2018/23, 14 March 2018
Last week, the world saw two contrasting events: roughshod protectionism and dogged commitment to global open trade. Even as President Trump imposed tariffs of 25% on imported steel and 10% on imported aluminium, 11 countries from Asia-Pacific signed the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
Stock markets fell across the globe on Mr. Trump’s action, on fear of a trade war. But alarmists should pause. Trade protectionism has been underway since 2009 as the world economy faced more than 7,000 trade distorting measures. Of this, approximately 1,300 originated from the US, many prior to the Trump administration.
In fact, the proposed tariff measures affect only 2% of US imports. They exclude Canada and Mexico, who together account for 32% of US steel and aluminium imports. More carve-outs are being extended to America’s allies including Australia and others who may be able to negotiate a deal. Mr. Trump tweeted that he expects China to work on a plan to reduce its trade surplus with the US by US$1 billion.
Mr. Trump has promised the industrial heartlanders to protect their jobs. Already, the US Commerce Department remarked that jobs in the US steel sector had shrunk by 35% in the last two decades, and for the aluminium industry by 60% between 2013-2016. Mr. Trump ignored the view that job losses could be due to increased automation and blames trade instead. Economists, on the contrary, believe that the outdated production have caused this. They have observed that the man-hours needed by American steelmakers for a ton of steel has gone down from 10.1 in the 1980s to 1.5 in 2017 because of the use of electric arc furnaces to convert scrap metal into steel. However, this message is politically expedient to convey to an angry domestic audience who make up a large segment of the voters.
Coincidentally tariff hikes were announced at the same time as the signing of CPTPP. This sends a strong signal that America under Trump walks the talk to discourage trade pacts which impact jobs in the US. Although the message could also have been directed at China, presenting a tariff increase as a blanket policy minimises the chance of a trade war between the two economies. Interestingly, Mr. Trump signed an informal proclamation, promising to share the exact details of affected countries in the next two weeks.
But all this does not mean that trade agreements are history. While America is trying to showcase that it is retreating from the global trade order, 11 countries had gone ahead with the signing of CPTPP, displaying interest in trade.
The CPTPP liberalises trade and gets countries to commit on domestic reforms. For developing countries like Vietnam, CPTPP is a catalyst to drive reforms in competition, services, government procurement, labour standards, intellectual property, e-commerce and others. CPTPP is meant to enable digital trade in an era of Industrial Revolution 4.0. It ensures cross-border data flows, provides privacy laws and discourages the need for local presence, benefiting e-commerce.
The CPTPP takes into account the structural change in conducting trade. For long, trade has been a function of cross-border supply-chains, where many countries participate in manufacturing a single product, increasing their trade-to-GDP ratio. However, since 2008, the growth of merchandise trade has been falling, the cause for this is the digitization of products as it enables production of goods locally. For example, in the music industry, purchase of compact discs has been overtaken by downloading music from Spotify, Apple Music, etc. 3D printing is facilitating delivery of goods via internet. The CPTPP prepares countries for such digital trade. While merchandise trade-to-GDP ratio may fall further, it will be the services trade a.k.a digital trade that will keep the world economy ticking.
That said, while Mr. Trump’s measures will cause much concern worldwide, the primary purpose is to assuage his domestic audience. It reflects the transactional way Mr. Trump perceives economics and trade agreements. Doomsday conclusions are premature at this stage. Global leaders will be very considered before they react on every move that US makes on trade. The signing of CPTPP testifies to this. It will be such deals that will transform trade and help countries to achieve their long-term objective of an innovative and prosperous society.
Dr Sanchita Basu Das is Fellow at ISEAS - Yusof Ishak Institute.
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