Chaotic Trade Negotiations Will Likely Result in Lower Barriers
The negotiations among major trading nations about global trade policies are driven by knowledge about the magnitudes of trade, what goods and services are traded and their multi-national flows, as well as current tariffs, quotas, and other barriers.
While Trump’s proposed tariffs on all U.S. imports of steel and aluminum are misguided and the Administration’s aversion to bilateral trade deficits makes no economic sense, the Administration has provided exemptions to Canada, Mexico, and other U.S.-friendly nations. The focus of the trade negotiations has shifted to China’s blatantly unfair trade practices.
Every major nation relies heavily on international trade and has room to negotiate on some of their barriers to trade. As a result, the trade negotiations could actually result in a reduction of trade barriers.
Trump’s erratic and unorthodox negotiating tactics could come at a cost. Certainly, he has upset normal diplomatic channels and practices and diplomats. In light of the need of every major trading nation to maintain channels of international trade—i.e., China relies heavily on Europe and the U.S. markets; Europe relies heavily on the United States and China (and would benefit if China eased its trade and investment barriers); and the United States relies heavily on Europe and China — the risk of a jarring trade war is minimal, but the biggest risk is a hit to confidence that harmed economic activity.
Global leaders have publicly stated willingness to negotiate and reduce select barriers. The confidence numbers have remained elevated in the United States, but have declined in Europe.
China’s leaders have stated their willingness to lower select trade and investment barriers. The Trump Administration has backed down on its earlier demands for renegotiating NAFTA; requiring arbitrary U.S. content requirements on select U.S. imports (autos, et al) made no sense and would not increase U.S. jobs or wages. And European leaders are offering reductions in select trade barriers as a quid pro quo for being exempted from U.S. tariffs on steel and aluminum imports and as a means of coordinating with the United States to extract more entrance into China with lower investment and trade barriers.
A reduction in trade barriers seems to be unfolding and following a lot of uncertainty and volatility in the markets, negotiations are likely to come to a favorable outcome, despite their poor beginning and the ruffled diplomatic feathers.
Although the United States is likely to see favorable outcomes in terms of lower barriers to trade and investment, particularly with China, any gains will likely fall short of what could be accomplished through multinational trade negotiations and agreements.
International trade volumes have accelerated to all-time highs. Trade volumes grew faster than global output in 2017, for the first time in six years. This decided pick-up in trade volumes reflects the synchronized global economic growth following the 2015-2016 slump. Both advanced and emerging nations are experiencing healthy growth in international trade.
Since 2000, the total value of China’s imports and exports has risen dramatically. Its current exports are 900 percent of their value in 2000, while their imports are 800 percent. In contrast, growth in the total value of imports and exports of Europe, the United States and Japan has been significantly more modest.
EU imports and exports have recently accelerated significantly and the EU has run a trade surplus over the last six years. Europe’s exports and imports center heavily on machinery, manufactured goods, and industrial materials. The United States and China are Europe’s largest trading partners. Germany’s exports have soared relative to imports, resulting in a trade surplus (and current account surplus) near 8 percent of GDP.
China’s imports are growing more rapidly than its exports, reflecting its strength in domestic purchases. Its trade surplus has receded toward 1.5 percent of GDP. The largest portion of China’s exports is machinery and transportation equipment and manufactured goods. China imports a large amount of machinery and transportation equipment and other durable goods and industrial products used in its industrial sectors. China’s largest export destination is the United States, and it relies heavily on imports from other Asian and emerging nations with moderate amounts from the United States and Germany.
U.S. imports and exports have risen and its trade deficit has remained large at 3 percent of GDP, even as its reliance on imports of petroleum products has fallen significantly. The United States imports and exports comprise a wide array of capital goods, automobiles, consumer goods, nondurable goods and industrial supplies and materials. The United States is also the world’s largest exporter of services, including business, financial and insurances services, and intellectual property.
Canada, Mexico, and China are the United States’ largest trading partners. The United States has a very large bilateral trade deficit with China and much smaller trade imbalances with other nations. While the United States has become increasingly reliant on goods from China, China has become less reliant on goods imported from the United States. Bilateral trade imbalances should not be the focus of trade policy.
China's ongoing economic strength relies heavily on trade with the United States and Europe, and it will agree to reduce some of its obviously unfair investment barriers and trade practices in order to keep trade channels open. Leading European economies Germany and France are potentially large beneficiaries and support Trump's efforts to pry open China.
In response to Trump's aggressive trade tactics, the WTO will modify and modernize some of its governance and operating procedures, making it a more effective and responsive mechanism for resolving future trade disputes.
Mickey Levy is the chief economist for the Americas and Asia of Berenberg Capital Markets, LLC, and member, Shadow Open Market Committee.
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