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Implications of Trump's trade policy

The ECCT's Tax committee hosted a lunch on the the topic "The Trump administration's trade policy and the implications for Asia Pacific regional integration" featuring guest speaker Roy Lee, Deputy Executive Director, Chung-Hua Institution for Economic Research. The speaker gave an overview of the evolution, current status and outlook for trade policy under the administration of US President Donald Trump.

The rationale for so-called "Trumponomics", which were integral to Trump's presidential campaign, is the argument that the de-industrialisation of America has led to its decline.

The argument looks compelling if you only look at the gradual decline in manufacturing jobs as a portion of the workforce. At the peak in the 1940s, manufacturing jobs accounted for 38% of all jobs in the United States but the percentage has been steadily declining since the end of World War II. By 2010, the portion of jobs provided by manufacturing had declined to just 8% of the workforce.

Trump's argument that the shift in manufacturing to other countries is the cause of America's loss of jobs turns out to be too simplistic upon evaluation. Firstly it ignores the shift in global economic growth drivers from the industrialised west to the emerging economies, particularly those in Asia. This is illustrated by the decline of the global share of GDP contributed by the G7 countries from around 70% in 1993 to under 45% in 2014, largely driven by China.

Trump also simplistically conflates rising trade deficits with overall decline, which he attributed to "bad" trade deals, arguing that: free trade creates wealth, but not US jobs, free trade exacerbates the US's de-industrialization and that free trade allows the US to be taken advantage of.

However, with a little scrutiny the arguments are not entirely convincing. While it is true that the US manufacturing sector has shed jobs, both productivity and output have moved in the opposite direction, upwards. This indicates that technological advancements (such as automation) and the rise of global value chain might be more direct causes of the job losses.

Another problem with Trumponomics is that certain US companies have managed to capture the lion's share of the value chain. Perhaps the best example is Apple, which, while outsourcing much of the manufacturing of components for its phones, computers and other devices, still dictates the pricing of components and commands the highest margins.

Taiwan is one of best examples of how the development of the global value chain has shaped the global economy. According to statistics cited by Lee, as recently as 1989, finished consumer goods accounted for 38% of Taiwan's exports while parts and components accounted for just 12%. By 2015, parts and components accounted for over 40% of exports while consumer goods had dropped to under 10%.

While Taiwan can be considered a success story of the development of global value chains, Lee stressed that there are nevertheless winners and losers in terms of the global and local distribution of income.

The winners have been the business and political elites and the middle class populations in the fastest growing economies.

The most likely groups to have been negatively affected by the economic shift are the lower-middle class, the middle-aged and rural populations.

Lee showed two maps of the United States, one showing the level of the impact of competition from China on US jobs and another showing the distribution of votes cast for Donald Trump in the election. By comparing the two maps it could be argued that there is a strong correlation between the areas where the most jobs were lost on the level of Trump's support rate, showing that Trump's campaign message resonated with a large number of voters.

The situation is not unique to the US. Lee presented two other charts which seem to point to a correlation between less educated and rural populations and those that voted for the United Kingdom to leave the European Union (Brexit).

Taiwan is also not immune to the phenomenon, which means that there needs to be support for those who missed the gains of the economic transformation.

The guiding principles of the Trump administration's trade policy are to: expand trade in a way that is freer and fairer for all Americans, increase economic growth and promote job creation, promote reciprocity with trading partners, focus on bilateral negotiations rather than multilateral negotiations, strengthen the manufacturing base, expand agricultural and services industry exports and reject the notion that the United States should, for putative geopolitical advantage, turn a blind eye to unfair trade practices that disadvantage the US.

Under the guiding principles, we can attempt to glean the top priorities of Trump's 2017 trade policy agenda. Lee suggested that the priorities are to strictly enforce US trade laws.

There are several existing laws which would allow the US to take unilateral action such as imposing trade sanctions. The Tariff Act of 1930 offers trade remedies. The Trade Act of 1974 has safeguard provisions under section 201 while section 301 covers ‘unfair practices' and IRP protection. The Trade Expansion Act of 1962 has a section (232) that makes provisions for the impact of "national security".

Key appointments made by Trump may also signal his intentions. The appointment of Robert Lighthizer as US Trade Representative (TR) and Gerrish as Deputy USTR for Asia and Europe may signal a tougher and more protectionist approach towards trade.

A Trade Deficit Investigation Report has been completed but not yet released. Pending are a publication of the North American Free Trade Agreement (NAFTA) Renegotiation Objectives (USTR), an Article 232 (national security) investigation on steel and aluminium and the publication of the 100-day program with China. It is not clear what action the administration will take in response to these reports.

In terms of possible negotiation agendas, the first round of negotiations to "modernise" NAFTA are set to begin in August 2017. The administration also wants to renegotiate its trade deal with South Korea and start talks on a deal with Japan and may want to hold negotiations based on the results of its various reports.

A potentially contentious situation could follow an investigation of China under section 301 of the Trade Act. The US is investigating China's "Made in China 2025" industrial plan, in particular, opaque and discretionary approval processes, joint venture requirements, foreign equity limitations, procurements, the inability of US companies to set market-based terms in licensing and other technology-related negotiations and undermine US companies' control over their technology, unfair facilitation or systematic investment in, and/or acquisition of, US companies and assets by Chinese companies to obtain cutting-edge technologies and IPR and unauthorized intrusions into US commercial computer networks or cyber-enabled theft of intellectual property, trade secrets, or confidential business information.

When the results of the investigations are released, action may come in the form of suspension of obligations, increases in tariffs or services trade restrictions or voluntary compensation and/or self-constraint arrangements. The administration may request bilateral negotiations, take cases to the WTO's Dispute Settlement gateway or take unilateral retaliation measures. Ever since 1995, the US has always chosen the WTO route but it is not certain that Trump will do the same.

While Taiwan is on the list of candidates for possible future trade agreement talks, Lee joked that this is not something to get too excited about. This is because Taiwan is on the list as having a large trade deficit with the US (regarded as negative by the Trump administration). The implication is that the US may seek a trade agreement with Taiwan as a way to reduce its trade deficit with Taiwan. If that is the case, it may not necessarily benefit Taiwan. Moreover, given the US's most vocal issues regarding trade with Taiwan (such as allowing US meat and GMO imports) face serious opposition in Taiwan, it would also be difficult to sell the idea of a trade deal that opens the Taiwan market to these products to the Taiwanese electorate.

Lee concluded that there are many uncertainties about the direction of future US trade policy, especially geopolitical uncertainties surrounding North Korea and the South China Sea and the outcome of the US's investigations on trade deficits and unfair practices of trading partners.

Moreover, he made the point that regardless of trade policy, the market-driven integration process is unlikely, unable or too costly to reverse in the long run. This is especially the case on a regional basis (in the EU, North America and Asia) where a significant portion of trade is between partners in the same region. He also said that the TPP remains relevant even without the US formally participating. He noted a high level of similarity between the TPP and NAFTA and the fact that the US congress has already mandated many elements of the TPP, which means that the deal is "alive" in substance.