More disruptions ahead in global trade

  • 13-Sep-2018
  • More disruptions ahead in global trade

Trade war is developing into a tale of disruption, rather than an account of back and forth trade actions, as it was initially expected to be. US—the perpetrator—is locked in a one-on-one battle with China. On the other hand, it is working out bilateral deals with alacrity. As countries negotiate with the US—either for protecting existing deals, or writing new ones—trade is experiencing new disruptions.

The reorganisation of the North American Free Trade Agreement (NAFTA) is a good example. The NAFTA predates the WTO and had come into force on January 1, 1994. Signed between the US, Canada and Mexico, it was arguably the most ‘21st century’ FTA. It came under severe attack from US president Donald Trump as a FTA that led to relocation of production from the US, creating economic distress including loss of American jobs. The NAFTA went up for renegotiation seeking terms more ‘favourable’ for the US.

Interestingly, the negotiations hardly remained trilateral with the US seeking to engage Mexico and Canada separately. The US and Mexico have agreed on a deal that they expect Canada to lock in to. If it doesn’t then the NAFTA would cease to exist in its current form, bringing to an end the integrated trade and investment framework for North America.

Trump’s emphasis on bilateralism and restitching existing deals to maximise US interests has the inevitable effect of disturbing economic arrangements. Global businesses look at contents of multiple FTAs between countries to fix supply chains. US tariffs on China, retaliatory tariffs by China, a new US-Mexico deal with amended local value content, specific tariffs between US and Turkey, etc, are actions that don’t just affect US FTAs, but also those that US FTA partners have with others. Right now, for example, several US businesses exporting to China are looking to relocate parts of their productions elsewhere for avoiding Chinese tariffs; Chinese steel producers are taking to dumping elsewhere for avoiding US tariffs; automobile assemblers in North America are bracing for major reorganisation of supply chains in North America if Canada stays away from the US-Mexico deal.

All these strategic business disruptions are results of the US taking to bilateralism in trade engagements. But the worst is probably yet to follow. As American and Canadian negotiators continue to work on NAFTA, Trump has reiterated his threat: pulling the US out of the WTO if WTO doesn’t ‘shape up’. Needless to say, the withdrawal of the largest economy in the world from the multilateral rules-based trade framework would be a seismic change that trade will find difficult to cope with. Some argue that it won’t make a great difference—after all, the US is out of the multilateral deal for tackling global climate change. But, the two scenarios are different. The climate programme is taking shape without the US from its infancy. The WTO has been up and running for more than two decades. It has established rules, processes and functions that trade has got used to. WTO concepts like MFN and national treatment are at the core of all global trade relations. Most importantly, the WTO symbolises a global trade order that the US itself had played a major role in building. While, like many other countries, the US has been disappointed and frustrated with the WTO, quitting it is an option that it has never proposed.

Trump’s trade agenda is shaped by the political objective of reaching his core constituencies. To that effect, there is little possibility of his administration backing off from its current trade posture. With mid-term elections in the US due in November, more trade retaliation, including disengagement with the WTO, is on the cards. If the polls bring success for Trump, he might get emboldened to implement his trade agenda more forcefully with an eye on a second term. While several American businesses with global operations and their industry organisations have criticised Trump trade policies, several others haven’t. It is therefore erroneous to conclude that his trade actions are entirely without support.

It is quite likely that the rest of the Trump presidency will witness more disruptions in world trade. And, like all disruptions, there would be winners and losers. But they are hard to predict as of now. The unpredictability of US trade policy, particularly its current knack of taking every trade partnership as a specific case and revisiting them for maximising ‘national interests’, make future trade patterns difficult to fathom, and their movers and shakers hard to identify. For the rest of the world, one choice though is clear: whether to come together for playing a multilateral trade game without the US; or keep hoping the US would come back to the game it had helped to get going.


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