Inside Out

Playground rule explains Trump’s disdain for global trade

The playground bully prefers one-on-one fights, but bilateral trade deals are costly, inefficient and unaffordable especially for small economies and businesses.

PUBLISHED : Monday, 20 March, 2017, 8:00am
UPDATED : Monday, 20 March, 2017, 8:00am

Donald Trump and his White House team have twittered a lot of terrible trade ideas to the world.

One of the worst is his seeming love affair with bilateral trade agreements.

Just as bad, we have the Brexit-obsessed government of Britain’s Theresa May building big plans for dozens of new bilateral trade deals to rebuild from Britain’s ruinous exit from the European single market.

As a matter of extreme urgency – before either Trump or May’s government inflict serious harm on global trade and the competition and productivity gains that lowered consumer prices for the world for three decades – we in business need to remind them why bilateralism is bad for us all.

Bilateral deals may not be as bad as outright trade wars and protectionism, but they are terrible compared to multi-country deals (what trade negotiators call plurilateral deals), or best of all global multilateral commitments being enforced by the World Trade Organisation (WTO).

To be fair, government interest in bilateral deals has not suddenly jumped out of the woodwork from nowhere in the past six months. From a high watermark in 1994 with global agreement on the Uruguay Round of trade liberalisation, and the establishment of the WTO, commitment to the multilateral trade liberalisation process has wilted.

Trump was crazy to kill it [the Trans-Pacific Partnership], and if in due course it is revived to exclude the US and embrace the other 11 participants, then US companies will pay a significant price

The disastrous quagmire of the Doha Development Round, launched in 2001 and now languishing in its self-made cemetery, sapped all interest in the consensus-based multilateral process that allowed any one of the WTO’s 150-plus members to veto any agreement.

Liberalising governments faced with the choice of no progress or bilateral progress, opted for the bilateral – not because bilateral deals were helpful, but because they were better than slippage back into xenophobia and protectionism.

Over the past two decades, Chile has forged 27 bilateral trade deals, Singapore 25, Korea 22, Peru 18 and the US had 15.

For most of us in business, this is make-work for government bureaucrats that has delivered almost nothing of value to businesses, small or large.

From that point of view, the Hong Kong government’s unflinching preference for the WTO and multilateralism is sensible, even if frustrating in the current pro-bilateral mood. Hong Kong has just four bilateral FTAs, and from a business point of view, it should stay that way.

There is one obvious possible exception to this generalisation, and that is the US, and US companies – which is perhaps why Trump and the White House team are so seduced by the idea of bilaterals at the heart of future trade policy.

The playground bully will always prefer to pick his fights one-on-one, rather than deal with the whole school yard all at once. The reason why China is such a passionate advocate of the WTO and multilateralism is that it does not want to get into a boxing ring to fight one-on-one against the US. And if China feels that anxiety, imagine the views of small economies like Brunei, Papua New Guinea or Peru.

But for most economies , and the businesses based in them, there are numerous powerful reasons why bilateral deals do more harm than good.

To name a few:

• A company in Chile, with 27 bilateral free trade agreements, has potentially 27 different sets of regulations, standards and licensing arrangements to comply with in trading with partners in those 27 economies. That’s great for lawyers, but horrendous for a company’s competitiveness. Each deal will have country-of-origin rules and requirements that dictate processes that have to occur in Chile if they are going to qualify for FTA privileges. That may be fine if you grow potatoes or tomatoes, but is hopeless in manufacturing spread across production chains in multiple countries.

• Legal compliance with multiple bilaterals is headache enough for huge multinationals with substantial in-house legal departments, but it’s an insurmountable obstacle for any SME. Any government anxious to help its smaller enterprises to win a foothold in international markets must regard bilaterals as a poison pill.

• Most companies engaged in international trade simply ignore bilateral trade agreements. They seek out natural competitive advantage across regions, and build their multi-country production chains around that competitive advantage. They simply ignore the FTAs and the privileges and preferences they claim to provide.

• Most bilateral deals exclude the tough, protected parts of the partners’ economies, and capture just low-hanging fruits. As a result, they do little to attack the core obstacles to trade and investment in an economy.

• Most bilateral deals focus only on at-the-border tariffs, and do little to liberalise services, or the behind-the-border barriers to trade and investment. But the most serious obstacles to trade and investment exist in services and behind-the-border barriers.

So our trade negotiators need to be clear: they are doing businesses no favours by spending thousands of hours, and millions of dollars of taxpayer money, negotiating bilateral trade deals.

If they want to make a difference – take note Mrs May – they must instead spend their time working on multi-country (plurilateral) deals, and making sure they embrace the tough behind-the-border reforms, rather than on-border tariffs.

If they want to make a difference – take note Mrs May – they must instead spend their time working on multi-country (plurilateral) deals, and making sure they embrace the tough behind-the-border reforms, rather than on-border tariffs

Any plurilateral arrangement – like the European Union, or ASEAN, or Nafta, or the Trump-vetoed Trans-Pacific Partnership – will be superior to a bilateral deal. At least these embrace a larger number of economies that can include meaningful manufacturing production chains.

To be really helpful, the deals need to penetrate behind the border to tackle the domestic regulatory barriers that so effectively keep international competitors at bay.

In that respect, the Trans-Pacific Partnership was truly a “gold standard” agreement that stood to offer huge benefits to US companies across the Asia-Pacific region.

Uniquely, it included commitments on trade facilitation, state-owned enterprises, environmental standards, labour laws, regulatory reform, transparency, competition policies, dispute settlement, and even capacity-building.

Trump was crazy to kill it, and if in due course it’s revived to exclude the US and embrace the other 11 participants, then US companies will pay a significant price.

As for the Brexit-obsessed British Government, the message is simple: forget the grand plan for a plethora of bilaterals.

Instead, work on building the UK (or what is left of it) into as many plurilateral and multilateral deals as possible.

As for Trump? Advice is neither welcome nor taken note of, so he will do what he will.

But US companies will not thank him if he tries to use bilaterals to “Make America Great Again”.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view