Washington Insider: Trade Pacts and Strategy

Well, the recent agreement on the modified NAFTA deal has lowered the political temperature among trading partners in North America somewhat, pundits are struggling to see what it might mean. For example, the New York Times in its Upshot section this week says that the administration strategy is coming into focus – but that “skeptics remain.”The article goes on to explain that the new focus suggests that the administration has been beating up on traditional allies, including Canada, Mexico, the European Union, Japan and South Korea “to extract moderate concessions favorable to American interests.” The Times cites the South Korean deal and the recent NAFTA agreement as examples.However, the Times also thinks this process supports the ultimate goal which is to reset the economic relationship between China and the rest of the world.And while that may take time and cause pain the main idea is it’s a multistep process to force China to improve trade terms with American companies. It also is intended to bolster the United States in a geopolitical rivalry with China that is becoming more tense, as Vice President Mike Pence articulated last week.One telling piece of evidence for this strategy is a provision in the new North American deal that will make it more difficult for Mexico or Canada to deal with a “nonmarket” economy like China without risking their favored access to the huge U.S. market.Larry Kudlow, the White House economic adviser, outlined this concept at the Economic Club of Washington last Thursday. China is the target “first and foremost,” he said.“We are talking to the European Union again, we are talking to Japan again, and we are moving to what I have characterized as a trade coalition of the willing to confront China,” Kudlow said.The Times also says this is a change from earlier in the year. At that point, from the outside at least, the administration seemed to be changing its approach by the week and sometimes by the day. “It has often seemed that there has been a series of improvised moves, with different senior officials favoring different approaches,” it said.Now, with the new North American deal, it’s become easier to see how the different elements of Trump trade fit together. The “nonmarket” provision seems devised to give the United States veto power over any deal Canada or Mexico might seek with China.Still, there are skeptics. Just because there is a more coherent strategy in the administration’s stance toward global trade than in the recent past doesn’t mean it will work, the Times said.“I do think we can see a strategy, but that doesn’t mean it’s a good strategy,” said Mary Lovely, a professor at Syracuse University and a fellow at the Peterson Institute for International Economics. “They’re going to use these bilateral deals to strong-arm countries into lining up behind the U.S. on China. But I don’t know what the endgame is.”Some items on the Trump administration’s list of demands in negotiations with the Chinese seem unlikely to be met, as they would compel China to abandon its entire strategy to modernize its economy, the Times said.There’s a risk that even if the effort to isolate China succeeds, the result might be simply a bifurcated world trade system in which there is one orbit of countries with close ties to the United States, and another tied to China, with minimal overlap.One crucial question is whether the administration’s strategy of pummeling allies with attacks, threats and tariffs can yield not just revised trade agreements, but also the trust needed to undertake a concerted campaign against China.That could happen if the scars and bruises from negotiations this year linger, compounded by the administration’s disinclination to engage in multilateral negotiations with many parties at once.The new North American deal, a case study in such unwillingness, shares many elements with the Trans-Pacific Partnership (TPP), which was abandoned by the Trump administration in early 2017. That whole agreement was intended as a strategic counterweight to Chinese economic power in the Pacific Rim.But rather than reopen the TPP, the administration chose the path of separate deals with each country – thinking that it will have greater negotiating leverage that way, as was the case with the new USMCA.The risk of that approach is that when the United States hammers out each deal separately, it may be hard to then turn around and create any kind of unified pressure against China.“To go into battle, together, you need to know that a partner is reliable, that if they tell you something, they’ll stick to it,” said Phil Levy, a senior fellow at the Chicago Council on Global Affairs. “This administration has been anything but reliable on trade policy.”It now is clear that the administration isn’t just looking to blow things up – this fight is “really a warm-up for a trade war with China.”So, we will see. A key point is the amount of “pain” the fight with China implies and who is to bear that – and how long that might continue. Some ag groups have said they are willing to support the trade policy, but want the fight to be over “quickly,” a hope that likely will be difficult to attain, Washington Insider believes.