Year In Review

Stimson Spotlight

Year In Review

The year just concluded consisted largely of bark rather than bite as far as trade is concerned. Although the president did pull out of TPP, other threats, including tariffs on Germany, China or Mexico, and pulling out of the WTO, KORUS and NAFTA, remained just that – threats rather than actions. Opinion in the “swamp” continued to be divided as to whether the lack of action was because (1) the threats were negotiating tactics the president never intended to act on; (2) at key moments he was talked out of acting by members of his staff either arguing linkages between trade actions and other foreign policy issues like North Korea or the dangers of jeopardizing the tax bill; or (3) despite all the bluster he is unwilling to actually pull the trigger. There is also a minority that believes he is entirely capable of agreeing to modest compromise at the last minute and then declaring a great victory. The majority believes he is determined to launch trade retaliation at some point, with opinion divided as to who will be the first victim.

However, obsessing over what the president might do should not obscure larger trends that are changing the trading system even as the U.S. is trying to figure out its place in it.

First, the world has, finally, become alert to the challenge China poses to their economies as well as to rule of law and the trading system generally. This is not new for the U.S. I’ve talked about it on numerous occasions, and the president’s national security strategy focuses on it. The new development is that others are beginning to see things the same way, particularly in Europe, which has historically lagged in its concern about China. In all cases, governments are led by their business communities which are gradually falling out of love with the Chinese market and recognizing the long-term challenge to their competitive survival that China represents. Many are still reluctant to sacrifice their short-term profits, so their support is quiet, but it is still support. This will not play out easily, as the Chinese are masterful users of both soft power and retaliation, but the battle is now joined, and both sides know it.

Second, in its search for new tools to advance its trade policy, the administration has discovered an old one – our antidumping and countervailing duty laws. While these laws have their limitations – they are narrowly focused, time consuming and expensive for companies to pursue – they have the advantage of being WTO consistent and comfortably in the basket of tools countries are allowed to use to defend their interests. In addition, they are appropriate tools for tackling what will be the next major issue – the massive subsidies the Chinese are planning for the high tech sectors identified in their “Made in China 2025” report.  We should expect to see more of these cases brought by companies and initiated by the administration. Good news for the trade bar!

Third, the administration’s broad skepticism about multilateralism threatens the World Trade Organization. Already under fire for its inability to complete the Doha Round and much of anything else, aside from the Trade Facilitation Agreement, the administration is raising new doubts about its procedures – the fight over the Appellate Body – and about multilateralism itself. Treasury Under Secretary for International Affairs David Malpass summarized administration views succinctly in a November 30 speech to the Council on Foreign Relations in New York: "Our view is that multilateralism has gone substantially too far, to the point where it is hurting U.S. and global growth." This adds to the centrifugal forces pulling the WTO apart and gives support to those like India and China who would use it for their own ends rather than strengthening it as a symbol of the rule of law in the international marketplace.

Fourth, investment restrictions are becoming a new battleground. On the inbound side, concern about national security has grown significantly, culminating in the introduction of legislation to update and reform the Committee on Foreign Investment in the US (CFIUS). Thus far it has been criticized from the left as not going far enough (primarily because it does not include a “net benefit” test in addition to the existing national security test) and by the business community for going too far and discouraging new investment. That makes its fate uncertain despite its hype, although if the president decides to actively support it, that should be enough to get a version of it through. On the outbound side, the administration’s preference for keeping investment at home has repeatedly been made clear by Amb. Lighthizer and others. Whether that leads to policy change or simply bullying and intimidation remains to be seen.

These latter two trends are disturbing. They reflect a willingness to close the U.S. off from the world based on the idea that the world is taking advantage of us. The truth is the opposite – we largely designed the world we are living in and have benefited enormously from it. Trying to turn back the clock will go down in history as an epic mistake that will deprive future generations of jobs and growth.

Of course, from the viewpoint of a commentator, it means there will be a lot to write about, and you’ll be hearing from me next year!