Will US Push Back Free Trade?

Trade & Policy

Will US Push Back Free Trade?

Trade winds, they are a-changing. The much awaited Trans Pacific Partnership is all but scrapped, Transatlantic Trade and Investment Partnership (TTIP) will go no further, NAFTA will be renegotiated, US could be increasing trade barriers. And on the other side of the world, China is working hard to build road and maritime networks to connect with Central Asia, Middle East, and Europe. Having been left out from the TPP, it could try and fast-track Regional Comprehensive Economic Partnership (RCEP), and find more signatory countries for this regional agreement. China is toying with the idea of building free trade areas. With US markets expected to get difficult to penetrate, manufacturing and trading economies will be heading towards Asia.

And all this because the US has a new president - Donald Trump - who has always been vociferous in his views against allowing unmitigated access of the US retail and labour markets to the outside world. Trump made his opposition to the TPP a centerpiece of his campaign, calling it a "disaster" and "a rape of our country" that would send more jobs overseas. His anti-free-trade message and pledges to stem the tide of imported goods from China and Mexico won him the US presidency.

Trump has said he will scrap TPP, renegotiate the 22-year-old North American Free Trade Agreement and adopt a much tougher trade stance with China.

He has even stated that his administration would consider withdrawing the US from the World Trade Organisation (WTO), one of his most reckless and dangerous utterances, to date. If the US, as the world's largest economy, were to pull out from a rules-based trading system like the WTO, it would destabilise the entire international trading system.

Both Hillary Clinton and Donald Trump say they oppose the Trans-Pacific Partnership, a trade deal among 12 countries.

The second-place finisher in each party's presidential primaries - Bernie Sanders and Ted Cruz - opposed it, too. Michael Froman, the US trade representative, is keeping hope alive. "We have to be careful not to overinterpret this election," he says.

US textile industry hopes yarn-forward rule goes

The US textile and apparel industry hopes that amid the chaos and uncertainty, there will be opportunities for the American textiles and apparel industry.

"I think there's some opportunity in a Trump administration," posited David Spooner, partner at Barnes & Thornburg LLP in Washington, D.C., and former chief textile and apparel negotiator at the Office of the US Trade Representative (USTR).

"Assuming chaos provides opportunities, and if Trump brings in new faces to USTR, it might give us an opportunity to do new things in trade. We've been screwed by the yarn-forward rule for decades. Maybe there's an opportunity to do things, even if it's around the margins." John Pellegrini, counsel at New York City-based McGuireWoods LLP, put things more bluntly, "The only good thing that happened was a full employment act for international trade specialists."

That's because Trump's campaign centered on a pledge to "Make America Great Again" by renegotiating trade agreements, imposing tariffs as high as 35-45% on imports from countries like China and Mexico and preventing companies from manufacturing overseas.

"This is the first election year since Ross Perot heard the giant sucking sound from Mexico," noted Jon Fee, senior counsel at Alston & Bird LLP in Washington, D.C., referring to Perot's comments during the 1992 presidential campaign that NAFTA (North American Free Trade Agreement) would send US jobs south to Mexico.

"In this election, trade became the proxy, the scapegoat for everything people felt was wrong with America. As The New York Times pointed out, trade isn't the main force destroying jobs but it serves as a good target."

All three agreed: The Trans-Pacific Partnership (TPP) won't happen with a Trump administration. "It will never happen because Mitch McConnell would rather act against his country's interests than allow TPP to be a part of Obama's legacy,"

TTIP shelved too

The Transatlantic Trade and Investment Partnership (TTIP), a proposed trade agreement between the US and the European Union that's already on rocky ground, likely won't happen either. "Talks have not been going well. Negotiation rounds have not been very productive," Spooner said. "The German vice chancellor and the French trade minister have both called for the talks to end."

NAFTA could be walking into a buzz saw, too. Not to mention, if Trump wants to raise tariffs on China, the US will have to withdraw from the World Trade Organization (WTO) - something that the president has the authority to do all by himself.

But back to the opportunities a Trump administration potentially holds for textiles and apparel. One of the president-elect's main advisors is Wilbur Ross, the billionaire who bought Cone Mills out of bankruptcy in 2004, combining it with Burlington Industries to create International Textile Group. Spooner's hope is that Ross has the industry's best interests at heart. "Just because TTIP is falling apart and TPP is not going to pass anytime soon, frankly I think that means we have to be more active and proactive," Spooner said.

"If Trump rips up NAFTA, at least it allows us to get in there and say get rid of yarn-forward, or we might see a free trade agreement with the UK. We'll have a clean slate and maybe some different thinking so it might not be all bad."

Polls show lukewarm opposition to free trade

While Trump's victory is being touted to be due to his rhetoric on `Making America Great Again' by curbing the `immigrant menace', bringing back manufacturing and jobs, protecting US industries, various polls around the time of elections show that political parties and the public have a lukewarm opposition to free trade, and not the frenzied opposition that Trump has tried to build up.

Congress, for one, has a lot of supporters for the trade deal. In an August Pew poll, 55% of them backed it while only 24% opposed it. And Congressmen have plenty of reasons to support it.

First: The agreement is expected to expand the economy. The US International Trade Commission estimates that it will make the economy $57 billion bigger each year. The Peterson Institute for International Economics pegs the number at $78 billion. Either number is a small percentage of the $17 trillion economy, but it's still a lot of money.

Second: Agreeing to the TPP will increase American influence in Asia. The alternative is that the other countries in the partnership start making deals with one another, and with countries outside the TPP, such as China. These deals would divert some trade that would otherwise benefit US.

They would be less favourable to the US in other ways, too. The TPP, for example, restricts the ability of state-owned enterprises to undercut American companies. To the extent the US does not participate in setting the rules that govern international trade, those rules will not reflect US preferences.

Third: Polling suggests lukewarm support for the deal from the public, not the bitter opposition you might expect listening to the presidential campaign rhetoric. Pew found that 40% of Americans thought the TPP would be good for the country, while 35% thought it would be bad. A September poll by the Chicago Council on Global Affairs found 60% support for the deal. The large number of people with no opinion about TPP might be swayable.

Fourth: There's a broad coalition behind the deal. Groups that have opposed many trade agreements in the past, like the National Council of Textile Organizations, are supporting it. Domestic footwear manufacturers and footwear importers are united in backing it. The tech industry and content providers are often at odds, but both are behind the TPP.

How A Trump White House Could Devastate Asia's Trade (And America's)

Protectionist Tariffs

Trump's mercantilist trade plan calls for using the power of the Executive Order to impose a 45% tariff on a broad swath of imports from China, 35% tariffs on items produced in Mexico, and arbitrary tariffs of between 15%-45% for any country deemed to be a "currency manipulator." Prime targets include the European Union, Japan and South Korea, which, taken together with China and Mexico, represent five out of America's top six trading partners.

These protectionist tariffs would be the precursor to a destructive chain of events that would harm manufacturers and consumers in both the US and Asia and would lead to disrupted supply chains, imploded trade relationships and, ultimately, trade wars.

Ironically, Trump's populist constituency would be most harmed by short-sighted protectionist tariffs; as consumers, they would face fewer choices and deal with higher prices for every day purchases. They would suffer as export-related job opportunities decline.

Disrupted Value Chains

The Peterson Institute of International Economics, a non-partisan think tank, estimates that Trump's trade policies would cost the US 4 million jobs and send the US into a recession.

Consider the damage and disruption that a protectionist trade policy would have on global supply chains. GE, for example, employs about 125,000 people in the United States. Its global footprint provides jobs for over 300,000, including operations in China and Mexico, where it manufactures parts, components, and sub-assemblies for a broad range of its products. Myriads of items must pass back and forth between the United States, China, Mexico - and other countries - before a finished product can be fully "manufactured" in the US

Protectionist tariffs could kill these value chains.

This scenario would be repeated throughout business ecosystems involving US-based subsidiaries of Japanese, South Korean, Chinese companies and other multinational enterprises.

There would be job losses in manufacturing plants across the US, which would further deprive other sectors such as services, retail and real estate from trickle down income.

Trump blocking ratification of the TPP is a setback for entire business networks, whether in emerging Asian economies such as Vietnam and Malaysia, or in more mature markets such as Japan, the US and Singapore.

Trade Wars

The US-China bilateral relationship is arguably the most important on the planet. Slapping a 45% tariff on Chinese goods would not only do harm to China's already slowing economy, it would severely damage US-China relations and spill over into other areas including the risk of military escalation in the South China Sea.

It would galvanise a more confrontational Chinese foreign policy posture in Southeast Asia and beyond. And it would invite a trade war.

It's hard to imagine that China - or Japan or S. Korea, or even Mexico - would not retaliate with their own retaliatory tariffs. This would affect hundreds of billions of dollars of US made products and lead to an inevitable outcome: trade protectionism and populism would hurt everyone.

What's needed is a more centrist, deep-thinking US President. A Trump Presidency, however, could spell the end of the neoliberal global economic order, after 70 years of progress and prosperity.