Trump is dangerously close to abdicating economic leadership on trade in the Pacific
President Donald Trump’s complaints about China, Mexico, and other nations with whom the United States has a bilateral trade deficit date back decades before the 2016 presidential campaign. But now that he is in office, his rhetoric, threats and, ultimately, his decisions are more than just idle chatter. If they continue as before, they appear likely to hurt the United States’ ability to lead on trade in the Pacific.
One of the first actions Trump took as president was to withdraw the U.S. from the Trans-Pacific Partnership, a promising trade pact with 11 other Pacific Rim nations. Had Congress and the president ratified the pending agreement, it would have raised living standards and increased economic growth by integrating the economies of the 12 member nations that together account for nearly 40 percent of global gross domestic product.
For nations in the region weary of Beijing’s influence, the TPP would have established the U.S. as the dominant economic leader in the Pacific. But while fiery rhetoric about China and the TPP may have worked on the campaign trail, the decision to withdraw from the agreement has hurt the U.S. strategically.
Thus, it’s likely that China will fill the region’s vacuum of economic leadership with its proposed Regional Comprehensive Economic Partnership. If enacted, this trade agreement among Southeast Asian nations, driven largely by China, will set the rules of commerce in the Pacific. RCEP is a lower-quality agreement than TPP, and it obviously excludes the U.S.
Over the Labor Day weekend, it was reported that the Trump administration, reportedly frustrated by the nearly $28 billion trade deficit the U.S. had with South Korea in 2016, also is preparing to withdraw the U.S. from the free trade agreement with that country. Known as “KORUS,” the trade pact between the U.S. and South Korea was negotiated by the Bush and Obama administrations and ultimately ratified by Congress in 2012. Since that time, South Korea has become the United States’ sixth-largest trading partner.
Withdrawing from KORUS would be a major mistake. Most pressing, it would isolate South Korea economically at a perilous time on the Korean peninsula, as North Korea continues to take increasingly hostile and bellicose actions. It would also take a toll on South Korean businesses who rely on exporting products to the U.S. Weakening the South Korean economy right now is especially unwise.
Withdrawing from KORUS would be a self-inflicted wound domestically as well. Chad Bown, a senior fellow at the Peterson Institute for International Economics, noted that if the U.S. withdrew from the agreement, South Korean tariffs on American exports would rise from 0 to 13.96 percent on average. Meanwhile, tariffs on imports into the U.S. from South Korea would increase from 0 to 3.5 percent on average. A 2016 report from the International Trade Commission found the trade deficit with South Korea would be $15.8 billion higher if KORUS weren’t in effect.
In short, withdrawing from KORUS would be a geostrategic mistake, and it exacerbates the very problem the administration allegedly is trying to solve.
There also are pending trade enforcement actions that could damage the United States and bolster China if they are handled improperly.
First, the U.S. trade representative has begun investigating China’s intellectual property theft. While this is a legitimate concern for U.S. businesses, the administration needs to take the case to the World Trade Organization and build a coalition of willing partners to press China to curb their abusive practices, rather than take unilateral steps to impose tariffs on Beijing.
Next, there is case pending at the ITC that involves solar cells imported from China and elsewhere. If granted by the ITC and the president, the import relief requested by the petitioners—one of whom is, ironically, a Chinese-owned company—could double the price of solar products in the United States. This trade protectionism would hammer domestic manufacturing in a growing industry (albeit one with too much government support) and further prop up manufacturing in China.
China generates more gigawatts of electricity from solar energy than the U.S. Likewise, in 2016, twice as many solar panels were installed in China as in the U.S. That disparity would increase further if the petitioners get their way. Moreover, it’s highly likely that China and others would challenge an adverse ruling imposing tariffs on solar imports at the WTO and potentially retaliate against U.S. products.
While it’s extremely unlikely the Trump administration will jump-start TPP negotiations, it should avoid further unforced errors that would damage our influence in the Pacific. The administration should curb talks of withdrawing from KORUS, and it should tread lightly with respect to trade enforcement actions.
Image by Olinchuk
