Talking Trade blog
Trumps stunning victory—now what for trade?
Published 09 November 2016
Donald Trump has captured the White House and his Republican party has held on to majorities in both the House and Senate.
We are about to test the argument that “it does not really matter who sits in the Oval office.” For the United States, for American companies and all across the Asia, the results are likely to show how serious a mistake this assumption has been. The economic consequences of a new Trump Administration will be felt hard and fast.
What happens now? For outsiders watching the United States, it is frankly hard to overstate how challenging it is to predict what sort of policies might come next. Normally, there is a certain set of objectives that are followed by each party. New administrations have different priorities and areas of emphasis within these broad objectives, but the pattern is relatively clear and known.
With Trump, nearly all such predictions are off. This is why markets are reacting very badly to the news. The levels of risk and uncertainty are as high as they have been in decades. No one—probably not even Trump himself—can say with any degree of confidence what a Trump administration will look like on any set of policies.
Nor is it very clear what the Republican party will do. While the party has maintained control of both houses of Congress, there is at least one major split in the ranks.
The more traditional wing of the party will see an opportunity to promote lower taxes, smaller government, change regulations and so forth. Some of this may resonate with the Trump wing and Trump himself.
But one big area of difference can be found in trade policy. Traditional Republicans have promoted the importance of trade and have argued strongly for the freedom of companies to explore new markets.
Trump does not take this view. In his campaign, he was inconsistent on so many policies that it is very unclear what policies he might actually implement in January. But two points have been stable—no trade and no immigration.
So, on trade, Trump and whatever might now be called the “Trump wing” of the party will be opposed to trade agreements (except for “really good ones” that are different from the current crop of deals).
This makes predicting US trade policy under a Trump administration extremely difficult. To add to the confusion, there have not been a set of officials or experts that are well known in the field with established positions that can be drawn upon for guidance in figuring out what might come next (see our previous post for an assessment of the one trade paper that was issued by his team during the campaign). It is unclear who might be in charge of crafting trade and economic policies for Trump.
This is important because, although the United States Trade Representative’s Office (USTR) is non-partisan (below the very top), if the new president takes a strongly anti-trade view, most of these officials with experience will be leaving their posts. Something similar is likely to occur in many other agencies tasked with trade and economic policy.
Trump, of course, will likely say, “Good riddance.” After all, he has promised to bring in really tough negotiators who can get better deals for America.
But for companies looking to understand the future and reduce risk and uncertainty, the lack of knowledge in the ranks of advisors and officials is likely to add to the confusion.
Trump has repeatedly made three promises that he is likely to carry through on in very short order for trade. Companies need to be braced for all three starting as soon as January.
First, he has promised to raise tariffs on China and Mexico.
Second, he has promised to “rip up” the North American Free Trade Agreement (NAFTA).
The plunge in the Mexican peso in the few hours since the polls closed shows that investors are already taking these possibilities seriously.
Third, the Trans-Pacific Partnership (TPP) trade agreement with the United States is dead.
There will be many who will argue that Trump cannot or will not actually do any of these three things. They will say that Trump will be constrained by advisors. But all available evidence drawn from months of campaigning shows he has not been hampered by guidance from others thus far and his stunning, upset victory will not give him any good reason to start listening to anyone else now.
Congress will likely not act as a brake on Trump’s policy choices. Nor will the court system. As Gary Hufbauer noted, the US system grants tremendous power to the Presidency in trade policy.
Hence, Trump IS actually likely to do all three—raise tariffs (and probably erect a series of new trade barriers, launch a fusillade of new anti-dumping case and other enforcement measures), pull out of NAFTA (and potentially other FTA agreements), and stop any further discussions of the TPP.
The reasons for assuming that Trump will act on the trade front are bolstered by the problems he is likely to face implementing other elements of his potential agenda. For example, his repeated call to build a wall against Mexico or repeal the Affordable Health Care Act could be tough to carry out, even with a favorable Congress.
But his room for maneuver on trade, by contrast, is much greater and could allow him to show results to his supporters within the first 100 days of his administration.
So where does that leave companies? In the short run, most will do nothing at all. Most probably had no contingency plans for such an outcome and, even if they had tried to do so, the inconsistencies in Trump’s policies make it hard to predict with clarity what might happen next.
Over time, despite Trump’s promises to make America great again, the opposite is likely to happen. The US will lose global leadership on trade and economic issues. As our earlier post noted, if the TPP does not go forward, there is no Plan B for America. Trump compounds this problem by adding in likely changes to other trade agreements, new aggressiveness in enforcement, and new assertive protectionism.
Companies hoping to remain competitive—and particularly those working in export markets—will have to work much harder now. Absent trade preferences, firms are at a disadvantage relative to competitors in places like Asia or Europe.
The outsourcing that Trump has complained about is likely to accelerate. Firms that want to take advantage of benefits conferred through deals like the Regional Comprehensive Economic Partnership (RCEP) in Asia will need to be located in Asia to provide goods and services to these faster growing, significant markets.
The wider world certainly grasps the consequences of this election. People of all sorts have been glued to their televisions in amazement.
For American voters, knocking over the system and electing Donald Trump as President may have felt very good. They voted for change and will sort out the messy realities and details later.
Unfortunately, the economic and trade consequences will be significant and the fallout felt far beyond Washington DC.
We had all hoped that the end of the election would bring relief. This one is likely to wreck havoc, even in places and parts of the world that did not get to vote at all.
Elections do have consequences. We are about to find out what they are.
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