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In October, Donald Trump listed what he plans to do as president in his first 100 days, giving us the first confirmation of his plans with regard to trade.
Specifically, Trump will withdraw the United States from the Trans-Pacific Partnership (TPP), renegotiate the North American Free Trade Agreement (NAFTA) and label China as a currency manipulator. His administration will identify all foreign trading abuses that unfairly impact American workers and respond using all tools under American and international law. He has also proposed a tariff on goods from U.S. companies that relocate to other countries.
The aim of these policies, as stated by Trump, are to address harms to U.S. workers from trade and to improve trade deals he sees as not being in the U.S. interests. These are certainly worthwhile goals. The problem is that Trump’s current trade proposals will work against each other, threatening to cancel out any gains, and likely inflicting additional costs on the very people he has pledged to help. And, as the U.S. is approaching full employment, the key challenge is less about more jobs but rather about getting at the concentrated losses in particular communities.
Further, the policies proposed are likely to have a range of broader security implications that will be negative for the U.S.
So what ways forward are there for trade under Trump?
Mexico and China
Part of Trump’s diagnosis of U.S. economic ills was explained by trade with Mexico and China.
For instance, Trump has stated that he plans to renegotiate NAFTA—the trade agreement with Mexico and Canada. Mexico and Canada are the U.S.’s largest export markets, together buying more U.S. goods and services than any other country. President Obama also proposed renegotiating NAFTA in 2008 and the TPP was his response. So from one perspective the TPP already achieves this goal.
But should Trump withdraw from the TPP and then seek to renegotiate NAFTA, any concessions on the part of Canada and Mexico will also require concessions by the U.S., i.e., lower tariffs and other trade barriers.
If instead he wants to raise U.S. tariffs on Canadian and Mexican imports, there will be two major effects. First, U.S. exports will also face higher tariffs, and the costs to U.S. industries, workers, and consumers will be particularly large because the North American market is integrated and goods that are part of supply chains often cross-borders multiple times, magnifying the impact of even small tariff increases. Second, tariffs that raise business costs will also reduce the competitiveness of U.S. products overseas.
Trump also plans to label China a currency manipulator. The impact of currency manipulation on trade is a legitimate concern. However, a specific focus on China misses other countries that might manipulate their currency. It is also ill-timed given that China’s trade surplus has declined from over 10 percent of GDP in 2007 to under 3 percent today (in comparison, Germany’s is 8.5 percent). And China is now taking measures to support its currency rather than artificially keeping it low.
What’s more, as part of the TPP negotiations, measures were agreed upon to provide transparency on currency markets and opportunities to address currency manipulation. Further rules on currency manipulation could be developed and a Trump administration could also seek to extend such rules globally.
So what about the TPP?
Trump’s plan to withdraw the U.S. from the TPP will limit his negotiating options, reduce the effectiveness of his other trade goals, and ultimately dampen U.S. growth.
For one, TPP would produce net economic gains for the U.S.—with annual gains estimated at between $57 billion and $131 billion a year.
The TPP also includes rules and enforcement mechanisms that would strengthen the hand of a Trump Administration in dealing with a range of trade practices by other countries that are not currently disciplined by existing trade agreements.
It is also the case that withdrawing from the TPP would further make the U.S. worse off with respect to other countries in Asia who are negotiating trade agreements. In particular, 16 countries in Asia are negotiating a separate trade deal, called the Regional Comprehensive Economic Partnership (RCEP), which includes such players as China and Japan, as wells as important emerging economies such as Vietnam and Malaysia, while excluding the U.S. Withdrawing from the TPP would make RCEP the primary vehicle for trade integration in the fastest growing region in the world, exclude the U.S. from having a say in how these rules are developed and placing China in the driver’s seat. U.S. exporters would also be placed at a comparative disadvantage in Asia. For example, in the absence of TPP, RCEP would make businesses in China more competitive in Japan compared to U.S. companies.
The strategic implications of the TPP
Trump has expressed concern that China has been taking advantage of the U.S. and promised to stand strong against such action. Implementing the TPP would be one of the most effective ways of doing this. On the contrary, withdrawing from the TPP would hand China a significant economic and strategic boon.
President Obama has stated repeatedly the importance of the TPP for establishing trade and investment rules in Asia consistent with U.S. interests. And U.S. Defense Secretary Carter has stated that the TPP would be preferable to another aircraft carrier group in Asia.
In parallel with statements by Trump questioning the value of U.S. alliances, withdrawing from TPP will further confirm for countries in Asia that the U.S. is no longer as committed to upholding security in Asia. This will create space for a greater role for China—the only other country that seeks to challenge and possibly replace U.S. dominance in Asia. Withdrawing from the TPP will only hasten the rise of China and the relative decline of the U.S.
Such an outcome would begin the reversal of 60 years of U.S. foreign and economic policy premised on the understanding that having security and trade arrangements in Asia (and globally) is less costly and more beneficial to the U.S. than dealing after the fact with discriminate trade outcomes or having to later intervene in conflicts.
A trade policy for U.S. workers
Getting at the challenges to workers of adjusting to an open and dynamic economy—whether from trade or technological change—could be the focus for a Trump administration. From this perspective, Trump’s proposals to allow income tax reductions for childcare expense and to expand technical and vocational training are good first steps. Lowering the cost of education, federally mandating maternity leave, and improving wage insurance would also support those who need it the most.
Trump’s proposals to invest in infrastructure and reduce taxes on repatriated business income earned outside of the U.S. could also help improve U.S. competitiveness, which should lead to higher growth, more trade, and jobs.
A proposal for moving forward
Given the recent campaign, it is not surprising that Trump has stated his intention to withdraw from the TPP. In order to maximize Trump’s chances of achieving his other goals of growing the U.S. economy and improving U.S. standing in the world, he should restate his TPP goal as renegotiating the TPP to respond to the interests of U.S. workers, failure which will lead to the U.S. withdrawing from the agreement. While a renegotiation of the TPP would be difficult, if managed successfully it would allow Trump to remain true to his political commitments and allow him to use such a new agreement to achieve many of his other economic and strategic aims.