How the U.S. Still Loses with a China Trade Deal

This op-ed originally appeared in the SCMP as “What the US will lose in a trade agreement with China,” SCMP 4/10/19

As the US and China get closer to a possible trade deal, the World Trade Organisation is set to lose its principal role as an arbiter of disputes. That has significant consequences for global trade, and underlined the re-emergence of bilateral agreements that once hindered global trade and development for decades. 

Illustration: Craig Stephens via SCMP

It’s no surprise that US President Donald Trump’s go-it-alone strategy to upend the status quo runs straight through Geneva. As a presidential candidate, he ran on rebellion. Once in office, he wasted no time reversing US participation in a variety of multilateral agreements.

He withdrew from the Trans Pacific Partnership (TPP), which the US had taken a leadership role in negotiating, and offered nothing to replace it. He imposed tariffs on much of the industrialised world, including allies Japan and the European Union, rather than bringing these disputes to the WTO. He also refused to nominate judges to the vitally important WTO Appellate Body, which inhibits the organisation from adjudicating cases.

His base probably didn’t care about these intricacies of international trade. Their economic anxieties could be assuaged, at least temporarily, by blaming foreigners in faraway places for taking their jobs.

This vision of world trade, fought as a zero-sum competition, is both troubling and naive.

In ordinary times, a dispute over market access or unfair trading practices would work its way through the international legal system. As litigants know, this can be a lengthy process. Even if the claims against a country turn out to be true, the appeals process can drag on while companies remain disadvantaged. Eventual penalties or other remedies may never fully compensate them for losses while other barriers to trade crop up in the meantime.

Instead, Trump unilaterally raised tariffs until China was compelled to negotiate directly with the US. If talks succeed, they will have made much swifter progress than a WTO case. The agreement is even reported to have an enforcement mechanism, whereby China’s adherence to its commitments will be judged under threat of reimposing tariffs. This way, the US retains direct leverage whenever the administration believes there’s been a breach of the agreement.

This all sounds perfectly reasonable – leverage the massive size of the US economy with its main trading partners to secure the best possible deal, all within a relatively short time frame. The world, it turns out, isn’t so simplistic.

A major point of contention for US negotiators is the trade deficit with China. Their solution reportedly includes Chinese government purchases of more US goods, a decidedly non-free-market solution. This fix can be easily reversed by the Chinese government in the future or delayed for any number of reasons – the domestic market may not be able to absorb those purchases, US suppliers may not be able to keep up with the demand, there may disputes over the prices set and the market distorting effects of “forced” purchasing.

Beijing is also no stranger to restricting purchases of imports for political purposes. Norwegian salmon imports were effectively barred from China for several years because Beijing disagreed with the Nobel Peace Prize award for jailed political dissident Liu Xiaobo. Restrictions and other non-tariff barriers to trade were also imposed on the Philippines for its territorial claims in the South China Sea.

Whatever the Trump administration negotiates with China will not be a durable solution, but rather a short-term political fix aimed at shoring up votes for the 2020 presidential election. Joining with similarly aggrieved WTO members to confront China could have created stronger, more lasting institutional-level change.

The negative impacts of this unilateralism are already being felt both domestically and abroad. US companies are losing out to their Canadian and Australian competitors in the lucrative Japanese market after the US withdrew from the TPP. Other countries such as Italy are turning to China’s “Belt and Road Initiative” instead of more traditional development lending institutions like the World Bank, with its extensive oversight mechanisms. That puts further strain on the legitimacy of the international system.

And that’s the point of Trump administration policies that promote a world where economic might makes right.

A fundamental principle of creating global rules of the road since 1947 was to make trade a win-win endeavour. Countries grew together as the overall size of their economies increased, in part due to the benefits of exports, which created new jobs. A rise in imports also increased competition and brought down prices. The current US administration downplays all of these advantages and instead focuses on the negatives of trade, purveying often false and misleading anecdotes of the damage open economies have on US workers.

Without doubt, China has been gaming the system for decades, alternately declaring itself a developing country that needs protection and a global economic powerhouse that deserves the respect of the world. It can’t be both. Entrance into the WTO gave China privileges as well as responsibilities.

As long as China’s market continued to grow, many advanced economies chose to ignore the heavily-tilted playing field. Only now when growth is slowing, the political environment is hardening and the government is actively supporting domestic companies, have the US, Europe and others decided to take action.

Trump’s tariffs have certainly been effective at getting China to the table. They have also been the wrong tool for the right problem. In the end, they will lead to short-term, ill-conceived solutions for temporary gains. Other countries will have to resort to similar bilateral negotiations as the WTO becomes weaker. That’s a terrible precedent to set. The world’s problems are becoming increasingly complex, requiring more cooperation, not less.

If this trend isn’t reversed and soon, there may be far more at stake than just the sale of soybeans and steel. US businesses, workers and consumers will have to live with the consequences long after Trump leaves the White House.


“Brand America” Falls Out of Favor With Foreign Investment

Trump understands that brand matters, and the latest version of brand America is failing badly. At this year’s World Economic Forum in Davos, business executives expressed not only concern, but outright dismay, over the investment climate in the U.S. And they aren’t just sitting on their capital waiting for better days.

Investors are voting with their money and heading for other countries. The statistics for Foreign Direct Investment in the U.S. (FDIUS) show a troubling trend. In the second quarter of last year FDI turned negative, a reversal of fortune not seen in years. That followed a drop of 41% year-on-year to $277 Billon in 2017, after peaking at nearly $472 billion 2016, according to U.S. government data.

Cyclical Decline in Foreign Direct Investment to the U.S.

Companies including Tesla, Unilever, and Foxconn are looking elsewhere to invest due in part to the uncertainty around the U.S.-China trade war. Imports and exports have been hit along with supply chain disruptions. While the upcoming trade talks in Washington were bathed in a positive light from governments on both sides of the Pacific, the outcome has been thrown into serious doubt after the Department of Justice announced criminal charges against Huawei and its CFO Meng Wanzhou. 

She is currently detained in Canada on an extradition request that is now sure to move forward. Trump has said he may intervene in her case if it serves the trade talks and U.S. national security. What he can actually do, politically or legally, remains unclear.

Trump Has Few Options
on Huawei Sanctions Trouble


The souring on brand America isn’t just about China trade disruptions. Trump’s immigration policies, his tacit acceptance of jingoistic and racist dog whistling by his most ardent supporters, and the perception that the U.S. is retreating from global affairs is turning away international students that might otherwise invest in a coveted U.S. education.

Enrollment in undergraduate programs dropped for the second year in a row with a 6.6% fall for 2017-2018. That’s putting new strains on colleges and universities that have grown accustomed to full-tuition paying foreign students.

The longer term cost to the U.S. will show up in worker shortages, primarily in science, technology, engineering, and math disciplines. These professions are already woefully short on trained graduates and unfilled jobs create a drag on economic growth.

While the administration touted $1.5 trillion dollars in corporate tax reductions that began in 2018, a survey by the National Association of Business Economics shows that companies are not in fact spending more. Trickle-down economics didn’t work under Reagan and it certainly isn’t working now even with a new, slick cover promising to make America great again.

A brand is only as good as what it delivers and so far Trump’s promises made continue to be promises broken. The U.S. accumulated a lot of good will over the decades. That hard-earned reputation is now at risk of being destroyed in only a few years.


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