Earlier this year the Trump administration published the President's 2017 Trade Policy Agenda, providing some official guidance as to the shape of its trade policy. In short (and as feared): it’s going to wage a fierce attack on the multilateral trading system by reneging the WTO’s jurisdiction on trade disputes and by refocusing the US trade strategy on bilateral relations in order to bring about trade surpluses.
By walking down that path, President Trump stands to undermine the post-World War II US-led global economic order, which has traditionally used free trade as a non-zero-sum instrument for geopolitical advantage and national security. Trump is set to reverse the equation by promising never to turn a blind eye to unfair trade practices that disadvantage American workers and businesses in global markets. Trade becomes a zero-sum game to leverage Washington’s existing geopolitical supremacy to deliver exclusive trade advantages.
In order to deliver on his “America First” campaign platform, the administration’s 2017 trade policy agenda identifies four priorities:
- Defend US national sovereignty over trade policy;
- Strictly enforce US trade laws;
- Strongly leverage other countries to import more American goods and services; and
- Negotiate new bilateral deals that reverse the US trade deficit.
The top priority, defending US national sovereignty over trade policy, signals a hard line on the multilateral trading system, and could portend a significant blow to the World Trade Organization (WTO). The trade policy agenda indeed promotes a restrictive interpretation of the US protocol of accession to the WTO, to conclude that Americans are not directly subject to WTO decisions. In other words, where the WTO dispute settlement panel or Appellate Body rule against the US, such a ruling will be undeniably trumped by Congress. Such an approach will undermine the WTO’s dispute settlement mechanism. Without that, the WTO stands to crumble, also considering that the failure of the WTO’s Doha round has already undermined the credibility of the multilateral trading system. With the US (and also Japan) denying China the market economy status sanctioned by its WTO accession, multilateral trade enforcement is further out of the question.
Trump’s push to unilateral trade enforcement (agenda priorities one and two) ushers the other two priorities of reversing the US trade deficit through the change of tack in industrial policy, which now focuses on domestic growth in the manufacturing, agricultural, and services industries, as well as on the strict protection of American intellectual property worldwide.
In sum, this is a signal of how and why Trump plans to implement the four trade policy priorities, which is to elevate a crackdown of competitors in the world markets to trigger an overhaul of trade deals that purportedly spur American jobs and exports.
As a matter of fact, in his confirmation hearing as Secretary of Commerce, billionaire investor Wilbur Ross, known as the “King of Bankruptcy” for rescuing distressed manufacturing companies, confirmed that he will crack down on illegal steel dumping, develop harsher penalties for countries that perpetrate cyber attacks in the US, and renegotiate NAFTA.
In fact, since the early days of Trump’s administration, key figures made it clear that Wilbur Ross would steer key trade policy decision, and not the US Trade Representative (USTR) office, which has effectively been downgraded and subordinated to Commerce.
In other words, the Trump doctrine amounts to a Copernican revolution of US trade policy, which is now instrumental to industrial policy, rather than the other way around, as it has been since the establishment of the GATT (then WTO) system in 1948.
Trump’s trade doctrine is set to deeply disrupt the global supply chain. Undermining the multilateral trading system to suddenly reverse the US account deficit will create havoc at both the manufacturing and monetary levels. That further indicates the need for US economic partners to fully understand the geopolitical implications of Trump’s trade doctrine.
The liberal democratic countries benefiting from globalised economies, in particular those shut out of the TPP, need to handle the Trump trade shift with extreme care. In 2016 the US trade deficit in manufactured goods was $648 billion, nearly half of which was with China. The temptation for countries that trade heavily with both the US and China will be to just sit on the fence and hope for trade diversion dividends from a Sino-American trade war. However, the Trump doctrine is not the only factor at play, as the Chinese geopolitical counter-measures will be equally important in defining how the global economy and institutional frameworks are going to absorb the shock, if at all.
Furthermore, there are significant monetary implications in the Trump doctrine. The US trade deficit fuels the outpour of US dollars into the global financial markets. Changing this flow is a risky game for the Trump administration, as scarcity will over-appreciate the US dollar over the short term, and over the long term it will undermine its role as the global reserve and trading currency. Firstly, this is going to incentivise China, Japan and the other countries with US trade surpluses to depreciate their currencies and compensate for export losses. Secondly, China is already playing a forward game to build up a shadow reserve portfolio and eventually become a major supplier of reserve assets.
Based on Trump’s trade policy agenda, this dynamic will likely pave the way for US devaluation claims, which are instrumental to trigger a global currency war among the countries that challenge the US monetary hegemony.
For the time being, free trading economies with no trade surplus with the US, like Australia, are relatively safe from the immediate backlash of the Trump trade doctrine. Nevertheless, liberal economic diplomacies are widely exposed to all the ensuing geopolitical dangers of ending the dollar standard as the pillar of the Bretton Woods system and of global financial stability.
As China currently benefits from a stable, open and secure system of free trade, Trump’s U-turn to an economic sovereignty agenda may instead push China towards hard-line foreign policies. This would compel its co-dependent trading partners in the Asia Pacific and Europe to abandon the liberal international economic order status quo. This is possibly going to open up unsavoury scenarios for European and Asian middle powers, including making a clear choice between global security alliances under reluctant US leadership and free trade in China’s expanding sphere of economic influence.
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Office of the United States Trade Representative
. 2017 Trade Policy Agenda and 2016 Annual Report of the President of the United States on the Trade Agreements Program, March 2017.