Can Trump wreck the world trading system?

New Zealand is such a small country that it is very easy to be internationally bullied. Much of our diplomatic effort aims to minimise such bullying, but fear of it lurks behind concerns about what a Trump administration might do, not only to us but the rest of the world. Could the US, big enough to be hard to bully, disrupt the world trading system? The answer is, ‘of course’, but it is unlikely.

At the heart of the international trading order is a rules-based system embedded in the World Trade Organisation. Membership of the WTO requires conforming to a set of rules and agreements that regulate international trade.

For example, in 1999 the US slapped a tariff of at least 9 percent and up to 40 percent on our (and Australian) lamb exports despite an agreement that it was bound to (could not be higher than) only a few cents per kilo. The surcharge was entirely for domestic political purposes, and it may have cost New Zealand farmers up to $45m over three years. Our redress against the bullying was to follow WTO procedures, which eventually found that the agreed bindings had not been kept. The US, accepting it was bound by international trading rules, reduced the tariffs to the bound levels.

These sorts of disputes happen all the time; on occasions the US has been the plaintiff. (Another example was when we took Australia to task over excluding our apple exports; again we won.) It seems likely that there would have been many more disputes which have been avoided because the offending country expected to lose.

So could a Trump administration refuse to observe the various bindings previous administrations have committed the US to? The short answer is ‘yes’, but it would then face the dispute resolution procedures of the WTO. Not just from New Zealand, for a host of other countries would also be litigating.

Could a Trump administration withdraw from the WTO? To do so would mean US exporters losing their preferential access to others’ markets. They would be very angry and the Trump administration would come under severe political pressures from business. Knowing this, it is unlikely to withdraw from the WTO.

I am less sure about individual trade agreements. Some the US has negotiated are for political purposes as well (as with Israel and some Latin American states) but Trump has threatened to abrogate the North American Free Trade Agreement with Canada and Mexico. It has been there for a while and many American businesses, representing powerful lobbies, would be deeply damaged. I suppose he could demand a renegotiation, but the Canadians and Mexicans are likely to want concessions in return.

Trump is not expected to go ahead with the Trans Pacific Partnership (TPP); he probably could not get it through Congress if he was keen – he is not. The TTP may proceed among the other 11 participants following renegotiation. But TPP11 would be less ‘ambitious’ and we would not get the improved access to the US market we had hoped for.

In a wider context, we seem to have reached a new phase in globalisation for exports are no longer growing faster than domestic production. This probably arises because the falling costs of distance which drove that growth seem to be exhausted (services aside).

In any case, most of the traditional opportunities in international trade deals have largely been implemented. The TPP was intended to be ‘ambitious’, a term intended to indicate a new stage of coverage. Without ambitions, all that is left is tidying up.

New Zealand is currently negotiating traditional deals with 14 Asian nations plus Australia (RCEP), the EU (probably delayed because of Brexit), the Gulf States, India (probably done as a part of RCEP) and Russia (strictly the Eurasian Economic Community), Each could be a tidy little earner, but none is ‘ambitious’.

Actually, New Zealand has a secret ambition. Tariffs on manufactures under the WTO are near zero. (Work still needs to be done on trade facilitation, eliminating administrative barriers, and on services.) But there remains severe restrictions on access for many agricultural goods, especially meat and dairy.

There is a conflict in WTO principles between free trade on industrial goods and services and protection of domestic agricultural sectors which many countries practise. Others demand freedom of access for their exports, just as for manufactures; among them New Zealand is a leader. Our strategy has been to use international forums to make explicit demands for comprehensive free trade in agricultural products while using particular trade deals, including the TPP, to nibble away at the restrictions as much as we can.

The US has been ambivalent, wanting international market access for its farm exporters but also wanting to protect its domestic-oriented farmers. Sometimes it has been helpful to New Zealand’s general case but only grudging about American market access. It may well be more battened down under a Trump administration.

We cannot expect US leadership for more ambitious deals under Trump, nor as much attention as we would like to the fight against agricultural protectionism. Meanwhile New Zealand will have to continue to put considerable efforts into maintaining a rules-based WTO. But we need not expect a disaster. I’m afraid I cannot say the same on other dimensions of international affairs.

Comments (8)

by Murray Grimwood on November 23, 2016
Murray Grimwood

'In a wider context, we seem to have reached a new phase in globalisation for exports are no longer growing faster than domestic production. This probably arises because the falling costs of distance which drove that growth seem to be exhausted (services aside)'.

Well spotted.

One of the problems in a finite world/nation is that as you grow your own consumption and approach the upper limit of what is short-term possible - and ultimately the upper limit of what is long-term sustainable - you have less and less available for export. Unless you choose to make your peasantry ever-poorer and thus ever-less-able to purchase whatever the short commodity is.

And those 'costs' - they were somewhat hidden by the continued extension of debt/credit too, were they not? Sooner or later that horse needs reined in.

Trump and Brexit and hollerings for protection or for the good old days, are all symptoms, not causes. Try asking who is to pay for our dairy, say, what with and for how long? If the trail leads to mortgages of houses, the 'value' of which magically escalated, was it with anything? Who holds that parcel and will the contents be 'worth' anything when the music stops?

 

 

 

by Tim Watkin on November 23, 2016
Tim Watkin

Brian, I think NZ and others would have been very keen to press on without America. Why? Because there is still the immense gain of a deal with long-protectionist Japan in the offing. That's nothing to sneeze at. But now Abe is saying that TPP without the US would be "meaningless". If that's the case it makes it much less worthwhile for NZ.

Still, frankly, even if we're down to single digits in the number of countries interested, I suspect NZ will sign up... on the basis that something is better than nothing and the fact that this government seems to be running low on other ideas for growth. And it sends the signals that we favour - free trade is best etc. We started all this with a P2, P3 etc, so I'm sure we'll push on to the bitter end, in the hope others will join at different times under different leadership.

 

 

by Rich on November 24, 2016
Rich

Governments aren't really 'bullying' - they're standing up for the interests of their populations.

The reason we can't make progress on agriculture tariffs is that for a range of good and bad reasons (including food security, landscape and cultural values, rural-vote gerrymandering) many countries want to source much of their food locally.

NZ should accept this and look at how we can manage a steady state or declining level of agricultural exports. The problem with the TPP is that it was damaging to growth industries (like tech) in a (failed) attempt to help the legacy farming industry.

 

by Murray Grimwood on November 24, 2016
Murray Grimwood

"the fact that this government seems to be running low on other ideas for growth".

Finally, something we agree on, Tim.

Except you were a wee bit too exclusive: everyone - and that totally includes Labour - is running low on any ideas for growth.

No idea can bypass a physical constraint. Funny old thing, physics.

by Dennis Frank on November 25, 2016
Dennis Frank

See also http://thearchdruidreport.blogspot.co.nz/2016/11/the-free-trade-fallacy.html - one of the better sceptical analyses.

Whereas our country has prospered on the basis of foreign trade since the settlers stared to export to the mother country, national self-sufficiency is a more sustainable alternative.  Yes, it would deliver a much lower standard of living - mainstreamers would have to wean themselves off their addiction to luxury products to survive.

Peak oil plus the gfc introduced the spectre of the collapse of global capitalism a few years back.  The wizards of capitalism introduced a new form of imaginary money (quantitative easing) to stave off the collapse, and fracking has kept the cost of global trade down sufficiently for the status quo to persist.  Mass perception thus prevails over reality - for now.  When reality eventually breaks through the delusion, the time to switch to resilience via national self-sufficient economic policy will arrive.

by Murray Grimwood on November 25, 2016
Murray Grimwood

Perfectly put.

Yet Tim, above, says: "Because there is still the immense gain of a deal with long-protectionist Japan in the offing. That's nothing to sneeze at"

And claims a superior right to opine, due to 'professionalism'.

References, please, Tim. Overlaid by the background constraints, if you please. How long Japan? This is the no-growth-since-1990 Japan we're talking about?

 

by Brian Easton on November 26, 2016
Brian Easton

I wrote the column before I saw the Japanese statement, Tim. There is a sense that TPP changed into JUSTA – a Japanese US FTA – when Japan joined the other 11. What strategy they have now is uncertain; RCEP cannot be it all. (NZ had much to gain, as we have no trade deals with either and they offer the opportunity of more agricultural product market access.)

Incidentally, just after I filed the NYT did a similar assessment albeit from a US perceptive. It gave great emphasis to the power of China to retaliate; I should have mentioned that.

Further notes on the slow down of the globalisation of manufacturing pressures, which is evident in the data. Of course a situation where export manufacturing was rising faster than production could not go on forever. There was a similar slowdown in the interwar period. The costs of distance where falling, but the costs of manufacturing production were falling even faster. Other costs of distance were decreasing to, especially in communications (radio). That alerts us to that there may an ongoing intensification of export services based on broadband; how it will affect trade deals is unclear. (3D printing may also contribute to relocalisation of manufacturing.)

The case for agricultural protectionism increasing food security is a nonsense. The FAO points out there would be greater security if there was free trade in food since a reduction in local supply would be covered by imports from the rest of the world. In my opinion we need an international food security agreement which includes an agreement not to embargo food (and pharmaceutical) exports for political reasons.

Food protectionism reflects that the farm sector is aware that while consumers may be better-off with lower food prices, producers are likely to be worse off. (Recall that trade theory does not say everyone is better-off under free trade; only that the better-off are still ahead after compensating the worse-off – but they usually don’t.) Farmers woke up to the distributional challenge long before the recent realisation of the problem in other sectors which is discouraging FTAs. That farmers have so much of their wealth in land which is immobile probably alerted them early.

by Murray Grimwood on November 27, 2016
Murray Grimwood

You might want to explain to Tim, Brian, that 3D printers need feedstock. Fossil-fuel-based plastic or metals or whatever. Physical resources, them is.

Indeed, you might explain that the only diffo between injection-moulding and 3D, is the lowered die-cost.

Too many First-World folk are believing themselves into the idea that broadband, or Iphones, or 'technology' is a replacement for real resources and the real energy needed to extract, process and deliver them.

That in turn leads them to think their paradigm can last. Which it can't, won't and is obviously beginning to isn't.

Wouldn't want to put them wrong.

https://endofcapitalism.com/about/1-is-this-the-end-of-capitalism/

 

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