Davos 2018: US protectionist vows matched by EU calm
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Donald Trump landed in the White House a year ago having promised to save US workers and industry from the ravages of foreign competition.
“The wealth of our middle class has been ripped from their homes and then redistributed all across the world,” he declared in his inaugural speech. “We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs. Protection will lead to great prosperity and strength.”
A year on, the US president continues to talk tough on trade, and his administration continues to make noises about a taking a more muscular approach to commerce, China and other rivals. He has pulled the US out of the 12-nation Trans-Pacific Partnership in a move critics have called a strategic gift to an emboldened Beijing. He has set about renegotiating the North American Free Trade Agreement (Nafta) and a trade pact with South Korea.
But if he campaigned as an angry populist daily projecting the economic equivalent of fire and brimstone, the reality is that he has yet to deliver on his protectionist promise. To a world that feared a wave of destructive protectionism with his election, he so far has looked like the president who cried “Bring me tariffs!” to no avail.
That may not last.
The Trump administration’s main trade achievements in 2017 were in launching a series of investigations into everything from Chinese intellectual property practices to the national security ramifications of increasing steel imports. All of those exercises face deadlines early this year.
There are expectations that Mr Trump will use his State of the Union address to Congress at the end of the month to announce trade moves, with a particular focus on China. In a year in which Republicans are fighting to retain control of Congress and many in the president’s party view his historically low approval rating with concern, some in the administration see a tough approach to trade as a political winner.
“I think the rest of the world has been waiting and patient to see where the Trump administration is going with [trade], which may have given them a false sense of security,” says Phil Levy, a trade adviser to former US president George W Bush and now a senior fellow at the Chicago Council on Global Affairs.
Mr Levy is among those who expect the administration to take action against China this year. A live and occasionally hard-fought debate over trade between hawks and doves has continued in the White House.
Despite the exit from the Trump team of prominent economic nationalists such as Steve Bannon, the outspoken former strategist, plenty remain, starting with the president himself. Mr Trump has advocated hard nationalism on trade since the 1980s and has wavered little since entering office. He believes his 2016 campaign vows to rip up US trade agreements were important in helping him win.
His trade tsar, Robert Lighthizer, served in the Reagan administration and was a long-time lawyer for the steel industry. Many in US trade circles view him as an incorrigible protectionist.
Peter Navarro, a former academic economist, and author of the 2011 book Death by China, is one of Mr Trump’s most abrasive and hardline trade advisers. He has survived battles with more pro-business advisers such as Gary Cohn, the former Goldman Sachs executive who leads the president’s National Economic Council.
Mr Trump has found other ways to push his trade agenda. Wilbur Ross, the secretary of commerce, boasts that the initiation of anti-dumping cases is up more than 50 per cent since last January, when the administration took office.
At the World Trade Organization, the Trump administration has blocked the appointment of judges, leaving the usually seven-strong appellate body with just four members, three of whom will see their terms expire by the end of 2019. That has raised questions on whether the US aims to dismantle the rules-based system of which it was once the prime advocate.
But for a president who took office threatening to raise tariffs and pull out of Nafta, the reality is that the bold action he promised has looked elusive. In office, he has had to confront the colliding constituencies all presidents have to cater to on trade.
In this, Republicans in Congress have played a big role. But on almost all his trade plans Mr Trump faces resistance from groups such as farmers eager to defend Nafta and to avoid a trade war with China in which they would probably be the first target for retaliation.
The US Chamber of Commerce, a stalwart supporter of past Republican presidents, has backed Mr Trump’s tax plans but has had abrasive relations with the White House on trade. “If we aren’t leading on trade, we’re falling behind,” Tom Donohue, the chamber’s president, said this month, warning against protectionism. “I’ve been saying that for years, and today we’re seeing it happen.”
Such messages have so far helped stop Mr Trump from acting on his protectionist instincts. How long that will last is hard to forecast.
If the global economy is being consumed in a conflagration of protectionism, and the world trading system is staring into the abyss of destruction, no one seems to have told the EU. While Donald Trump’s administration continues to threaten an array of trade actions against China and disable one of the few remaining functioning parts of the World Trade Organization, Brussels is jogging along, continuing to sign new trade deals and generally aiming to keep the system going.
For sure, the EU’s scope of trade policy is rather narrow and its ambitions are not expansive enough to replace the US as the anchor of the world’s trading system. It has to deal with some protectionist rumblings among member states, which have required moves towards the restrictive end of the spectrum. But in general, given the turmoil on the other side of the Atlantic, and regardless of what ensues from the UK Brexit matter, trade policy in Brussels is comparatively calm.
When European Commission president Jean-Claude Juncker made his State of the European Union speech in September, laying out policy priorities for the year ahead, trade featured prominently. Unlike other apparently intractable issues, such as designing a resilient framework to manage the euro or dealing with future mass influxes of refugees, trade is at least one area in which the EU’s machinery functions and the commission has a clear idea of what it is trying to do.
Last year, the EU overcame a little difficulty with late opposition from the Belgian region of Wallonia to the Comprehensive Economic and Trade Agreement (Ceta) with Canada. It concluded negotiations with Japan over a bilateral free trade agreement and is updating its existing agreement with Mexico. This year, Brussels aims to wrap up a deal with Mercosur, the South American trading bloc, and begin talks with Australia and New Zealand.
For Brussels, signing these countries up to deals with the EU would be highly symbolic. Canada, Mexico, Japan, Australia and New Zealand are all members of the Trans-Pacific Partnership, the proposed 12-nation trade deal originally pushed by the US but which Mr Trump abrogated as soon as he came to office. Mercosur is right in what is often termed the US’s backyard of Latin America, a region in which Washington once strived to set the trade agenda.
The commission’s task has been eased by the European Court of Justice, which issued a ruling last year making it easier to pass a trade deal at an EU-wide level, rather than ratifying it separately in each member state. Conveniently, the decision gave Brussels an excuse to ditch the controversial provisions for investor-state dispute settlement where companies can sue governments directly for expropriation or unfair treatment.
In its haste to sign a deal, though, the EU is sacrificing quality for speed. Its proposed accord with Mercosur offers minimal new import quotas in beef, sugar and ethanol to the European market in return for some cuts in industrial tariffs. The rapidity with which a potential agreement with Mercosur has evolved after decades without progress suggests strongly that a political imperative for a deal on both sides of the table is taking precedence over the desire for substantial liberalisation.
In some ways, the EU has also steadfastly declined to enter the 21st century of trade policy. Despite entreaties from trading partners, it has refused to put provisions on cross-border data flows into its trade agreements, even at the risk of threatening to kill entire deals, such as the Trade in Services Agreement being negotiated by more than 20 members of the WTO, including the EU.
Moreover, the EU is having to adjust some of its policies to take account of protectionism among its members. At the urging of France, the EU is looking at taking a more critical view of foreign direct investment in Europe, with an eye to restricting Chinese takeovers of European companies. Admittedly, an unfavourable reaction from other member states has meant the mechanism has been downgraded to not much more than an information-sharing exercise. Nonetheless, the protectionist sentiment remains.
The challenge of dealing with the rise of China has forced the EU to revise one of the most contentious parts of any economy’s trade toolkit, the anti-dumping and anti-subsidy duties it imposes on imports deemed unfairly priced or benefiting from state aid. Ambitiously, it has chosen to redesign its entire set of instruments to take a much wider information set into account before deciding whether to impose such tariffs. Its challenge will be to implement the new policy in a delicate and tactically astute way that does not immediately provoke legal challenges from China at the WTO.
To say that the EU’s trade policy is surging ahead at full speed would be an exaggeration. It still has some blind spots, such as data flows, and protectionist sentiment among some member states is ever-present. But compared with the tenor of the debate elsewhere, Europe’s trade policy is at least constructive and stable.
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