SINGAPORE (April 17): In the past two weeks, the Trump Administration has initiated a series of moves on trade, which shows that the US’ trade policies under its new president are beginning to take shape. While these policies are still evolving, there are several developments that will worry Asia and only a few positive changes.
Asian economies have to accept that the trade environment is going to get tougher. Ideally, they should ensure that regional trade and economic partnership agreements currently being negotiated will materialise in a form that really does make a difference to growing trade opportunities. This seems difficult, however, and, in the end, the smaller and more open economies of Asia will have to work on their own to diversify their export dependence away from the US.
What has changed?
The good news is that there has yet to be any substantive change in actual policies. The bad news is that the hints contained in the announced initiatives are not encouraging.
First, Trump signed two presidential executive orders on trade. The first will be of greater concern to Asia, as it instructs the Department of Commerce to investigate the causes of the US’ bilateral trade deficits. The references in the executive order to alleged causes such as “cheating”, ill-conceived trade agreements, World Trade Organization “constraints” and “misaligned” currencies seem to place the blame for the US’ trade imbalances at the door of other nations, with little recognition that the country’s own policies could have contributed to those deficits. That can set the scene for protectionist measures against Asian exporters. The second order was meant to step up enforcement of anti-dumping and countervailing duties measures and is not very different from a similar order signed by former President Barack Obama.
Second, the White House has laid out its approach on how it wants to renegotiate the North American Free Trade Agreement (Nafta) in a document sent to senior Republican congressmen and senators. This draft was troubling to the extent that it included references to clearly protectionist measures such as “safeguard measures” that would allow the US to impose tariffs on imports it deems harmful to its interests. As a sign of the Trump Administration’s thinking, this could be a portent of what is to come for Asia as well.
Third, of direct relevance to Asia was the report from the US Trade Representative, which outlined its concerns with 63 of its trading partners. China bore the brunt of criticism but several Asian countries were singled out for running surpluses with the US, including China, Japan, Vietnam, South Korea, Malaysia, India, Thailand, Taiwan and Indonesia. Trump himself has signalled that he expects a difficult summit meeting with Chinese President Xi Jinping on April 7 since “we can no longer have massive trade deficits and job losses”.
Fourth, the administration has also issued a new directive on the issuance of H1B visas, which have enabled thousands of Indians and many Filipinos to work in the US. The remittances that these workers send home help India and the Philippines to fund their large trade deficits. These visas are also key to the success that Indian IT services companies have enjoyed in the US market.
On a more positive note, the chances of the administration’s securing sufficient support to bring in the Border Adjustment Tax have diminished recently. BAT is in effect a subsidy on exports and tax on imports. If passed, it would encourage US manufacturers and others exporting from production bases in Asia and elsewhere to relocate production back to the US. BAT would also cause tremendous disruption of supply chains and provoke retaliation from major trading partners — which in turn could lead to a downward spiral in trade.
Good reasons for concern
Even though the administration has yet to detail its thinking on specific trade issues, what we know about the Trump Administration so far suggests that an aggressive trade policy must appear appealing to him.
First, trade is an issue that he seems to feel strongly about. It is an issue he has harped on for a long time, even before he began his run for the presidency.
Second, trade policy stands in contrast to his healthcare and tax reforms, which are not only contentious but complex and likely to face criticism from a range of non-governmental organisations. In contrast, trade policy changes do not have to undergo a tough passage through Congress, as the constitution gives the president considerable authority over foreign trade.
Third, Trump needs to demonstrate to his political base that he is able to deliver on his promises, especially after the debacle his healthcare reforms suffered and the resistance that his tax reforms will face.
So, we can expect some tough measures over time.
As US trade policy toughens, which countries are most at risk?
The omens are not good for Asia. Trump is distracted with multiple challenges such as the tax reforms, an ongoing effort to revive the healthcare bill, and the troublesome investigations into alleged collusion by Trump campaign officials with Russia. He may not have the bandwidth to focus on ensuring a well-crafted trade policy — his default may be to rush through something that plays to his base but which may be damaging in the long term to both the US and its trading partners. Moreover, his administration is still not fully formed, with key departments such as the State Department woefully short of senior officials. This would mean that the usual balance that State would provide against the more protectionist- minded trade officials may be missing.
- China is clearly at risk — it is seen as a geo-strategic rival and runs a large surplus with the US, and many countries including the European Union (EU) are unhappy with China over recent industrial policies to promote its national champions. However, a successful Trump-Xi summit may help contain these risks. China’s strategy will probably be to offer Trump enough concessions to enable him to declare victory and move on. It is unclear whether this will work;
- Malaysia and Thailand run large surpluses with the US, with Malaysia also having a weak currency, which opens it to accusations of unfair trade. In addition, while traditionally close in strategic terms with the US, they have been recently moving closer to China;
- Japan and South Korea are also at risk, but they are helped by the fact that they are key Asian allies at a time when Trump knows that the common North Korean threat that the US, Japan and South Korea face is growing. South Korea may well agree to a limited review of the South Korea-US trade deal that would satisfy the US. Japan appears eager to cut a bilateral deal with the US, with Prime Minister Shinzo Abe having been quick to seize the initiative to offer investment and other deals to the new administration;
- Vietnam is at risk, as it runs a large surplus with the US and lacks an extensive trade agreement with the US, which could have provided cover. Although its currency has been generally stable against the US dollar, it is a managed currency, which could open it to criticism from the US. It is not a strategic ally of the US, though the two sides have been edging closer in recent years;
- Indonesia does run a trade deficit with the US and has a currency which, while stable, recently has had a record of sharp depreciations against the US dollar. It has no trade agreement with the US, but its strategic engagement with it has been growing. Most of its exports are commodities rather than manufactured goods. It is unlikely that Trump would want to alienate the world’s largest Muslim nation;
- India and Taiwan are seen as potential allies against China. So, while they run large trade surpluses with the US, a way could be worked out to contain US retaliation. They each have strong lobbies in the US who support them, including in the Republican party; and
- Singapore appears least at risk. It runs trade deficits in both goods and services with the US, and has a longstanding free trade agreement with the US, which resolved many of the irritants in the economic relationship. While not a formal ally of the US, it has strong strategic ties with it, and hosts the US Air Force and Navy.
So, what can Asia do?
Asian trading nations have to do two things: They need to work together to keep the momentum of trade liberalisation going and diversify their export bases so that they rely less on the US.
The first is proving difficult. The Trans-Pacific Partnership agreement had been an important strategy for the most open economies in the region such as Malaysia and Singapore, but the US has now pulled out of it, leaving TPP moribund. A meeting of TPP signatories except the US in Chile last month did agree to work towards further trade opening, but left open exactly how this would be done. It does not seem likely that TPP members outside the US will ignore the US’ absence and go ahead with TPP. Japan, the second-largest export market outside the US in TPP, seems keener to cut a bilateral deal with the US than to pursue this TPP-lite aim.
The Regional Comprehensive Economic Partnership is the only remaining major region wide trade agreement under negotiation. However, the talks are bogged down over many disagreements. For instance, India is unwilling to make concessions demanded by the other RCEP partners. RCEP was not planned to be as ambitious as TPP but, with the current difficulties, it would seem that even if RCEP is eventually signed and sealed, it would be an agreement based on the least common denominators, one which will not make much difference in terms of really boosting trade in goods and services.
Another option would be to pursue substantive trade negotiations with the EU, still the world’s single-largest market. Singapore is already close to achieving a free trade agreement with the EU but the process is long and treacherous, involving many concessions, which other Asian countries may not be in a position to make. Moreover, the EU is likely to be so bogged down with the highly complex process of negotiating the UK’s exit from the EU that it may not have the bandwidth to pursue talks with Asian economies for several years.
That really leaves countries that depend on trade with two choices. One is to pursue bilateral economic partnership agreements with likeminded Asian partners to achieve at least some synergies from integration. For example, Malaysia and Singapore could work together more, now that their integration projects such as the Iskandar Region and the high-speed rail have made some progress.
But, in the end, given the limited options above, each country will have to rely on its own resources and strive to diversify its economic bases so that it relies less on the US market. That might mean exploring new but more difficult markets in South Asia, Africa, the Middle East and Latin America.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy
This article appeared in Issue 774 (April 10) of The Edge Singapore.
