Is America mis-thinking its 21st century trade strategy? Part 2

Richard Baldwin 17 May 2011

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An ambitious and balanced Doha Round package is within reach (HLTE 2010), but only if President Obama decides Doha is in the US’ strategic interest. Unless US trade negotiators get instructions to start compromising, Doha will die within weeks (of course, China, Brazil and India would also have to match any new American flexibility).1 There may be a face-saving mini-Doha agreement, but it won’t include any improved market access for US exporters of industrial goods, agricultural goods, or services.

As discussed in my last column, motives for the US’s unwillingness to “split the difference” with China and other emerging markets have not been articulated. It seems to rest on strategic thinking based on the “tariff-leverage argument”. Splitting the difference now would leave America with few bargaining chips (tariffs) while leaving China et al. with plenty. To avoid being locked into such tariff asymmetry, Obama seems willing to let Doha die this year.2

This strategic thinking might make sense. Sometimes it is a good idea to run away to fight another day. But it only makes sense if future tariff “battlefields” look more auspicious than the current one. To answer this, we must answer the question: “How and where would the US use the tariff leverage it is trying to save?”

If Doha dies in 2011, the multilateral pillar will be down for a decade

If the US and China can’t find a compromise in 2011 based on the items on the Doha negotiating table, they won’t find one in the future. In particular, 2013 will not be another window of opportunity.

  • The US will be less likely to compromise in 2013.

Democrats and Republicans are and will continue to tear themselves apart in fights over the role of government. In this poisonous climate, it is likely that any US President will find it even harder to compromise on multilateral trade liberalisation than is the case today. (Of course two years is a long time in politics and it is possible that a strongly pro-trade President and Congress are elected, but at this moment trade looks to remain a contentious issue in the US for years.)

  • China in particular and the emerging markets in generally will not be more willing to compromise in 2013.

China’s exports grew by an average of 20% per year since the Doha Round started in 2001. China and other emerging markets are unilaterally cutting tariffs (mostly on intermediate industrial goods) and undertaking other pro-trade autonomous reforms. They have successfully pursued free trade agreements (FTAs) of their own. These policies have proved to be investment magnets. Their industrial output and competitiveness are booming. In short, they face very little pressure to sign a multilateral tariff cutting agreement that goes as far as the US insists they must.

Given this, multilateral tariff cutting can only work this decade if the range of items on the negotiating table is expanded to include new items that are especially attractive to emerging markets – something to induce China, India, and other emerging markets to accept the US’ market-access demands.

Negotiating an expansion of the agendas, however, would takes years – at least two years – and negotiating the actual deal even longer – at least five years3. That takes the new market access gains beyond the year 2020. In short, improving US market access via multilateral tariff cutting is a now or “never” proposition; never meaning not before 2020. US tariff leverage will yield no improvements in US market access at WTO talks for the rest of the decade.

Can the US do better using the free-trade-agreement route?

If Obama’s advisors decide to let the WTO route fail this year, the US has only one way forward – the bilateral road, starting with the 3 Bush-era FTAs, the Trans-Pacific Partnership (TPP) agreement, and any future FTAs they are able to sign. As mentioned in my last column, the FTAs and TPP would altogether improve American market access to nations that account for only 6.2% of US exports (Korea makes up more than half of this). Part of the problem is that the US already has FTAs with 4 of the 8 TPP partners.

What about future free trade agreements?

A few facts suggest that future US bilateralism will not work well. The US insists its FTA partners fully open their markets to US food exports. This makes it difficult for nations with sensitive agricultural special interests to sign FTAs with the US.

Another major problem is internal to the US; Democrats insist on labour and environment provisions that many nations find intrusive. Small nations that are highly dependent on the US market (like Colombia) may be able to ”grin and bear it”, but large emerging markets, especially those not heavily dependent on the US market, will not. Indeed, at least in part to avoid intra-party conflicts on trade, the Obama administration has not sought to renew its trade-negotiating authority, "trade promotion authority" also known as "fast track".

But why discuss this in the abstract? Table 1 lists the nations that don’t have a FTA with the US but absorb a share of US exports above 0.5% in 2010. The first column gives my guesstimate of the probability of an FTA with the US before 2020; the other columns point out the problems.

Table 1. Likelihood of FTAs with US major export markets before 2020

 
FTA probability before 2020
TPP
Low-wage nation
Labour issues
Agric. issues
Political issues
US exports share
EU27
0%
 
 
 
YES
 
20%
China
0%
 
YES
YES
YES
YES
12%
Japan
0%
Possible
 
 
YES
 
5%
Taipei, China
0%
 
 
 
YES
YES
3%
Brazil
0%
 
YES
 
YES
YES
2%
India
0%
 
YES
 
YES
YES
2%
Saudi Arabia
0%
 
 
YES
 
YES
2%
Venezuela
0%
 
YES
 
 
YES
2%
Malaysia
50%
YES
YES
YES
YES
 
1.1%
Switzerland
0%
 
 
 
YES
 
1.0%
Nigeria
0%
 
YES
YES
 
YES
1.0%
Thailand
50%
Possible
YES
 
YES
 
0.9%
Russia
0%
 
 
YES
 
YES
0.9%
Hong Kong
0%
Possible
 
 
 
YES
0.7%
Indonesia
50%
Possible
YES
YES
YES
 
0.6%
Vietnam
100%
YES
YES
YES
 
 
0.6%
Algeria
50%
 
YES
 
 
 
0.6%
Philippines
50%
Possible
YES
YES
YES
 
0.6%

Source: The labour problem judgement is based in part on Kucera (2004) and Sari and Kucera (2011).

There is much art and little science in this, but the estimate for the 6 most important markets seems solid.

  • Special interests in the EU, Japan, India, and Brazil will refuse any FTA the US Congress can pass; an FTA with China faces impossible opposition in both nations and this blocks a US-Taipei deal.

Moving down the list to nations that account for at least 1% of US exports, the prospects are mixed.

  • Political issues are likely to prevent FTAs with Saudi Arabia, Venezuela, and Nigeria.
  • US agriculture demands are likely to prevent an FTA with Switzerland (Hufbauer and Baldwin 2006).

If the Trans-Pacific Partnership agreement works out as the US hopes, a number of small East Asian nations may join Malaysia in TPP thus securing US exporters duty-free access. There could, nonetheless, be problems.

The way the US is pushing the shape of the TPP, any nation joining TPP would have to negotiate the equivalent of a new bilateral US FTA and Congress would have to approve the deal. Here Congress’s attitude towards labour and environmental practices in the region may prove an obstacle. Moreover, TPP is not yet a done deal, so I set the probability of a Malaysia FTA at 50% along with Thailand, Indonesia, and the Philippines. An FTA with Algeria seems reasonably likely, especially given the Arab Awakening, but FTAs with Nigeria and Russia are unlikely this decade for political reasons.

Adding up the likely future FTA partners (Vietnam, Malaysia, Thailand, Indonesia, Algeria, and the Philippines) yields improved market access on only 4.4% of US exports.

Falling behind in the market-access game

If the Doha Round ends with a face-saving mini-package or worse, the whole world will see that conflicts between the US and emerging markets – especially China – will stall multilateral tariff cutting for years. With multilateralism dead for a decade, most nations will turn to regionalism – or more precisely, turn to regionalism with even greater vigour, since they are already pursuing FTAs much faster than the US is currently. With the FTA floodgate open, how will the US fair in the bilateral market access game?

In the bilateral game, the US has enormous advantages – its huge market for imports, and its huge willingness to internationalise its supply chain via FDI, offshoring, etc. But it also has the big disadvantages mentioned above – its agriculture and labour interests. The US’s two largest export competitors – the EU27 and Japan – do not have these problems.

By the time Obama or his successor turns back to trade policy in 2013:

  • The EU will have equal or better market access in all of the US’s main export markets: the EU itself, Canada, Mexico, Korea, and India. With a strong push – and a failed Doha Round might provide just such a push – an EU-Brazil FTA is also possible (perhaps via an EU-Mercosur deal).
  • Japan has or is likely to have equal or better market access in India. It is also seeking agreements with the EU, Canada, and many East Asian nations.

The good news for US is that China will have enormous difficulties in signing FTAs with the markets that matter the most for US exporters; its problem is the hyper-competitiveness in industrial goods.

Will the Trans-Pacific Partnership work?

The strong point in the US regionalism strategy is the Trans-Pacific Partnership. The current members are too small economically to have a noticeable effect on US market access, but the great hope is that signing the agreement will trigger a domino effect which draws in all APEC members (except perhaps China and Taiwan).

Lewis (2011) notes, however, that a domino outcome is unsure and US negotiating tactics – intended to minimise short-term political hassles – are reducing its strategic potential. Lewis writes: “The more the TPP looks like a series of bilateral US FTAs with exclusions for products the United States considers sensitive, the less likely the TPP will attract other countries to accede”. She continues: “the TPP agreement has the potential to become a new paradigm for trade agreements, to help the US re-assert its position in the Asia-Pacific, and to begin the process of defragmenting international trade.” But, the US “must be careful not to shoot itself in the foot by following a ‘business as usual’ approach … .”

Concluding remarks

For decades the US has pursued better market access via multilateral and bilateral negotiations. The future, however, does not look bright along either road.4

  • If the Obama Administration doesn’t start thinking strategically about the WTO, the Doha Round will die this year and with it any possibility of multilateral tariff cutting before 2020.
  • The bilateral route looks somewhat more hopeful, but all the FTAs that are likely to be signed this decade cover less than 5% of US export markets.
  • US export competitors, the EU and Japan, are likely to be far more successful at improving market access bilaterally, thus leaving the US to play catch-up (as with Korea).

The Obama Administration should rethink the merits of allowing Doha to die this year in order to maintain US tariff leverage. Opportunities for using the leverage in Obama’s second terms are far grimmer than many of Obama’s advisers seem to be assuming.

Moreover, as the TPP talks have shown, the US does not need high tariffs to negotiate 21st century trade agreements. Four of the 8 TPP partners already have FTAs with the US and yet are still eager to negotiate. The reason is that 21st-century FTAs are not about tariff preferences, they are about making it easier to do business internationally in the complex, interconnected world of today (Baldwin 2011).

References

Baldwin, Richard (2011). 21st Century Regionalism: Filling the gap between 21st century trade and 20th century trade rules, forthcoming, November 2010.
HLTE (2010). “Interim Report, The Doha Round: setting a deadline, defining a final deal”, Interim Report of the High Level Trade Experts Group.
Hufbauer, Gary and Richard Baldwin (2006), “The Shape of a Swiss-US Free-Trade Agreement”, Peterson Institute for International Economics, Washington.
Kucera, David (2004), “Measuring trade union rights: A country-level indicator constructed from coding violations recorded in textual sources”, Working Paper No. 50, International Labour Office, Geneva, October.
Lewis, Meredith (2011). “The Trans-Pacific Partnership: New Paradigm or Wolf in Sheep’s Clothing?”, Boston College International and Comparative Law Review, 27.
Sari, Dora and David Kucera (2011). “Measuring progress towards the application of freedom of association and collective bargaining rights: A tabular presentation of the findings of the ILO supervisory system”, Policy Integration Department, Working Paper No. 99, International Labour Office, Geneva, January.
Schwab, Susan (2011), “After Doha: Why the negotiations are doomed and what we should do about it”, Foreign Affairs, May/June.
USTR (2011), “Statement of Ambassador Michael Punke US Permanent Representative to the World Trade Organization”, 29 April 2011. https://geneva.usmission.gov
 


1 The next decision point is a 31 May 2011 meeting in Geneva of all WTO members.
2 Phil Levy of the American Enterprise Institute points out the lack of support may not be so strategic, but rather a case of benign neglect. “President Obama is not anti-trade; he just doesn’t particularly grasp its importance and sees it as politically awkward. If someone were to present him with a Doha package that had domestic support, I suspect he’d be glad to sign it. He just doesn’t want to lead on the issue.”
3 This one might take even longer as it would be viewed as setting “the terms of trade for decades” in the words US Ambassador to the WTO Michael Punke quoting from Schwab (2011). This means the multilateral route to better market access will be shuttered till at least 2020.
4 Of course all this may have been done on purpose; a standstill on trade may suit the Administration’s domestic politics, but it won’t serve US export interests.

 

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Topics:  International trade

Tags:  US, bilateral trade agreements, free trade agreements

Professor of International Economics, Graduate Institute, Geneva; Director of CEPR; VoxEU.org Editor-in-Chief