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Trade

TPP survives but Donald Trump’s retreat from globalisation is likely to remain, creating an opening for China to take the lead

  • Rodrigo Zeidan says China and India are poised to be the two largest economies by purchasing power parity by 2050
  • The US is likely to ignore or even seek further retaliatory measures as the Regional Comprehensive Economic Partnership (RCEP) moves towards its final design
PUBLISHED : Saturday, 03 November, 2018, 1:03am
UPDATED : Saturday, 03 November, 2018, 11:21am

Shooting oneself in the foot is par for the course in poor countries, but rich countries usually know better. This has not been the case recently. US President Donald Trump has withdrawn his country from the Trans-Pacific Partnership (TPP), forced a renegotiation of the North American Free Trade Agreement (Nafta), raised tariffs on US$250 billion worth of Chinese exports and imposed quotas on steel and aluminium under the guise of national security threats.

This protectionist wave has created headwinds against the American economy and rippled through international markets, pushing down stock prices and disrupting global supply chains. The Shanghai Composite Index is at a near four-year low and yuan has slid more than 7 per cent in 2018 partly because of the effect of US tariffs on U$250 billion of Chinese exports.

Meanwhile, the TPP has moved ahead without the US. The agreement initially covered 40 per cent of the world’s GDP and although that has been reduced without the US, the pact will come into effect at the end of the year and remains a meaningful agreement. Of course, its importance may yet be superseded by the Regional Comprehensive Economic Partnership (RCEP), a multilateral agreement led by China.

The US could still reverse course on the TPP but it is unlikely. For politicians, trade agreements are similar to public infrastructure projects: they crave shiny new things and rarely show the willingness to improve on old ones. And there is no chance the US will reverse course before Trump leaves office.

The 45th President of the US might seem erratic on many issues but not on trade. Trump and Peter Navarro, his main adviser regarding trade policies, have been unrelenting in their drive to reduce America’s trade deficit, even at the expense of the well-being of average Americans.

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There is a joke that says that 99.99 per cent of all economists favour free trade and the rest are Peter Navarro – and there is some truth to that. Trump’s trade war is hurting the people he promised to help. Tariffs are hurting some of America’s biggest companies, such as Apple.

The Chinese tariffs alone may cost the US more than 94,000 jobs. A precious few companies stand to benefit but most American companies lose by the spike in input prices, a weaker yuan and fewer sales due to rising prices for consumers.

In the past, we could count on America to be the adult in the room, leading globalisation. We might have expected the US to respond to the RCEP by strengthening the WTO, expanding the TPP or designing new trade agreements. No more. The US is likely to ignore or even seek further retaliatory measures as the RCEP moves towards its final design.

The RCEP gained importance following the US withdrawal from the TPP. Members were initially attracted to it to maintain relations with China, its chief promoter, and to hedge against the TPP. But the long-term impact of the RCEP might outstrip the TPP’s – even with US participation in the latter.

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After all, the 16 countries that form the RCEP have a combined population of 3.4 billion people. China and India are poised to be the two largest economies by purchasing power parity by 2050 – China alone should account for 20 per cent of the world’s GDP.

The agreement that paves the way for multilateral cooperation between these countries could be expanded in the future to include other countries dissatisfied with US trade policies.

The US might eventually return to its liberal traditions and come back to the table but not before Trump leaves office. The world is still coming to terms with America’s new-found affinity for protectionism.

The WTO is swamped with trade disputes that emerged as a response to America’s steel and aluminium tariffs. The organisation will find many obstacles in designing retaliatory policies that have teeth. This brings us to the question: what next?

Other countries can choose to lie low and live with higher tariffs on its exports, retaliate against the US or look for alternative paths to navigate a suddenly fragmented global order.

China has wavered between taking the high road and designing tit-for-tat policies such as increasing tariffs on American exports. At the same time, it is seeking to expand its role in the global order.

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Many analysts do not understand the importance of symbolism in Chinese politics. The attendance of President Xi Jinping and politicians and business executives from about 150 countries at the China International Import Expo is a clear sign China is not seeking to emulate the US in taking a protectionist turn.

This will better suit Chinese consumers and companies – and perhaps even the global order – than tit-for-tat policies. The world may yet avoid the protectionist pitfalls. But it will be a close call.

Professor Rodrigo Zeidan is Associate Professor at NYU Shanghai and Visiting Professor at Fundação Dom Cabral