The Art of the Trade Deals

So far, President Trump has demonstrated that he will try to make good on his campaign promises, though the process may be anything but pretty. We cannot recall a president who started out “fighting” on so many fronts: still confirming most of his cabinet, nominating a Supreme Court Justice and multiple sweeping executive orders on domestic and international matters. Until the rollout of corporate and other tax proposals, which at this rate may come sooner than expected, the economic focus should be on Trump’s trade policy.

Trump took the oath of office with a strong “America First” statement, and followed up by scrapping the proposed Trans-Pacific Partnership. (The latter was also pushed by both Clinton and Sanders during the campaign, though only Bernie tweeted kudos after Trump acted). There is every reason to believe that Trump will try to realize this vision The question is what is that vision?

As a businessman, Trump well knows that imports are good for the economy. Many of his Trump-branded products used foreign sources, his hotels tapped guest worker visas, and so on. Though his inaugural address came across as oldschool protectionism, “buy American,” etc, Trump’s campaign was more nuanced  Rather than rail against trade deficits, Trump insisted that the U.S. should get better “deals.” He wants to increase U.S. exports more than he is looking to control imports. Or that is FMI’s belief (hope). 

Trump is correct that many, if not all, existing U.S. trade arrangements have been less than optimal. It is axiomatic that the person who wants a deal the most will be at a disadvantage in a negotiation. Trump probably wrote about it in his books (though we are not going to read them to check). The vast U.S. market is by far the biggest prize in international trade. Even the EU’s effort to cobble together a comparable market has fallen well short. Literally every nation wants access, many desperately so. Yet, the U.S. has always behaved as though it had to make the deal, make the concessions.

For most of the post-WWII era, this was the price of hegemony. Like the oversized American contributions to the United Nations and NATO, trade concessions were the bribes paid to tailor the world order more in-line with views of generations of U.S. leaders. In particular, American farmers have taken a beating, forced to accept barriers from inefficient producers in Europe and elsewhere. This mindset has continued. The TPP, for example, had various economic goals to expand trade, but it was also supposed to serve as an American-built check on China.

Now, Trump says it is time for a new trade order, one more focused on the U.S. bottom line. This may well reflect his lack of concern over the state of the “world order,” i.e., an indifference to the designs of rival powers. Or it may reflect his belief that a harder line will compel other nations to step up. Or both.

Regardless, if Trump wants to play hardball on trade, the advantage is his. Massively.  Critics have tallied up the costs of an imagined “trade war” with China, complete with surging prices at Wal-Mart et al. However, by any measure, China could not hope to win such a trade conflict and would never start one. The U.S. gets just under 1% of its GDP from exports to China In contrast China depends on the U.S. market for 4% of its GDP (Cover). The U.S. has greater exposure on imports, but it is not that difficult to find alternate sources for most.

To be sure, a protracted trade conflict would be a clear inconvenience for the U.S., but it would be an existential threat to China. Its real growth will plunge beyond the ability of Beijing’s most creative statisticians to conceal. In turn, slower growth will lead to civil unrest, which as Mr. Gorbachev would tell them, can quickly turn into revolution. 

For Mexico, the other subject of Trump’s ire, the asymmetry is far starker. Mexico depends on exports to the U.S. for more than a quarter of its GDP; In contrast, exports to Mexico comprise to barely more than +1% of the GDP for the U.S. If Trump demands any reasonable changes to NAFTA, or even not so reasonable ones, Mexico has no practical option but to grant them. Mexican leaders would suffer in the polls, but that is better than being blamed for a full-scale economic depression.

The U.S. and virtually all trading partners have signed on to World Trade Organization rules which limit the trade restrictions that any country can impose, but here is still significant flexibility. For someone like Trump well-versed in using the courts to his advantage, the U.S. could bend those rules, expecting to force the other party to yield long before the case can be adjudicated.

BILATERAL IS BETTER
Trump has basically put an end to all multilateral trade negotiations such as the TPP. By doing so, he improves the U.S. bargaining position immensely. On a one-on-one basis, the asymmetry will prevail. There is so much money to be made for a country that gets favorable access to the U.S. market that it is well worth meaningful concessions. Bilateral deals also eliminate the lowest common denominator problem. For example, current U.S. trade arrangements with the whole of the EU have to accommodate the demands of notoriously inefficient French farmers (as do internal EU arrangements, yet another stress on that troubled institution).

After the Doha round of global trade talks beagn to falter in 2001 (and was later formally buried in 2008), many feared there would be a backslide into protectionism. Instead, the U.S. negotiated dozens of bilateral (or small multilateral) pacts, as did other countries. That was Bush and Obama. Trump insists he can do better. We doubt that he can do worse.

Finally, I believe that not all trade negotiations will be hostile. The U.S. will surely and quickly conclude a pact witht eh post-Brexit UK, for example. (Undoing another Obama pledge, to push the UK to "the end of the line"). At minimum, this will replicate the advantages both parties enhoy under current U.S.-EU arrangements. It is likely that the new deal will be even closer to true free trade (i.e., no French farmers in the way)

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