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The Potential Costs of Trade Withdrawal

University of Wisconsin, Real Town Hall with Joe Conti.

Joe Conti
October 05, 2016

Both Presidential candidates have promised to improve America’s trading relationships through new approaches to negotiating trade deals.  Both candidates’ positions reflect a deepening disapproval of globalization because of its purported effects on employment and income. Trump goes further than Clinton because he has proposed high protectionist tariffs against Chinese imports and withdrawing from or re-negotiating the North American Free Trade Agreement (NAFTA) and possibly the World Trade Organization (WTO).[1] In terms of trade, this Presidential election has been unusual because there is not a free trade candidate and there has been little discussion of why we should think that shifts in trade policy are the best way to improve American prosperity. The candidates are saying that they want to rethink the global trading system. This will pose many challenges that are currently not part of the public conversation about US trade policy.

What about renegotiating the WTO and NAFTA?  Both agreements have procedures for revising the treaties. They have both proven difficult to employ because they require achieving a consensus among the state signatories to the agreements.  The latest round of negotiations at the WTO has gone on for over a decade and is largely considered a failure. Moreover, it is not clear why we could expect cooperation on new trade agreements from our trading partners if the goal is to get a relatively better deal for the United States. The whole modern trading system is built on the principle reciprocity: we open our markets in exchange for market access for American firms abroad.  That bargain has been incomplete, particularly in the context of agriculture.  In agriculture, the United States has refused, despite the rules of the WTO, to eliminate various forms of subsidies.  While this has been beneficial to American farmers this issue has been a major sticking point in in WTO negotiations.  What this suggests is that if the purpose of renegotiating trade agreements is to better protect American markets from competition, then we should not expect cooperation from our trading partners.  From their vantage point, we already have a more favorable deal.  It is worth remembering in this context that it has been developing countries that have most strongly resisted more labor-friendly trade policies.  Trade deals that favor American labor are likely to directly contradict the interests of developing countries that rely on cheap labor.  The point is that it is simply not obvious that the US will be able to get a better deal outside of NAFTA or the WTO.

The idea behind Trump’s threat to withdraw from these agreements is that the world economy won’t work or be as profitable if the US pulls out and that US’s economic power and the desirability of access to our markets will lead our trading partners to accept a less favorable deal.  It would not be the first time that an economically dominant power was able to translate that into beneficial terms of trade.  But what might it look like if countries like China or Brazil or the EU rejected our demands and we left these agreements?

First, there are some procedural issues to be dealt with. There is no denunciation clause in the WTO. This means that the process for leaving would have to be invented. That will take time and keep the lawyers at the US Trade Representatives Office busy for a while. Consider the analogy to Brexit, where several months after the referendum the British government neither has a plan nor the personnel to actually negotiate its exit from the EU. Congress has to authorize tariff increases and negotiation of trade agreements. Both candidates seem to assume a Congress that they can work with on trade policy, but that may be optimistic.  If the US government moves to renegotiate trade deals, there will be intensive lobbying from the business interests that have set the trade agenda for several decades: pharmaceuticals, Silicon Valley, Hollywood, and agriculture. As we know, labor and old industrial sectors like steel have been fighting these agreements and pretty much losing since NAFTA.  But, perhaps this time will be different given the broader change in attitudes about trade that are appearing during this election cycle.

Assuming those obstacles could be overcome, the first result of a US withdrawal from the WTO or NAFTA would be an immediate imposition of punitive tariffs by major US trading partners.  This would undermine the competitive position of US firms, like Ford or GM.  Withdrawing would entail dismantling over a decade’s worth of corporate investments in regional and global supply chains and would force American multinationals to adopt relatively less efficient production systems. The same would be true for foreign firms, like Honda or Samsung, that have built extensive global productions system centered on the US and employ many Americans.  These costs to business plus higher tariffs would translate into higher priced goods and declining employment opportunities, at least over the short run.  These costs would fall hardest on those workers without college degrees.  And the US would have given up the primary instrument it has to fight illegal trade practices by our trading partners, which is the WTO itself.  Finally, the US would have abandoned a leadership role in the regulation of the world economy and would put the US at a severe disadvantage in future trade negotiations.  Today’s trade deals like the TPP are not primarily about tariff reductions but regulatory harmonization. In the specific case of the TPP, it is about asserting US influence as a geopolitical and economic counter-weight to China.[2]

Maybe these costs are worth it to Americans, but it is hard to know for sure since neither candidate is talking in detail about them. We also are not getting a lot of information or other steps that might be take to compensate for these costs. At minimum if we are going to withdraw from trade agreements we should be having clear-headed discussions about the trade-offs involved.  The good news is that talking about the costs of trade withdrawal might encourage clearer thinking about the most direct and effective ways to enhance American prosperity.

[1] It isn’t clear what Trump proposes about the WTO. His website suggests rather than leaving the WTO, he would he would aggressively use the tools it provides to challenge China.  But he also raised the possibility of leaving the WTO if there were international resistance to his plan to implement taxes on US companies offshoring manufacturing. See Maudlin, William. “Trump Threatens to Pull U.S. Out of World Trade Organization.” Wall Street Journal. July 24, 2016. http://blogs.wsj.com/washwire/2016/07/24/trump-threatens-to-pull-u-s-out-of-world-trade-organization/ (Accessed October 3, 2016).

[2] This is most clear in the TPP provisions around state-owned enterprises, which will pull countries like Vietnam closer to western style market capitalism and make it harder for China to assert its economic weight in the region.

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