Trump’s Trade War

Trump’s Trade War

Korea: Front and Center

The world’s attention to the U.S. threat of a global trade war—which now seems underway with China’s announcement that it has raised tariffs on 128 U.S. exports—has been deflected to a true hot spot—the Korean Peninsula. President Trump has exercised his gift for stirring troubled pots by impulsively agreeing to meet with North Korean dictator Kim Jung On in May. These sorts of sensitive negotiations typically take a year or more of hard preparation by experienced technocrats on both sides negotiating scores of substantive issues and protocol measures necessary to lay the foundation for a fruitful meeting of heads of state. This foundational work typically leads to meetings of Deputies and then Ministers and Secretaries, all to create a final opportunity for Heads of State to meet and consummate a strategic and well-designed agreement.

President Trump’s model is different: A promise—or threat– to exercise the Art of the Deal with an erratic, nuclear-armed dictator based on virtually no foundation. A skeletal and disassembled staff of knowledgeable people on the U.S. side is scrambling to target vague ambitions and is surely struggling even to get logistics in place. Add in a new Secretary of State trying to piece together his own team. What could go wrong?

In parallel– or perhaps more accurately, a perpendicular move– President Trump re-opened the Korea-US Free Trade Agreement (KORUS) to strong-arm more U.S. exports to South Korea. Re-opening KORUS was complemented quickly by high-tariffs on steel and aluminum—perceived as the first volley in a global trade war. Trump has claimed that the threat of steel tariffs has forced the South Koreans to concede to opening up their market to more U.S auto exports. The new deal doesn’t appear to open much else, and could be a threat to U.S. agricultural exports, but it does increase the sales each auto producer can make in Korea from 25,000 to 50,000 a year. Yet, it is reported that no U.S. producer has shipped more than 11,000 in any year so far. That is, it doubles the amount of auto’s the Koreans will permit in from more that twice as many as ever actually make it into the Korean market to nearly four times as many as ever make it in. It appears to be a Pyrrhic victory at best.

This form of managed trade—forcing other governments to ensure that their private citizens buy a negotiated volume of U.S. goods was tried unsuccessfully in the 1980’s and is unlikely to work any better now. It turns out that opening markets, especially Asian markets, is a longer, more difficult process of economic diplomacy: breaking down layers of regulatory barriers, business practices, cultural norms, and nationalistic pride. It also requires very high quality products at a very competitive price.

As reported in the Financial Times [March 26, 2018], “The changes came after US companies have long complained of regulatory trade barriers in South Korea that were hampering US exports to the country. US carmakers in particular have taken issue with Seoul’s environmental and certification procedures that have limited their market share in South Korea to roughly 15 per cent.  ‘South Korea did a relatively good job, making some concessions in the auto sector in return for steel tariff exemptions. Not a bad deal,’ said Lee Hang-koo, researcher at the Korea Institute of Industrial Economics & Trade. ‘But we are unlikely to see much bigger US auto exports to South Korea because of the limited US sedan models imported to the country.’

If this trade deal, and concessions on steel (not applying the new steel tariff) are as minor as they appear, they contrast starkly with the sharp power being exercised by the other major player in the Korean story– China. Kim Jong Un recently was beckoned to Beijing, as his first venture abroad since taking power, to pay tribute to Xi Jinping. To encourage his visit, and to clarify for Kim his client status, China virtually halted exports of refined petroleum (down to about 1.3 per cent of monthly average)—well beyond UN sanctions. Coal exports were cut to zero, the FT reports. Steel exports dropped to a slow dribble and autos fell to literally one car exported in February. At this rate, North Korea, already plagued by deep poverty, could be starved out in months. Even Kim’s regime would be unsustainable.

The message is clear, to Kim and to the rest of the world. China has control over Kim’s regime. Kim has been beckoned to Beijing. His dependence and corresponding allegiance has been made clear to him and to all relevant parties in anticipation of Kim’s meetings with Moon Jae-in, President of the Republic of South Korea set for April and with President Trump in May.

China has not ignored South Korea. Beijing is taking advantage of an important opportunity to re-set its relations with South Korea with skilled use of economic carrots and sticks. China is already the top destination for Korean manufacturing. China has shown its ability and willingness to use that advantage as a negotiating tool. China punished Korea for its participation in THAAD (Terminal High-Altitude Area Defense) system. Regulatory measures and government encouraged consumer boycotts forced the South Korean Department store Lotte from China. It also banned K-pop music stars from China.1 Millions more was lost in consumer boycott of Korean goods and local markets avoided by Chinese tourists.

South Korean President Moon Jae-in has made a pilgrimage to Beijing to rebuild diplomatic bridges and restore Chinese favor for Korean goods. Beijing has sped up the China-South Korea trade negotiation. A successful Sino-South Korean Free Trade Agreement would be an important boon to South Korea and every useful political carrot for Beijing.

In contrast, Washington has created tensions by demanding, in the face of a faltering Korean economy, more financial support for military operations, including THAAD, re-renegotiating its trade agreement, and unilaterally imposing new tariffs on Korean steel. All these measures offers very little real economic benefit to the United States. Instead they help pave a smoother path for China to build its bonds, and hegemonic influence, step-by-step across the Korean peninsula. The next step is a successful meeting between North and South, followed by a successful Free Trade Agreement between China and South Korea, then pressure to reduce or eliminate THAAD, possibly followed by agreement to reduce military exercises with the U.S., and reduce South Korean financial support for U.S. presence. All this leads to a slow, patiently constructed alliance between South Korea and China,

With China’s proposal for a dual freeze – North Korea freezes nuclear testing and the United States freezes its military exercises with Seoul—rejected, it has pushed for bilateral talks between North Korea and the United States as the best option to manage a potential crisis. Washington has now obliged. There should be zero hope that Kim Jong Un will eliminate or even reduce his nuclear capability, even if he promises to do so. It is not clear what President Trump hopes to accomplish. It is less clear what he will accomplish. It is a better bet to try to understand what Beijing would like to see from this negotiation, and to put better than even odds that it will be the outcome.

Deft and effective Chinese economic statecraft has strategically positioned both North Korea and South Korea. Meanwhile, President Trump’s team blusters and fumes over bilateral trade deficits and high-profile and meaningless trade victories against one of South Korea’s top manufacturing industry. China seems to be playing a much more adroit game of economic statecraft than is the United States.

Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.

Reflections on a Trade War

The current “trade war” that the U.S. appears to be launching is, fortunately, still at the level of frontier skirmishes. The theaters of war are being explored and the resolve of the enemy is being tested. With any luck, this will be mostly theater and little war. However, one cannot help but believe that a little bit of war could be a good thing, for a few very important reasons. It is these reasons that we shall explore over the next few weeks in this blog.

First, recognizing the wisdom in Colin Powell’s warning that no battle plan survives contact with the enemy, it is still wise to at least plan for battle. More specifically international trade is always a form of ongoing, simmering warfare. The economics of trade is an optimistic, entirely positive-sum story: cooperation, collaboration, expanding commerce, escalating opportunities, partnering for innovation, and creating mutual prospects for growth. The politics of trade, however, is always a form of warfare.

A bit of history will help set the stage. From the time of Marco Polo Continue reading “Reflections on a Trade War”

Elegy for the Trans-Pacific Partnership

Elegy for the Trans-Pacific Partnership

Robert A. Rogowsky
Professor of Trade & Diplomacy
Middlebury Institute of International Studies in Monterey, CA

It has been more than a year since President Trump pulled the United States from the Trans-Pacific Partnership: the result of nearly a decade of negotiations with 11 other countries, including three of our largest trading partners, two South American trade partners and six more in Southeast Asia. The jilted trading partners have found their way back to a new TPP-11, which will undoubtedly open new opportunities for their industries and consumers, much at the expense of their U.S. counterparts.

The TPP was the new gold standard in trade agreements, to be surpassed in the future to be sure, but for now a major step forward in the hard task of negotiating rules for the rapidly evolving global marketplace, increasingly dominated by complex supply chains. It was the latest version of a long evolutionary process begun by Ronald Reagan when he proposed the expanded and visionary trade agenda to the GATT in 1982. Hard fought negotiations to open a new Round of negotiations in 1986 led to the Uruguay Round Agreement in 1994 creation of the WTO and expanded the trade agenda from manufacturing tariffs to begin to incorporate the global nature of business into rules defining a new level of governance for international commerce. Continue reading “Elegy for the Trans-Pacific Partnership”