The White House, contrary to appearances, seems to have orchestrated a coherent approach to trade. Its agreement with the EU to erase all trade barriers and subsidies will not only put pressure on China, but it also improves the framework for negotiation for the first time in some 35 years.
US-EU Trade War: Perhaps Not. Getty Getty
For a man commonly associated with impulse and chaos, Trump seems to have orchestrated something remarkably coherent on the trade front. Of course, there is the appalling tit-for-tat tariff game with China. That is hardly encouraging, not least because the back and forth has also involved insults from both sides. But otherwise, the application of White House policy looks rather well organized. Indeed, the White House has not only marshaled global trade directions to help in his Chinese fight, it seems to have reframed trade issues in constructive ways not seen for some 35 years. For all this, matters will not correct this country’s trade deficit.
Indicative of this impressive change are the current negotiations between the United States and the European Union. Since July, when these two huge economies stood on the brink of all out trade war, and European Commission President Jean-Claude Junker met with President Trump at the White House, both parties have talked amicably of simply removing all tariffs and non-tariff barriers, as well as subsidies. Such steps remain a long ways off, since the effort will necessarily involve a harmonization of complex regulatory and labeling guidelines. Still, just such talk contrasts with the kinds of discriminatory trade positioning that has otherwise prevailed since the 1980s.
Over this long period, the dominant frame of reference on trade called for what economists refer to as preferential trade agreements (PTAs). The North American Free Trade Agreement (NAFTA) and the Trans Pacific Partnership (TPP) stand as indicative, as does the Transatlantic Trade and Investment Partnership (TTIP). These, and other agreements like them, elaborate reductions in some trade restrictions only for the signatories. Otherwise these agreements have imposed or would have imposed sometimes-punitive trade barriers on the rest of the world. In contrast to this otherwise exclusive approach, today’s framework aims at across-the-board reductions in trade barriers and distortions of every sort. To be sure, this newer approach must cover much the same detail as the PTAs did, but the approach, unlike the PTAs, implicitly invites other economies to join the effort and enlarge the impediment-free zone.
Indeed, today’s efforts resemble the trade approach taken by the United States during the four decades following the Second World War. Then, Washington eschewed PTAs in favor of efforts to promote free trade globally. Under the auspices of the General Agreement on Tariffs and Trade (GATT), the precursor to today’s World Trade Organization (WTO), Washington insisted that all nations simply rid themselves of tariffs and non-tariff trade barriers. It actually succeeded in large part through a series of negotiations, called “rounds,” the last of which, called the Doha Round after the venue where negotiations began, failed earlier this century when the EU, which constitutes the world’s largest PTA, refused to give ground on agricultural subsidies and preferential treatments, including tariffs. Given this history, it speaks to how matters may have turned a corner that the EU’s good will gesture last July included easing restrictions on American soybeans.
Especially because the White House and the EU are trying to spread this new framework, it has the potential to put considerable pressure on China. Beijing is already suffering other pressures in its contest with the United States. Its effort to meet Trump’s tariffs dollar for dollar have reached a limit, because China’s exports to the United States are so much larger than American exports to China and because they are much more important to China’s economy than U. S. exports to China are to the U. S. economy. Now this latest turn in the framework of trade talks puts Beijing in a still more awkward spot. By bringing up the need to harmonize regulatory regimes, recent, more universal efforts have brought to light how much difficulty most nations, including the United States and the EU, as well as Japan, have with Beijing’s approach to trade, most especially its insistence that any firm entering the Chinese economy must have a Chinese partner and that it also must share its technological and commercial secrets. If recent trade directions gain momentum, China would have to lift such rules or risk the kind of trade isolation that its economy can ill afford. Matters have not yet gone far enough to place Beijing at a decision point, but China’s leadership surely knows how these new directions could do so.
If all this offers more promise than the formerly dominant PTA approach, it will not correct the U. S. trade deficit, as President Trump has promised. That is less a result of trade deals — good or bad, preferential or not — than the dollar’s role as the world’s reserve currency. Because so many import and export contracts are denominated in dollars, companies around the world, foreign and domestic, hold more dollars than they otherwise would just to conduct business. And because so much trade is conducted in dollars, firms and individuals, as well as governments, hold more investments in dollars than they otherwise would. The resulting chronic demand for dollars keeps its value higher in terms of other currencies than it otherwise would be. American goods and services accordingly become more expensive to the rest of the world than they otherwise would be and foreign goods and services become cheaper to Americans. The difference creates the U. S, trade deficit on goods and services. It will remain. The best trade deals can do is act on the margins. That said, the turn in the framework of trade talks is otherwise encouraging.
I consult on economics and investment strategy and serve as chief economist for the NY-based communications firm, Vested. I am a contributing editor for The National Interest and an affiliate of the Center for the Study of Human Capital and Economic Growth at the University…
Ezrati writes on markets, economics, and is senior economist for the NY communications firm, Vested https://fullyvested.
