- Victor C. Bolles
With Great Fanfare
On his first overseas trip as President Donald Trump signed, with great fanfare, a $110 billion arms deal with Saudi Arabia. This bilateral deal with the oil kingdom is a clear win for the president. And President Trump likes to win. Of course, the deal had been in the works for years but had been blocked by the Obama administration. But still, a win is a win.
President Trump has stated that he much prefers bilateral trade deals over big, bulky multilateral pacts like the Trans-Pacific Partnership (TPP). One his first acts as president was to withdraw US participation from the TPP. Multilateral trade deals are messy, difficult agreements. The TPP negotiations lasted seven years and the still incomplete ratification process has been on-going for another year. The Doha Round of trade negotiations comprising 159 countries began in 2001 and is not yet concluded.
It is hard to describe these big multilateral trade agreements as wins. Countries have to make many concessions in order to appease the concerns of the other countries. Each country has powerful domestic constituencies (and special interests) that must be placated. A win in one arena such as intellectual property may be offset by a concession in agricultural exports.
The reason President Trump prefers bilateral deals is likely an outgrowth of his years as a businessman and dealmaker. Dealmakers prefer one-on-one negotiations. Even in very complex transactions, many of the elements of the transaction are negotiated separately. You make one deal with your bankers. You make a separate deal with your investors. You have a different negotiation with the city or state on tax concessions. You cut a separate deal with the trade unions. When all the separate negotiations are assembled into the final transaction, nobody knows exactly what the dealmaker’s cut will be.
Translating this experience into international trade deals will allow President Trump to use the size and power of the United States to overwhelm our trade partners, just like Mr. Trump did with his partners in his real estate deals. His business deal track record is littered with bankrupted partners, stiffed suppliers and sour grapes. No matter. Each one was a win for the Trump Organization. They were a bunch of doofuses anyway.
A series of bilateral trade deals where the US dominates smaller countries may be notched as wins to bolster the self-esteem of the president, but they may not serve the long-term interests of the country. Multilateral trade deals may be difficult to negotiate. And they may be difficult to portray as clear victories. But multilateral trade deals are intended to be win/win collaborations not a win/lose contests.
President Trump’s purported goal in these bilateral trade deals is to reduce the US’s enormous trade deficit. But the causes of the US trade deficit are more complex than just bad trade deals. First, the actual amount of the US trade deficit may much less than the reported amount. In an article in the in the Wall Street Journal (The True Trade Deficit, May 18, 2017) Brookings Institute analysts Martin Neil Baily and Adam Looney stated that US exports in 2012 were understated and that the “true” deficit was only $257 billion instead of the reported $537 billion. One reason for this undercounting is the $2.4 trillion in cash parked in offshore tax havens by US corporations because of the flawed tax policy of the US. The US fiscal deficit also drives up the trade deficit. There are other structural reasons such as the skills gap that are holding back US production and exports. And finally, forcefully reshoring US manufacturing will not create the high-paying manufacturing jobs President Trump’s rustbelt supporters are longing for. Those jobs will go to robots, AI and the engineers and programmers that keep them running.
Placing the blame for the trade deficit on poorly negotiated trade deals is an oversimplification that will divert us from resolving the underlying structural problems. Renegotiating trade deals is unlikely to have a significant impact of the trade deficit but could possibly trigger a trade war that would create devastation across the globe that would dwarf the Great Recession.
But these international trade deals are important for another reason. Large multilateral trade deals, along with the World Trade Organization, set the rules for international trade. By agreeing to these rules, even if one particular rule does not work in our favor, we are establishing a rule of law for international trade. Not just with the transactions with us, but also in their transactions with each other. These trade partners are agreeing not just to specific trade terms but also to the concept of the rule of law, a concept that is one of basic building blocks of our democracy. By agreeing to transact business within the parameters outlined in these trade deals, they are agreeing to operate in conformance to how we envision the world should function.
So the Trans-Pacific Partnership was more than just a complex multilateral trade deal. It was an agreement by 12 countries on how the world should work. How we envision the world should work is different from how other countries might want the world to operate. President Xi of China is already attempting to claim the mantle of leadership in the area of world trade that the US has supposedly renounced. China’s mercantilist vision of world trade is very different from ours. If they get to set the rules, it will be to our disadvantage. Not only to our trade balance, but to our standing in the world and our national security.
Among other things, TPP was intended to be a message to China that this is how we want international trade to function. If you want to trade with us you must follow our rules. China agreed to follow the rules when it joined the World Trade Organization but its mercantilist stratagems are not in alignment with WTO objectives. Enforcing WTO rules and demanding protection of our intellectual property rights will do more to rebalance our trade flows than renegotiating deals. And rejoining TPP along with a modernization of NAFTA terms would help insure that the terms of world trade continue to reflect the values and principles of America and our allies.