Would it matter if the US walked away from trade agreements such as NAFTA?

Gwadar Port is a tax-free, warm-water, deep-sea port situated on the Arabian Sea at Gwadar in the Balochistan province of Pakistan. Wikimedia Commons CC BY-SA 3.0

By Joseph Dana | May 30, 2017

This month, amid an unfolding domestic political crisis, US President Donald Trump began the process of renegotiating the North American Free Trade Agreement (NAFTA). Trump’s newly appointed trade representative, Robert Lighthizer, notified Congress that fresh trade talks would take place within 90 days to decide the future of the 23-year-old trade agreement.

The debate about the future of NAFTA, and what provisions might arise from renegotiating it, has rekindled long-running discussions about multilateral trade agreements (MTA), the US’s place in them, and the rise of bilateral trade agreements (BTAs). Would it matter if the US withdrew from major MTAs such as NAFTA? Can the US and other powerful economies forge a new future of BTAs that replace MTAs? Does the potential shift to BTAs contain an opportunity for emerging markets around the world?

Role of populism in rethinking trade

As a candidate, Trump rose to power partially on a wave of populist frustration stemming from perceived negative effects of MTAs. Many Trump supporters view agreements such as NAFTA and the Trans-Pacific Partnership (TPP) as vehicles for job exports and the decline of the US manufacturing sector. They see these multi-country agreements as eroding US bargaining power, and thus resulting in bad deals for the country’s workers. Politicians from across the US political spectrum, including Democratic candidate for president Bernie Sanders, have embraced some aspects of this economic perspective.

Within three days of assuming office, Trump formally withdrew the US from the TPP. Meanwhile, China, the world’s other economic superpower, has been pushing forward with its proposed One Belt, One Road (OBOR) initiative. In simple terms, OBOR is an attempt to extend Beijing’s political and economic clout from Asia to Europe, with massive infrastructure projects that will reduce the time it takes for goods to reach their destinations. The aim is to ensure all roads lead to Beijing. As Washington signals its desire to rewrite the rules of the world economy, Beijing has responded with its own plans to entrench its economic power globally.

One Belt, One Road Corridor

One Belt, One Road Corridor
Source: The Economist, 2016

Protectionism and bilateral trade

The arguments for and against BTAs are not new. Given the size of its economy, some US politicians believe the country should demand more favourable trade provisions inside BTAs as opposed to going for MTAs, which are subject to the agendas of more countries.

Trump shares this economic view. The president believes he will be able to craft trade agreements on a country-by-country basis that will be advantageous for US exporters, and consumers. He wants to use the size of the US economy to persuade smaller countries to enter BTAs that eliminate barriers to trade, and favour the US. But is Trump’s assessment correct? Can the US eliminate barriers to trade that favour its economy with more ease in bilateral agreement negotiations?

Bilateral and Multilateral Free Trade Agreements: China vs US

Bilateral and Multilateral Free Trade Agreements: China vs US Sources: Office of the United States Trade RepresentativeChina FTA Network, accessed May 2017

“Trump is completely wrong that TPP would have been a disaster,” Haufbauer noted. “I think he is completely wrong in thinking he will get a better deal with this bilateral approach – but he is going to ask for a lot more. He may get some countries to sign on to his ‘ask’ – but we will see how far he gets.”

When unpacking Trump’s views on BTA, it is critical to bear in mind certain World Trade Organisation (WTO) principles concerning the ‘most favoured nation’ (MFN) status. While further discussions on the matter are stalled in the WTO’s Doha Development talks, there are certain MFN clauses that could give favourable terms to countries outside of a BTA negotiation.

Will Japan forge its own path?

When Trump pulled out of TPP in January 2017, several countries expressed concern about US disengagement from Asia, just as China ramped up discussions about OBOR. While Australia and New Zealand have been vocal in creating a new TPP agreement without the US, Japan finds itself in a difficult situation. After the trade wars of the 1980s between the US and Japan – in which Japan was cast as an unsavoury economic adversary and tariffs were slapped on Japanese goods such as cars – Tokyo’s options are limited, given its concerns about US engagement in Asia under the Trump administration. A BTA with Washington that opens up Japan’s agricultural sector could be one way to ensure the US remains engaged in the wake of the TPP.

Japanese officials have already echoed their US counterparts by underlining their commitment to free trade “as a source of economic growth” while some US politicians have vociferously pushed for a trade agreement that will open up Japan’s protected agricultural sector. Writing in Business Insider, US Senator John Thune, a member of the Senate Committee on Commerce, Science, and Transportation, noted that “US trade negotiators made major progress on these trade barriers as part of TPP, and it is critical that we take advantage of the work they did by reaching a bilateral agreement with Japan without delay”.

If Japan bends to US demands in the context of a bilateral trade agreement, including the opening up of its agricultural sector in exchange for lower import tariffs on its cars, the Trump administration would have plenty of room to push for a wave of new BTAs to replace the MTAs. Similarly, if Japan rebukes the US and instead turns to MTAs along the lines of the TPP, the US could be forced to rethink its bilateral push.

All roads lead to Beijing

As the US pivots away from multilateral trade, at least rhetorically, China is pushing forward with its own attempt to entrench its position in global commerce. At a lavish international conference in Beijing this month, China reaffirmed its commitment to OBOR as a way of expanding trade across the emerging world.

Beijing’s vision is forecasted to connect one-third of global GDP, and a quarter of all goods and services in the international economy, to China through infrastructure projects in Central Asia (ostensibly along the ancient Silk Road), and new sea trading routes in South Asia. Having already raised $1trn in investment capital, China is paying for new roads, tunnels, bridges, pipelines, ports, and rail lines across emerging markets from Mongolia to Kenya.

Both the US and China are refining their political visions for the future, and studying how economics can fuel them. For the Chinese leadership, all roads should lead to Beijing through the creation of massive infrastructure projects that will make trade faster, and bring several countries firmly into the Chinese economic (and political) sphere of influence.

The US, on the other hand, seems prepared to embark on a similarly ambitious task of rewriting global trade’s last 40 years. Using its weight, the Trump administration wants to give certain countries preferential treatment through bilateral agreements that place US exports first. While the US could, in theory, walk away from MTAs such as NAFTA, and China could see its vision of a new silk road become reality, the fact is change will not occur overnight. Despite China’s already significant investment capital for OBOR, there are many reports of projects stalling due to mismanagement and oversight.

Emerging markets opportunities

It is no secret that emerging markets are dependent on trade and capital from large economies. For example, Mexico’s exports to the US account for 25% to 30% of its GDP, and these exports happen under the auspices of NAFTA. While Mexico has defended NAFTA, its economic relationship with the US is predicated on more than one MTA, and is currently at risk due to aggressive statements concerning immigration.

As emerge85 argued with regards to African emerging markets, increased competition between emerging markets, especially in the services sector, is enabling some countries to place less emphasis on trade with larger economies. But this is a not a viable long-term solution as emerging markets can’t avoid external integration with larger economies.

The emphasis on intra-emerging market trade in the era of BTAs could serve an important political purpose. Emerging market politicians from Latin America to South Asia are regularly forced to stave off criticism that BTAs with powerful countries are bad for the independence of their countries. For example, for several decades in Latin America, there has been strong support for populist leftist leaders who reject FTAs with countries such as the US, fearing that such agreements lead to massive privatisation, rising inequality, and other neoliberal reforms that erode social welfare programmes.

Incidentally, China’s attempts to expand its own economic power through the OBOR raise similar concerns. For proof of this, one need not look further than the effects OBOR is already having in certain parts of Africa. While China promises billions in infrastructure projects across Africa, some analysts are concerned about what the infrastructure will be used for. Chinese products are flooding African markets but African products are not finding the same sticking power in China. In a more radical light, as Eric Olander, founder of the China-Africa Project recently argued, that OBOR is looking increasingly like an old colonial route, where resources are extracted from colonies and finished goods are sold back to them.

The benefits of multilateral trade agreements such as NAFTA have been exaggerated, creating anger about the results of such agreements. The renegotiation process is, however, fraught with danger for countries such as the US. To use the NAFTA example, the Mexican economy has matured sufficiently in two decades to a point where the country has its own BTAs.

Insistence on unsustainable trade provisions inside multilateral trade agreements could end up pushing Mexico into the arms of more equitable trading partners. Coupled with the rise of intra-emerging market competition, many emerging markets have more choices in trade than before. Yet, expanding domestic and regional markets via intra-emerging market FDI and trade cannot fully substitute external integration for emerging markets, given the importance of developed countries in international trade.

Regardless of Trump and his ideas on redrawing MTAs, global economic integration will continue. Hurdles such as tariffs that impede economic efficiency that capital demands will not be sustainable in the long term. The US and emerging markets must respect these new truths if they intend to remain competitive in the global marketplace.

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