To read and listen to the US press and media one would think Trump is against free trade and for protectionism. The media—like some of the American left and progressives—remains obsessively fixed on what Trump says and not what he does. They continually fall into a critique of Trump’s personality traits, at the expense of trying to understand the strategy behind Trump and the billionaire-led new aggressive capitalist forces allied with him and the policies they together are beginning to implement.
The misunderstanding of where Trump is going is especially notable in the media’s coverage of Trump’s emerging trade policies. They interpret Trump’s rejection of the TPP and attacks on Mexico-NAFTA represent Trump as anti-free trade. But nothing could be further from the truth.
Less than a week after assuming office, President Donald Trump signed an Executive Order abandoning the 12 nation Trans-Pacific Partnership (TPP) free trade agreement negotiated by former president, Barack Obama, but not yet ratified by the US Congress. He then quickly attacked Mexico—abruptly cut short a phone conversation with Mexico’s president, Pena Nieto, canceled a meeting with Pena Nieto after demanding Mexico pay for a wall on the US border, and threatened to impose a 20% border tax on goods exported to the United States based on the North American Free Trade Agreement, NAFTA.
Trump’s trade representative, Peter Navarro, then dropped another trade policy bomb by publicly declaring Germany was manipulating the Euro currency unfairly to its advantage, stealing US exports, while similarly exploiting the rest of the Eurozone economy as well.
Trump meanwhile continued to declare that China and Japan were also currency manipulators who were taking advantage of US businesses and increasing their exports at the expense of the US. Their currencies declined by 8% and 15%, respectively, in recent months. The Mexican peso fell by 16% after the US election and the Euro and British pound each by around 20% in 2016.
Trump’s flurry of Executive Orders canceling trade deals, his phone calls to country leaders, his appointed representatives public statements, and his constant ‘tweets’ on social media suggest to some, including the US mainstream media, that Trump is anti-Free Trade, that Trump is ushering in a new trade protectionism, and that his attacks on free trade agreements, like TPP and NAFTA, will precipitate a global trade war. It is this writer’s view, however, that none of this is likely.
Trump is a dedicated free trader. He just rejects multilateral, multi-country free trade deals like TPP and NAFTA. He wants even stronger, pro-US business free trade deals and intends to renegotiate the existing multilateral treaties—to the benefit of US multinational corporations and at the expense of the US trading partners. Trump’s threats of protectionist measures, like the 20% border tax and previous election promises of imposing a 45% import tax on China goods, are primarily tactical aimed at conditioning US trading partners to make major concessions once US renegotiation of past deals and agreements begin. And as for a trade war, the answer is also a very likely ‘no’. The big ‘four’ targeted trading partners—China, Japan, Germany, and Mexico—currently exchange goods and services with the huge US economy amounting between $1 to $2 trillion a year. China-US two-way trade amounts to nearly $500 billion a year, Mexico about as large, and Japan and Germany also account for hundreds of billions of dollars of trade with the US per year. These are the countries with which the US has the largest trade deficits: China’s about $360 billion and the largest, Japan’s close to $100 billion, Mexico and Germany around $60-$70 billion. Given the large volume of lucrative trade with the US, these countries will eventually agree to renegotiate existing free trade treaties and trade arrangements with the US.
What Trump trade policies represent is a major shift by US economic elites and Trump toward bilateral free trade, country to country. Trump believes he and the US have stronger negotiating leverage ‘one on one’ with these countries, and that prior US policies of multilateral free trade only weakened US positions and gains. But free trade is free trade, whether multi or bilateral. Workers, consumers, and the environment pay for the profits of corporations on both sides of the trade deals, regardless how the profits are re-distributed between the companies benefiting from free trade.
Trump’s shift to bilateral trade represents the intent of US economic elites to increase their share of trade profits and benefits at the expense of their capitalist trading cousins. And this is not the first time the US has set out to ‘shake up’ trade relations to its advantage.
In 1971 Richard Nixon introduced his ‘New Economic Program’(NEP), at the center of which was eliminating the post-war Bretton-Woods international monetary system which pegged the US dollar to gold at $35 an ounce. That meant the dollar would devalue, giving US exporters a cost advantage over their rivals in Europe and Japan, which were growing increasingly competitive with US capitalists. The NEP also provided historic new corporate tax cuts and corporate subsidies. The NEP was thus a major assault on US offshore capitalist competition. It also attacked unions and collective bargaining by freezing wages and then reducing the prior two years of union wage increases to no more than 5.5%. The average wage gains of 1970-71, produced by the second largest strike wave in US history those years, garnered union workers gains of 20%-25% in the new contracts. So Nixon was the pioneer of Neoliberalism, which has its major hallmarks both an attack on foreign capitalist competitors as well as on workers wages and social benefits.
Ronald Reagan institutionalized neoliberal policies coming to office in 1980. He too attacked wages and workers’ benefits across a number of policy fronts, and proposed even deeper corporate-investor tax cuts: $750 billion, on a US GDP of $4 trillion at the time. Reagan also launched an assault on US foreign capitalist competitors via new trade initiatives. In 1985-86, when the US under Reagan was losing out exports to Europe and Japan, the US forced Japan to the bargaining table and negotiated the ‘Plaza Accords’ in which Japan was forced to make major concessions to the US. This was immediately followed up by the ‘Louvre Agreements’ with Europe, with the same results.
The Reagan team, led by James Baker of the US Treasury, decided to abandon multi-lateral trade negotiations through the then global ‘General Agreements on Tariffs and Trade’ or GATT. GATT was an attempt to negotiate trade on a global scale involving scores of countries. The US could not get the deal it wanted from GATT trade negotiations, so it turned its fire on its biggest capitalist trading partners—Europe and Japan—and forced the Plaza and Louvre Agreements on them. The results were great for US business, especially multinational corporations. But the agreements play a large part in leading to banking crashes in the early 1990s in Europe and in Japan. Japan thereafter went into chronic recession for the rest of the decade and Germany in the 1990s ended up being described as the ‘poor man’ of Europe.
Similarly today, Trump’s nixing of the TPP and his attacks on Mexico-NAFTA, Germany, and Japan reflect a strategic shift from multilateral free trade strategies and a US policy turn to bilateral approaches to free trade where the US can extract even more concessions from competitors in the critical decade ahead.
One reason for this strategic shift is that global trade volumes have been slowing rapidly in recent years. The global trade pie is shrinking, especially since 2010, when global trade grew at a 20% rate; but this past year the growth will be less than 2%. Capitalist elites are thus increasingly fighting over a smaller share of trade. For the first time, in the past year, the growth of global trade is slower than the growth of global Gross Domestic Product (GDP), even as GDP itself is slowing globally.
Another explanation for the Trump shift is that the US dollar and interest rates are expected to continue to rise. That will result in an increase in inflation in the US. The rising dollar and US prices will mean US multinational corporations’ profits from trade will take a hit. They already are. The Trump shift to bilateral trade is therefore in anticipation of having competitors make up the expected losses of US businesses from trade due to the rising US dollar and US price inflation.
The consequences of the Trump trade shift for the ‘big four’ trade deficit trading partners are mostly negative. 80% of all Mexico exports now go to the US and 30% of Mexico’s GDP is from US trade. Mexico’s peso will continue to fall, import inflation rise and undermine standards of living. Mexico’s central bank will raise interest rates to try to slow capital flight and that will cause more unemployment in addition to import inflation and a slowing economy.
For Europe, the US turn from multilateral free trade will add impetus to Britain’s ‘Brexit’ from the European Union, as well as further legitimize other countries in the EU exiting the Eurozone. France could be next, should the pro-Trump French National Front party there win the upcoming elections this spring, which the polls show it is in the lead.
Japan appears to want to be the first major US trading partner to cut a bilateral deal with Trump. Japan prime minister, Shinzo Abe, continues to shuttle back and forth to Washington to meet with Trump. The first to strike a Trump bilateral deal may get the best terms. Britain’s Teresa May is not far behind, however, equally desperate to cut a bilateral deal to enable the UK to ‘Brexit’ sooner than later.
Where the US clearly loses from the trade policy shift is with China. The end of the TPP means that China will likely expand its own free trade zone, the ‘Regional Comprehensive Economic Partnership’ negotiated now with South Korea, Australis, India and also Japan. The TPP was the US economic cornerstone for its so-called ‘pivot’ to Asia (China) politically and militarily. That has now been set back. The expansion of China’s regional trade zone will also further solidify its currency, the Yuan, as a global trading currency, as well as strengthen its recent Industrial Bank and ‘One Belt-One Road’ initiatives.
The biggest negative impact of the Trump shift on free trade will be the global economy itself. The shift will take time, produce a lot of uncertainty, as well as reactions and counter-measures. That will only serve to slow global trade volumes even further. All emerging market economies will consequently pay a price in lower exports sales for Trump’s strategic trade shift, the ultimate aim of which is to restore US economic hegemony in trade relations over trading partners—a hegemony that has been weakening in recent years. But this is not 1985 or 1971. And a safe bet is that restoration will not prevail.