Bread, Circuses, and Managed Trade
February 10, 2020Now that the president has begun to pile up a few trade victories, it is time to take a closer look at them. For him, they are, of course HUGE deals—the greatest ever negotiated—but how do they look from a more objective point of view?
Much has been written about the relative modesty of the ones that have been completed—the United States–Korea Free Trade Agreement, the United States-Mexico-Canada Agreement (USMCA), and the Japan and China phase one deals. The South Korea agreement and the USMCA are comprehensive trade agreements—no surprise since both either amend (South Korea) or replace (USMCA) comprehensive agreements. The others, as well as those about to get underway, are “deals”—limited agreements that address specific issues. They pay lip service to comprehensiveness by saying the remaining issues are left for subsequent phases—two, three, four, and on and on. This lip service is not unimportant, since World Trade Organization (WTO) rules require bilateral or plurilateral trade agreements to cover “substantially all trade,” which these clearly do not. This particular rule has generally been honored in the breach over the years, but the United States in the past, to its credit, has insisted that its agreements be comprehensive—one reason why there have been so few of them. The Trump administration no longer seems to have that goal.
Economists have generally concluded that any positive economic impact of these agreements so far is minimal. The International Trade Commission’s analysis of the USMCA concluded it would increase U.S. GDP by 0.35 percent. The South Korea agreement makes minor changes in several product categories. The Japan deal provides some additional market access in agriculture offset by some U.S. tariff reductions on manufactured goods. The China deal promises substantial Chinese purchases in the short term and leaves many questions about the significance of their commitments beyond that, and studies suggest any gains will be exceeded by the costs of the U.S. tariffs on China and their retaliation. (Bloomberg estimates the cost in lost U.S. GDP has reached $134 billion to date and will rise to a total of $316 billion by the end of 2020.) Clearly in the case of Japan and China, the administration picked low-hanging fruit and not much more.
More serious than the market access implications of the agreements, however, is their form. All of them, one way or another, are agreements where the goal was not trade liberalization or even trade growth but trade management—market manipulation designed to run counter to normal market events. In the case of the USMCA, for example, the main change from NAFTA was a revision of the auto rules of origin. The point of those changes was not to promote trilateral trade in autos or further integrate the North American car market. The point, explicitly made, was to force production of parts and components back to the United States, largely at the expense of Mexico. This was achieved through a network of content and wage requirements that make manufacturing autos in Mexico less attractive and give manufacturers little choice but to alter the supply chains in ways that favor the United States. CSIS’s analysis of those rules concluded that they will likely achieve their goal, but it will be at the expense of making the U.S. auto industry less globally competitive over the long term by increasing the price of domestically produced cars. This is the opposite of free trade, and it is no surprise that the word “free” no longer appears in U.S. trade agreements.
It is beginning to look like other negotiations this year will take the same approach. The India agreement, if there ever is one, is rumored to focus on a few selected sectors that the United States has been trying to crack open for some time. Discussions with the European Union seem to be slowly moving beyond the agriculture impasse but only in the direction of some selective tariff cutting and recognition of standards and conformity assessments. The path forward with the United Kingdom is less certain but could easily end up in the same place if they prove unwilling to abandon EU regulatory policies.
Although this is a disappointment, it is not a surprise. The president has always had a transactional focus in trade. He wants to make deals, not reach agreements, that have tangible short-term benefits he can brag about. In the case of China, for example, it is much more important for him to be able to go to Iowa and say, “I got them to buy more corn and soybeans,” than it is to say, “We got better rules on state-owned enterprises and intellectual property protection.” The latter is more important than the former, and while both are on our agenda, there is little doubt which the president cares about more. Likewise, Ambassador Lighthizer pursued managed trade when he was at the Office of the U.S. Trade Representative in the Reagan administration and seems quite comfortable returning to it now. The rules at the WTO have changed in the interim, making it harder to pull off, but with the demise of the organization’s Appellate Body, he will be able to get away with it despite the objections of those who lose because of it.
This approach is shortsighted. The United States is a big winner in a rules-based system, but if the United States tries to substitute short-term quid pro quos for it, it will be a loser in the long term. This is also sad because it is occurring in other areas of the government as well. Institutions and rules that have been painfully built up over many years are being sacrificed in the interest of short-term benefits. Roman emperors mastered this tactic when they provided bread and circuses to the masses. It would be nice to think we have learned something in the last 2,000 years, but it appears we have not. Unfortunately, it is all of us who will ultimately pay the price as the underpinnings of the trading system slowly erode.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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