7 Feb 2017

Trump and the challenges to the multilateral trading system

'The United States, Europe, and China: Imminent Challenges to the Multilateral Trading System' was the subject of a distinguished lecture by Chad Bown, Senior Fellow at the Peterson Institute for International Economics in Washington, DC and Research Fellow at CEPR in London at the World Trade Institute on 6 February.

Bown, who said an alternative title to his talk could simply be ‘Trump’, described it as an attempt to understand what is happening in the United States since the new president took office last month.

Donald Trump’s election could be explained by the fact that generations of US workers have failed to adjust to the increasingly disruptive forces of automation and globalisation, said Bown. For that reason a sufficiently sizable share of the electorate chose a new president who appears to value deals more than rules.

Aside from the US presidential election, 2016 also marked the 15th anniversary of China's entry into the World Trade Organization. While China wrestles with its own period of adjustment away from an export-oriented to a consumer-based economy, it is under attack for not having transformed into the market economy that its trading partners had hoped.

Meanwhile, the European Union has been forced to turn increasingly inward since the global financial crisis – to address a series of first economic and now political crises.

The timing and combination of these issues all pose a challenge to the multilateral, GATT/WTO system, which marks its 70th birthday this year. 

Concerns over China

China’s entry to the WTO in 2001 raised concerns over competition and cheap imports and the surging Asian economy has been blamed for the loss of millions of manufacturing jobs in the US. Bown pointed to research that had shown that China could only be held responsible for 20 percent of these job losses.

This loss of jobs was not unexpected, said Bown, but manufacturing workers were not able to move to other jobs or areas that were growing. The US was not adequately prepared to deal with this shock.

Another issue was that when China entered the WTO it was not a market economy, although it was becoming more market-oriented. Fifteen years later the country has shifted from the state-owned enterprise model, but government and party officials continue to serve in the management or boards of companies. Other problems are the availability of cheap 'directed lending' that spreads to the whole of the economy, rendering prices meaningless, a lack of transparency and intellectual property rights.

China continues to be so important because it is huge. The decisions it makes spill over to the rest of the world and call into question the future of the world trading system, said Bown, adding that concerns over China would be the same regardless of who won the US presidential election.

What will Trump do?

Under Obama a ‘piecemeal’ approach was taken to exert leverage on China through bringing WTO disputes and export restrictions. The Trans-Pacific Partnership (TPP) was an attempt at a rules-based alternative to address US concerns.

“Trump will not follow the same path,” said Bown. “The signals are that he is interested in blowing up the existing system.” While Trump is unclear about his policy, the rhetoric during his campaign was very negative, and he is doing what he said he would since entering office. On its first day Trump’s cabinet withdrew from TPP.

If Trump does ‘blow up’ the system he will have the choice of leaving it blown up or reconstructing it from scratch, said Bown. A sign will be whether the administration continues to pursue disputes initiated by Obama at the WTO, such as over raw materials and aluminium subsidies, or decides on a new approach by filing more aggressive and riskier cases against China.

For its part, China has filed a dispute against the US and the EU for treating it as a non-market economy (NME). Some people expect that if China gets market economy status a flood of imports will follow and the trade system will collapse. Bown does not believe this will happen.

More disputes could follow. A blueprint for a major overhaul of tax in the US proposes moving away from corporate tax and replacing it with a destination-based cash flow tax (DBCFT). If implemented this could have the effect of an import tariff and be viewed as discriminatory, triggering a potential WTO dispute from trading partners over lost trade. If the US was to lose this it could face retaliation, with other countries being authorised to raise their tariffs to eliminate 220 billion dollars of US exports in the largest WTO retaliation ever seen.

Renegotiating NAFTA

Also on the cards is a renegotiation of the North American Free Trade Agreement (NAFTA). Trump’s problem is with the North American supply chain and the fact that much final assembly work takes place in Mexico rather than the US. The president would rather see a return to the 1950s where everything was made in a plant in Indiana, Bown said.

A possible way out would be – ironically, given Trump’s opposition to it - the TPP, whose provisions on labour and the environment actually discourage US companies from moving to Mexico by making Mexican workers more expensive and levelling the playing field. Mexico has already agreed to these provisions in the TPP, Bown pointed out.

Regarding US policy towards the EU, Bown said he was concerned that the new administration might see it as being in its interests to inflame internal EU issues, as it has already shown signs of doing with its accusations of German currency manipulation and its support for Brexit.