The World Isn’t Waiting for Trump on Trade an hour ago
During the campaign, Donald Trump slammed current and potential U.S. free-trade deals, called for possible tariffs on China, Mexico, and other countries, and promised to use the presidential bully pulpit to attack companies that outsource. In the transition, he’s appointed a U.S. trade representative known for fighting to impose punitive tariffs, lashed out at companies he believes have outsourced jobs from America, and created a special office on trade and industrial policy to be led by an extremely harsh critic of free trade. While it seems unclear how committed Trump is to many of these promises—he also chose a U.S. ambassador to China with long experience promoting bilateral trade—the president-elect has already triggered a counterreaction in global trade and business, showing that other countries aren’t going to wait for him to act. They’ll go ahead and determine their own economic futures.
The biggest beneficiary may be China, which is positioning itself as the defender of the global economic order. In a speech to the Asia-Pacific Economic Cooperation forum in late November, Chinese President Xi Jinping, obviously commenting on Trump’s election, urged Asian and Pacific nations to “deepen and expand cooperation in our region” and announced that, no matter what happens in the U.S., Beijing would take the lead on promoting global economic ties.
Despite Trump’s investments and branding deals across South and East Asia, many business leaders and economic officials in the region feared his election. One of their greatest concerns is likely to come to pass: Trump has vowed to withdraw the U.S. from the biggest potential free-trade deal, the Trans-Pacific Partnership, on his first day in office. A few Asia-Pacific leaders called on TPP signatories to finalize the deal even without the U.S. in it, but Japanese Prime Minister Shinzo Abe denounced that idea, saying the “TPP is meaningless without the United States.”
Only days after Trump’s election, leaders from Australia, Malaysia, and other nations that promoted the TPP changed course and embraced a rival China-led agreement, known as the Regional Comprehensive Economic Partnership, which Beijing has been pushing for years. The RCEP, which pointedly excludes the U.S., would allow China much more influence to set regional trade rules and norms.
Many Asian nations—longtime U.S. partners—are fearful of China’s rising influence, even though they accept that they’re becoming more dependent on Chinese trade and investment. Beijing retains many state-owned companies, and other Asian nations worry that China might use the RCEP to protect the power and influence of those enterprises. The RCEP contains weaker environmental and labor standards and fewer tools to ensure intellectual-property protection. It also would likely provide only a small initial boost to growth in poorer nations such as Vietnam, which would have benefited massively from the TPP, according to the Peterson Institute for International Economics. The RCEP will lead Asian companies to favor trade with companies in countries that are part of the China-backed trade deal; the White House’s Council of Economic Advisers estimates that the passage of the RCEP will lead U.S. industries that now export more than $5 billion in goods to Japan to lose market share to Chinese exporters.
Many Asian officials privately say they would still prefer the TPP but will support any deal that even marginally maintains the momentum for trade in Asia. They also say they could eventually support a broader, regionwide trade deal known as the Free Trade Area of the Asia-Pacific that also excludes the U.S. (and includes China). Leaders of Asean, the Southeast Asia regional organization, recently proposed another trade pact that would expand the deal covering the region to include other Asian economies.
While some Asian businesses are trying to use their ties to the president-elect to bolster their companies, there appear to be many more searching for ways to ensure their businesses grow even if the U.S. embraces protectionism. Many aren’t waiting for the RCEP or another replacement TPP deal to be completed to examine the long-term risk of investing in the U.S. for the next four years, or for the possibility that Trump will deliver on his suggestions of a 5 percent or 10 percent tariff on imports.
Japanese companies, for example, are ramping up their ties and investments in Southeast Asia and Latin America, even as Trump attacks by name prominent Japanese manufacturers such as Toyota, which he threatened to punish for putting factories in Mexico. Leading Japanese companies joined Abe on a visit to Argentina in November, where he signed 57 trade deals with Buenos Aires. Chinese companies and Beijing appear ready to increase the value of Chinese technology exports and ensure that the nation’s businesses are less dependent on sales to U.S. customers.
Trump and his border wall have so alarmed Mexico’s leaders and businesspeople that the country’s economy minister is looking to negotiate new trade deals with Asia-Pacific economies as soon as possible. Many Mexican businesses—and international companies with manufacturing operations in the country—are scrambling for backup plans to move operations dependent on the U.S. market in case the new administration follows through and substantially changes the North America Free Trade Agreement. Canada, whose economy is heavily dependent on trade with America and which stands to be hit hard by any significant changes in Nafta, signed a free-trade deal with Europe in the fall. Canada is also working to sign agreements with South American and Asian states.
Some senior Republican officials are privately worrying that other major economies are much better equipped to adapt to U.S. protectionism in the long run than the incoming administration believes. The Trump transition team has offered no clear clues about how it will address the possible impact on the U.S. if other countries respond to potential tariffs by erecting their own to American exports, or by taking the U.S. to the World Trade Organization over and over. Meanwhile, Indian politicians and companies in Hyderabad and other tech hubs are welcoming the prospect of Trump cutting highly skilled legal immigration to the U.S., saying it will lead to more jobs being created in India, including for American companies with offices there.
The potential for financial mayhem is huge. After all, China isn’t just a target of Trump’s anger over supposedly unfair trade deals but also America’s largest trading partner and the biggest holder of U.S. Treasuries. U.S. companies have spent billions of dollars building manufacturing operations in China, Mexico, Vietnam, and many other countries. Chinese and European leaders already have made veiled threats of countertariffs—including reductions in purchases of U.S. agricultural and manufactured products—if the U.S. erects trade barriers.
In the long term, a protectionist shift in U.S. policy is likely to backfire. It will probably exacerbate some of the patterns of economic and financial deglobalization—that is, globalization in reverse—that have existed since the 2008-09 worldwide downturn. According to reports by the WTO, trade flows have sharply slowed since 2007 and might decelerate further in the Trump years. European and Asian banks, which have already slashed foreign lending because they’re subject to rules promulgated after 2008 to bolster capital requirements, may keep more of their money at home as well. This would further reduce international capital flows, especially to developing nations, where companies have little ability to raise their own money through domestic banks and local stock markets. That will certainly affect their ability to buy U.S. goods. American exports contribute about 14 percent of gross domestic product, and that figure is rising each year. And so while Trump is ramping up for trade conflict, the deglobalization it’s promoting will undermine the very prosperity that he’s promised to deliver.
Kurlantzick is senior fellow for Southeast Asia at the Council on Foreign Relations and author of A Great Place to Have a War: America in Laos and the Birth of a Military CIA.