A question of balance
“Steve Bannon may be gone from the White House, but his trade agenda survives in the form of Robert Lighthizer. Last week the US Trade Representative opened renegotiation of the North American Free Trade Agreement (NAFTA), and he has made reducing US trade deficits with Mexico and Canada his top priority.”
The Editorial Board, The Wall Street Journal, 21 August 2017
If there ever was any doubt, it is now clear that the Trump Administration’s trade ‘policy’ seems to come down to one thing, ie reducing, if not reversing, bilateral trade deficits country by country, even if it means tearing up existing trade agreements and, possibly, fatally undermining the World Trade Organisation (WTO).
Certainly, nothing which has transpired in the four rounds of NAFTA renegotiation we have seen to date runs contrary to this, even if the three partners have agreed to extend the original timetable for completion beyond the end of this year and into 2018Q1 (by the end of which, if there is no agreement, the process will likely be bogged down in Mexico’s presidential and legislature election campaigns).
Indeed, as any number of commentators have pointed out in past few days, the latest US demands, described by the FT’s Edward Luce as “poison pills”, look as if they could have been designed specifically to ensure failure while laying the blame on Canada and Mexico, ie:
- A “sunset” clause under the terms of which the treaty will expire every five years unless renewal is agreed;
- Half of all content for duty-free cars made in North America to be sourced in the US; and,
- The scrapping of the dispute settlement mechanism — on which Mr Luce (subscriber access only) comments that: “The only dispute mechanism that Mr Trump can abide is one in which America always wins”.
Charitably, one could hope that these are opening bids from which the US will, in due course, be prepared to compromise. But even then it is far from clear that US Trade Representative Robert Lighthizer will be able to extract sufficient concessions from the other two parties to satisfy what Mr Luce describes (rightly, in my view) as Mr Trump’s “winner takes all mindset”. As with the Iran nuclear pact, the proposed repeal of Obamacare and dealing with the ‘Dreamers’, the President’s inclination seems increasingly to be to set up for failure while ensuring that the buck stops anywhere but with him.
[Note: On the subject of ‘failure’, I was very interested to read a recent article in Politico by Matt Latimer in which he argues, counter-intuitively, that Mr Trump may be better served if Congress fails to pass tax reform (which, to be clear, does not appear to be his aim) than if it succeeds. Mr Latimer sees this as the only thing currently keeping the Republicans together; if passed, he believes, an increasing number of GOP legislators will feel free publicly to distance themselves from the President which could, ultimately, lead to his denouement either in the 2000 primaries or, possibly, as a result of Robert Mueller’s ongoing investigations.]
This being said, I am confident that both the Canadians and the Mexicans are wise to the possibility that Mr Trump is aiming for failure and, if indeed he is, are unlikely to give him the satisfaction of pulling the plug for him. They will be well aware that pro-trade Republicans in Congress, egged on by powerful business and farming lobbies in the US, are getting ready to fight back against any attempt by the Administration to scupper the treaty. And, as I argued in a Global Lead article published on 2 September, it is highly questionable whether the President, as opposed to Congress, has the legal authority to withdraw the US from trade treaties.
[Note: For starters, Republican lawmakers have been telling the Administration that if it tries to withdraw the US from NAFTA it could jeopardise prospects for tax reform. Although there is almost certainly a degree of realism over the likelihood of a successful conclusion to the renegotiation by year-end, as originally targeted, I do wonder if the recently agreed extension is in part in the hope (belief?) that tax will be done and dusted by the proposed new end date, thereby negating that particular threat.]
Bull in a China shop?
One way or the other, the NAFTA process remains a significant threat to international trade. But a bigger one may well lie in the Section 301 investigation recently launched into Chinese barriers to market access. Unlike the Administration’s shelved (for now) proposals to impose swingeing tariffs on aluminium and steel imports, this action not only has substantive merit, in my view, but is also politically popular across the US. Even if what I think are near-inevitable further rounds of US secondary sanctions against China over North Korea fail to trigger retaliation by Beijing, unilateral punitive tariffs imposed under Section 301 of the 1974 US Trade Act almost certainly would. And I expect the investigation to be pushed through very quickly with the likelihood that it will be concluded before the end of 2018Q1.
[Note: Even though he claims (probably rightly in terms of perceived urgency at least) that the principal aim of his Asia tour will be to drum up support for an even tougher stance on North Korea, I expect Mr Trump to fire some verbal warning shots during his visit to Beijing next month, especially given that the US trade deficit with China reached a new record high in September. He is also likely to raise bilateral trade deficits in Tokyo, Seoul and Hanoi.]
In addition to retaliation — which I think could finally spur Mr Trump into action on both aluminium and steel, thereby sucking in Europe — China would very likely take the US to the WTO. This could have very serious consequences indeed, given that the US could well lose the case, an outcome which Mr Trump would find very hard to swallow. The Trump Administration’s antipathy towards the WTO’s dispute settlement mechanism (as well as NAFTA’s) is already readily apparent from its blocking of appointments to the seven-person appellate body, which needs at least four members to function, is already reduced to just five and will be down to the minimum requirement by December unless there is a change of heart in Washington. Undermining this key function of the WTO would pose a real risk to the future of the Organisation as a whole.
Crunch-time in Q1?
Looking ahead into 2018Q1:
- Although I think pushing through tax cuts is simply too important to Congressional Republicans’ reelection prospects for this to fail, I still think it improbable that legislation will be passed by year-end, thereby leaving Mr Trump with no legislative successes to his name as he starts his second year of office;
- As I have previously suggested, I expect it to be increasingly apparent that the NAFTA renegotiation is not going to be successfully concluded this side of the Mexican elections (if at all);
- North Korea will probably remain on its current trajectory, getting closer to having a genuine nuclear strike capability, possibly by around the end of 2018;
- Tensions between the US and Iran may have risen significantly depending how Congress responds to having Mr Trump kick the ball into its court; and to what Mr Trump then does when the nuclear agreement next comes up for review in January;
- Mr Mueller’s aforementioned investigations seem may well have reached the point where at least one member of the Trump campaign team has been indicted; and,
- To judge from the trend in recent months (driven in part by boosted imports of both aluminium and steel in response to the Trump Administration threatening to impose tariffs), ironically the overall US trade deficit could be in even worse shape than it is today.
In short, Mr Trump will be under even more domestic pressure than he is already, further strengthening his already clear determination to shore up his base of 36-38% of the electorate by whatever means come to hand. Delivering on at least some of his pre-election promises on trade is therefore likely to become an imperative in the mind of the President — even though a trade war stands to damage, potentially seriously, the second metric (after trade balances) with which he seems to be obsessed, ie stock valuations. This irrespective of whether Treasury Secretary Stephen Mnuchin is right or wrong that investors have already “baked into” the stock market tax reform.
One would hope that this would cause Mr Trump to think very carefully before taking any steps which could trigger a trade war. However, according to the Federal Reserve, 48% of Americans have no money in stocks including the vast majority with incomes below around US$50,000 a year. As Greg Valliere, Chief Global Strategist at Horizon Investments, recently pointed out: "When Trump's base sees him be a cheerleader for Wall Street, it's a negative for Trump. His base in Youngstown, Ohio, or Bethlehem, Pennsylvania — they don't feel the stock market is their friend". To my mind, this strongly suggests that, if/when push comes to shove, stock market metrics will be sidelined in favour of Mr Trump's overarching obsession with a third metric, ie his approval ratings. Coupled with his 'trade deficit disorder', this may well drive a 'wag the dog'-type move by the US President into a trade war.