Trump trade policy

A View From Washington

A View From Washington

First is what might be called the “X Factor”—the multi-dimensional challenge posed by China under Xi Jinping to the U.S.-led international order, especially in the Asia-Pacific. There is an emerging consensus that the U.S. and China have entered a period defined by confrontation and competition that will be won or lost in the grey area short of kinetic action. At its core, this is a contest over divergent values and interests. It’s a contest between opposed political and economic systems, and between different visions for the future of Asia and the world writ large. On the political front, it’s a contest between authoritarian rule and democratic rule. On the economic front, it’s a contest between a state-led model and a market-based model. It’s a contest in which the U.S. must prevail. To compete effectively with China, it’s imperative for the United States to strengthen economic engagement in the Asia-Pacific through increased trade and investment, and not to succumb to protectionist impulses. I would note that every U.S. multinational enterprise worth its salt understands that they cannot be a successful global company unless they have a meaningful presence in Asia or a strategy to attain one. But American firms are working against considerable headwinds emanating out of Washington.

Mexico Solved? Not So Fast…Significant Damage Remains

Mexico Solved? Not So Fast…Significant Damage Remains

The net result, for Trump, is that he did what he wanted and it worked.  Flush with this victory, it is highly likely that Trump will double down on his strategy in the future.  After all, he will reason, his advisors argued against his Mexico gamble and yet it paid out so well for him.  Why, then, should he listen to them if they advise against similar trade and tariff policies again? Trade is now a tool to be used for non-trade objectives, as we have noted previously.  While clearly illegal, such a distinction does not matter.  Trump was willing to impose tariffs on Mexico in direct contravention of existing World Trade Organization prohibitions, NAFTA rules and the upcoming NAFTA 2.0 rules.  He used a dubious interpretation of the American emergency powers act to justify his decision domestically.  The gloves, so to speak, are clearly off.  And, having won a big match in this way, there is every reason to believe such tactics will be tried again.  Future opponents should be forewarned. 

Going Rogue on Trade

Going Rogue on Trade

There is no justification that allows a government to raise tariff levels based on immigration levels. To take such a step means that the United States has decided that it will no longer bound by international trade rules.  The early commentary on the Mexico decision has been nearly entirely focused on which companies in which sectors will be most at risk from an increase in tariffs by 5% on June 10, with additional increases monthly afterwards until every inbound product faces 25% tariffs by October 1.  Such a damage assessment is important for firms that suddenly awoke to find themselves in the front lines of a new trade conflict that they did not anticipate. But it misses the larger point—everyone is affected by this decision.  It is not just companies that ship goods from Mexico to the United States that should be paying attention.  If the US proceeds down this path, it is the end of the global trade regime that has given stability and lowered risks for an increasingly larger share of companies and consumers since the 1940s. 

A Turning Point for US Trade Policy

A Turning Point for US Trade Policy

American trade policy has been like the proverbial frog in a pot, slowly simmering under increasing heat.  At a certain point, the frog will not be able to survive, even if it were suddenly rescued.  The US, it appears, has reached this juncture. Were any country other than the United States to have taken this set of steps in a week, Washington would have been aghast.  Instead, it was largely shrugged off as “just another week in DC.”  The fact that the United States could take such actions as escalating tariffs to 25% on potentially $500 billion in goods from China, possibly seal the fate of one of the most important telecommunications firms globally, make national security arguments about the threat level emanating from cars arriving from US allies, and continue to watch the multilateral trade system crumble and then argue that it is “just another week” is especially telling.

How Not to Win a Trade War

Arbitrary or capricious rule changes are a significant danger for foreign firms looking to diversify out of China into other markets in Asia.  It certainly does no good to open a new warehouse or building, only to have a regulatory change that renders it unusable or be saddled with new requirements on staffing that drive costs into the red. Most of the markets in the region that are currently expecting to capitalize on the trade war struggle with at least some—and usually all—of these problems.  An honest assessment of market conditions in hopeful “winners” could bring about some necessary changes.  There is certainly an opportunity for many markets to capture new gains from trade in areas that have not been “in play” for years.  But absent some significant improvements in the ease of doing business in a remarkably short period of time, many of the locations that expect a windfall from relocations are likely to be bitterly disappointed.