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Monday, April 9, 2018

Prospects for Trump's Trade Policy in 2018

                                                                                                            Eric.Chiou

     This past January, numerous global leaders and business elites gathered at the World Economic Forum (WEF) in Davos, Switzerland, to share their insights on global economic trends.

     Among the various subjects of media attention, US President Donald Trump's speech no doubt drew the most press, given that US trade policy under his administration has been seen as one of the crucial factors affecting global economic stability.

     Indeed, since his inauguration in January 2017, international society has been haunted by the gloomy prospect of an upcoming "trade war," together with anxiety over the uncertainty surrounding Trump's trade policy.

     As advocates of globalization and liberal economists fretted about the possible consequences of Trump's economic nationalist rhetoric and his apparent "anti-globalization" proclivities, these supporters of free trade applauded Chinese President Xi Jinping in Davos last year when he delivered
remarks firmly defending economic globalization. Xi framed himself as a savior of market mechanisms and global free trade, and positioned China as the last guardian of the existing global economic order.

     Despite Xi's rhetoric, there was no apparent seismic shift in the global economic order over the first year of Trump's presidency, nor were the most pessimistic predictions of liberal economists borne out. The global economy grew 3.7% in 2017, and global growth is expected to increase to 3.9% in 2018, according to the IMF's January 2018 forecast.

     However, the lingering shadows of trade protectionism and an upcoming trade war have not disappeared. Indeed, the Trump administration last year began an investigation under Section 301 of the US's Trade Act into alleged violations of intellectual property rights by China. And this past January, Washington imposed steep tariffs on Chinese solar panels and South Korean washing machines under Section 201 of the act.

     Many experts who earlier predicted the outbreak of a trade war saw the record-high US trade deficit in 2017-signifying a heavy slap in the face of the Trump administration's efforts to reduce it-as a main potential motivating factor. As a result, Trump's address in Davos became particularly important, given the profound global economic implications of US trade policy guided by Trump.
     In front of a pro-globalization audience in Davos, Trump's speech did not deviate from his "America First" rhetoric, but did deliver a pro-business message, proclaiming: "America is open for business, and we are competitive once again."

     In other words, what he intended to impress upon his audience in Davos is that the US has become a more business-friendly environment under his administration. And "America First" certainly does not mean "America Alone" or isolationism as some skeptics claim.

     In terms of trade policy, Trump pointed out that Washington aims to reform the international trade system in order to promote shared prosperity and reward countries who abide by trade rules. He asserted that the US supports free trade, but that "it needs to be fair and it needs to be reciprocal."
     Trump also warned that the US will "no longer turn a blind eye to unfair economic practices," such as "massive intellectual property theft, industrial subsides and pervasive state-led economic planning."

     In the interview, Trump claimed that he would reconsider the Trans-Pacific Partnership (TPP) if he could strike a "substantially better deal." Trump also vowed to enforce US trade laws and restore the integrity of the US-led trading system, insisting that fair and free trade would benefit all countries, not just the US. The takeaway was that the US is prepared to sign mutually beneficial bilateral trade pacts with other countries.

     From Trump's aforementioned statements, it seems problematic to accuse Trump of being "anti-free trade" or promoting "trade protectionism" purely on the basis of his overweening economic nationalist rhetoric and his prioritization of so-called "American interests."

     Essentially, trade protectionist states display the following characteristics: First, they deliberately utilize various policy instruments, such as high tariffs and non-tariff barriers, to discourage imports from other countries and protect their markets and domestic industries.

     Second, they intentionally adopt industrial policies, subsidies for export-oriented industries, exchange rate manipulation, and other measures to promote exports and facilitate national development. The ultimate goal of these measures is generally to obtain a massive trade surplus while
accumulating foreign reserves to bolster national wealth.

     Under these standards, it would be difficult to classify the United States as a trade protectionist state, given its gaping trade deficit of US$810 billion in 2017. China, Mexico, and Japan are the three countries carrying the highest trade surpluses with the US, with China's surplus alone accounting
for nearly half of the US's total trade deficit. It is therefore unsurprising that Xi rejected any "trade protectionism" that may alter the status quo favoring Beijing.

     Two broadly-used measures of trade protectionism are tariff and nontariff barriers. According to the WTO, the average tariff rate in the US was 3.5% in 2016, much lower than China's 9.9%, South Korea's 13.9%, India's 13.4%, Mexico's 7%, and the EU's 5.2%.

     While the WTO allows developing countries to impose higher tariffs for the purpose of protecting their domestic markets, some developing countries disregard the WTO principles of non-discrimination and the free market to take advantage of these allowances. It seems hypocritical for these countries to portray themselves as resolute believers in free trade and to denounce
others for trade protectionism.

     As for non-tariff measures, the US has a lower prevalence score, coverage ratio, and frequency index than China, the EU, and Japan, according to data from UNCTAD. In other words, to crown the US as a trade protectionist state ignores the fact that other major trading countries have gone farther than the US in adopting unfair trade practices which violate WTO principles.

     On the other hand, recent developments in US trade policy have rightly triggered widespread concerns. For instance, in March, Trump decided to impose a 25% tariff on steel and a 10% tariff on aluminum, a decision which met with immediate resistance from his Republican Party and from US
allies, who worry that the imposition of tariffs is likely to trigger retaliatory measures by affected countries and possibly pave the way for a full-blown trade war.

     Given the rising tide of US trade protectionism, there are other reasons for many countries to be worried about Trump's trade policy. First, the US remains one of the largest consumer markets in the world, with exports from many states directly or indirectly reliant on the US market.

     Second, the US plays an irreplaceable role in the global system, with more transparent and easier market access than other countries. If Washington were to initiate tariff barriers across all categories without exemption, many states would suffer and retaliate, a scenario which would likely escalate into a full-blown trade war with grave implications for the global economy.

     Third, given that the US continues to play a crucial role in global upstream supply chains and in consumer markets, if Trump succeeds in twisting global supply chains by moving manufacturing back to the US and reshaping the global trade system, those countries enjoying excessive trade
benefits from the existing trade system may lose their advantages in global competition.

     Thus, it suits countries with vested interests in the current system to maintain this imbalanced system and to thwart, resist, and deny any appeals for reform from the US. As a result, tensions between the reform-oriented US and proponents of the status quo are likely to continue.

     After a 2017 in which Trump's trade policy secured no concrete achievements but revealed his proclivities for bragging, flip-flopping, and bluffing in cases including the US's withdrawal from the TPP, threatened trade sanctions against China and Mexico, and renegotiation of NAFTA and the US-Korea FTA, the year of 2018 is a critical time for examining whether Trump's trade policy can actually lead to substantial changes in the world economic system.

     Due to various political and economic factors, the Trump administration will be forced to adopt tougher trade policies this year, a trend foreshadowed by the US's recently announced tariffs on steel and aluminum. We can expect that with the US midterm congressional elections coming up in November, Trump may utilize a more aggressive trade policy to rally his supporters and to boost his low approval rating.

     Externally, Trump's trade policy of appeasement toward China in exchange for the latter's cooperation last year on the North Korean nuclear issue may also change in response to recent developments. Now, there are indications that the Trump administration may disengage Chinese trade from the US pursuit of North Korean denuclearization. Such a move might signal that Trump intends to adopt more hostile trade measures against China, in order to compel more substantial concessions.

     We can therefore expect that Trump's trade policy will develop in the following directions. First, the US will utilize its trade laws more frequently and pervasively, targeting its major trading partners with huge bilateral trade surpluses while initiating investigations and imposing trade sanctions as
threats to win concessions.

     Second, the US will take a more aggressive approach to reforming the WTO and its existing mode of operation. If it cannot obtain agreeable responses, Washington will move to resist, deny and undermine the legitimacy of the WTO.

     Third, the US will strongly compel its trading partners to further open their domestic markets to American goods and services, and to enforce protections on US intellectual property rights.

     Finally, the US will continue to adopt an unyielding posture in multilateral trade negotiations like NAFTA, and will use tariffs as extra bargaining chips in such talks. As for the TPP, there is uncertainty on whether the US will return soon, given the lack of clarity on whether the 11 countries
to have signed the revised agreement will agree on Washington's terms for renegotiation.

     In the end, Trump's threatened tariffs may not only harm and alienate the US's trading partners, but also prove self-destructive, making it more likely that these tariffs remain a rhetorical tactic to be used in trade negotiations rather than as a policy to incite total trade war. However, given Trump's
unpredictable personality, even the imposition of tariffs on certain products 10 could quickly escalate into a destructive trade war. Until the US makes progress in cutting its trade deficit and reforming the global trading system, the outlook for global trade in 2018 will remain turbulent and unstable.


(Eric.Chiou.is.an.Associate.Professor.in.International.Political.Economy.at.National. Chiao.Tung.University)

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