Talking Trade blog
The new US policy is disruption: Implications for Asia
Published 24 August 2017
Three trade events unfolded last week in three different environments that each held clues for Asian watchers of US trade policy. The United States was simultaneously engaged in trade negotiations with Canada and Mexico as part of NAFTA, with South Korea as part of KORUS, and indirectly with China as part of a new trade investigation under Section 301.
We have been waiting for evidence of what to expect from the US on trade. The one word answer seems to be disruption.
In fact, while many believe there is no American trade strategy, I think the US trade agenda boils down to this: the President genuinely believes that the global trading system has become (or may always have been) unfair to the US. That is to say, the US is held to an unfairly higher standard than anyone else.
While other countries can—and do—routinely flout the rules and cheat, the US has been powerless to do much about this problem. In the meantime, the US remains hampered by its own commitment to rules and laws.
The result of this inherent unfairness has led to a system that is increasingly tilted against the United States, causing a loss of jobs and a future that is considerably bleaker than the past.
To correct this problem, this transactional President is not interested in some grand, long-term scheme to fix the system. He doesn’t want to use tools that are time consuming and rely on others. He wants specific solutions to individual problems that will yield immediate results.
He is especially obsessed with manufacturing (which is very odd, given that his entire background, history and fortunes have been built in services like real estate, tourism, education, retail and so forth). He prefers to measure success or failure based on one number: the size of the trade deficit or surplus in manufactured goods.
He likes to be just as unpredictable in trade as he is every other aspect. He is willing to issue threats and promises in trade that would otherwise seem unfathomable, like his pledge to withdraw the United States from NAFTA or KORUS. He may even be willing to pull the US out of the World Trade Organization (WTO).
The President has not recently come to these views on trade. While his positions on many issues have shifted, his opposition to trade, and especially trade agreements, are long-standing and form a core part of his overall agenda. When he started staffing his key cabinet posts, he has therefore found like-minded individuals for many important positions.
This past week’s engagement in three settings simply highlights the impact of these perspectives.
In the first round of meetings with Canada and Mexico to kick off the renegotiation of NAFTA, USTR Robert Lighthizer started with comments so extreme that the Wall Street Journal felt compelled to issue an editorial noting the difficulty of achieving a successful outcome with a focus on reducing trade deficits through a trade agreement.
The NAFTA talks were also striking in the extent to which the Administration faced near immediate push-back from US businesses from across the board. Even the auto industry began complaining about some of the so-called "beneficial" policy positions taken by Lighthizer’s team.
Canada and Mexico immediately pointed out how some US stances, such as the one proposed for auto content, would fall afoul of existing trade rules.
The new Korean trade minister Kim Hyung-chong was equally unsupportive of US plans to reopen the US-Korean trade agreement (KORUS), noting that KORUS had served the economic interests of both sides very well.
When faced with complaints about the US trade deficit, the Korean side apparently pointed out that the US manufacturing deficit consists largely of electronic goods and autos. KORUS did nothing at all for electronics, since these products had already been addressed through a different trade deal (the Information Technology Agreement or ITA) at the WTO. The auto sector commitments in KORUS are not yet phased in, so it cannot be the case that KORUS has affected trade in this industry.
Hence, Korea agreed that a study could be necessary to examine the facts of the matter.
US industry does not appear to be enthusiastic about reopening KORUS at this time. The agreement is still coming into effect and most companies have not noticed substantial issues that require changes.
The launch of 301 investigations into Chinese intellectual property policies is likely to be quite complicated. This is because some of the issues under discussion probably fall under WTO rules and could be handled through WTO dispute settlement. Some issues are unlikely to fit within WTO rules, particularly those on investment since WTO members have never been able to agree on how to bring investment rules into the global trading regime.
Adding to the complexity, the China issue has been linked by the President to North Korea (although this linkage has also been denied by the President and many of his staff members).
The use of 301 itself is challenging, as last week’s Talking Trade noted. It may be that this is the best tool for addressing at least parts of the problem that cannot be tackled under WTO rules, but it comes with serious risks for the global trading system.
Finally, while US industry is more unified in supporting action over IP and China than other trade issues, there is still not clear consensus on the issues. Even within the tech sector, for instance, there is likely to be disagreement on the appropriate path forward.
In short, evidence of last week’s US engagement in NAFTA, KORUS and 301 all provide a much clearer window into the extent of American disruptive trade policy. While some staff members will be trying to hold the pieces together, it is not obvious how well they will fare when led by a President that views unpredictability as a key strength and does not place a high value on maintaining the global trading system.
For Asia, it will be difficult to rely on the United States in trade. This is not to say that the US will simply disengage. It is that the Americans will behave in ways that may not have been experienced in the past. They will be less willing to defend the global trading system and more willing to take unprecedented risks to tackle what they view as unfair trade practices. These challenges will be handled unilaterally, if necessary.
Even American companies will struggle to manage this new environment. The Administration may take positions that are not helpful to business interests.
Disruption could be challenging to everyone in the region.
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