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Global macro & geopolitics from a small economy perspective

Actions speak louder than words

David Skilling
10 November 2017

A year ago this week, Donald Trump was elected as US President on a trenchantly America First platform. For 30 years, Mr Trump has held particular views on trade. In 1987 he took out a full page ad in the New York Times arguing that ‘For decades, Japan and other nations have been taking advantage of the United States’ by, among other things, running a weak yen policy that caused ‘vast deficits’. Since his inauguration, he has withdrawn the US from the TPP, is renegotiating NAFTA (and in a way that some believe suggests he isn’t serious about reaching a deal), has threatened to renegotiate KORUS, and has complained bitterly about the unfair treatment he believes the US receives from its trading partners.

However, despite early fears, this hasn’t yet led to trade and currency wars – China has not been designated as a currency manipulator, for example. And since Q4 last year, world trade growth has picked up strongly as a coordinated global recovery takes hold. Small economies have benefited particularly from this. But this week is a consequential one in terms of whether this can be expected to continue.

Mr Trump arrived in Asia on Sunday for bilateral meetings in Japan, South Korea, and China, and then the APEC meetings in Vietnam and the East Asia Summit in the Philippines. On the trade policy front, little of great consequence has occurred. In a well-choreographed visit, PM Abe brushed off US requests for bilateral trade talks. And in South Korea, there was little on trade; the KORUS renegotiation was not mentioned in the public remarks.

So the Trump Administration’s preferred approach of bilateral deals is not making much progress. Indeed, Singapore PM Lee recently noted the flaw in this approach: if the US intends to use its negotiating muscle to extract a better deal, ‘I think not that many partners will be keen to deal with you bilaterally’. Commerce Secretary Wilbur Ross reminded the UK of this reality during the week, talking of the need for the UK to align its trade and regulatory approaches with the US.

China of course is a more challenging relationship, and with a large trade surplus (‘embarrassing’). China rolled out the red carpet for a ‘state visit plus’, and succeeded in kicking bilateral trade issues into touch. A purported US$250 billion of commercial deals were announced, but there was less on policy. Mr Trump promised ‘practical steps’ to reduce the trade deficit, but there is little on the agenda. This may be sustainable while the North Korean issue requires cooperation, but likely not for much longer.

Although Mr Trump seemed to have a touch of China envy, noting that he didn’t blame China for taking advantage of the US and seeming to applaud China’s economic nationalism, strategic competition between China and the US is likely to increase. There are fundamental tensions between the ‘Made in China 2025’ plan, for example, which has deeply mercantilist elements, and the interests of Western economies. And both China and the US seem increasingly unwilling to be constrained by the WTO. This relationship will become increasingly demanding to manage.

But at least for the moment, the consequential trade policy discussions in Asia are happening without the US. The key platform for this is the meeting of TPP Ministers at the APEC summit in Vietnam this week – and held, it should be noted, in Da Nang, where the first US combat troops landed 50 years ago.

TPP Ministers have been meeting to attempt to agree on a (slightly revised) version of the TPP agreement to present to leaders. Some countries have raised concerns – such as Canada and New Zealand’s new government – but many of these seem to have been resolved. Agreement and ratification by all remaining 11 countries remains challenging – and the negotiations are apparently going down to the wire as I write. But Japan has done a very good job in keeping the deal alive, and I remain optimistic that a TPP deal will be agreed that includes most of the TPP-11.

A TPP-11 is a less economically interesting proposition than the original TPP-12, but it is still valuable for both economic and strategic reasons. For many countries TPP is seen as creating options in dealing with China.

Next up are the RCEP (Regional Comprehensive Economic Partnership) negotiations that will take place alongside the East Asia Summit in the Philippines next week, but these negotiations are progressing slowly and any quick conclusion is unlikely. RCEP is also a much less ambitious deal than the TPP. It is TPP that is central to a rules-based trading system in the Asia Pacific.

So there is room for some confidence in the outlook for the trading system: the absence of large-scale protectionist activity, progress on deals like the TPP, and leadership from the EU and Japan. The pick-up in global trade growth is also encouraging.

But there are real risks. A failure to conclude TPP, together with a worsening in the relationship between China and the US, could quickly lead to problems for global trade and the global economy. And, of course, the spectre of military conflict – both in North Korea and, increasingly, in the Middle East – is another risk. So far the global trading system is surviving the abdication of the US. But like riding a bicycle, forward momentum is required.

twitter: @dskilling
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