Is Trump turning the US into the Biggest Loser?

US President Donald Trump has been quick to change his stance on complex issues like US relations with other countries, including China. Trump has also been unpredictable in his approach towards important multilateral organizations like the North Atlantic Treaty Organization (NATO) and US ties with important allies in the Indo-Pacific, especially Japan and South Korea.

The most recent instance of Trump yet again changing his views was his statement on the Trans Pacific Partnership (TPP) during the Davos Summit, saying that the US was open to a rethink, provided the provisions were fair. While the US pulled out of the TPP agreement much to the chagrin of other signatories, eleven countries (they are, in alphabetical order, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) have agreed on signing the deal in March in Chile.

While speaking at Davos, Trump said that the US was not averse to negotiating trade deals with its TPP partners. In an interview with CNBC, on the eve of his address, the US President had said:

….we would do TPP if we were able to make a substantially better deal. The deal was terrible, the way it was structured was terrible. If we did a substantially better deal, I would be open to TPP.

The US President sensed the pitch at Davos, which was firmly in favor of globalization and a more open economic world order. During his address, while speaking of American interests, Trump made it a point to state that watching out for US interests did not imply that his administration would prefer America to become more insular. Said the US President:

America First does not mean America alone. When the United States grows, so does the world. American prosperity has created countless jobs all around the globe and the drive for excellence, creativity, and innovation in the US has led to important discoveries that help people everywhere live more prosperous and far healthier lives.

Mr Trump is not the only world leader to have won competitive elections by appealing to insularity, only to realize that economic interdependence between countries today is incredibly entrenched. For instance, Indian PM Narendra Modi, while arguing in favour of globalization, had said:

Instead of globalization, the power of protectionism is putting its head up.

Modi had gone to the extent of saying that inward looking tendencies were an important challenge, arguing that:

 …such tendencies can’t be considered lesser risk than terrorism or climate change.

Interestingly, Modi’s remarks on globalisation were welcomed by the Chinese, with the Chinese Foreign Ministry spokesman, Hua Chunying, arguing in favour of China and India working together to promote globalisation. Said Hua:

China would like to enhance coordination and cooperation with all countries including India to steer the economic globalisation towards benefiting world economic growth and well-being of all countries.

Last year in his address at the Davos Summit, Chinese President Xi Jinping had spoken in favour of globalization, saying:

Pursuing protectionism is like locking oneself in a dark room […] Wind and rain may be kept outside, but so is light and air.

While some flexibility is welcome, excessive unpredictability and Trump’s woolly approach on serious issues is confusing the outside world. A business-like approach is good to an extent, but to deal with complex geostrategic issues purely from the prism of US short-term financial interests as opposed to long term geopolitical interests is a disastrous idea.

Every country has to watch its own interests, and the US is no exception, and there is absolutely no doubt that domestic public opinion cannot be ignored. Yet if the US wants to be a leader, it cannot be as transactional as Trump. US dreams of a “Free and Open Indo-Pacific” – a key aim of the US Defense Strategy – will remain a mere dream if the US sends confusing signals to its allies in the region and is not willing to take a clear leadership role. While the Strategy identifies China as a threat, Trump’s continuous somersaults on relations with US allies are only emboldening Beijing.

While it is unfair to single out Trump for being insular he has been the mascot for inward looking protectionist economic policies and an anti-immigration sentiment. While the US President did tell the global audience at Davos that “America First does not mean America alone,” it will indeed end up alone if he does not start thinking like a US President.

Currently he is thinking purely like the head of a company, and running a business is different from running a country, which has long sought to be the flag bearer of democratic, liberal values and globalization. While Trump’s isolationism and short sightedness may cause some discomfort for other countries, and groupings like the TPP, the latter will find other alternatives as has been the case with the signatories of the TPP, and America will be the bigger loser.

Trump’s rejection of TPP: a political economy comment

Trump’s rejection of the Trans-Pacific Partnership (TPP) seems virtually certain. Without the United States and with a weak Canadian prime minister on the issue (who got elected without a clear position on it), the agreement will die a swift death. By dying that rapidly, it confirms a point I have been making for years: agreements like the TPP are managed trade that generate as much (if not more) opposition than genuine free trade agreements (those that could fit on a few pages, not 10,000).

Protectionism are basically income-redistributing schemes. Shifting from protectionism to free trade means altering these schemes. Thus, the political opposition and the agreements we have seen over the last decades where special dispensations are placed inside the agreements. In some instances, like the Canada-US Free Trade Agreement of 1988 (CUFTA), this leads to genuinely freer (not free) trade. In other cases, like CAFTA in the early 2000s, the agreement is nothing less than rent-seeking by different means.

In the case of TPP, it seems that popular discontent is large enough to kill this very complex (and flawed) agreement. I am not sure whether or not, in net terms, the TPP was an improvement over the current state of affairs. What I am sure is that the opposition was similar to what the opposition would have been with unilateral trade liberalization.

At this point, small countries with no influence on world demand (like Canada) should simply go “at it alone”. What I mean is that unilateral trade liberalization is the way to go. There is a strong case for unilateral trade liberalization (see notably the work of Edwards and Lederman) for small economies. A large part of the cost of protectionism is not the level of tariffs and quotas, but the distortions generated in relative prices that lead to inefficient allocations of resources.The low hanging fruits are to be found in the tree of leveling the field. Small countries could convert quotas into tariffs and set a uniform (across the board) low tariff (see Chile’s case).Although far from ideal free trade (no barriers), this would represent a considerable improvement over the distorted relative entry barriers.

In such a situation, the political costs would be the same as those with agreements like the TPP, but the benefits would be infinitely larger making it easier for governments to proceed. The narrative would also be easy to sell to electorates: no special treatment for anyone. In the long-term, this may even “spillover” into multilateral trade agreements by reducing frictions during negotiations.