[SCMP Column] An Assault on Free Trade

October 21, 2017

In the midst of his 210 minute speech to the National People’s Congress on Wednesday, China’s President Xi Jinping stood proud: “The Chinese nation now stands tall and firm in the east.”

The triumphalist statement could be tailor-made as a warning to Donald Trump, who arrives in a week or so for his first Asia tour carrying heavy armour to fight his mission to destroy decades of work on multilateral and regional trade deals and convert the world to bilateralism designed to transform the US’s US$500bn trade deficit.

Around the Da Nang APEC leaders meeting in early November, he will be visiting five key Asian economies, but nowhere will the fight be clearer than when he drops in on Beijing. From the balmy lawns of Mar-a-Lago in April, Xi and Trump will meet in a miserable wintry chill – the contrast in weather no doubt reflecting the change in mood. Trump’s Art of the Deal will come face to face with the Sun Zi’s Art of War. We will see how tall and firm China stands in the east.

While we still fall short of full-scale trade war, the Trump administration has by now fought so many skirmishes that for most trading partners the warnings are clear and consistent. As Financial Times columnist Ed Luce wrote on Thursday: “Anyone who thinks (Trump) has dropped his vow to rip up the global trading system has not been paying attention.”

Luce was talking specifically about the wreckage beginning to build around Mexico and Canada’s efforts to renegotiate a North American Free Trade Agreement (Nafta) deal with the US. But he could have been talking about the US abandonment of the Trans-Pacific Partnership (TPP), threats to unravel the US’s trade agreement with Korea, or efforts in Geneva to “kill the WTO from within” by crippling its critically important Dispute Settlement body.

For someone like me who believes passionately in the net gains that have come to us all from the past six decades of trade and investment liberalisation, the one source of comfort has been the concerted effort worldwide of trade policymakers to stand firm – and against the US – in their efforts to defend and continue to build on free and open trade and investment.

Most prominently, there is mounting evidence that the Da Nang meeting will see the formal signing of a “TPP11” as all of the original signatories except the US gather to endorse what many regard as one of the world’s most significant trade liberalising agreements. If the signing occurs while Trump is in town, the slap in the face will be clear. Putting “American First” has left American alone, with APEC’s other 20 members pulling together in unison.

As Trump flies out on his Asian crusade, he leaves behind a lot of broken crockery around the fractious “renegotiation” of Nafta. Hopes of completing the negotiation by the end of the year have now formally been abandoned. At the end of the fourth round of talks last week, Mexico’s foreign minister was clipped: “We have important differences. Are these differences impossible to resolve? We don’t know.”

Canada and Mexico have discovered that US “reform” proposals are in fact poison pills that would destroy Nafta, and set appalling precedents for trade deals elsewhere. First, the US wants a “sunset clause” under which Nafta would terminate after five years unless it were specifically renegotiated. This would quite obviously destroy the ability of all businesses to make long term plans within Nafta. As Luce commented in the FT: “It is like putting a recurring expiry date on a marriage contract. Divorce becomes inevitable.”

Second, the US wants Nafta’s rules of origin – which currently insist that 63 per cent of the value of a car must originate from within Nafta – to be lifted to 85 per cent. Put on one side the reality that such origin rules are a discriminatory and protectionist cancer at the heart of any “free trade” deal, lifting local content rules on such a scale would inflict massive disruption on production chains that have cost billions of dollars to build.

Third, the US wants to scrap the Nafta dispute settlement mechanism (even though the US has never so far lost a case submitted to the dispute settlement body), instead letting local courts settle cross-border trade disputes. Trump wants to ensure that no pesky foreign judges can frustrate US efforts to decide on the rights and wrongs of a trade dispute. Given Trump’s own controversial corporate history in complying with contracts, foreign trade officials cannot be faulted for preferring Nafta’s independent judicial process.

Perhaps the most sinister of all of the Trump administration’s assaults on the global trading system is the decision to block the appointment of new judges to the World Trade Organisation Dispute settlement body. This body is supposed to have seven judges, but after retirements is now down to five, and by the end of the year will be down to four. It has warned that it will soon be unable to function properly without new judges to replace retirees. The US block is apparently to exert leverage to undermine a process that is seen by most WTO members as one of the most pivotal successes of the WTO, because in US eyes it rules too often against US companies, and against important aspects of US trade law.

The irony here is that the US is by far the biggest user of the WTO dispute settlement process, accounting for almost 20 per cent of the 520 cases brought since 1995. The EU’s trade commissioner Cecilia Malmstrom, said last week that the impasse could lead to a breakdown of a system that is central to managing disagreements among the world’s trading nations.

The question being asked as Trump climbs onto a plane into Asia is whether he is truly preferring bilaterals to multilaterals, or whether he is simply bent on destroying a system of trading rules that have helped to integrate the world’s economies, drive economic growth, lift people out of poverty, and create tens of millions of jobs. Is this the “Darth Vader” of trade? Or just a bull stepping into a China shop? Either way, he seems bent on inflicting considerable harm in the interests of “America First”.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view. Opinions expressed are entirely his own.
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