Leader of the Economic Order?

Originally published as “For American business to thrive, bilateral trade deals aren’t enough” at Global Risk Insights on December 11, 2017

After November’s Asia-Pacific Economic Cooperation (APEC) Summit, it has become clear that the United States under President Trump is not interested in multilateral trade deals or policies. At the same time, others, such as the European Union, Japan, and China are forging ahead with multilateral deals. When the U.S. steps down and other nations and blocs step up, the American economy will find itself increasingly isolated as the global economy moves on without it.

America Stepping Down

During his speech to the APEC Summit, President Trump stated, “[W]e will no longer… enter into large trade agreements.” The President has consistently spoken against multilateral trade agreements, believing that they encroach on American sovereignty and unfairly allow other countries to take advantage of the American economy and consumers. In January 2017, he pulled the U.S. out of the Trans-Pacific Partnership (TPP), which would have eliminated over 18,000 tariffs on American goods, according to the U.S. Trade Representative. Trump’s comments on trade and Europe more generally prompted EU leaders to shelve the Transatlantic Trade and Investment Partnership (TTIP) negotiations, which would have brought in billions of dollars for the American agriculture sector. Under Trump, the U.S. will also be the only country in the world not party to the Paris Climate Accords, which would have positioned America to lead the $60 trillion clean energy market.

Instead, the Trump Administration is touting bilateral trade deals as the answer to America’s trade issues. The problem is that the major economies America needs to be trading with do not want bilateral deals. The Japanese Finance Minister refused the idea of a bilateral trade deal with America. As the Trump Administration attacks the South Korea-U.S. trade agreement, South Korea has signaled that it is willing to back out of the deal itself if American demands remain “irrational” and is making plans for a free trade agreement with the Eurasian Economic Union, led by Russia. Moreover, the Administration does not seem to be putting in the effort necessary to make bilateral deals work. Joshua Meltzer, a senior fellow at Brookings, says of the U.S., “There seems to be more of a focus on making a political point about trade deals vs. improving them.” And the political point, that the U.S. is the largest economy and needs to be treated with respect, often highlights the difficulty of bilateral trade deals. Lee Hsien Loong, Prime Minister of Singapore, stated, “ [America is] bigger than any other partner that comes along and so you get a better deal. As a result of which I think not that many partners will be keen to deal with you bilaterally.” Other countries are reluctant to deal one-on-one with America simply because of its sheer size.

Japan and Europe Stepping Up

As America is pulling back from multilateral trade deals, Japan and Europe are stepping up to fill the void. Japan’s Prime Minister Shinzo Abe, having spent significant political capital on the TPP, has spent the past months reviving it in the wake of America’s withdrawal.With Japan now at the helm, the TPP has been recreated as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Japan needs the CPTPP to revitalize its economy and serve as a hedge against China, so Abe will not discard the deal as easily as Trump did.

While Japan is focused on rewriting trade in the Pacific, the EU is attempting to cement a deal with MERCOSUR, a South American bloc consisting of Argentina, Brazil, Paraguay, and Uruguay (and a suspended Venezuela). The EU hopes that the deal will position it as the leader of global free trade in the age of Trump.

Equally important to both is their own Japan-EU free trade agreement. The two parties are seeking to sign a deal before 2018. A successful deal would create the largest industrialized free trade area in the world, accounting for 19% of global GDP. Together, the EU and Japan are driving trade agreements in the most economically important and vibrant markets, trade agreements to which the United States could have been party.

Enter the Dragon

In his own speech to the APEC Summit, Chinese President Xi Jinping offered a direct rebuke to Trump’s bilateral stance. He called for Asian countries to enhance “interconnected development” instead of going their “separate ways.” Xi’s speech highlighted how China is forgoing the old maxim of “biding its time and hiding its capabilities” in favor of acting as a leader of the global economy.

The most obvious manifestation of China’s new role is the Belt and Road Initiative (BRI),  an ambitious plan to reorient global trade through China. Through the BRI, China would pump nearly $1 trillion into global infrastructure projects that will facilitate increased trade, such as new ports and railways. Directly on trade, Premier Li Keqiang has called to advance the China-Korea-Japan free trade talks as tensions between the countries cool and trade reaches unprecedented levels. In addition, days after the APEC Summit, leaders from sixteen Asian countries met in Manila to discuss the Regional Comprehensive Economic Partnership (RCEP) a Chinese-led regional free trade agreement. If completed, the RCEP would decrease tariffs and increase trade across a quarter of the global economy and would allow China to rewrite the rules of trade.

America Left Behind

The Trump Administration’s unwillingness to engage with multilateral trade agreements will have negative effects for the American economy. By shunning multilateral agreements, American businesses will need to pay for access to key markets through high tariffs while their foreign competitors gain that access for significantly less. For instance, the TPP should have produced $10 billion in output for the U.S. agriculture sector, largely from access to food-import dependent countries like Japan and Vietnam. Notably, American beef exports to Japan would have seen a tariff of only 9%, far lower than the current 50%. Instead, New Zealand and Australia are likely to claim that prize with the CPTPP, as will the EU with its agreement with Japan. Pulling out of these deals gives other countries’ economies clear advantages over the United States in trade.

Backing out of the TPP, and its subsequent revival as the CPTPP, has another, indirect consequence. It gives Mexico and Canada increased leverage during NAFTA renegotiations. With America’s absence, the CPTPP acts as an alternative to the American market for Mexican and Canadian exporters. If CPTPP is successful, America’s neighbors will be less reliant on the American economy and therefore less willing to give concessions during negotiations.

Backing out of the Paris Climate Accords and stalling negotiations on TTIP also hurt America’s economy. Yet these kinds of deals are the only way that the American economy will move forward on trade in the future. Just as Trump wants a favorable deal for America, other countries’ negotiators want a good deal for their home country, and they just will not get one negotiating alone with the United States. Until the American government recognizes this, American businesses will lose out to their foreign competitors.


The Next Decade: Manufacturing and Infrastructure

Two major sectors will outperform in emerging markets over the next decade: manufacturing and infrastructure. As Chinese and Indian workers become more expensive and Chinese and Indian factories seek to move up the value-chain manufacturing will once again spread out across countries. As they cede their “world’s workshops” title China will drive infrastructure spending and construction with its Belt and Road Initiative. While risks abound for both, we should expect these two sectors to outperform others.

For decades, China, and to a lesser extent India, has dominated global manufacturing. Yet Chinese and Indian wages have seen a drastic increase in recent years, pushing manufacturers to look elsewhere for cheap labor. According to a former World Bank Chief Economist, 100-million low skilled manufacturing jobs will leave China soon. Many of these jobs will go to Africa, which is in the early stages of a population boom, though other countries, such as Vietnam and Sri Lanka, will also benefit. China’s and India’s move into mid- and high-technology manufacturing will put them in competition with the developed economies. While their workers may be too expensive for low-skilled factories, they will be perfectly priced to attract mid- and high-technology manufacturers from the developed world, further bolstering emerging market manufacturing.

China has paired its manufacturing shift with an ambitious global infrastructure plan, the Belt and Road Initiative (BRI). The Chinese government has planned over $900 billion of investment in global infrastructure projects, such as railways through Central Asia and ports along the African coasts. While the goal is to facilitate trade, the building process will spark an infrastructure boom. As investment attracts investment, we should further expect other countries and businesses to add to the original $900 billion.

While risks such as corruption and war present significant obstacles to both these sectors, we should expect that market forces will ensure that low-technology manufacturing shifts to non-Chinese and Indian markets and that the Chinese government will see through at least a significant part of its BRI plan. Both will ensure that these two sectors outperform others over the coming decade.

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This is the second in a three-part series on elections in Sub-Saharan Africa

While Rwanda’s recent election result was nothing short of predictable, the same cannot be said for its neighbor to the west. Both countries are led by men determined to maintain their control of power. Continue reading

The Human Costs of Controlling Xinjiang

Originally published on The Diplomat, October 10, 2017. 


Xinjiang and the Uyghurs

The Uyghurs, one of the largest ethnic minority groups in China, have an unfortunate lot. As a group, they possess two key factors which encourage the ruling Chinese Communist Party (CCP) to repress them. First, they have a strong ethnic identity which is separate from the principal Han ethnic group which dominates the CCP. Indeed, many Uyghurs are beginning to view a major component of their identity as “being non-Han”. Second, the land they inhabit, Xinjiang Province, is rich in resources and economic importance. It holds one-third of the country’s natural gas and oil reserves in addition to large deposits of gold, uranium, and other minerals. Renewable energy also factors in: Xinjiang is a prime location to harvest solar, wind, and nuclear energy. Moreover, Xinjiang sits along the historic Silk Road, which the CCP is intent on rebuilding in its One Belt, One Road Initiative. Continue reading