- Brexit, the anti-trade rhetoric of the 2016 U.S. presidential campaign and growing anti-European Union (EU) sentiments in Europe have grabbed headlines, but typically overlooked is that global trade has experienced a meaningful slowdown since the 2008 financial crisis.
- A slowdown in multilateral agreements has been somewhat offset by an increase in bilateral deals, although trade economists generally point to the former as creating more value. The Trump Administration has displayed consistent misgivings about multilateral agreements in favor of bilateral deals, in which the United States could presumably leverage its invariably larger market to obtain better terms.
- Regardless, a feeling of cautious optimism extends to the financial markets. A March 2017 survey showed that only 21 percent of fund managers cited protectionism as their biggest fear to the bull market in equities, down sharply from the 34 percent who sited such concerns only a month earlier.
The era of globalization may not be over, but the post-World War II global trading regime is undergoing a period of stress last seen during the demise of the Bretton Woods exchange mechanism in the early 1970s.
I. General Overview
Brexit, the anti-trade rhetoric of the 2016 U.S. presidential campaign and growing anti-European Union (EU) sentiments in Europe have grabbed the headlines, but typically overlooked is that global trade has experienced a meaningful slowdown since the 2008 financial crisis.
Cross-border capital movement (including stock and bond purchases, foreign direct investment and lending) fell from $11.9 trillion in 2007 to $3.3 trillion in 2015. Similarly, the sum of cross-border loans held by banks fell by 21 percent from 2008 to 2015. Even more troubling is the stagnation of global merchandise trade, which increased every year from 1946 until 2009, and usually grew 1.5 times faster than global economic output. In 2016, however, global trade grew only 1.3 percent, even lower than the 3.1 percent rise in world gross domestic product (GDP).
Progress in reducing trade barriers has also stalled. The last successful global trade talks – the Uruguay Round resulting in the establishment of the World Trade Organization (WTO) – wrapped up in 1993 after eight years of negotiations. By contrast, the Doha Round – which began in 2001 – was finally given up for dead in 2015, with no successor in sight.
Similarly, tariff rates for both advanced and developing countries have also stopped falling, with a corresponding increase in protectionist measures. By one count, nearly 7,000 protectionist measures have been enacted since 2009, half of them aimed at China.
The slowdown in multilateral agreements has been somewhat offset by the increase in bilateral deals – which have increased from 50 in 1990 to 280 in 2015 – but trade economists generally point to the former as creating more value. The proliferation of bilateral agreements adds to the complex patchwork of taxes, trade barriers and regulations that companies must navigate in order to access new markets.
II. U.S. Protectionism
President Donald Trump has adopted the most mercantilist trade posture of any presidential administration over the past 80 years. As spelled out in its "National Trade Policy Agenda for 2017," the Trump Administration's four major priorities in international trade are to 1) defend U.S. national sovereignty over trade policy; 2) strictly enforce U.S. trade laws; 3) use all possible sources of leverage to encourage other countries to open their markets and protect U.S. intellectual property rights; and 4) negotiate new and better trade deals. Specifically, the Administration has identified six core industries for protection: steel, aluminum, vehicles, aircraft, shipbuilding and semiconductors.
In pursuing its trade goals, the Administration has focused on trade agreements and enhanced use of trade remedies.
A. WTO and Trade Agreements
The Trump Administration has displayed consistent misgivings about multilateral agreements in favor of bilateral deals, in which the United States could presumably leverage its invariably larger market to obtain better terms. This is complemented by the Administration's aversion to the WTO, especially with regard to its Dispute Settlement Understanding, which calls into question future compliance by the U.S. to adverse rulings.
The most prominent action so far by the Trump Administration was to formally withdraw from the Trans-Pacific Partnership (TPP), the 12-country free trade agreement between the U.S. and 11 other countries in Asia, North America and South America that together accounted for almost 40 percent of the global economy. TPP members include important U.S. allies such as Canada, Mexico, Japan, Australia and New Zealand, as well as emerging Asian economic powers such as Vietnam.
TPP – which had broad, if lukewarm, bipartisan support during years-long negotiations – turned into an unexpected flashpoint during the 2016 presidential campaign as a symbol of unfair trade deals and U.S. job losses. In particular, TPP was unfavorably compared with the North American Free Trade Agreement (NAFTA) as a potential blow to U.S. workers.
Additionally, TPP served important U.S. political and diplomatic interests as part of the Obama Administration's "pivot towards Asia." Though not explicitly framed as an anti-China pact (membership was theoretically open to China), the Obama Administration touted the agreement as an important means for the U.S. to take the lead in fostering an open economic environment in the Pacific and east Asia.
NAFTA was a popular target during the 2016 election season, with then-candidate Trump calling the agreement a "terrible deal." After President Trump took office, fears that the U.S. would unilaterally withdraw subsided as the new Administration recognized the complex interdependence of the Canada, U.S. and Mexican economies; an abrupt U.S. withdrawal would wreak havoc on multifaceted supply chains relied on by many U.S. manufacturers. Contrary to the popular image of cheap goods flooding in from across the Mexican border, 40 percent of U.S. imports from Mexico contain U.S. components. Additionally, a substantial percentage of those imports are intermediate and investment goods, not consumer goods. Ironically, given Trump's campaign rhetoric, the 10 U.S. states with the largest trade surpluses under NAFTA all voted for Trump during the election. The powerful U.S. agricultural lobby is also making its voice heard, insisting that renegotiations not damage U.S. farmers' access to the Canadian and Mexican markets.
A more nuanced view of NAFTA was reflected in the Trump Administration's notice to Congress as required under fast track. Though critical of NAFTA's outdated provisions on labor and environmental protection, as well as digital trade, intellectual property protection and state-owned enterprises, the notice's objectives for renegotiations were mild and focused on tweaking the agreement rather than forcing wholesale changes.
Canada and Mexico have signaled a willingness to renegotiate the pact; neither wants NAFTA to devolve into a series of bilateral agreements between the three North American neighbors. Potential areas of disagreement will be U.S. wishes to increase local content for country of origin calculations, especially with regard to automobiles (currently 62.5 percent), as well as Canada's protectionism of its dairy industry.
B. Protectionist Measures
Apart from the withdrawal from TPP, the most visible manifestation of a more protectionist U.S. trade policy is a significantly more robust anti-dumping/countervailing duties (AD/CVD) remedies regime. A March 31, 2017, executive order by President Trump directed Customs and Border Protection (CBP) to promulgate enhanced measures to collect unpaid AD/CVD duties, which currently stand at $2.3 billion, and prevent companies from circumventing AD/CVD. The Trump Administration has begun anti-dumping investigation on numerous steel products, as well as initiated action to impose countervailing duties on imports of Canadian softwood lumber (commonly used in residential construction), bringing to head a sore point between the two countries that has festered for some time.
Likewise, sectors of the U.S. solar panel manufacturing industry are using the favorable political climate to shield itself from foreign competition. Suniva, a Georgia-based manufacturer that recently sought Chapter 11 bankruptcy protection, filed a petition with the International Trade Commission (ITC) invoking Section 201 of the 1974 Trade Act. This seldom-used mechanism permits the President to take action – including increased tariff rates and price floors – to protect domestic industries that face "serious injury" as a result of "new conditions of competition." The ITC has until Sept. 22, 2017, to determine if relief will be granted, which could increase costs for certain solar products back to 2012 levels. Unlike an AD/CVD case, there is no requirement for a finding of unfair trade practices. Rather, the criteria for relief are based on the escape clause found in Article XIX of the WTO Agreement, which permits a country to temporarily sidestep its tariff commitments.
A more surprising development has been the Administration's invocation of Section 232 of the Trade Expansion Act of 1962, which provides broad authority to the President to take action to "adjust" the importation of certain articles upon a finding that such articles are being imported in a manner or quantity that can "impair national security." Section 232 has been used relatively infrequently – the last time in 2001 – and has often focused on oil imports in the aftermath of international crisis such as the 1973 Arab oil embargo.
The scope of possible action is broad; courts have held that the President may take any actions that have an "initial" and "direct" impact on imports, including imposition of tariffs and quotas. Prior to any action under Section 232, the U.S. Department of Commerce must initiate an investigation into the effect of imports on national security, taking into account, inter alia, the capacity of domestic industries to meet requirements, as well as the impact of imports on the economic condition of domestic industries. The April 20, 2017, presidential memorandum directing the Commerce Department to initiate an investigation references "artificially low prices caused by excess capacity and unfairly traded imports" that have hindered efforts by U.S. producers to advance steel technologies. This was followed by a notice in the Federal Register on May 9, 2017, soliciting interested parties to submit comments and data on a separate Section 232 investigation on aluminum imports.
Another potential arrow in the protectionist quiver is a more vigorous utilization of the Committee on Foreign Investment in the United States (CFIUS). By statute, CFIUS is tasked to consider a transaction only for its effects on national security. However, there have been calls from Congress to modify CFIUS' authority to explicitly take the economic effects of foreign takeovers of U.S. businesses into account, especially as the number of filings has rebounded from 65 during the financial crisis nadir of 2009 to 147 in 2014 (the last year for which the U.S. Department of the Treasury has provided data).
Increased scrutiny of Chinese investments is also possible. The U.S.-China Economic and Security Review Commission (ESRC), which is tasked by Congress to monitor and investigate the security implications of the U.S.-China bilateral economic relationship, released in November 2016 its most critical report on China's trade and economic policies vis-à-vis the United States. In addition to urging Congress to investigate the impact of outsourcing to China on the U.S. defense industrial base, beef up AD/CVD enforcement and combat Chinese cyberespionage, the commission recommended a statutory bar on Chinese SOEs acquiring U.S. companies. The ESRC report comes on the heels of a bipartisan letter signed by both conservative and liberal members of Congress requesting the Government Accountability Office to review the "statutory and administrative authorities" of CFIUS. The letter specifically cited the ChemChina-Syngenta transaction and raised concerns over foreign investments in the telecom, media and agricultural sectors.
III. Other Trade Deals
TPP's continuing viability after the U.S. withdrawal remains an open question. Under the existing provisions of TPP, for the agreement to come into effect, at least six signatories with a combined GDP totaling at least 85 percent of the total GDP of the original 12 signatories were required to implement the agreement domestically. This figure was purposefully chosen so that both the U.S. and Japan needed to participate. Though Japanese Prime Minister Shinzo Abe initially reacted to President Trump's withdrawal by asserting that TPP is "meaningless" without U.S. participation, a number of TPP signatories, including Australia and New Zealand, expressed interest in moving forward. By the time senior trade officials from the remaining 11 countries met in Hanoi, Vietnam, in late May 2017 during the Asia-Pacific Economic Cooperation (APEC) meetings, Japan had taken the lead in urging the remaining 11 countries to resuscitate the agreement. As a result, the remaining participants agreed to complete preparatory work by November 2017 for a new version, while forming a mechanism to allow the United States to quickly rejoin. Though Japan and the other advanced economies would prefer to keep TPP's existing provisions in place, Malaysia and Vietnam, who were counting on access to the U.S. market, are more reluctant and have indicated a desire for some changes.
Despite a souring mood on globalization and the U.S. withdrawal from TPP, headway has been made on a number of free trade agreements. For example, the Japan-EU Economic Partnership Agreement (EPA), negotiations for which began in March 2013, continues to make quiet progress. Now in their 17th round of negotiations, the two sides hope to wrap up a deal by the end of the year. The EPA could increase EU exports to Japan by as much as 30 percent, while increasing Japanese exports to the EU by 20 percent. The EU hopes to broaden investment opportunities with its fourth-largest trade partner while also gaining more access to government procurement. For its part, Japan is counting on reduced EU tariffs on automobiles and electronics.
U.S. withdrawal from TPP has also provided China an opening to push its own alternative: the Regional Comprehensive Economic Partnership (RCEP), which is comprised of the 10 members of the Association of Southeast Asian Nations (ASEAN) as well as Australia, China, India, Japan, South Korea and New Zealand. RCEP members would account for almost half of the world's population and 39 percent of its GDP.
Though not strictly a trade agreement, the Paris Agreement and related efforts to combat global warming will likely have a substantial impact on the global economy, especially as cap-and-trade and similar carbon-reduction economic policies advance from single-country models to encompass regional and even global frameworks. President Trump's withdrawal of the U.S. from Paris Agreement is unlikely to slow the process. The EU and China have signaled their determination to press ahead, with support from private industry, which views increasing investment in green technologies as an important economic opportunity over the next several decades.
The United Kingdom under Prime Minister Theresa May continues to forge ahead with plans to exit the EU. The U.K. gave formal notice to its EU partners on March 29, 2017, which invoked Article 50 of the EU Treaty and began the countdown to Brexit. Under the EU Treaty, the U.K. and EU now have two years to negotiate an orderly unwinding of the U.K.'s complex political, legal, regulatory and economic connections with the EU.
The type of relationship that will follow the divorce remains unclear, as no country has withdrawn from the EU. For its part, the EU has been firm in its insistence that the U.K. must respect the EU's four freedoms (freedom of movement of capital, goods, people and services) if it seeks unfettered access to the EU's single market of 400 million people. A template for such a relationship is the European Free Trade Association (EFTA), which includes Norway, Switzerland, Lichtenstein and Iceland. Although not members of the EU, members of the EFTA enjoy broad access to the EU while harmonizing regulations and allowing the free movement of people.
With regard to access to the single market, the EU has also been adamant that the guidelines are "indivisible" – i.e., that the U.K. will not be able to cherry-pick its favored sectors. This has caused considerable angst for London's sizable financial industry. With the specter of losing access to the EU through passporting rights, a number of large global financial firms have already explored establishing new branches on the continent.
The EU has also been resolute that negotiations on the U.K.'s future relationship with the EU cannot begin until the terms of Britain's exit from the EU are finalized (or at least agreed to in principle). Specifically, Brussels wants "sufficient progress" on three major issues: guaranteeing the rights of EU citizens living in the U.K., settling the divorce bill and safeguarding the 1998 Good Friday Agreement that ended the violence in Northern Ireland. Furthermore, the U.K. must also respect its financial commitments to the EU, which some have calculated at almost $82 billion.
For its part, the U.K. under Prime Minister May has been adamant that – while hoping that "Brexit is a success" – it has no intention of joining the EFTA and is resigned to losing access to the single market, especially since reasserting control over immigration was a driving force in the pro-Brexit campaign. The U.K. has also been very cool to the idea of any exit fees, arguing that the EU's founding treaties make no mention of such payments. This week's stunning U.K. election results – which saw May's Conservative Party lose its outright majority in Parliament only weeks after Emmanuel Macron cruised to any easy victory in France's presidential elections while touting a commitment to the EU – only serves to underscore how volatile and unpredictable Brexit negotiations will be.
Trade globalization is, to some extent, a victim of its own success. Unrealistic expectations and unbridled optimism masked the inevitable economic dislocations that increasingly unfettered movement of goods and capital have carried in its wake. Nonetheless, fears that a backlash would bring a return to the ruinous economic isolationism of the 1930s are likely overblown.
Public opinion, while more skeptical, still skews positively towards free trade; a recent Gallup survey found that 72 percent of respondents in the U.S. viewed trade as an opportunity rather than a threat. Scholarly opinion remains staunchly in favor of trade liberalization; the International Monetary Fund-World Bank report cited a study that tariffs imposed on Chinese tire imports in 2009 resulted in an economic loss of at least $900,000 for each job saved.
Looking further ahead, the WTO expects trade to grow by 2.4 percent in 2017, almost double the growth last year. Additionally, the EU zone is forecast to grow at its fastest pace since 2011. Even the Transatlantic Trade and Investment Partnership (TTIP), which floundered in the last year of the Obama Administration and appeared dead in the water with President Trump's election, has shown new signs of life, with House Speaker Paul Ryan indicating that a trade agreement with the EU is in U.S. best interests.
A feeling of cautious optimism extends to the financial markets. A March 2017 survey showed that only 21 percent of fund managers cited protectionism as their biggest fear to the bull market in equities, down sharply from the 34 percent who sited such concerns only a month earlier. Correspondingly, shares of large U.S. multinationals most affected by trade have outperformed those of smaller companies less sensitive to international trade since the beginning of the year, reversing a trend that began after the November 2016 elections. Though policy volatility in the months ahead will be difficult to avoid, underlying indicators suggest that businesses that continue to press forward with a global outlook that seeks opportunities will be rewarded.