Under Donald Trump, America may go from trade rule-maker to rule-taker

Matthew P. Goodman says that as the Trump administration escalates the trade conflict and undermines prior agreements, one consequence will be that it is no longer active in writing the trade guidelines that have been beneficial to American interests

Trade

Matthew P. Goodman

Published: 5:00pm, 3 Aug 2018

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Critics of Donald Trump’s trade policies are understandably focused on the damage to short-term US economic interests and to the broader global economic order. These costs are real and measurable. But the most lasting impact of Trump’s approach could be to concede to others the role the United States has played since the second world war as the leading rule-maker in the global economy. Early signs of this shift are appearing around the world, from Brussels to Hanoi to Beijing.

The tally of economic harm from Trump’s tariffs on steel, aluminium and US$34 billion worth of goods from China (so far) is getting longer and more specific. It ranges from anecdotes about workers being laid off in US manufacturing plants dependent on imported steel to a new estimate by the International Monetary Fund that, if Trump follows through on his pledge to tax another US$200 billion of Chinese imports, this will knock half a percentage point off global growth by 2020.

The Peterson Institute for International Economics has estimated that imposing a 25 per cent tariff on imported automobiles and auto parts, as the Trump administration is threatening to do by the end of the summer, will cost nearly 200,000 American jobs – or more than triple that number if other countries retaliate.

Trump’s harsh trade actions and statements have also rocked the global system of institutions and rules that the US created and championed for 70 years. This may not be the president’s intent, but it is an approach that will have real costs for US economic and strategic interests. The use of Section 232 of a cold war-era trade law for the transparently commercial objective of limiting competition from imported steel and automobiles violates the spirit, if not the letter, of World Trade Organisation rules and gives licence to other countries like China to cite “national security” as an excuse for protectionism against US exporters and investors.

Trump, China and Europe: one enemy at a time please

Meanwhile, antagonising allies like Canada, the European Union and Japan has visibly undermined their willingness to join Washington in pursuing shared objectives, such as challenging China’s mercantilist policies.

The shift of the US from global rule-maker to rule-breaker is likely to end in the country becoming a mere rule-taker. Indeed, US allies and other trading partners are moving ahead with economic arrangements that do not include the US on terms that are likely to harm US interests. The EU and Japan this month signed a sweeping economic partnership agreement that will establish new trade rules for an economic area representing over one-quarter of the global economy.

Among other things, Tokyo agreed to provide special protection to over 200 EU “geographical indications”, regional food and beverage brands like Gorgonzola and champagne that Brussels claims deserve special protection. If this becomes the global standard, Illinois-based Kraft Heinz will no longer be able to sell its ubiquitous green containers of “Parmesan” under that name.

European Council president Donald Tusk (right) and European Commission president Jean-Claude Juncker (left), alongside Japanese Prime Minister Shinzo Abe, shake hands at Abe's office in Tokyo on July 17 after signing a free trade deal between the EU and Japan. Photo: Kyodo

What Europe needs from Beijing to be a better friend to China

Even more potentially damaging to US interests are the provisions in the EU-Japan agreement on digital trade. Because of political sensitivities about personal privacy in Europe, Brussels resisted Tokyo’s pressure for a binding agreement on free flows of data. Instead, the two sides agreed to recognise the “adequacy” of each other’s privacy regime, enabling transfers of personal information but not enshrining the principle of free data flows as an enforceable commitment. This sent a bad signal to the many countries around the world that want to require data to be stored in local servers and to restrict cross-border flows.

Binding commitments not to engage in such data-localisation practices, along with an array of other digital disciplines, were a centrepiece of the Trans-Pacific Partnership (TPP), the comprehensive trade agreement negotiated under US and Japanese leadership that Trump, in one of his first acts, walked away from.

As Beijing points fingers internally, Trump moves to contain China

Vietnam's Prime Minister Nguyen Xuan Phuc delivers the main socioeconomic report at the National Assembly in Hanoi in October 2017. In June, the National Assembly passed a cybersecurity law placing restrictions on internet companies wishing to operate there. Photo: AFP

Vietnam is a TPP member that has already taken advantage of the US absence from the table to carve out its own unhelpful approach to digital issues. In June, the country’s National Assembly adopted a cybersecurity law that, among other things, requires internet companies like Facebook and Google wishing to access Vietnamese users to open offices in the country, store their Vietnamese customers’ data on local servers, and remove online content within 24 hours at the government’s request.

The US embassy in Hanoi was sufficiently concerned that it issued a public statement warning that the new policy could violate Vietnam’s international trade commitments – a protest that would carry more weight if the US were still a member of TPP and not undermining the WTO.

All of this is music to Beijing’s ears. As my colleague at the Centre for Strategic and International Studies, Samm Sacks, recently wrote, China is on a “mission to write the rules for global cyber governance”. Beijing’s preferred approach includes not only localisation requirements and restrictions on outbound data transfers, but also pushing out Chinese technical standards and Beijing’s vision of “cyberspace sovereignty”. As Sacks says, this “crashes headlong in the foundational principles of the internet in market-based democracies: online freedom, privacy, free international markets, and broad international cooperation”.

Beijing’s newfound role as global rule-maker extends beyond trade to its ambitious plan for Sino-centric connectivity under the Belt and Road Initiative. In late June, the Supreme People’s Court in Beijing enacted provisions to establish two courts to mediate disputes related to the belt and road plan, one based in the southern city of Shenzhen to handle disputes arising along the maritime “road”, the other in Xian to handle cases along the overland “belt”.

No doubt a legal mechanism to manage inevitable commercial disputes in belt and road projects is necessary, but the fact that Beijing opted to set up its own courts rather than rely on existing international arbitration centres in Hong Kong, London and New York shows that there is a powerful new rule-maker on the global stage.

Some in the Trump administration appear to have woken up to the dangers of letting others write the global economic rules. On July 30, Secretary of State Mike Pompeo and other senior administration officials laid out an economic and commercial vision for the Indo-Pacific region. A credible trade and investment strategy will help replace the destructive tariff-based approach with one that puts the US back in its traditional role as global rule-maker and norm-setter.

Matthew P. Goodman holds the William E. Simon Chair in political economy at the Centre for Strategic and International Studies. Distributed by Pacific Forum CSIS. Copyright: Pacific News Service

This article appeared in the South China Morning Post print edition as: Trump the rule-breaker

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