In Trade Pacts, Signs Emerge of a Strategy

Posted October 6, 2018 12:24 p.m. EDT

Anyone who has been closely watching the Trump administration’s strategy for remaking global trade might have reasonably believed at times that it had no strategy for remaking global trade.

But that has changed in recent weeks, with a more coherent approach starting to become apparent — though not one with any guarantee of success.

The strategy that has jelled goes something like this: The president has been beating up on traditional allies, including Canada, Mexico, the European Union, Japan and South Korea. He has been assailing them publicly, placing tariffs on their steel and aluminum, and threatening to tax their automobiles. But fundamentally, that was just about softening them up to extract moderate concessions favorable to U.S. interests.

That has now been achieved with a trade deal with South Korea in late September and a new NAFTA, now to be called USMCA (for United States-Mexico-Canada Agreement), struck last weekend.

Now that the administration has shown it can get to yes with those deals, similarly patterned agreements with Europe and Japan are expected to come next. After revised deals with those allies are in place, the administration will most likely seek a concerted effort among them to isolate China and compel major changes to Chinese business and trade practices.

The ultimate goal, in other words, is to reset the economic relationship between China and the rest of the world. It may take time and cause pain in the interim. But the idea is it’s a multistep process to attain more leverage with which to force China to allow U.S. companies to sell their goods and operate freely, without having their technology stolen. And it bolsters the United States in a geopolitical rivalry with China that is becoming more tense, as Vice President Mike Pence articulated in a speech last week.

One telling piece of evidence for this strategy: a provision in the new North American deal that will make it hard for Mexico or Canada to negotiate a trade deal with a “nonmarket” economy like China without risking their favored access to the United States’ huge market.

Larry Kudlow, the White House economic adviser, outlined this strategy at the Economic Club of Washington on Thursday. “China is first and foremost,” he said at one point.

“There’s a lot of unfair trading practices, and the biggest culprit is China,” he said. The administration was able to complete the new North American deal, he said, with “a combination of pressure and negotiations.”

“We are talking to the European Union again, we are talking to Japan again, and we are moving to what I have characterized as a trade coalition of the willing to confront China,” Kudlow said. (He didn’t note that he’d borrowed a term also used for the allies that joined in the 2003 invasion of Iraq, which President Donald Trump has called a disaster.)

The sense among analysts that the administration has been pursuing a single coherent strategy contrasts with earlier in the year. At that point, from the outside at least, the administration seemed to be changing its approach by the week, and sometimes by the day. It has often seemed that there has been a series of improvised moves, with different senior officials favoring different approaches.

Steel and aluminum tariffs were to be applied to all imports, then close allies were exempted, until two months later when they weren’t.

There seemed to be a deal to increase Chinese imports of American agricultural and energy products, achieving trade peace — which crumbled days later, as Trump changed course and demanded more profound changes in the Chinese economy and trade practices.

Now, with the new North American deal, it’s become easier to see how the different elements of Trump trade fit together. The “nonmarket” provision seems devised to give the United States veto power over any deal Canada or Mexico might seek with China.

But just because there is a more coherent strategy in the administration’s stance toward global trade than in the recent past doesn’t mean it will work. And there are still plenty of reasons for skepticism.

“I do think we can see a strategy, but that doesn’t mean it’s a good strategy,” said Mary E. Lovely, a professor at Syracuse University and a fellow at the Peterson Institute for International Economics. “They’re going to use these bilateral deals to strong-arm countries into lining up behind the U.S. on China. But when we get there, what’s the next step? I don’t know what the endgame is.” Some items on the Trump administration’s list of demands in negotiations with the Chinese seem unlikely to be met, as they would compel China to abandon its entire strategy to modernize its economy.

For example, one demand is for China to halt its subsidies for its “Made in China 2025” program aimed at giving its companies a foothold in aircraft, robotics and other areas of advanced manufacturing.

There’s a risk that even if the effort to isolate China succeeds, the result might be simply a bifurcated world trade system in which there is one orbit of countries with close ties to the United States and another tied to China, with minimal overlap.

A crucial question is whether the administration’s strategy of pummeling allies with attacks, threats and tariffs can yield not just revised trade agreements but also the trust needed to undertake a concerted campaign against China.

Lovely jokes that it would really be the “coalition of the coerced” rather than Kudlow’s “coalition of the willing.”

The scars and bruises from negotiations this year could linger, compounded by the Trump administration’s disinclination to engage in multilateral negotiations with many parties at once.

The new North American deal, a case study in such unwillingness, shares many elements with the Trans-Pacific Partnership, which was negotiated by the Obama administration and abandoned by the Trump administration in early 2017.

The whole agreement was intended as a strategic counterweight to Chinese economic power in the Pacific Rim.

But rather than reopen the TPP, the Trump administration chose the path of separate deals with each country. The bet is that the United States will have greater negotiating leverage in a series of bilateral deals with allies than it would in some large multicountry agreement — even if many of the details of agreements end up looking similar, as was the case with the new USMCA.

The risk of that approach is that when the United States hammers out each deal separately, it may be hard to then turn around and create any kind of unified pressure against China.

“To go into battle, together, you need to know that a partner is reliable, that if they tell you something, they’ll stick to it,” said Phil Levy, a senior fellow at the Chicago Council on Global Affairs. “This administration has been anything but reliable on trade policy.”

Still, a few things are apparent now that were not at all clear at the beginning of the summer.

The Trump administration isn’t just looking to blow things up; so long as negotiators can claim victory for U.S. interests, there are deals to be had for allies. And unpleasant as trade skirmishes with Europe or Canada or Japan may be, they’re really a warmup for a trade war with China.