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Wednesday, December 14, 2016

Letting the Deal King Loose on Trade

 
By Roy C. Smith

US manufacturing has been hollowed out, the President-elect has said, by unpatriotic American companies and poorly negotiated, unfair trade arrangements, and he will set things right. Will he?

Mr. Trump has tweeted complaints about several US companies that he says have inappropriately exported American jobs to foreign locations. In commenting about Carrier Corp., a division of United Technologies Corp. that was pressured into rescinding some plant layoffs, Mr. Trump said no more American jobs will leave the country without “consequences” being visited upon the offending manufacturer.

Indeed, US manufacturing jobs have fallen to about 9% of the labor force from about 17% in 2000, a difference of 5 million jobs. This is certainly a rapid rate of job erosion, but even so, US manufacturing output was near an all-time high in 2015, representing 36% of GDP. Outsourcing factories to low wage countries is part of the reason for the job losses, but so is improved technology, global competition and better supply chain management. 

During the campaign, Mr. Trump also said he would impose steep (35% to 45%) tariffs on imports from Mexico and China unless he could negotiate better terms of trade with each.  He has also said that he would abandon the Trans Pacific Partnership trade deal on “day one” of his Administration.

Many economists have expressed concern that Mr. Trump doesn’t understand the basic economics of world trade, upon which 28% of the US GDP currently depends, and his protectionist notions are only likely to upset established trade flows or, worse, lead to a tariff war reminiscent of the Smoot Hawley Act that helped grind world trade to a halt in the 1930s

Some of these economists may remember past efforts to publicly shame (“jawbone”) companies into doing what the president wanted, and other attempts from the “bully pulpit” to manage corporate behavior and alter trading relations with other countries. From Harry Truman on, these efforts have been fairly common, but ineffective. Sometimes they succeeded in the short term, but not over time. Corporations are unwilling, and arguably unable under their fiduciary obligations to investors, to defy the laws of economics and the pressures of competition in order to help presidents score political points.

But that was before the Master of the Deal took over the jawboning?

Even before taking office, Mr. Trump has chosen the role of the decisive on-field referee to call fouls and assess penalties on companies he thinks have failed to live by the new rules of America First. He hopes that by jawboning a few, others will get the message and follow his lead even though it may not be legally required or economically justified. No one yet knows what “consequences” he has in mind for the non-compliers, but large companies with multiple involvements with the US government may think twice before offending the White House-to-be. This opens the door for these companies to make private deals with the government to stay in good standing. This is a generally bad idea that can promote favors, favoritism and illegality.

Jawboning is also being used to set up renegotiations of trade relations with Mexico and China, the two countries Mr. Trump has said are most responsible for American manufacturing job losses.

After 23 years of NAFTA, the US now has a $58 billion trade deficit with Mexico, Mr. Trump can easily claim that NAFTA has been poorly enforced and needs rebalancing. Certainly, Mr. Trump’s comments about tariffs, rapists and walls, and the 10% drop in the peso since the election have pushed Mexico back on its heels. Surely the Mexicans want a settlement to bring things back to normal, even if they don’t think a settlement is justified. Maybe a list of administrative “fixes,” and a modest “contribution” to help pay for the costs of job retraining for displaced US workers could be agreed to settle things.

Based on Mr. Trump’s not-so-tough deal with Carrier (800 out of 2,000 jobs to be saved after a $7 million Indiana tax break), which the company (a major defense contractor) could easily live with, indications are that Mr. Trump won’t need too much to be able to claim victory.  But surely, after all the preliminary bombardment, he will expect something.

China will prove to be more difficult, depending on just how much Mr. Trump hopes to extract in improvements, but nevertheless there is room for some. Mr. Trump can point to a record $366 billion deficit (equal to more than half the total US trade deficit), even while the yuan was strengthening (which it was until recently) and the Chinese economy was slowing. China too has been bombarded with pre-negotiation rhetoric - Mr. Trump has already said China is a currency manipulator and engages in unfair practices that destroy American jobs.

In April, the US Treasury backed up Mr. Trump by adding China (and Germany, Japan, Taiwan and South Korea) to its list of suspected currency manipulators (as required by US Trade Facilitation and Enforcement Act of 2015) which it must “monitor” on several fronts to be sure trade practices are fair. There are several criteria, and China, even in the eyes of the Obama Administration, is failing in some.

The Chinese probably have more to lose from a curtailment of exports to the US than the US does, so they should be willing to talk about concessions even though their position is that they                    do nothing that is unfair. China, too, has geopolitical reasons to want to stand up to any bullying from the US.

So, Mr. Trump might want to revisit President Richard Nixon’s actions in the early 1970s when he suddenly announced a 10% “surtax” on all imports from Japan (the principal trade offender at the time) until the large trade deficit with that country could be addressed satisfactorily. This action followed years of trade disputes and rising public sentiment that Japan was not playing by the rules. Years of negotiations by establishment types had produced little, so Mr. Nixon swung his axe. The Japanese then agreed to some quotas on exports, to removal of some non-tariff barriers to US exports into Japan, and to greater Japanese investment in factories in the US. This was by no means the end of US trade disputes with Japan, but it smoothed them out for a time enabling the tariff to be withdrawn and things to return to normal after a few months. What was seen as a seismic event at the time was largely forgotten a year later, but Mr. Nixon got a lot of support from working class America voters in the 1972 election.

The world would issue a great sigh of relief if Mr. Trump’s trade issues were settled with pragmatic, even cosmetic, deals like these, unconventional though they may be.  It will be nice get past fears of tariff wars and recessions caused by bungled trade negotiations.

It may also give us greater confidence that the deal king knows his limits and will not wreck the world economy by reckless efforts to bully others into doing what he wants. Any good commercial negotiator knows that things are settled by comprise. We will have to see whether Mr. trump will follow his business instincts into international relations, or get hung up on projecting American power at whatever cost. 

Maybe these trade deals will turn out to be good practice for the tougher struggles with Iran, Russia and the Middle East that await his attention.







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