Defending free trade as the US shuts the door

According to the forecasts of the International Monetary Fund (IMF), the world economy is set to grow by 3.7 percent in 2018. Europe, the emerging markets and US are all set for prosperity. There are a few laggards like the UK, thanks to the impact of Brexit. But the wider picture looks as rosy as it has since the onset of the financial crisis.

Tax reform in the US, a better-than-expected performance in China, healthy European industry numbers, and recovering commodity prices are all fueling growth. There seems to be little reason for concern. However, there is a clear drive toward protectionism emanating from the US. Brexit also endangers free trade flows between the UK and Europe, which is by far Britain’s most important trading partner.

International trade was always a driver for growth, which is why we should take the warning signs seriously.

There are such warning signs coming from the US. Trans Pacific Partnership (TTP), a free-trade agreement between the US and 12 further Pacific Rim nations that had been negotiated by the Obama administration over many years, was canceled by President Donald Trump on the very day he assumed the presidency. On the orders of the new president, the US is also renegotiating the North American Free Trade Agreement (NAFTA) with Mexico and Canada. The NAFTA came into force under President Clinton in 1994, boosting ties between the three economies, especially in manufacturing supply chains between the US and its two neighbors. The components in the automotive and other industries are shipped back and forth — adding value during each trip.

Both Canada and Mexico humored President Trump and are now trying to salvage what they can of the agreement. The president’s argument for aggressively moving against trade is the preservation of jobs. Yet as many as 6 million jobs in the US depend on NAFTA. The agreement also lifted millions of Mexicans out of poverty, which matters to the US, because prosperous neighbors tend to create fewer problems than destitute ones.
 

We should heed the warning signals emanating from the Trump government and other protagonists of protectionism.

Cornelia Meyer

In Europe, Brexit endangers the free trade arrangements between Britain and the EU. The UK government insists it wants to leave the single market as well as the customs union, which may well result in falling back on WTO rules as the lowest common denominator. This would have bad ramifications on the supply chains, as here too automotive and other industries depend on the ability of shipping parts back and forth across the Channel. The impact of losing the free trading status would be bigger for Britain than for the EU. The UK was attractive to foreign investors such as Nissan and Toyota due to its liberal employment laws, engineering skills and — above all — its access to the EU markets. If that access goes, so goes the attractiveness of the UK as a recipient of foreign direct investment. The same holds true for financial services: Once the UK loses the so-called passporting rights (the ability to execute euro-denominated transactions), the City of London will lose some of its attractiveness as the major financial center in Europe.

There are some sun rays penetrating the dark clouds of protectionism, however. The 12 remaining signatories of the TPP are trying to go ahead and form a trading alliance without the US. As far as NAFTA is concerned, Canada and Mexico have embarked on a charm offensive to salvage what they can. Industry is by and large on their side because there is little interest in realigning supply chains. The 6 million workers whose jobs depend on NAFTA and their trade unions will hopefully also realize where their interests lie at some stage. The EU-Canada Comprehensive Economic and Trade Agreement (CETA) was approved by the European and Canadian parliaments in early 2017. It will eliminate 98 percent of trade barriers between Canada and the EU, although it does not include the services industry.

The green shoots prove that trade is not dead — as does Chinese President Xi Jinping’s passionate plea in favor of free trade at last year’s World Economic Forum in Davos. Xi was of course advocating national interest, because it was trade that allowed the Middle Kingdom to grow its economy aggressively and lift hundreds of millions into the middle classes over the last two decades.

We should heed the warning signals emanating from the US government and other protagonists of protectionism, because free trade is based on a global system of laissez faire. When the leader of the free world opts out, things are bound to become more difficult. At the same time it may be opportune to take another look at the World Trade Organization (WTO) as a comprehensive global framework. Its Doha Round negotiations are sadly all but dead. Some elements could possibly be revived — but that may be a difficult task without the world’s largest economy at the negotiating table.

* Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources