Decisions on trio of trade partners loom large for US in 2018

The Trump administration has China, Canada and Mexico at the top of the trade agenda for 2018. Decisions are pending about trade sanctions on China and about modernizing or leaving the North American Free Trade Agreement (NAFTA).

These are America’s top-three trading partners and export markets. Millions of U.S. jobs and many billions of dollars in trade and investment are in the balance, as are key U.S. strategic interests. The costs of missteps can be very high.

{mosads}The U.S. administration is considering imposing trade penalties on its largest trading partner, China, for intellectual property (IP) theft and forced technology transfers, for underpricing solar panels sold in the U.S. and for subsidizing the cost of steel and aluminum exports to the U.S.

Legislation is pending in Congress that would bring more scrutiny of Chinese investments. The new U.S. National Security Strategy focuses sharply on the damage caused and the threats posed by Chinese behavior. U.S. decisions on several issues are expected in January.

The choice to impose sanctions is significant given China’s regional role and bilateral trade: 2016 U.S.-China trade totaled about $645 billion with a U.S. trade deficit of over $300 billion.  

Regarding North America, negotiators from the U.S., Canada and Mexico will meet in Montreal Jan. 23-28 to continue crafting a modernized North American trade agreement. All three partners agree the treaty should be updated.

NAFTA commerce of $1.3 trillion supports up to 14 million American jobs and has made the two neighbors America’s No. 1 one and No. 2 export markets. The talks have been stuck over hardline U.S. demands put forward in 2017. U.S. officials have threatened to walk away if U.S. demands are not met, setting off alarm bells for U.S. businesses and farmers.

The contrast between the two situations is stark. China is a country that the president’s new National Security Strategy describes as a rival, sharply criticizing its economic, political and military practices.

Canada and Mexico are two friendly neighbors committed to market principles, one of which is a NATO ally and the other is increasingly close partner on many issues, including countering Transnational Criminal Organizations: a threat highlighted in the U.S. National Security Strategy. Canada and Mexico are also vital for strengthening U.S. energy security, as the National Security points out.

Regarding China, the administration is on the high ground on substance and has laid out its case for responding to Chinese economic misbehavior in its new National Security Strategy. Many agree that China has been acting contrary to international trade law in various ways.

The European Union and the United States are arguing in the World Trade Organization that China is not a market economy, while the EU, Japan and the U.S. announced a joint effort to work on related problem areas.

Still, many voice concern about the risks of U.S. punitive actions on the massive two-way flow of U.S.-China trade, on prices for U.S. consumers, on treatment of U.S. companies invested in China and those reliant on Chinese imports.

Some will opine that trade penalties would be ineffective or that if not well managed, the countries could slide into a costly trade war that would spill over into other areas, such as cooperation on North Korea. Others add that, as with NAFTA, the U.S. is too focused on trade deficits.

Yet, well-crafted, WTO-consistent trade enforcement actions that get China’s attention could demonstrate constructive leadership in moving to a new, positive era of economic relations. This would be especially true if the U.S. engages with partners and signals how its moves will help strengthen (not undermine) international trade standards.

Also, explaining how U.S. moves fit into a coherent overall strategy toward China and Asia will be important.

Regarding Canada and Mexico, the administration has put forward very tough proposals on rules of origin, dispute settlement provisions, a sunset clause and other items that have alarmed key parts of the U.S. business community and generated opposition from North America’s auto sector.

The threats to walk away from NAFTA have spread alarm in U.S. farm states. Those states rely heavily on NAFTA-advantaged farm exports to both U.S. neighbors. Projections suggest that pulling out of NAFTA would cost the U.S. hundreds of thousands of jobs and many billions in U.S. exports, and spark negative reactions in the stock market. This has generated a steady stream of governors, senators and others urging the White House to preserve NAFTA.

The relative costs to the economies of Mexico and Canada would be greater. For Mexico, a U.S. withdrawal would likely deepen anti-American sentiment and negatively affect the July 1 presidential elections to the detriment of the U.S. The strategic costs could be long-term. In addition, China is standing by to offer Mexico and Canada new trade opportunities.

Importantly, while U.S. officials argue that the trade balance shows NAFTA is unfair, recent studies show the raw deficit figures don’t tell the true story because of NAFTA’s integrated production chains. Mexico and Canada each have more American content in their manufactured exports to the U.S. than any other country.

Applying a “value-added” analysis to the overall U.S. deficit with Mexico shrinks it significantly. The Wilson Center found that the U.S. deficit shrank 36 percent when the U.S. content in Mexican imports was applied. Another study argues that the 2014 U.S. “deficit” of $30 billion in manufactured goods is really a U.S. surplus once the U.S. “value added” is taken into account.

Pulling back from NAFTA would significantly harm U.S. workers, farmers and businesses and send a clear negative message to the world. The Trump administration says it seeks bilateral trade agreements to expand U.S. exports.

If, however, America walks away from its two largest clients and undermines a $1.3-trillion production and trading network built by the U.S. private sector, others will be more wary about a trade agreement with the U.S.

The treatment of China and Canada and Mexico raises bigger questions. Is the U.S. able to be forceful and responsible with China, a country it says is trying to “erode American security and prosperity?” Is it willing to forge a mutually beneficial way forward with its closest neighbors who partner with it on vital non-trade issues?

Or, will its actions create more of a sense of a vacuum in international economic leadership, of its own isolation and of opportunity for China to expand its influence? We will have some answers soon. 

Earl Anthony Wayne is a public policy fellow at the Woodrow Wilson Center. He served as assistant secretary of State for economic and business affairs from 2000-2006 and ambassador to Mexico from 2011-15.