Often accused of being rambling or incoherent, in his inaugural address President Donald Trump did—for better or worse—have something substantial to say. He summed it up in the two-word slogan, “America First.” To the uninitiated, this might have sounded like typical new-president waffle that might be forgotten as quickly as the “thousand points of light” of George HW Bush’s 1989 inaugural. Those who know their American history, however, were not so easily soothed. For “America First” was also the slogan of the isolationists during the 1930s, the last time the world descended into a serious trade war. The question that can no longer be ducked is whether it could happen again.
On their path to the top, many presidential candidates—Barack Obama and Bill Clinton included—have aired anxieties about trade, but they have tended to cool their rhetoric pretty quickly on assuming office. They were bound to do so if the United States were to maintain the role it has had for the last 70 years, as the linchpin of the liberal trading order. No winning candidate, however, has adopted anything like the language of Trump, who has talked of the “rape” of America’s jobs.
And as he stood in front of the Capitol on 20th January, he doubled down on that line. “Protection,” he said, “will bring great prosperity and strength.” He indicated that all his decisions on trade, taxes, immigration and foreign affairs would be made in the interests of American families and workers. In Trump’s America trade is a zero-sum game in which only one party gains, and in which the interests of Americans as suppliers of products or labour are all-important, entirely dominating the interest they have as consumers.
Trump is an ugly new feature on the world’s trading landscape, but he did not come from nowhere. In important respects he is a creature of his time. If the great contemporary political battle is between globalisers and the malcontents, then trade is the front line. Even before the remarkable events of 2016, world trade had been in trouble, mainly for economic reasons. Now, though, there is a new political cloud hanging over world trade, bringing in its wake greater protectionism and the real possibility of a full-on trade war.
Trump has quickly given notice that the US would withdraw from the 12-nation Trans-Pacific Partnership (TPP) free trade agreement, and seek to renegotiate the North American Free Trade Agreement (Nafta) with Canada and Mexico. He has made clear that he will punish countries that “violate” trade agreements. This is aimed largely, though not exclusively, at China, which Trump seems intent to weaken through trade issues. And the most immediate risk of Trump’s protectionist stance is, undoubtedly, a trade war with Beijing. Everything depends on how far the US is prepared to go, and the extent to which the Chinese retaliate. The broader risk to the world economy is that we are losing America as the champion of an open, rules-based, regime of trade and investment, the role it has played ever since the Second World War.
All this formed the backdrop to Theresa May’s trip to Washington to try and set in motion a quick-fire trade deal with the new president. Both leaders have their political reasons to look as though they will be able to pull off an artful deal. I’ll come back to the detail of what that might entail. But while a post-Brexit Britain would like to reinvent itself a trading buccaneer, it is essential to bear in mind the depressing wider context for trade—with America, and beyond. As the UK prepares to leave the European Union, which is the biggest free trade area in the world, the May government’s aspiration for “Global Britain” as a beacon of free trade is fundamentally hollow in the absence of a domestic strategy of economic mitigation.
Put the politics out of your mind for a moment: focus on the figures. World trade of goods and services was, until fairly recently, at the leading edge of globalisation. Between 1985 and 2007, trade grew at twice the rate of world GDP, but since the 2008 financial crisis, it has hardly managed to keep pace, at times even lagging behind. In the last five years, it has grown at about 3 per cent annually, which is less than half the rate of growth over the previous 30 years. There are few historical precedents in the last 50 years for such weak performance, and none for such prolonged sluggishness.
Last autumn the International Monetary Fund made the sanguine suggestion that around three-quarters of the slowdown in trade could be put down to passing “cyclical” factors. Yet the weakness of trade has been going on for so long, that it seems wiser to assume that structural factors are at work. What are these? Chronic weakness of business investment is one. The end in 2014 of the long commodity price boom, which had been boosting the value of trade, is another. Then there is China, for so long the world economy’s engine, whose growth has been slowing since 2011. The previously phenomenal growth in complex global supply chains has also been levelling off: the proportion of China’s imports that are taken up with parts and components, for example, has fallen from almost 60 per cent before the financial crisis to 38 per cent today. Its companies now produce more locally. Across the planet, ageing societies weigh on trade, because older consumers devote more resources to things like healthcare, which are generally locally produced.
Such factors incline some—like Barry Eichengreen, who wrote in Prospect recently (“Spinning beyond Brexit,” November 2016)—to argue that we shouldn’t necessarily be surprised or disappointed if “trade ain’t what it used to be.” While the pace of integration has slowed, he insisted, the state of globalisation will endure, so long as societies maintain a commitment to openness and interdependence. Thus Eichengreen maintained—after the Brexit vote, but before Trump’s election—that the world was witnessing a recalibration of globalisation, and not a reversal.
Even before America’s fateful vote on 8th November, Eichengreen’s analysis of the outlook for trade—based on manufacturing processes and communications technologies, rather than brute politics—was arguably incomplete. In the wake of Trump, however, the whole idea of a temporary globalisation plateau is redundant.
Think about what Harvard Professor Dani Rodrik has called the globalisation “trilemma.” Rodrik says you can only ever have two of deep economic integration, national sovereignty and democratic politics—unless you have trusted institutions to balance all three. The principal example of such balancing arrangements was the Bretton Woods system. Established in the years after the Second World War, it was based for many years on fixed-but-adjustable exchange rates that proved to be unsustainable during the 1970s. Today, it is self-evident that the institutions that we have to oversee such cross-border economic arrangements—such as the EU—are no longer strong enough to hold the rising demands for greater sovereignty at bay.
Just think of Brexit. For 52 per cent of UK voters and many European citizens, the trusted institutions check-box is empty. The third part of the trilemma, economic integration, is falling away. Martin Sandbu highlighted the political reaction against the globalisation narrative in Prospect (“The Shock of Free Trade,” July 2016), singling out the cases of the US and Brexit in particular. Until we rebuild trust in our institutions at home and internationally, globalisation and trade will remain at continuous risk of unravelling. If you doubt it, look at what is already happening—and was already happening before Trump.
- Protectionism is on the rise
- Meanwhile, the liberalisation of trade has waned
For a while, it looked like regional and bilateral free trade agreements (FTAs) might pick up the slack. But according to the Design of Trade Agreements database, where there were around 30 FTAs per year in the 1990s, that slipped to 26 per year in the run-up to the financial crisis, and then—since 2010—just 10 annually. Admittedly, some of these recent deals were big, multi-partner arrangements, sometimes covering more than just tariffs—things like the product standards, rules of origin and public procurement rules which constitute the most important trade barriers. That said, thanks to Trump, two of the very biggest recent FTAs—the TPP, and the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU—will very likely soon be gathering dust.
- There’s even squabbling about the form of future deals
The new White House view, however, rejects this multilateral way of working, insisting that bilateral deals are now in and regional deals out. There is no economic logic for this, except perhaps for the faith that the US can use its size to secure better leverage one-on-one.
"There is already speculation that China is drawing up a list of products in 20 US states that voted strongly for the president so they can tax them in retaliation"All of this is happening in a political context where the president is talking seriously about bespoke tariffs on Mexican goods of perhaps 20 per cent to pay for a wall to keep Mexican people out. The Republicans in Congress are considering a so-called border tax adjustment as part of US corporate tax reform, which would, in effect, represent a tariff on imports and a subsidy for exports. As a stealth tax on trade this would probably fall foul of World Trade Organisation rules. Nobody knows how far Washington will press the new protectionism.
The big picture, then, is not pretty. But there is particular reason to fear where the most important bilateral trading relationship of all is concerned—between the US and China. Over many months, threats have emanated from Trump and his people, including a possible 45 per cent tariff on Chinese imports.
Optimists hope that the economic interdependence between the US and China, the strong presence of businesspeople in the new administration and in the lobbying world may act as a moderating force. Yet the new president hasn’t wasted time confirming his protectionist trade bias, or nominating like-minded people to head up the Commerce Department, US Trade Representative Office and National Trade Commission. In parallel, he has indulged in purely political provocations—such as speaking directly to Taiwan, which the US does not officially recognise in deference to Beijing—which do nothing to lighten the mood where trade is concerned. There is also a growing concern that the US may seek to challenge China militarily over its posturing in the South China Sea.
Even if the US pulled back from very high across-the-board tariffs, there are other potential areas of dispute. It’s likely that investigations will soon be launched that could result in specific duties being imposed to force concessions from Beijing. After all, Trump’s advisers believe that China has long pursued unfair trade through state aid and discriminatory rules and regulations that favour local companies.
There is little question that China will retaliate if the US pushes it too far. There is speculation that Beijing is drawing up lists of products and companies in 20 US states that voted strongly for the president so they can tax them in retaliation. Major US exporters to China such as Boeing could be targeted, as could American companies operating inside China. But exactly how hard China will hit back is unclear. At the crucial 19th Communist Party Congress to be held late this year, President Xi Jinping wants to make important constitutional changes that will cement his power. A distracted China might, to some extent, be prepared to bite its tongue to keep the economy on an even keel. But it would be naive to imagine that Xi will endure US provocation without any response at all.
While US-China relations are set to deteriorate, Washington is inadvertently doing Beijing’s image a favour by changing itself from the guardian to gremlin of free trade. With its ambitious attempts to replace its spaghetti of bilateral deals in Asia with proper regional agreements, China may even attempt to pose to the world as picking up where the US left off. But could the notionally communist country really ever replace the US as the leader of the global trading system? Optimists point to Chinese initiatives: setting up the Asian Infrastructure Investment Bank, which may soon have 82 members; the pursuit of the One Belt One Road strategy that seeks to extend Chinese commercial and political influence around the world; and the near-completion of the 16-nation Regional Comprehensive Economic Partnership that brings much of Asia together. And indeed, Asian countries may look increasingly to China for economic and trade security.
Australia has even suggested China could replace the US in the TPP. But that seems extremely unlikely: Beijing would never accept TPP stipulations governing state enterprises, labour standards, independent unions and intellectual property rights. Sure, China’s eyes are firmly set on some form of Asia-Pacific trade arrangement, but Beijing will do this in its own way—setting most of the terms and the timetable, which could take years.
There are two more fundamental problems with the view that China can replace the US. First, the leader of globalisation needs to have willing followers, and a capacity for statecraft and diplomacy. It also has to be the recipient of trust, as well as the provider of generosity and shared ideals. China falls short of these criteria even though it can certainly act as a magnet for commercial marriages of convenience. Second, although China professes a belief in openness, it is anything but open at home. Its system of state capitalism restricts the activities of foreign firms and NGOs, and opposes human rights, internet freedom and “western values,” including the rule of law. And because of a susceptibility to capital flight, it recently tightened capital controls that restrict the transfer of dividends and income.
If, as many at the global elite who assembled at Davos in January fondly imagined, Xi was really going to push China to become the new leader of globalisation, he would have given quite different signals from those that he actually did. Above all, he would have acknowledged that China would address the structural causes of its own trade surpluses; reducing them would benefit China as much as the world economy.
The logical flipside of those big trade surpluses is that China saves a lot—and thus exports capital. National savings are a high 49 per cent of national income compared with investment at about 46 per cent. Indeed if, as seems likely, China’s investment rate now fades further then, if all else is equal, its trade surpluses will—as a matter of accounting—rise, not fall. Trump’s protectionism could perversely help to swell the surpluses further, by weakening Chinese growth and so depressing its imports. That would mean even bigger Chinese capital outflows and, more significantly, capital flight.
Yet the one thing the world doesn’t need is more Chinese capital. Rather it needs China to save less, and consume and import more. This would reduce the big surpluses, which should suit the Chinese people too—it is high time they were able to consume more, relative to the country’s extraordinarily high rates of investment. Yet the government is reluctant to risk the growth and employment consequences of this sort of upheaval in economic policies; instead, it drifts along with big surpluses, just as it does with a credit-fuelled model of growth which could soon prove unsustainable.
So the chances of the required change in direction are slim. Instead, US trade pressure on China will most likely cause Beijing to become more prickly, and still more resistant to the economic reforms that it needs. And so the world’s two largest economies are likely to inflict economic pain on one another. Other countries are unlikely to be able to remain aloof—and few should be more concerned about the fallout than the UK.
The UK will soon, in this grim climate, begin the process of leaving the EU. As an exercise in damage limitation, it needs to sign new bilateral deals with far-away countries and markets. Some countries, such as the US and China, can bring strong leverage and powerful vested interests to bear. Some such as Australia and New Zealand are smaller and cannot compensate us for leaving the EU. Others, like India, are not even big fans of free trade, and have special interests they want to protect, and industries they would like to nurture.
May’s Washington trip left no doubt about London’s desperation to pursue a trade deal with the US, which is the UK’s biggest trade partner after the EU. Trump encouraged her in this hope. Both politicians have a political point to make to the EU. A quick deal would be a totemic win for Brexit supporters, but for the economy, speed matters less than the terms. What Trump means by “America First” is “buy American and hire American.” His administration will look to reduce the trade surplus with the US which the UK enjoys today. It will want access for its agricultural produce, pharmaceutical and financial services companies at a time when UK farmers, the NHS and the City are already facing various degrees of dislocation.
The more important question for the UK is whether the prime minister really can strike up a “bold and ambitious FTA with the EU” by 2019—two years after Article 50 negotiations start this year. Even assuming the government’s timetable holds, negotiations will be affected by the looming French and German elections. There may not be a new German government until November or December. That would leave a good deal less than two years, not least because the European parliament would also have to ratify an agreement.
Even assuming negotiations go smoothly—which is unlikely—modern trade deals are complex and time-consuming. They span a vast agenda: market surveillance and conformity measures; agreements about customs, competition, intellectual property rights; dispute settlement, governance and arbitration procedures; and conditionality agreements covering human rights, and labour, environmental and health and safety standards.
In the best of times, striving for an agreement would be arduous enough. In the current fractious circumstances for trade globally, and especially in the particular and newly-charged context of UK/EU relations, it is—surely—not going to be possible to have a comprehensive FTA signed, let alone ratified, before the end of 2019. More time, in the form of a transitional agreement, will be needed, but both the UK and EU would have to agree to that. If this agreement proved elusive, or if the prime minister should live up to her threat to “walk away” in the event of a “bad” agreement, the UK would attempt to fall back on membership of the WTO. But sorting even that fall-back out would also take time—and require approval from all of 164 WTO members.
Back in a not so distant past—like that which existed between 1980 and 2007—trade was buoyant and becoming more free. There was opportunity aplenty for beacons of free trade. But we are today saddled with the very different world that we have got. As it is, the UK is condemned to seek its own way in the world in the age of Trump. It will need a properly thought out economic coping strategy. Trade will doubtless play a part. But we are deluding ourselves if we think that it is the be all and end all.
