Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Ambassador Rufus Yerxa – president of the National Foreign Trade Council (NFTC) and deputy director general of the WTO from 2002 to 2013 – is the 126th in “The Trans-Pacific View Insight Series.”
Is the U.S. retreating from or recalibrating its leadership role in international trade?
There is clearly a significant danger for the United States and for world trade generally if the Trump administration applies its concept of economic nationalism in the wrong way – by building trade barriers in sectors where we are uncompetitive, withdrawing from our trade alliances, or starting trade wars with excessive use of unilateral tariffs or other forms of trade retaliation. The dangers are three-fold: first, we will be turning inward and losing our competitiveness; second, by shelving our existing preferential free-trade arrangements just when our competitors are expanding theirs, we will lose our competitive position in export markets; and third, by abandoning WTO principles and acting unilaterally, we will make it more likely that other countries will write global trade standards without us and further isolate us from the global economy.
So far, the Trump administration’s rhetoric on this idea of economic nationalism has far exceeded its actions. But the administration’s worrying belief in mercantilist trade polices as a panacea for all our economic ills runs the risk of moving our country decisively in the direction outlined above. In the end, such a philosophy may cause our economy and our workers far more harm than good. American industries are willing to support a tougher line on enforcement of trade rules, as well as a more resolute stand against the nationalistic, unfair trade, and investment policies of China. But these things need to be done in the context of our broader support for the open trading system we led the world in building. If we send the signal that we do not believe in that system – even though it is there because of our leadership – we will lose the support we have built over 70 years for free and fair trade, and with it we will lose our leverage to shape the future of globalization.
What might the World Trade Organization (WTO) look like without U.S. involvement?
It is not a very pretty thought. The WTO system was designed to reflect core U.S. values, such as non-discrimination, transparency, and respect for the rule of law. These values are embedded in the organization’s rules, and help to commit other countries to the basic ideals of free market economics that America was built upon. For example, the WTO has some fairly effective rules about subsidy practices, dumping, and non-tariff measures (such as technical barriers to trade). These are important safeguards for U.S. industries.
For the U.S. to disengage from the WTO system, particularly at this critical moment in the globalization process, would leave the door open for politically influential countries such as China and Russia to push a trade model based much more on state-run capitalism and authoritarian economics than on our free market principles. This could pose a long-term problem that could take decades to repair. In fact, it took decades for us to push the Europeans in the right direction on state intervention, and the WTO’s predecessor, the GATT, was an important tool in that effort. Now the Europeans have a respectable state aids code and have adopted far greater discipline on agriculture subsidies. But if China, Russia, and others with less attachment to free market economics become the dominant force in the WTO, the Europeans themselves could be drawn back towards their earlier model, just as a matter of survival! That would not be a good world for Americans.
What is your outlook on the U.S. administration’s efforts to renegotiate NAFTA?
There is both good and bad news. The industries I represent are strong supporters of NAFTA, but they are also supportive of efforts to modernize this 23 year-old agreement and make it more relevant to the new world economy. There has been progress in making some of the improvements we support in areas such as e-commerce, digital trade, customs, trade facilitation, services, and energy. However, there are deadlocks in a number of other areas, and regrettably, most are caused by proposals that U.S. negotiators have put on the table. Most of them make NAFTA a more restrictive agreement with fewer opportunities to trade freely in North America, rather than expanding trade. In the autos and textiles sector, for example, the USTR has put proposals on the table on “rules of origin” that would severely restrict the U.S. auto industry and harm its global competitiveness. The U.S. has made similarly regressive proposals in areas such as procurement and dispute settlement. We have strongly opposed these U.S. proposals, and ironically so have our two NAFTA partners.
As things now stand, an agreement based on these U.S. proposals is highly unlikely, but the danger is that President Trump might decide to withdraw from the agreement altogether unless these ill-advised proposals are accepted. This would be a disaster for American businesses and workers. NAFTA has been an extremely effective agreement in helping the U.S. and the entire North American economy compete more effectively. Moreover, if the U.S. pulls out of NAFTA, Mexico and Canada will still have free trade agreements with much of the rest of the world, creating a scenario in which U.S. businesses will be at a competitive disadvantage to their European and Asian competitors when exporting to Canada and Mexico. This will put at risk the $600 billion export market we enjoy in those two countries.
Assess China’s growing influence as a key stakeholder in reshaping global trade norms.
I think I addressed this problem in my earlier comments, but let me elaborate a bit. China is going to continue its growth, which will be good for the world economy and good for the U.S. if it involves respect for open trade and reciprocal treatment. However, there is a very real danger posed by China’s current stated intent of using highly protectionist investment and technology policies to achieve its economic development, as outlined in its “China 2025” initiative. China already practices policies such as forced technology transfer, and even uses outright governmental theft of trade secrets as a way of enhancing its technological prowess. This needs to change! China needs normative pressure from the rest of the world, and from institutions such as WTO, to reverse this philosophy, open its market to greater foreign investment and reduce its state-driven model of capitalism.
In the long run, I believe this will be in China’s interest, because the state-driven model will eventually fail and face a need to change. But the sooner China wakes up to this reality, the better. It has had short-term success with state capitalism, partly because the industrialized world has tolerated their development and absorbed a lot of their exports. However, that tolerance is being tested, not just in the U.S. but in Europe and Japan as well. By showing a willingness to move away from its overly interventionist model, China will help the U.S. move back towards its traditional role as a believer in open trade. Support for President Trump’s hardline views on trade stem largely from the belief that we have lost many manufacturing jobs and even entire sectors of manufacturing to China’s aggressive policies. While this may be overstated, since other factors such as technological change or underinvestment in our own competitiveness have played larger roles than trade, it will be impossible to maintain support for open markets here in the U.S. if China continues on its present path.
Describe three scenarios – good, bad, and ugly – for the future of U.S. leadership in international trade.
I am not a futurist, so I don’t really like to outline hypothetical models. However, I think my earlier answers have described the “bad” and the “ugly” pretty clearly! To my member companies, the “good” would be to strengthen the United States economy with the right kinds of policies that make us more competitive in fields such as taxation, education, worker training, and infrastructure development, while maintaining our support for open trade and investment. We would like to see more trade agreements along the lines of TPP, which committed countries to greater openness in areas such as digital trade, established disciplines on state owned enterprises, and increased respect for labor rights and environmental quality. Finally, we believe the recent reduction of corporate tax rates and other changes in our tax system will actually help make U.S. industries more competitive globally, but they will be undermined if the United States turns inwards and abandons trade in a hastily-decided, poorly conceived effort to recreate the past through policies based on “economic nationalism.” The better path forward is to stick to our long-held beliefs and policies, which have helped give the world the greatest era of sustained peace and prosperity in modern history. I haven’t seen anyone propose a better alternative to that world.