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15 January 2019

The Outlook for Global Trade Is Even Bumpier in 2019

Kimberly Ann Elliott 

After a more-bark-than-bite approach to trade during his first year in office, President Donald Trump took on the world in 2018 and shows no sign of letting up. In Europe, British Prime Minister Theresa May has so far failed to convince Parliament to accept the Brexit deal she negotiated with Brussels. And under the radar, the World Trade Organization is facing paralysis if there is no compromise on how to reform its system of settling disputes. These are among the ongoing challenges that are likely to make 2019 another unsettling year for global trade. 

Even before the calendar turned to 2019, the salvaged Trans-Pacific Partnership, renamed the Comprehensive and Progressive Trans-Pacific Partnership, or CPTPP, went into effect for the first six countries to ratify it. That means American farmers, already under pressure from Trump’s trade war with China, now face a competitive disadvantage in another major market because of Trump’s withdrawal from the TPP. With the CPTPP’s implementation, Japan must reduce its tariffs on beef, pork and other agricultural imports, mainly to the benefit of Australia, Canada, Mexico and New Zealand. The breadth and size of the disadvantage facing American farmers will grow as more countries ratify the CPTPP and phase in the deal’s sizable tariff cuts that are not available to U.S. exporters.

In response, American farm organizations are pushing the Trump administration to quickly begin bilateral trade negotiations with Japan, perhaps as early as late January. But Japanese Prime Minister Shinzo Abe has not been enthusiastic about the bilateral alternative, and it is not clear how quickly any negotiations will move. The longer it takes, the less likely it is that American farmers and other exporters will be able to win back markets they are now losing to countries that are part of the CPTPP. 

Last October, the U.S. Trade Representative notified Congress of the administration’s intent to launch bilateral negotiations with the European Union too sometime this year. But the outlook for those negotiations is just as murky as it is for those with Japan. Given Trump’s inconstancy as a negotiating partner, to say the least, it would not be a surprise if both Tokyo and Brussels tried to run out the clock on this administration and hope for a better environment after 2020.

The outcome of the Commerce Department’s investigation into the national security implications of automobile imports could affect the pace and intensity of both bilateral negotiations, however. The department’s final report, which could result in the imposition of a 25 percent tariff on up to $200 billion in auto and auto parts imports, is due in February. Trump’s promises to Japanese and European leaders to hold off on new tariffs while negotiations are ongoing would seem to preclude so-called Section 232 tariffs against those partners. But exemptions for them—plus Canada and Mexico, which recently signed a revised North American Free Trade Agreement with the U.S.—would render the action virtually meaningless. It seems more likely that the Trump administration will find some way to either delay release of the Commerce Department’s report or hold off on imposing tariffs so it can keep the threat in its back pocket, to be pulled out if the negotiations with Japan or the EU falter. 

It is probably safe to say that most of the trade action in the first part of this year will come in negotiations with China. If an agreement acceptable to Trump is not reached by March 1, tariffs on $200 billion in Chinese exports will rise from 10 percent to 25 percent. Since the dinner meeting between Trump and Chinese President Xi Jinping in Argentina last month, China has taken some steps to address American concerns—resuming purchases of soybeans, lowering the retaliatory 40 percent tariff on imports of U.S.-produced cars to the 15 percent rate paid by other exporters, and increasing penalties for intellectual property theft. But U.S. Trade Representative Robert Lighthizer has said he will not accept a deal that does not include fundamental changes to how the Chinese government promotes and protects key domestic industries. The big question here is whether the gyrations in the stock market will continue and spook Trump enough that he orders Lighthizer to accept a symbolic deal in which China increases imports of American products while making only vague promises to undertake deeper reforms in its trade practices.

Worsening economic conditions could be a major factor in how the trade agenda plays out this year.

Later in March, the action will move to Europe where May must thread her way to a Brexit outcome that does not badly disrupt the British economy—or negotiate a delay while she still tries to figure it out. Where this is headed will likely be revealed earlier than that, however, when May tries again to get Parliament to approve the deal she negotiated with the EU. Given the tight constraints imposed by Brexit hard-liners within May’s Conservative Party, who want a decisive break with the EU, and Northern Ireland representatives who are key to May’s parliamentary coalition and oppose restoration of a hard border with the Republic of Ireland, some form of delay seems almost inevitable. Negotiating a delay might also provide time to arrange a second referendum to see whether the reality of Brexit has changed minds, as polling suggests

Meanwhile, in the midst of all this, a key part of the World Trade Organization’s dispute settlement system will grind to a halt by the end of the year if nothing changes. When dispute panel decisions are appealed at the WTO, as almost all of them are, a panel of three experts—chosen from a roster of seven—are supposed to review the case. But under the Trump administration, the U.S. has been blocking the appointment of new appellate body members when existing members’ terms expire because it wants changes in how the body operates. While many WTO members agree on the need for reform, American negotiators believe the WTO has overreached in deciding a number of cases that have gone against the United States. It has yet to accept any of the ideas for how to avoid the coming crisis

There are now only three appellate body members left, the minimum for the system to operate. The terms of two more will expire by the end of 2019, but a crisis could arrive sooner if a case comes up that requires one of the remaining three to recuse themselves, potentially leaving trade disputes unresolved. 

Finally, the U.S. Congress will have to decide when, or even whether, to ratify the renegotiated NAFTA, clunkily rebranded by Trump as the U.S.-Mexico-Canada Agreement, or USMCA. Many Democrats and labor groups have praised certain aspects of the deal, but the party leadership wants to see further improvements before bringing it to a vote. Politically, some Democrats will be leery of giving Trump a victory on anything, and newly elected Speaker of the House Nancy Pelosi has made it clear that a vote on this trade agreement is not a priority. But if the vote doesn’t happen this year, it will drag into an election year—an even less propitious time for Congress to vote on controversial trade legislation. Remember the TPP?

The surprisingly positive December jobs report gave the skittish stock market a boost and pushed back talk of a recession in 2019. But both the bull market and the economic recovery are getting long in the tooth, there are signs that the effects of Trump’s trade wars are growing at home and in China, and, unless things go badly awry, the Federal Reserve plans to continue gradually raising interest rates. So worsening economic conditions could be a major factor in how the trade agenda plays out this year.

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