By Jeff Ferry, CPA Research Director
Two developments in recent days provide an early indication that the Trump Administration is determined to take a new approach to international trade. And it looks like this new approach is aggressively focused on trade agreement reform and policies that could lead to higher U.S economic growth.
First was last weekend’s meeting of the Group of 20 (G-20) nations finance ministers in Baden-Baden, Germany. The finance ministers agreed on a “communiqué” to form the basis for the July meeting of G-20 heads of state. U.S. Treasury Secretary Steve Mnuchin was the “new kid in school” at the meeting as most of the other finance ministers have attended many previous such get-togethers. But instead of standing shyly at the back of the room, Mnuchin demanded that a phrase about “resisting protectionism” be removed from the communiqué. According to press reports, officials from China and France argued in favor of retaining this hoary old phrase. Never mind that the Chinese and the French speaking out against protectionism is a bit like Warren Beatty or Brigitte Bardot speaking out in favor of chastity; in the end the others yielded and that phrase was replaced by an apple-pie pledge to work to “strengthen the contribution of trade to our economies.”
That’s significant because it shows that the Administration is determined to fight its corner in international forums. It’s also significant because Mnuchin, a Goldman, Sachs veteran, had not said much about trade policies before last weekend. Mnuchin has now made it clear he is supporting President Trump’s desire for a new aggressive trade policy. “I couldn’t be happier with the outcome,” Mnuchin told the press after the meetings. He added that the Administration wants to better enforce WTO rules and renegotiate some trade agreements. “Mnuchin is an articulate, constructive, and pragmatic man,” commented European Commission minister Pierre Moscovici, surprising praise from a French Socialist!
Meanwhile, the emergence of a list of 24 points to guide the negotiation of new trade agreements provides further insight into what Mnuchin and other Administration officials have in mind. The list was developed by Trump’s top trade advisor Peter Navarro, and passed to Sen. Pat Roberts (R-KS), who put it into the Congressional Record. The list shows that this Administration is set to take a much tougher approach to trade agreements than previous Administrations. Point 1 on the list, “Rules of origin percentages and loopholes,” is likely to include tightening up NAFTA to make it harder for imports to Mexico from other countries integrated into Mexico-made parts or products to count as Mexican. Another important point (#9) is the renegotiation of Chapter 19 of NAFTA, dealing with dispute resolution under NAFTA. The existing rules have led to the U.S. losing a number of cases where it sought to apply anti-dumping duties to Canadian products like lumber. Chapter 19’s complex bi-national procedure short-circuits U.S. sovereignty and needs to be fixed.
Another important point (#4), currency manipulation, suggests the Administration is focused on getting currency manipulation into trade agreements, so that undervaluation of a currency can be seen as a violation of free trade principles and punished accordingly. The undervaluation of various foreign currencies, and the overvaluation of the dollar have cost the U.S. billions or trillions of dollars of lost net exports over the last three decades and played a significant role in hollowing out our manufacturing base.
Point #15, Country of Origin Labeling, refers to the 2015 decision by Congress to comply with a WTO ruling and remove such labeling from certain kinds of meat products. Polls show the American people want to know where their food comes from, and this ruling, like other WTO rulings, is profoundly undemocratic.
Labor groups will be pleased to see that the list includes a point (#5) on “strict environmental and labor standards,” because U.S. workers cannot compete against workers forced to work in sweatshops in the midst of polluted cities. And the technology industry should be thrilled to see intellectual property protection (#6) and technology transfers (#24) on the list, as these issues have featured as tactics used by Asian countries to force U.S. tech companies to give up their “crown jewels” if they want entry to Asian markets.
Still another important point (#11) is government procurement. It’s not clear exactly what the Administration is looking for here. But what is clear is that the U.S. government has thrown open far more of its government procurement process to foreign bidders than they have to ours. With a trillion-dollar infrastructure spend proposal anticipated to reach Congress later this year, it’s critical that the Administration take action to ensure that spending goes on U.S.-made goods and services.
Of course, the hard work is still to come. All these objectives must be negotiated with our trading counterparties, many of whom will not just roll over and agree to change practices that have helped them run large surpluses with the U.S. for decades. And if they don’t agree, then the Administration needs to reach for a bigger bazooka. But the signs so far are that, despite all the political noise in Washington, the merits of a pro-growth trade policy are beginning to win more adherents. Senate Minority Leader Chuck Schumer (D-NY) recently told us he’s working on a Democratic trade bill aimed at getting China to stop some of its trade cheating practices.
Last week, respected bond investor Mohammed El-Erian commented that the U.S. has an excellent chance of achieving its trade objectives because other nations know they would lose in the event of a trade war (a point we made earlier this month here).“Should the world end up in a trade war, the damage to the economy would likely be less than that felt by many, many other countries.” El-Erian wrote. “If rational behaviors prevail, the more likely outcome is a series of renegotiations that keep trade open but realign certain governing practices and procedures in favor of the U.S., including those that pertain to non-tariff barriers and standards. It is a world in which the U.S. gains economically.”