An Uncertain Future? March 2018 issue

An Uncertain Future?

US President Donald Trump has doubled down on his protectionist campaign rhetoric by withdrawing from Trans-Pacific Partnership (TPP) and threatening to walk out of North American Free Trade Agreement (NAFTA). Many think that the erstwhile champion of free trade reversing gears is an ominous sign for the world of trade. But then, there is an optimistic bunch that believes that the trade vacuum left by US is an opportunity for other nations. Question is – who will gain the most? Can Asian giants like Japan, China and India make the most of the situation and make the dream of an 'Asian Century' come alive? Or, will the West continue to dominate the world of trade in most respects?

By Indranil Das, executive editor | November 2017 Issue | The Dollar Business

 

The leader of the free world, is the epithet that #POTUS (i.e. the typical US President) used to be known by. It was a little pompous at the best of times, given that the US President is the elected leader of just about 4.4% of the world's population. Nonetheless, the title enshrined the might of US when it came to leading the world, whether it be in war, peacekeeping, environment or global trade. Not any longer.

The current US President, Donald Trump, has for all practical purposes, through his protectionist rhetoric and inward looking policy, abdicated the mantle of global leadership. In the first year of his presidency, Trump has withdrawn from the 12-nation Trans-Pacific Partnership (TPP), walked out of the Paris Climate Agreement, threatened to withdraw from the North American Free Trade Agreement (NAFTA) and with his acerbic rhetoric jeopardised the South Korea-US (KORUS) free trade agreement (FTA). US, the erstwhile champion of free trade, seems to have engaged the reverse gear, and has left the leadership space in a vacuum.

It is not that there is a lack of contenders and pretenders to the throne. German Chancellor Angela Merkel has been aggressively promoting free trade in various fora as has been Chinese President Xi Jinping. But the US reversals have both shaken and stirred the world of trade and raised many questions. So will the axis of trade shift towards EU? Or will China be setting the agenda for global trade in the near future? Will countries look for more bilateral FTAs rather than setting their sights on the more ambitious and unwieldy mega trade agreements like TPP and the Regional Comprehensive Economic Partnership (RCEP)? And finally, what will be the impact of this wave of change on India's trading community? As we seek answers to these questions, let us look at the trade deals whose fates seem to be hanging fire.

 

"Countries around the world are bracing for a Potential Impact"

 

Backdrop

When the then US President Bill Clinton signed the NAFTA in 1994, he had expressed hope that the deal would strengthen trade between US, Canada and Mexico, ease tariff and non-tariff barriers, and create jobs as well as ease prices allowing consumers across borders to benefit. Since its inception, the deal has had its fair share of criticism, especially on the US side of the border. The major grouse of critics on the US was that NAFTA had created an unfair playing field, allowing Mexico to generate employment at the cost of US jobs. US's yawning trade deficit with Mexico has also been a flashpoint. And to be fair, there is some truth in these allegations, as a number of US companies, including auto majors, invested in plants in Mexico to take advantage of lower labour and operating costs, causing job losses in US. Almost 23 years later, US, now under the leadership of Donald Trump, has raised its voice against NAFTA and is threatening a walk out. Could be any day.

A similar situation can be seen in the FTA with South Korea, a strong trade partner and political ally for US in the East. With US already walking out of TPP and many more trade deals under the scanner, the list of potential walkouts is long. The common factor in most of these situations? Trumpland! Countries around the world, whether in trade agreements with these warring factions or not, whether small or big, will surely be impacted if US actually does pull out of these major deals. The US being the largest economy in the world, is bound to also affect the balance of power when it comes to trade. While some countries are looking at the turn of events as an ominous sign for the future of free trade, for others, the strain in relationships between the larger players is an opportunity to cement new ones. India, for one, has been working on strengthening its trade partnerships with not only US, Mexico, Canada and South Korea but also with EU and other countries. China, on its part, has been playing the role of the flagbearer of free and open trade in any and every trade fora that it happens to be a part of. The power-play is on, but is there any real reason to get excited, or is it just another of Trump's famed negotiation tactics to force partners to agree to his terms? Could it also be that Trump is just pandering to his domestic constituency without having any serious intention of putting the deals in jeopardy? Or will the global trading community sans big brother US be able to open up even better and fairer trade deals for themselves?


Winds Of Change

These events may not come as a surprise to many, keeping in mind the winds of change that were activated once the Entrepreneur-in-Chief President Donald Trump took over charge of the growing US economic polity, earlier this year. The frequent calls for 'America First' and threats to withdraw from trade deals the US does not find ‘beneficial’ to its interests have found their shares of support and opposition. While the Theresa May-led UK, itself embroiled in an economic conundrum, has expressed its support for these protectionist policies, voices on the other side of the English Channel, France’s Emmanuel Macron and Germany’s Angela Merkel, have been actively protesting the same.



In North America, the constant threats of closing borders has raised concerns for US trade partners like Canada and Mexico, who until recently considered US both a political and economic ally. They have now found themselves at the receiving end of US's threats that have already impacted their economies and incentivised them to find new trading partners. Asia, with China in the lead, which has shown remarkable economic growth in the last couple of decades, too has found itself at the receiving end of Trump’s trade agenda. While the possibility of a trade war amongst these warring factions seems to be small, many new partnerships have emerged from the shadows of the failed TPP. Carlo Dade, Director, Centre for Trade and Investment Policy, Canada West Foundation, says, “Actions by the US government are forcing other countries to step up and fill the void in liberalised trade. Liberalised trade is more than just an economic principle. It is a part of the underlying belief in liberalism and freedom, economic and political, that have defined the American era. I would argue that US is abandoning both.” Countries like US however justify their actions as steps needed to improve the country’s economy and increase employment opportunities in their country. The changing scenario raises a pertinent question: What is next for the signatories of these deals and are we headed for a world of trade without US?

Canadian Foreign Minister Chrystia Freeland, US Trade Representative Robert Lighthizer and Mexican Minister of Economy Ildefonso Guajardo (L-R) participate in the 4th round of NAFTA negotiations at General Services Administration Headquarters in Washington, D.C. on Oct. 17, 2017. 


Cost Of Withdrawal


With US withdrawing from NAFTA appearing to be a distinct possibility, how would a failed deal impact US, Mexico and Canada? While the White House claims that moving away from the deal is beneficial, trade analysts warn of negative repercussions. Under NAFTA, the three countries pay nothing on most goods that cross the border. If United States exits NAFTA, the tariffs, or taxes, that Canada and Mexico put on US goods would rise. For some goods, tariffs could go as high as 150%. That would cause consumer prices to spike. All three countries being members of WTO, tariffs could revert to WTO levels. Currently, the average WTO level tariff levied by Mexico is 7.1%, that by Canada is 4.2% and by US is 3.5%. Surely, US exporters have the most to lose. The equation may not however be so straightforward. Mexico will lose tariff-free access to its biggest export market and that could perhaps be a body blow to the Mexican economy.
At this time we must also look at the fact that NAFTA had goals that transcended trade. Dade of Canada West Foundation explains, “NAFTA had economic and political goals, as with almost all trade agreements. The political goals, assuring the flow of Canadian oil to the US in the period after implementation of Canada’s national energy policy and assuring that Mexico did not deteriorate to become a version of present-day Venezuela, have succeeded."

The blame game when it comes to NAFTA also has a lot to do with public misconception and political manipulation, both of which mostly have nothing to do with the actual economy. The job losses in US have been real, and while NAFTA had a role to play, experts suggest that it had more to do with the advancement of technology and the use of sound business logic. Businesses will go where there is an opportunity to make better profits, NAFTA or no NAFTA.

Dr. Amitendu Palit, Senior Research Fellow, Institute of South Asian Studies, National University of Singapore, says, “I think NAFTA has been one of the most successful trade agreements. It has led to the growth of North American production networks and value chains and has benefitted both producers as well as consumers. That is the benefit from trade that policymakers, academics and businesses look forward to. But there may be industries that may not have got as much from NAFTA as they had expected to."

While there has been opposition to NAFTA from many on the US side, many sectors in US are also concerned of this possible break-up of NAFTA and other mega trade agreements. Dade explains, “US agricultural interests groups (with small exceptions like Florida fruit growers, etc.) have been huge advocates, supporters and beneficiaries of US trade agreements like NAFTA. They stand to lose enormously if tariffs on their exports rise compared to their competitors.”

Similarly, when it comes to the KORUS FTA, President Trump has expressed concerns due to an increase in US’s trade deficit with South Korea. Currently, according to US, the agreement has worked in favour of South Korean exports and not vice versa. A statement not all are in agreement with. Troy Stangarone, Senior Director, Congressional Affairs & Trade, Korea Economic Institute of America, sees the impact of the FTA as a positive one. He says, “The KORUS FTA has largely worked as expected. Trade deals help facilitate increased trade, which has happened in case of KORUS. Further, contrary to the perspective of the Trump Administration, FTAs are not tools to manage trade deficits and surpluses between countries. The surplus or deficits are caused by various other factors. While the US trade deficit has grown since the KORUS FTA has come into effect, that has been due to structural issues in US-South Korea trade that are relative to the difference in the size of auto markets in each country.” The biggest challenge to the deal, Stangarone says, has been the actual implementation of the trade deal, an area where United States and South Korea need to work together.

 

Asia's Century...

While economists and policymakers have disagreed with Trump's protectionist policies, the US President has shown no signs of backing off. Is this then an opportunity for one of the major Asian economies to grab the mantle of leader of the free world when it comes to world trade? The opportunity sure is there, and unlike in the last century, Asian nations are no longer shy to voice their opinion on free and more importantly fair trade. In the TPP-11, we have seen Japan making a sustained push to conclude the deal notwithstanding the withdrawal of US. Fact is, TPP-11, once a distant dream, does appear to be probable in the not so distant future. China too has consistently been at the forefront of the ambitious Regional Comprehensive Economic Partnership (RCEP), which has the potential to create an enormously powerful trade bloc. China’s economic influence also plays through the One Belt One Road (OBOR) initiative and the China Pakistan Economic Corridor (CPEC).

 

"The changing India-China dynamics will play a role in India’s growth"

 

...Or India's Chances?

India, already a part of RCEP, is also pursuing FTAs with EU, Australia and Canada, amongst others. Both China and India have also been wooing the emerging African economies and have been using diplomatic channels to find new trade partners in Eurasia and the Middle-East. So, can Asia emerge as the new power centre? Experts believe that might not come so easy. Stangarone (of Korea Economic Institute of America) says that a lot of Asia’s role will be determined by how some of the emerging trade pacts work out. He says, “Asia’s role in global trade will likely be determined by the outcomes of RCEP and TPP-11. While comprising much of the world’s trade, South Korea, India, China, and Japan have historically had great differences in how they individually view the trading system. If they are able to narrow those differences in a meaningful way, Asia could play a larger role in the global trading system.”



Of course, not all are optimistic that Asia will be able to make the most of the situation. William A. Reinsch, Distinguished Fellow, The Stimson Centre, USA, says, “So far, it seems unlikely that Asia can come together. India, in particular, seems unable to agree to anything with anybody in the trade area, and relations between India and China on larger geopolitical issues are such that it is hard to see them agreeing on anything right now. There are also many longstanding issues among China, South Korea, and Japan that may make agreements difficult. A trilateral trade agreement has been under discussion for some time but does not seem to be making progress.”

The differences that experts talks about have been on display in various fora, and emanate essentially from the structural differences in the economies of these Asian behemoths. But, the Association of Southeast Asian Nations (ASEAN), the South Asian Association for Regional Cooperation (SAARC), and now RCEP has shown that these nations have the ability to overcome the differences. The communication channels seem to be more open than ever and with Asian economies growing in might, both consumption and production wise, Asia may just be in the right place, in the right time, to grab this opportunity.


India Shining?

India, which is on track to recover from the twin blows of demonetisation and the implementation of the GST, is delicately positioned geo-politically as well as economically to influence the world of trade. While many believe that India can act as a counterbalance to China geo-politically, what is ironic is that the inter-dependence of Indo-China trade dynamics will play an important role for India’s growth as an economy as well as in its trade with other countries. Collaboration, rather than competition, experts believe will help India grow faster – by integrating itself with the global supply chain that other major Asian economies have already been able to do.

US citizens protesting against Trans-Pacific Partnership (TPP).


Is there a distant chance of India rising as a counterforce to China? A US-China conflict may help. Stangarone says, “The impact of a trade dispute between US and China on world trade would depend on the extent of the dispute. United States and China are the world’s two largest economies and important trading partners. If any dispute were to cause either or both countries to go into recession, I would expect it to have a negative impact on global trade. Should the dispute lead to increased restrictions between US and China, I would expect to see some of that lost trade shift to other countries in Asia.” This seems to be a scenario where India wins by not cooperating with China. Most however believe that the negative impact of a global recession will far outweigh the gains that India might make at the cost of China and US.

 

"India has been working to strengthen its trade relations with Canada & US"

 

A US withdrawal from major trade treaties though may work in India's favour. Ajay Sahai, Director General & CEO of Federation of Indian Export Organisations (FIEO), says, "A US withdrawal from TPP or NAFTA will not have any negative impact on India albeit such a move may benefit India as we compete with many countries who are members of TPP or NAFTA. Withdrawal of tariff advantage to such countries will give an edge to Indian exports.”

While the government looks towards expanding our export basket, it also has to become more proactive in pursuing bilateral and multi-lateral trade deals. A number of trade deals, including the FTA with EU, has remained stalled and the one's that have been signed have failed to reach their potential. A case in point could be the India-South Korea Comprehensive Economic Partnership Agreement (CEPA) that was signed in 2005. The trade fraternity believes that the current CEPA is a low-quality agreement, and one that both sides have wanted to update to help increase trade. While initially, the exports from South Korea to India had the upper hand, over the years, Indian exports to South Korea have grown over the imports, leaving the South Korean side dissatisfied with the state of the deal. At the same time, South Korean firms have faced significant hurdles in the Indian market.

Similarly, when it comes to Mexico and Canada, India has a window of opportunity but trade deals with either country will not come easy. Dade says, “We have done economic modelling that demonstrates that Canada and Mexico would actually do better in TPP without US. But neither country will rush into bad deals with countries like China or India. Negotiations with India will move forward when that country gets serious about negotiating and puts serious tariff reductions on the table.”

When it comes to trade between India and Canada, trade has seen a gradual increase. While the proposed FTA between both countries has been ongoing since quite some time now and both countries have at various platforms expressed a desire to expand trade, the FTA is yet to see the light of day. Over the last five years, total trade between India and Canada has increased by a modest 26.85%.

Further, India also has also signed a Bilateral Investment Protection and Promotion Agreement (BIPA) with Mexico.And while both countries have talked about the need for an FTA, nothing concrete has emerged. This then could possibly be the time to engage with Mexico and Canada to quickly conclude the deals. FTAs with Canada and Mexico can yield enormous benefits for India as both countries are trying to grow their trade partnerships beyond US. Mexico for example is the focus of many trade deals, including the existing EU-Mexico FTA which is undergoing a modernisation discussion. And then, there is also a proposed FTA between post-Brexit UK and Mexico. This is in addition to access to the untapped Latin American region that a deal with Mexico can give. Similarly, Canada is working on trade deals which will provide access to EU through the currently under negotiation CETA (Comprehensive Economic Trade Agreement) and a post-Brexit UK trade deal. While talking about NAFTA countries, it will be a grave mistake to discount our relationship with US. Recently, Kenneth Juster, Trump Administration’s Ambassador to India has spoken about the need for the US to focus on various economic issues and trade challenges impacting US and India. Palit is of the opinion that for a country like India, developing trade relations with US may not be completely dependent on trade agreements. He says, “The geo-political angle to India and US relations can lead to more investments in fields such as defence. US has also started to export crude oil to India. So, there are many new areas where India and US can grow their relationship without entering into a free trade agreement.”
Point is will India be able play its cards right when dealing with these countries?

What Lies Ahead

Having talked about scenarios that may arise out of US walking out of the trade deals, let us also keep in mind there is a significant possibility that the deals will not break-down completely. Reinsch says, “It appears from public statements that US wants to renegotiate the agreements in ways that will reduce our bilateral deficits with Mexico and South Korea.” But he adds, “I don’t believe there is anyone in the American business community who believes that Canada or Mexico will agree to US demands.” Of course, US walking out of NAFTA is not as easy as it appears, as the final call will need the backing of the US Congress. Additionally, because withdrawal would require Congress to pass legislation changing US domestic law, the agreement could take time to get out of. Palit adds, “It is not yet even clear that the US is going to walk out of the deals. The fact of the matter is that even when it comes to KORUS FTA, Trump agreed to renegotiations. The reason for this is simple – there is an establishment bureaucracy and there are industries that are trying to convince him that it is not just trade, there is much more to these agreements.”

Dade believes that there is a silver lining to Trump's contrarian stance and says, “Agreements constrain the ability to do politically expedient things that harm large portions of our population to benefit smaller but vocal interests. I see the TPP-11 as sign for hope. The Japans, the New Zealands, the Singapores and the Chiles of the world are picking up the banner of free trade along with the EU. Even China is doing more – less progressive and liberal than the others mentioned, but still doing a lot more than earlier.” As far as Asia goes, Biswajit Nag, Associate Professor, Indian Institute of Foreign Trade (IIFT), feels that there is a need to work on strengthening regional cooperation. He adds, “We just need to maintain the status quo as much as possible. Seek market access slowly in other countries. Increase intra-regional trade and investment. Make the services sector more liberal. If we do all that, then we can become a mini world and that won’t be affected by any western trade deals.” India, Palit says, has a lot of potential to develop its relations with many countries with or without FTAs. Talking about the future, Sahai says, “While India won’t decouple from US, but as it connects with other economies India will be less reliant on US if it continues with its stance. A country like India manages a trade deficit of over $50 billion with China yet US is worried about a deficit of $24 billion with India?” Sahai is of the opinion that the US exit from TPP is a positive sign for India, particularly as the product specific Rules of Origin would have given a severe jolt to Indian textiles exports to some of the member countries like Vietnam.

While it is difficult to ascertain whether US will walkout of NAFTA, the rise of protectionism in US has indeed opened up opportunities for other countries. Will it be Asia's century? Will EU rise to the occasion and take on the mantle of the leader? Will the world trade dance to China's tune? Will India grab the opportunity to sign more FTAs? It will all depend on who makes the smartest moves. For one thing is certain, Trump will keep throwing curveballs!

 

 

“A Trade War is in no one's Interest, but our President is unpredictable”

 

William A. Reinsch, Distinguished Fellow, The Stimson center, Washington D.C.

 

TDB: Ever since the Trump administration has assumed power in US, there has been a paradigm shift in the country's policy with regards to foreign trade. How much of an influence will this new direction have on world trade?

William A. Reinsch (WAR): That’s very hard to say. First, we don’t know how for long this new US policy can be sustained, particularly if it runs into opposition from our trading partners. Second, it’s too early to predict how other countries will respond. The initial response appears to be to ignore the US and go forward with other trade agreements that leave US out. That is not good for US, but it may not be bad for world trade.

TDB: When it comes to strengthening its international position, can Asia work together to emerge as a powerful new bloc to influence the direction of world trade?

WAR: So far that seems unlikely. India, in particular, seems unable to agree to anything with anybody in the trade area, and relations between India and China on larger geopolitical issues are such that it is hard to see them agreeing on anything right now. There are also many longstanding issues amongst China, Korea and Japan that may make agreements difficult. A trilateral trade agreement amongst them has been under discussion for some time but does not seem to be making much progress.

TDB: Can a US-China fallout impact China’s position in world trade? Further, can this fallout in any way assist India in its growth in the years ahead?

WAR: I’m confident the Chinese are developing alternatives should their trade with the US decline. I don’t have a view on how that might affect India.

TDB: Considering that US is highly dependent on imports, don't you think its withdrawal from trade deals will prove counterintuitive to its economy?

WAR: US did not threaten to withdraw previously. In fact, US has been one of the strongest supporters of the global trading system and of WTO. The new administration is, I hope, a temporary aberration.

TDB: What are US’s expectations from NAFTA and the US-Korea trade deal? How fair are these deals from the US perspective. Is it feasible for the other countries involved in this deal to agree to US's demands?

WAR: It appears from public statements that US wants to renegotiate the agreements in ways that will reduce its bilateral deficits with Mexico and Korea. The demands US has made in NAFTA so far appear intended to do that. I don’t believe there is anyone in the American business community who believes that Canada or Mexico will agree to the US demands.

TDB: How important will a stronger India-China relationship be for India's foreign trade?

WAR: I think a better relationship would be essential if India wants to become a more significant player on the international economic arena.

TDB: Countries have, over the years, moved from closed economies to an era of free trade. Do the recent anti-globalisation movements point to a reversal in this trend?

WAR: There appears to have been a slowdown in world trade, although that may be ending, but there certainly is a growing anti-globalisation political movement, at least in EU and US, which has led to fears of economies closing themselves off to trade. How soon these governments will come to their senses remains to be seen.

TDB: Do you believe that the absence of trade agreements will result in an increase in trade barriers?

WAR: Not necessarily. At best, it would mean continuation of the status quo. The best approach would be to return to multilateral negotiations under the WTO, but that seems unlikely at present. Instead, it appears that more and more countries are negotiating regional or bilateral deals, all of which will promote some amount of trade liberalisation, although in many cases it may be quite modest.

TDB: Can President Trump walk away from these trade deals. How complicated is the process and can other partner countries object?

WAR: This issue is being debated right now in US. Some believe he has the legal authority to withdraw from trade agreements; others argue that only Congress can do that. At this point it appears there is no agreed-upon answer to that question, which means that if he did actually withdraw from one, there would be litigation, and the outcome of that would be uncertain.

TDB: Can fallouts from these trade deals lead to a trade war between US and other developed and developing nations?

WAR: Deals will not produce trade wars. Failure to reach deals could produce trade wars. At this point, no one appears to want that, and a trade war is in no one's interest, but our President is unpredictable.

   

 

 

 

 

 

“Problems with NAFTA are more Political than Technical”

 

Carlo Dade, Director, Trade & Investment Centre, Canada West Foundation

 

TDB: Has NAFTA failed to achieve its goals?

Carlo Dade (CD): NAFTA had economic and political goals, as is the case with almost all trade agreements. The political goals, including assuring the flow of Canadian oil to US irrespective of any changes in Canada’s national energy policy and ensuring that Mexico did not deteriorate to become a version of present-day Venezuela, have succeeded. For Canada and Mexico, gaining privileged and more predictable access to the world’s largest, richest and easiest market has, on the whole, benefited both countries enormously. There have been some loses too in terms of jobs. If you’ve lost your job you have the time and reason to protest. If you’ve gained a job you’re too busy to go march; that is how the world works!

The narrative in the media is that all new jobs created are due to efforts of local politicians or the genius of the CEO, never thanks to a trade agreement. When jobs are lost, those same politicians and CEOs blame trade agreements. Problems with NAFTA are more political than technical issues. NAFTA has been prone to political manipulation from time-to-time due to various misperceptions surrounding the agreement. When I do radio call-in shows in Canada, I am taken by surprise at the number of things callers blame on NAFTA. Also, there is the perception that, if there is one problem in one area of the agreement, then the entire agreement is flawed.

TDB: How would the results of the NAFTA negotiations impact Canada and Mexico’s relationship with other countries?

CD: That is underway, has been underway and would continue, regardless. But, as a result of the acrimonious nature of these negotiations, Mexico is looking to facilitate imports of key agricultural goods from countries other than US. Both Canada and Mexico are also moving to join other TPP countries that plan to move ahead with the agreement, without US. We have done economic modelling that demonstrates that Canada and Mexico would actually do better in the TPP without US. But, neither country will want to rush into bad deals with countries like China or India. Negotiations with India will move forward when that country gets serious about negotiating and puts serious tariff reductions on the table.

TDB: Can a country like US, which is highly dependent on imports, sustain itself on its own?

CD: The case of US, being the largest world economy, is a little different that of other nations. I think California by itself would rank as one of the world’s largest economies. But sectors of the US economy like agriculture are highly dependent on trade. US interests are nervous, bordering on panic, at the projected losses owing to the 'TPP-11' going ahead without US. The country is also a major exporter of services and it has consistently run a trade surplus with Canada on trade in services. I’d imagine the same is with Mexico. US has been attempting to write the rules for trade in intellectual property and digital trade through TPP, basically the future of trade. Then the Trump administration walked away from the deal. Some of the things that the Americans most wanted in that agreement are now being stripped out. It is somewhat unbelievable to see a country so severely and so consistently, almost methodically, shoot itself in the foot, or undermine its self-interests.

TDB: Can the fallouts from the breakdown in these trade deals lead to a trade war between US and other nations?

CD: I am not very sure. I think Mexico will retaliate. They’ve already done this to some degree with corn. I don’t think Canada will follow suit. We are more dependent on US.

   

 

 

 

“Outcomes of RCEP & TPP - 11 talks will determine Asia's role in World Trade”

 

Troy Stangarone, Senior Director, Congressional Affairs & Trade, Korea Economic Institute of America (KEI), Washington D.C.

 

TDB: Korea-United States (KORUS) free trade agreement (FTA) is in news for initiating amendment negotiations. Has the FTA achieved what it set out to do?

Troy Stangarone (TS): The KORUS FTA has largely worked as expected. Trade deals help facilitate increased trade, which has happened. Contrary to the perspective of the Trump Administration, trade deals are not tools to manage deficits and surpluses between countries. Deficits and surpluses are caused by various other factors. While the US trade deficit with Korea has grown since KORUS FTA has come into effect, this has been due to structural issues in US-Korea trade that mainly emanate from the difference in the size of auto markets in each country. The biggest challenge with the KORUS FTA has been related to the implementation of the same. Here, United States and South Korea need to work with each other to ensure that the agreement is properly implemented.

TDB: Asian countries like South Korea, China, Japan and India have become forces to reckon with in the world of trade. Are these countries now in a position to influence the direction of world trade?

TS: Asia’s role in global trade will likely be determined by the outcomes of RCEP and TPP-11 negotiations. While comprising much of the world’s trade, South Korea, India, China and Japan have historically had great differences in how they have individually viewed the international trading system. If they are able to narrow those differences in a meaningful way, Asia could play a larger role in the global trading system.

TDB: How important is it for the growth of the US economy that international trade continues to grow?

TS: While United States is one of the world’s largest trading nations, compared to most other countries trade accounts for a relatively small amount of the US economy. In 2015, trade was only about 12% of the US GDP, while the global average was 58%. If United States were to trade less, US consumers would see higher prices, less choice, and lower quality goods as competition lessens. In the short run, depending on how drastic the changes, there could be shortages of some consumer goods that are no longer produced in United States. Having said that, it would not be impossible for the United States to adjust.

TDB: What are US's expectations from KORUS FTA?

TS: The United States would like to see its trade deficit with South Korea decline, specifically in the area of automobile trade. There are steps that South Korea can take on the regulatory side to open the market further to US automobiles, and Seoul should be able to accommodate requests of this nature. In the long run, South Korea benefits more from auto sales in the United States than any potential losses from increased US sales in South Korea due to the differences in market size. However, United States will also need to accommodate South Korean requests in the talks. One-way discussions with no benefits for South Korea will be unsuccessful.

TDB: How important is India as a trade partner for Korea?

TS: India and South Korea can be key trading partners, helping to diversify and augment mutual trade. However, the current CEPA is a low-quality agreement, one that both sides have wanted to update to help increase trade. At the same time, South Korean firms have faced significant hurdles in the Indian market. These are issues that should be addressed as they would be beneficial for job creation and broader economic growth in both countries.

   

 

 

“India can develop trade relations even without FTAs”

 

Dr. Amitendu Palit, Senior Research Fellow, Institute of South Asian Studies (ISAS), national university of Singapore (NUS)

 

TDB: Would you view NAFTA as a success or a failure?

Dr. Amitendu Palit (AP): I think NAFTA has been one of the most successful regional trade agreements, in addition to other trade agreements like the European Union and the ASEAN FTA. The particular success of NAFTA has been that it has been able to integrate the North American markets. It has led to the growth of North American production networks and value chains and benefitted both producers and consumers. In that respect, NAFTA has been clearly successful, but one has to accept the fact that there may be industries that may not have gotten that much from NAFTA as they had expected. This directly relates to the political interpretation of NAFTA by the US President. He has highlighted how there were industries, such as automobiles, that had relocated from US to Mexico taking advantage of cheaper labour costs there and from there are exporting to US. While the US consumers have benefitted from the cheaper products, the US industries have not. If one looks at the overall aim for the economy, and for the region as a whole, there is no question that the gains from NAFTA have been fairly substantial.

TDB: Does a potential US exit from NAFTA allows China to emerge as the leader in global trade?

AP: It is not yet clear that US is going to walk out of the deal just because President Trump has been making these threats quite forcefully. The fact of the matter is that even when it comes to KORUS-FTA, he did not eventually back out. The reason is simple – there is the establishment, the bureaucracy and industries that are trying to convince him that it is not just trade, there is much more to these agreements. Canada and US, for example, are more than just trade partners. NAFTA has implications for regional and global relationships, as does the US FTA with Korea. I am not fully confident that President Trump will actually withdraw from the agreement. When it comes to whether the vacuum would allow Asian countries like China to emerge as leaders, I am not sure that China has an alternative template to offer when it comes to global trade because China does not have what one can describe as a trade vision which offers an alternative to the US and UK trade visions. China wants to capture global trade markets. This may not translate into an overall positive attitude towards globalisation because China continues to maintain strong barriers to market access in its own economy. I would be more comfortable of a scenario where there would be a shift towards regions and countries like Europe, Japan and even ASEAN as they have been better proponents of free trade.

TDB: How can India expand its influence in the future?

AP: The geo-political angle to India and US relations can lead to more investments in fields such as defence. US has also started to export crude oil to India. Various new sectors have opened up and there are many new areas where India and US can grow their relationship without entering into a free trade agreement. So, NAFTA may not actually have any impact on a potential US-India trade relationship. When it comes to Canada, India and Canada have been negotiating a trade agreement for many years. But there is no end at sight. It shows some kind of a reluctance from the Indian government’s side to complete negotiations. There seems to be some trade pessimism.
India has good relations with many countries, even those with which it does not have trade agreements. India should work towards becoming competitive in the global market, both by improving infrastructure and reducing business costs. It needs to develop a positive trade policy.

   

 

 

“Any disruption in global trade is bound to impact Indian economy”

 

Dr. Biswajit Dhar, Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University

 

TDB: According to you, what are the challenges that arise from a major economy like US moving away from major agreements such as NAFTA, TPP, etc.?

Dr. Biswajit Dhar (BD): Global trade governance faces the gravest uncertainty since a rules-based trading system was established. Exactly seven decades ago, the agreement that provides the multilateral framework of trade rules, the General Agreement on Tariffs and Trade (GATT), was signed on October 30, 1947. Until a few years ago, the World Trade Organisation (WTO), the successor to GATT, was the institution to look up to. But the inability of WTO to respond to the needs of its members and also to the changing dynamics of global trade shifted the focus on to the free trade agreements (FTAs). These bilateral, regional, and now mega-regional trade agreements (MRTAs), were at one point in time considered to be easier to negotiate, but times seem to have changed. FTAs are facing the same problems as the WTO, namely meeting the aspirations of the partner countries in a holistic manner and to remain relevant over a period of time. For some time, therefore, the global community will have to fall back on the WTO rules.

TDB: Do events like Brexit, the US withdrawal from TPP, etc., signal a reversal in the global trade winds?

BD: There will certainly be higher doses of protection if trade agreements become redundant. But this will occur principally through the non-availability of preferential tariffs, which have lowered the levels of tariff protection in all the member states. Trade agreements have increased the use of non-tariff measures, including the increased use of standards as a barrier, among member states.

TDB: Over the years, India’s trade relationship with nations like US, Canada and the rest of Asia has improved. How can a trade fallout between US and its partners impact India?

BD: In an interconnected world, any major disruption in world trade, and that too caused by the largest economy, US, is bound to have an impact. India would get affected even more since US is India’s largest export destination. Any pull-back by US would naturally affect the Indian economy.

TDB: On the other hand, could a fallout give India an opportunity to develop newer trade deals?

BD: India needs to diversify its trade and look at the possibilities of forging new partnerships. Towards the end of the previous decade, India had made a significant push towards strengthening its relations with Africa. The Africa-India Forum Summit, which was launched with much fanfare in 2008, was seen as a game-changer as far as trade and economic relations between the two partners were concerned. A well-thought-out plan to build economic partnerships with the sub-regional arrangements in Africa, like the Common Market for Eastern and Southern Africa (COMESA) and the Economic Community of West African States (ECOWAS), would be the step forward.

TDB: How will the current US ‘protectionist measures’ impact US and the global economy?

BD: The US protectionism, or should I say, look inwards policy, will make a huge impact on global trade. But, the good news is that the US economy cannot implement all the pronouncements of President Trump. Currently, the US economy does not have the capacity to rebalance the economy, shifting away from import to domestic sources to meet domestic demand. But, nonetheless, the Trump rhetoric will continue to adversely affect global trade.

   

 

 

“India is likely to adopt a Pro-US foreign policy stance, soon”

 

Dr. Manoj Pant, Director, Indian Institute of Foreign Trade (IIFT), New Delhi

 

TDB: What implications will US’s possible withdrawal from mega accords such as NAFTA have for India?

Dr. Manoj Pant (MP): In my view, there are not any significant losses for India. Yes, historically, it is true that India did lose a good amount of textile trade due to NAFTA because special benefits were given to textile exporters in Mexico who manufactured textiles using American yarn. But leaving aside that example, wholly speaking, since India does not lose much from NAFTA in the first place, it can’t gain much from the US's withdrawal from NAFTA either. In my view, NAFTA does not affect us in any way when it comes to our relationship with US. There, however, could be some positives that emanate from a breakdown in NAFTA, i.e. in terms of increased trade diversions taking place through Mexico in the textile sector amongst others.

TDB: Do you really think the Trump Administration can walk out of these deals and associations?

MP: The problem with Trump is that he exhibits a very typical businessman-like approach to government policymaking which is not tenable in today’s globalised world. Simultaneously, he does not know how business benefits from multilateral trade framework accrue. He only knows to deal bilaterally and not multilaterally, and that reflects in most of his policies. Going forward, the troubling reality staring at him in the face is he is not bigger than the trade institutions and the economic interests of US. And that’s the reason he has not been able to follow-through on many of his promises. When it comes to TPP and NAFTA, what he is basically trying is to gain some bargaining power. He knows he simply cannot withdraw with impunity overnight. Trump is building a case of pulling out of NAFTA is not a done deal yet, and the same is true for TPP – where the door still remains open for an US entry at a later date. The US President knows that such multilateral frameworks take time to materialise, and by the time they would actualise; he would probably be out of the office. At best, what he can do is to try slowing down the TPP. America has over the ages stood for free markets, and no President including Mr. Trump can alter that.

TDB: What repercussions do you see arising out of US, for all practical purposes, abdicating its role as the beacon of free trade. What will be the impact on Asia?

MP: As a result of global economic upheavals like Brexit and the US withdrawal from TPP, a lot of multilateralism is being encouraged by developing countries. That’s why you see the advent of many alternative trade arrangements in this part of the world. As a result of TPP fallout, one can notice a dramatic rise in trade equations involving South Korea and Japan, South Korea, Japan and Australia as well as South Korea, Japan and South-East Asia, amongst others. Worth noting here is that the two major economies that were not part of the original TPP plan are India and China. With TPP, America’s plan was to counter China’s influence. And China, by tying up with many developing countries and forming an umbrella under RCEP, aims to build a counter trade bloc.

TDB: In such a dynamic environment, what does India need to do to influence the direction of globe trade?

MP: Today, our major USP comes from our large consumer base that we have. If the Chinese economy, which is already showing signs of slowing down runs into further trouble, then the only large enough economy which can bring a resemblance of stability in this part of the world is India. And, this is the fact that makes India an unavoidable partner in global economics. No country, be it a superpower or not, can afford to leave India out of their global schemes of things now. Our biggest advantage when it comes to our relationship with US stems from the fact that we both are robust political democracies. India is the only country in the world which has been a one man-one vote democracy, right from its inception. This is why you see, person-to-person US-India links are so strong today. The spillover benefit of this is also evident in the increased economic cooperation between the two countries. We are a natural partner to US. Further, it is also a fact that over the years, India has tried to maintain a balance with US and other countries in international politics because of geopolitical developments in this part of the world. We have a neighbouring country i.e. Pakistan cosying up to China but, in my view, China will dump Pakistan the day it finds a better market. India also does not wish to be bracketed as a member of the US Camp – a stand that’s perfectly fine given the multipolar world we now are living in. With Trump as US President, at the moment, I don’t see any major shift in the status quo, except for issues related to our software exports. But then, that also does not form the largest pie of our US-bound exports. On the commodity trade side, we have a surplus with US. Going forward, I believe, India-US relationship will improve both in terms of trade and geo-politics. You will soon see this in our foreign policy stance.

  

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