The White House Looks Better On Trade Than It Seems

Milton Ezrati

Chief Economist

Indicative of this impressive change are the current negotiations between the United States and the European Union.  Since July, when these two huge economies stood on the brink of all-out trade war, and European Commission President Jean-Claude Juncker met with President Trump at the White House, both parties have talked amicably of simply removing all tariffs and non-tariff barriers, as well as subsidies.  Such steps remain a long ways off, since the effort will necessarily involve a harmonization of complex regulatory and labeling guidelines. Still, just such talk contrasts with the kinds of discriminatory trade positioning that has otherwise prevailed since the 1980s.

Over this long period, the dominant frame of reference on trade called for what economists refer to as preferential trade agreements (PTAs). The North American Free Trade Agreement (NAFTA) and the Trans Pacific Partnership (TPP) stand as indicative, as does the Transatlantic Trade and Investment Partnership (TTIP). These, and other agreements like them, elaborate reductions in some trade restrictions only for the signatories. Otherwise, these agreements have imposed or would have imposed sometimes-punitive trade barriers on the rest of the world. In contrast to this otherwise exclusive approach, today’s framework aims at across-the-board reductions in trade barriers and distortions of every sort. To be sure, this newer approach must cover much the same detail as the PTAs did, but the approach, unlike the PTAs, implicitly invites other economies to join the effort and enlarge the impediment-free zone.

Indeed, today’s efforts resemble the trade approach taken by the United States during the four decades following the Second World War.  Then, Washington eschewed PTAs in favor of efforts to promote free trade globally.  Under the auspices of the General Agreement on Tariffs and Trade (GATT), the precursor to today’s World Trade Organization (WTO), Washington insisted that all nations simply rid themselves of tariffs and non-tariff trade barriers.  It actually succeeded in large part through a series of negotiations, called “rounds,” the last of which, called the Doha Round after the venue where negotiations began, failed earlier this century when the EU, which constitutes the world’s largest PTA, refused to give ground on agricultural subsidies and preferential treatments, including tariffs.  Given this history, it speaks to how matters may have turned a corner that the EU’s good will gesture last July included easing restrictions on American soybeans.

Especially because the White House and the EU are trying to spread this new framework, it has the potential to put considerable pressure on China. Beijing is already suffering other pressures in its contest with the United States. Its effort to meet Trump’s tariffs dollar for dollar have reached a limit, because China’s exports to the United States are so much larger than American exports to China and because they are much more important to China’s economy than U.S. exports to China are to the U.S. economy. Now this latest turn in the framework of trade talks puts Beijing in a still more awkward spot. By bringing up the need  to harmonize regulatory regimes, recent, more universal efforts have brought to light how much difficulty most nations, including the United States and the EU, as well as Japan, have with Beijing’s approach to trade, most especially its insistence that any firm entering the Chinese economy must have a Chinese partner and that it also must share its technological and commercial secrets. If recent trade directions gain momentum, China would have to lift such rules or risk the kind of trade isolation that its economy can ill afford. Matters have not yet gone far enough to place Beijing at a decision point, but China’s leadership surely knows how these new directions could do so.

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