participation in the Transpacific Partnership). The North American Free Trade Agreement (NAFTA) might be severed into separate deals with Mexico and Canada. And President Trump and UK Prime Minister May agreed to explore a bilateral, while discussions over a U.S. agreement with the European Union have all but evaporated.
This bilateral approach might afford more control per the President’s “America first” orientation. And there is every expectation it can produce quick wins through an aggressive effort to knock down individual foreign trade barriers followed up by robust enforcement of trade rules. But it remains to be seen if it will generate the kind of long term gains that a multilateral strategy would provide.
Negotiating a series of bilateral deals creates a “hub and spoke” system that only benefits direct trade between the parties to those agreements, and therefore limits the creation of larger regional markets and the supply chain flexibility they afford. Requiring companies to follow the path of trade deals imposes additional costs on supply chains that must be contorted to meet the rules of the trade deal, rather than the trade deal reflecting the reality of firms’ supply chain choices.
Which is More Important: Trade Surpluses or Trade Deficits?
The Trump Administration has suggested it will review existing trade agreements, and launch new ones, with a special eye toward reducing trade deficits. The implication is that previous agreements have generated trade deficits. They haven’t. Our biggest trade deficits are not with free trade agreement partners; many of our existing agreements – such as the Central America – Dominican Republic Free Trade Agreement (CAFTA-DR) – boast trade surpluses.
Worry about trade deficits is nothing new, but the focus now seems more single-minded than before. And while politically popular, this can be damaging because it creates the impression that half of the economic activity – i.e., imports – that trade deals unleash is somehow negative. In fact, imports benefit the U.S. economy three ways – helping manufacturers (by providing inputs), supporting competitiveness (through fair competition), and benefiting consumers (growing the range of affordable choices).
Who Drives Trade Policy: Congress or the Administration?
While the President does enjoy a wide array of tools delegated by Congress over decades (and which virtually every President has used before), Congress retains, and is sure to assert, its Article I Section 8 Constitutional authorities with respect to trade.
One of the primary tools Congress uses to assert authority is Trade Promotion Authority (TPA), which governs the way trade agreements are negotiated (or renegotiated) and outlines detailed public and Congressional consultation requirements. What’s different now is that the roles between the Legislative and Executive Branch may have suddenly flipped. Originally designed as a license to the Administration to negotiate new trade deals, TPA may now be used as a tool by Congress to strictly limit what the President can negotiate.
Past is not Prologue
The conventional wisdom seems to be that there is no conventional wisdom anymore – and this is also true for trade. The way trade negotiations worked in the past is not necessarily how it will be going forward. But that doesn’t mean that an active trade agenda goes away, rather it is seen through a new lens.
Regardless of what policy choices this Administration works out with Congress, policy makers should take pain to remind themselves that trade – or more precisely access to global suppliers and global customers – remains important to our economy, our society, and our way of life.