RIP MFN

It lived an amazing life

Donald Trump’s second term as President of the United States looks set to be one of the most disruptive for the global trading system in the country’s history. He has recently announced that his administration intends to introduce the Trump Reciprocal Trade Act which will see the United States levy tariffs on goods entering the country at the same rate as those levied by other countries on imports from the US. What is more, he looks set to levy even higher tariffs on goods from China as he views China’s success as an existential threat to the United States. This will essentially destroy the Most Favoured Nation principle of the World Trade Organization (WTO) which prohibits countries from discriminating against other nations unless there is a formal Free Trade Agreement in place.

In some ways, Trump has a point. China is ruled by the Chinese Communist Party (CCP) which is an evil regime that persecutes its own people, has destroyed democracy in Hong Kong, and threatens the sovereignty and security of its neighbours. Moreover, since joining the WTO it has not played by the rules. It routinely grants illegal subsidies to Chinese firms which gives those companies an unfair advantage and leads to the ‘dumping’ of Chinese manufactured goods which makes the same products produced by American firms less competitive. The CCP also engages in corporate espionage and intellectual property theft all while placing export controls on critical minerals and components in order to gain an edge over the US. The CCP needs to be challenged.

Furthermore, the WTO has repeatedly shown itself not to be fit for purpose. While it has improved under Director-General Ngozi Okonjo-Iweala, disputes take far too long to be resolved, offenders such as Communist China go unpunished, and the rules governing digital trade and trade in services are in desperate need of being updated. The WTO may have functioned successfully in the 1990s and 2000s but is in danger of becoming powerless and moribund as we head towards the future. The WTO needs to be reformed.

However, although Trump is right to be concerned about the malign influence of the CCP and frustrated with the WTO, his approach will be incredibly damaging. Challenging the CCP by levying incredibly high tariffs and disregarding the WTO is not the right path for the United States or other freedom loving nations.

Tariffs are essentially a tax. They increase costs for domestic firms who then pass on these costs to consumers in the form of higher prices. The Trump Administration may attempt to deny this fact even though they do tacitly recognise it as Trump delayed imposing tariffs on Chinese goods in his first term as his advisers were rightly concerned that it would push prices up over Christmas. Tariffs also lead to trade wars as country’s slap retaliatory tariffs on American made goods, which is again what happened during Trump’s first term. This makes American exports less competitive which means that the profits of US firms take a hit which can result in the wages of US workers taking a hit and their livelihoods being placed in jeopardy. In short, it is ordinary working Americans who will suffer the most as a result of Trump’s tariffs.

Rather than becoming increasingly protectionist, Trump should actually embrace free trade and the international rules based system if he is serious about standing up to China. The first thing he should do is reverse the move he made in his first term where he withdrew the US from the Trans Pacific Partnership and should rejoin what is now the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

The economic case for the US joining CPTPP is relatively straightforward. It will give US firms tariff free access to some of the fastest growing economies on the planet as well as increasing exports to established allies such as the United Kingdom, Canada, Mexico, and Japan.

However, the geopolitical reason is perhaps even stronger. China has wanted to join CPTPP for a number of years so that it can boost its exports to the nations in the bloc while also increasing its hegemony in South East Asia and the Pacific. It is not in America’s interests to allow this to happen. Both the UK and Japan have previously been likely to veto China’s accession but the new Labour government in the UK is looking to strengthen ties with China and so may waver on this which would make it even more difficult for Japan to publicly oppose China’s request. What is more, the other nations in the bloc may see it as in their interests to draw closer to China if they find trading with the US to be increasingly difficult due to Trump’s tariffs.

Joining CPTPP would not only allow the US to boost its exports to more countries, it would also allow Trump to claim a victory over the CCP. The CPTPP with the US as a member would be the most powerful trading bloc in the world and it would mean that China would be unable to join. Trump could go even further by insisting that the other members fast track Taiwan’s accession to the bloc which would not only infuriate the CCP further but would also ensure that America’s allies have greater access to the critical parts manufactured by Taiwanese firms.

Finally, rather than retreating or withdrawing from the WTO, Trump should take it more seriously. We have seen with the World Health Organization what happens when the US takes less of an interest in international bodies: the void is filled by the CCP. If Trump is serious about challenging the CCP's malign influence and making trade work for the US then he should invest more resources into the WTO. He should push for reforms to dispute resolution to ensure that there are real and serious consequences for nations such as China which engage in illegal trading practices. Trump should also push the WTO to update the trading rules so they are fit for purpose and boost trade between the US and other nations.

Donald Trump looks set to disrupt the global trading system and he is determined to stand up to China. While he may have a point, his approach looks set to be extremely damaging for ordinary Americans, the United States, and other freedom loving countries. If Trump is serious about challenging Communist China then he will embrace free trade by joining CPTPP and working to reform the WTO.

Somehow, Peter Navarro returned…

Given that Trump is set to appoint Peter Navarro as a senior adviser on trade then this is even more unlikely to happen but who knows!

Thanks as ever for reading. Have a nice weekend!