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For American business to thrive, bilateral trade deals aren’t enough

For American business to thrive, bilateral trade deals aren’t enough

The Trump administration has made it very clear that the United States is no longer interested in multilateral free trade agreements or policies. At the same time, the European Union, Japan, and China are forging ahead with multilateral deals. As the U.S. steps aside and other nations and blocs step up, the American economy will find itself increasingly isolated as the global economy moves on without it.

From multilateral to bilateral free trade deals?

President Trump has consistently spoken against multilateral trade agreements, believing that they encroach on American sovereignty and unfairly allow other countries to take advantage of the American economy and consumers. In January 2017, he pulled the U.S. out of the Trans-Pacific Partnership (TPP), which the U.S. Trade Representative says would have eliminated over 18,000 tariffs on American goods. Trump’s comments on trade and Europe more generally prompted EU leaders to shelve the Transatlantic Trade and Investment Partnership (TTIP) negotiations, which would have brought in billions of dollars for the American agriculture sector. Under Trump, the U.S. will also be the only country in the world not party to the Paris Climate Accords, which would have positioned America to lead the $60 trillion clean energy market.

“We will no longer enter into large trade agreements.”

President Trump, APEC Summit speech, November 2017

As an alternative, the Trump administration is touting bilateral trade deals. However, most other major economies do not want bilateral deals. The Japanese Finance Minister rejected the idea of a bilateral trade deal with the United States. As the Trump Administration continues to attack the South Korea-U.S. trade agreement, South Korea has signaled that it is willing to back out of the deal itself and is making plans for a free trade agreement with the Russian-led Eurasian Economic Union if American demands remain “irrational.”

Moreover, the Trump administration does not seem to be putting in the effort necessary to make bilateral deals work.

“There seems to be more of a focus on making a political point about trade deals vs improving them.”

Senior Brookings Institute fellow Joshua Meltzer

The administration’s focus on making sure the U.S. is treated with respect highlights the difficulty of bilateral trade deals. Other countries are reluctant to deal one-on-one with America simply because of its sheer size.

“You [America] are bigger than any other partner that comes along and so you get a better deal. As a result of which I think not that many partners will be keen to deal with you bilaterally.”

Lee Hsien Loong, Prime Minister of Singapore

Shinzo Abe Donald Trump White House

Presidents Shinzo Abe of Japan and Donald Trump of the US at the White House.

Japan and Europe step up

As America pulls back from multilateral trade deals, Japan and Europe are stepping up to fill the void. Japan’s Prime Minister Shinzo Abe, having spent significant political capital on the TPP, has spent the past months reviving it in the wake of America’s withdrawal. With Japan at the helm, the TPP has been recreated as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Abe will not discard the deal as easily as Trump did, as Japan needs the CPTPP to revitalize its economy and serve as a hedge against China.

While Japan is focused on rewriting trade in the Pacific, the EU is attempting to cement a deal with MERCOSUR, a South American bloc consisting of Argentina, Brazil, Paraguay, and Uruguay (and a suspended Venezuela). The EU hopes that the deal will position it as the leader of global free tradein the age of Trump.

Equally important to both is their own Japan-EU free trade agreement. The two parties are seeking to sign a deal before 2018. A successful deal would create the largest industrialized free trade area in the world, accounting for 19% of global GDP. Together, the EU and Japan are driving trade agreements in the most economically important and vibrant markets, trade agreements to which the United States could have been party.

Enter the dragon

In his own speech to the APEC Summit, Chinese President Xi Jinping offered a direct rebuke to Trump’s bilateral stance. He called for Asian countries to enhance “interconnected development” instead of going their “separate ways.” Xi’s speech highlighted how China is forgoing the old maxim of “biding its time and hiding its capabilities” in favor of acting as a leader of the global economy.

The most obvious manifestation of China’s new role is the Belt and Road Initiative (BRI), an ambitious plan to reorient global trade. Through the BRI, China would pump nearly $1 trillion into global infrastructure projects, such as new ports and railways, to facilitate increased trade. At the same time, Premier Li Keqiang has sought to advance the China-Korea-Japan free trade talks as trade between the two countries reaches unprecedented levels. In addition, days after the APEC Summit, leaders from sixteen Asian countries met in Manila to discuss the Regional Comprehensive Economic Partnership (RCEP), a Chinese-led regional free trade agreement. If completed, the RCEP would decrease tariffs and increase trade across a quarter of the world economy and would allow China to rewrite the rules of global trade.

Xi Jingping Pedro Kuczynski APEC 2016

Chinese President Xi Jingping with Peruvian President Pedro Kuczynski.

America left behind

The Trump administration’s unwillingness to engage with multilateral trade agreements will have negative effects for the American economy. By shunning multilateral agreements, American businesses will need to pay high tariffs to access key markets, while their foreign competitors do so for significantly less. For instance, the TPP should have produced $10 billion in output for the U.S. agriculture sector, largely from access to food-import dependent countries like Japan and Vietnam. Notably, American beef exports to Japan would have seen a tariff of only 9%, far lower than the current 50%. Instead, New Zealand and Australia are likely to claim that prize with the CPTPP, as will the EU with its agreement with Japan. Pulling out of these deals gives other economies clear advantages over the United States in global commerce.

Losing out on the TPP and its successor as the CPTPP has another indirect consequence for the United States: it gives Mexico and Canada increased leverage during NAFTA renegotiations. In the U.S.’ absence, the CPTPP acts as an alternative to the American market for Mexican and Canadian exporters. If the CPTPP is successful, America’s neighbors will be less reliant on the American economy and therefore less willing to give concessions during negotiations.

Deals such as the Paris Climate Accords and TTIP are the only way that the American economy will move forward on trade in the future. Other countries want a good trade terms, just as Trump wants a favorable deal for America; but they won’t get them negotiating one-on-one with the United States. Until the American government recognizes this, American businesses will lose out to their foreign competitors.

This article first ran on Global Risk Insights, and was written by Zachary Torrey.