The Law of Intended Consequences

Not content with threatening to impose tariffs on all of China’s exports to the United States, the Trump Administration has included a provision in the new NAFTA agreement which makes clear its unhappiness with others doing trade deals with China. While the provision does not make a substantive difference to the legal niceties of the agreement, its signalling is clear – with some disturbing implications for future Asia-Pacific economic architecture of interest to New Zealand.

One of the additions to the renegotiated North American Free Trade Agreement (stodgily renamed – in a marketer’s nightmare – the “USMCA”, or United States-Mexico-Canada Agreement) is a provision that obliges a member to consult the others if it intends to negotiate with a “non-market economy”. The other members will have the chance to form their own bilateral agreement in place of USMCA. This is aimed squarely at China, whose status as a “market economy” has long been a bone of contention for the US (and European Union) in the WTO.

Substantively, the “poison pill” (in the words of Commerce Secretary Wilbur Ross) will make little difference. Under the old NAFTA arrangements any party could withdraw from the agreement for any reason with six months’ notice; technically this amounts to much the same thing. But the signalling to trading partners is crystal clear – and the US has just announced it intends to negotiate new FTAs with the EU, United Kingdom and Japan.  China will of course be considering its own positioning too.

The move is consistent with the rest of President Trump’s approach to trade, which is fixated on China – first with the steel and aluminium tariffs (although these had little impact, since China’s SOE-produced steel had already been largely excluded from the US market by anti-dumping and countervailing duties); then with the ‘Section 301’ measures aimed at China’s industrial policy and intellectual property approach, which have seen the US impose or threaten tariffs on all imports from China. The US has also taken steps to tighten foreign investment rules.

The US was a supporter of China’s 2001 accession to the WTO, advocating for its inclusion in the global trade system at least in part to encourage a move away from the “socialist market economy”. And of course global value chains, where production is integrated across multiple geographies, and which have driven the design of modern FTAs, have opened up vast new opportunities for the United States as well as emerging economies. Deeper global economic integration has been a polestar for New Zealand trade policy since the Second World War. But the times they are a-changin’.

The US approach has worrying implications for the Asia-Pacific’s regional architecture. Since 2014, when (ironically) China was in the Chair, APEC has championed the idea of a ‘Free Trade Area of the Asia Pacific’; FTAAP has the potential to give new stimulus to inclusive and sustainable development in the region and to grow trade opportunities for New Zealand among others. While the FTAAP concept is for a free trade “area” not an “agreement” as such, US enthusiasm for that vision must, at the least, be in question.

Similarly, during recent discussions as part of an Asia New Zealand Foundation Track II visit to China, Chinese thinktanks were receptive to the idea that China might eventually join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership; membership of CPTPP could provide helpful impetus for further domestic reform – an approach that regional neighbour Viet Nam has embraced to its benefit over recent years. But of course Canada, Mexico and Japan are a part of the CPTPP agreement and may be reluctant to welcome China given the USMCA signalling.

It is incumbent on all of us to shore up the global rules-based trading system, resist normalising overt discrimination and do what we can to help lower the current tensions. At the very least, trade relationships based on big-power politics, in a world where the first and second largest economies in the world are at odds, are likely to cause some middle-of-the-night existential soul-searching for small states. Isolationism and picking sides sit very uncomfortably in our globalised world.

This post was prepared by NZIBF Associate Director Stephanie Honey.