WASHINGTON – The best thing that can be said about President Trump’s latest trade initiative is that it moves the U.S. back toward the kind of agreements Trump unwisely blew up when he became president.
So, two cheers for Trump’s revamped free-trade agreement with Mexico, announced Monday, and the one he may get soon with Canada. He wants to rebrand the package, of course, so that it’s not called NAFTA – “bad connotations!”. But the preliminary update includes labor and environmental standards somewhat like those Barack Obama wanted to add to NAFTA – and made the centerpiece of the Trans-Pacific Partnership, which Trump scuttled.
Trump seems readier to compromise these days with Europe, too, another positive shift after 20 months of intermittent trade tantrums. He hasn’t yet embraced Obama’s broad, market-opening vision of a Trans-Atlantic Trade and Investment Partnership (TTIP), but maybe Trump will get there eventually, too. In recent months, he has been talking about mutually abolishing tariffs, which would be a good start.
“You go tariff-free, you go barrier-free, you go subsidy-free. … I mean, that would be the ultimate thing,” Trump enthused in June at the G-7 summit, in between taking swings at his trading partners. For once, he was entirely right.
The financial markets, which Trump touts as a proxy for success, have been roaring this past week at the prospect that we may see new trade agreements, rather than the trade war Trump had threatened. The current virtuous economic cycle – solid expansion, wage growth and continued low inflation – may be good news for Trump, but it’s also good news for everyone else.
The real importance of Trump’s Mexico move is that it clears the debris so that the White House can concentrate on the bigger battle worth fighting – for fairer trade with a rising China that has tried for decades to rig the game in its favor. Europe and other trading partners should be our natural allies in this negotiation, for they, too, have suffered from China’s selfish policies.
What Wall Street seems to be hoping is that Trump will resolve the little trade spats and marshal his forces for the more consequential ones. Allianz economist Mohamed El-Erian said Monday on CNBC he sees a 60 percent chance Trump’s aggressive policies will produce “fairer trade” for the U.S. The puzzle for investors, he cautioned, is “how much damage would we incur in the process of winning this.”
Trump has often misdiagnosed the China trade problem. It’s not the sheer size of the U.S. trade deficit with China – though that was a staggering $375 billion last year, or about 65 percent of the total U.S. trade deficit. This raw number disguises the fact that China’s current-account surplus has been declining sharply as a percentage of its overall economy, from 9.9 percent of its GDP in 2007 to about 1.4 percent last year. The International Monetary Fund projects that China’s surplus will continue to decline steadily, to 0.4 percent of GDP in 2022.
The China problem isn’t how much it sells us, but that it won’t allow American companies or investors fair access to its markets – and that it steals every bit of intellectual property that it can.
Treasury Secretary Steven Mnuchin made this case Tuesday on CNBC: “We need better market access to China. We need reciprocal trade. And these are issues that our allies in the G-7 agree with us on. … This can’t be a one-way transaction where they have free trade here and we have no trade there.”
The Obama administration was heading in the right direction on this one, as well, by trying to negotiate a bilateral investment treaty with China that would open markets for American companies and protect them from theft. Trump chucked that, too, but he now seems to be reprising his own amped-up version.
Maurice Obstfeld, chief economist at the IMF, cautioned against “Pyrrhic” victories in trade in a recent Financial Times article. He explained: “The U.S. imports aluminum … which contributes to its trade deficit with China. But cheaper aluminum imports facilitate one of the U.S.’ biggest and most distinctive exports: aircraft. Restricting aluminum imports would not only hurt aircraft exports, it would make the global division of labor less efficient.”
Trump was elected by a country that doubted the global trading system was benefiting the average worker. The answer to that popular anger wasn’t to wreck the system, but to fix it. Too often during his presidency, Trump has looked like a wrecker. But this past week, on Mexico, he claimed the unusual and welcome role of repairman.
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