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In his first five days in office, President Donald Trump has followed through on many controversial campaign promises, prompting concerns in the trade world.
The reassuring stance adopted by most analysts after the election is starting to waver. ''We thought that this was all electioneering. We felt that there was going to be a bit of protectionism – he would have to follow through on some of the pledges – but we weren’t really sure he was going to do an awful lot. Our anxiety began to rise as we saw the various people he was appointing to the trade posts. He is starting to look a lot tougher on trade than we thought he would be in practice,'' says Rob Carnell, chief international economist at ING.
The US’ withdrawal from the Trans-Pacific Partnership (TPP), implemented through an executive order on Trump’s first day as president, will have limited economic consequences, as the agreement hadn’t yet been ratified. It may give room for China to expand its commercial influence in the region, but this doesn’t seem to concern Trump.
On the other hand, the announced renegotiation of the North American Free Trade Agreement (NAFTA) could have much larger implications.
“The question is on how far he goes and what he’s prepared to accept. But it does look pretty aggressive,” adds Carnell.
Trump is in a good position to have his demands met, as Canada and, to a much larger extent, Mexico are far more dependent on the US than vice-versa – 20 times more for Mexico, according to ING.
''Whether or not US manufacturing jobs keep declining as a proportion of the total is perhaps neither here nor there: that falls into the category of economic facts and it sounds like he doesn’t really care about those. What he cares about is soundbites and perceptions and if he seems to be delivering he will be voted in again and I think that’s what he’s after.
I think all sides would be prepared to concede a little bit and admit that the US has gained far less than them from the agreement,'' Carnell tells GTR.
At the Peterson Institute on International Economics (PIIE), Gary Hufbauer believes Trump will most likely focus on the agreement’s rule of origin clause in the auto sector, asking to lift it from its current 65%. ''That will make it inconvenient for some companies such as Toyota, but other companies might like it. Mexicans might go along with that, probably not willingly,'' he says.
In exchange, Hufbauer believes Mexico could ask for infrastructure improvements to ease congestion along the border – but Trump’s expected executive order today (25 January) to start using funds to build ''the wall'', his signature campaign promise, is likely to do more harm than good when it comes to Mexico-US traffic.
Dismantling NAFTA still looks unlikely, less because it would harm all economies involved than because Canada and Mexico appear willing to agree to some US demands.
''The threat to rip up NAFTA would not be a logical step economically – everybody would suffer from that, but we’ve had countries prepared to do things for political rather than economic reasons, and it’s a real threat that we need to take seriously,'' Carnell adds.
However, Hufbauer thinks the agreement’s name could be changed to satisfy voters. ''I want to emphasise the symbolism point. I think NAFTA’s name will be changed. For many of his supporters that will be quite a triumph. And [Trump may] replace the substance of NAFTA with bilateral agreements, one with Canada and one with Mexico,'' he says.
It is worth noting that Canada already has a pre-NAFTA bilateral trade agreement with the US, and trade regulation would revert to that if NAFTA is repealed.
When it comes to China, President Trump seems to be treading a much more cautious path. Despite his promise to label the country a currency manipulator in his first days in office, and his threat to impose an up to 45% tariff on Chinese goods entering the US, no action has yet been taken.
This is partly because his nominee for treasury secretary (who would be responsible for labelling China a currency manipulator), Steve Mnuchin, hasn’t yet been confirmed by Senate. In his confirmation hearing, he did not give a clear answer on his position about such label.
Traditionally, there is also a list of criteria that needs to be met by a country before it is labelled a currency manipulator: spending at least 2% of its GDP selling currency to buy foreign exchange (which, according to Cornell, China doesn’t); having a more than US$20bn trade surplus with the US (it does); and running a 3% or more current account surplus (it did in 2015, but not consistently).
Carnell believes Trump is more likely to negotiate without drastic action, at least at the beginning. “Trump would perhaps like to trade a blind eye to some of China’s geographic ambitions in the South China Sea in exchange for a more reasonable attitude to trade. China could somehow limit the amount of certain key industries which are dumping – steel in particular. I think this is the nature of the debate that could happen. My guess is that tariffs will be used only as an extreme if he sees no move at all on the Chinese front,” he says.
Another one of his campaign promises, which he reiterated at a breakfast meeting with executives this week, is to impose a border tax on US companies relocating production outside of the country and sending the finished goods back to the US. He has described this as ''selective'' 35% tax. But according to experts, this is easier said than done.
Hufbauer says: ''I think if he imposes tariffs on individual companies, naming them, he will run into court problems pretty quickly. He could name the product that the company imports on a very finely designated level and put a tariff on those. But naming companies sounds like a breach of the 14th amendment, which requires equal protection of the laws.''
