Kevin Nealer publises article on Free Trade

February 7, 2017

Principal Kevin Nealer published an article on Free Trade in the Nikkei Asian Review. Find the article here, or below.

 

Is this the end of free trade?

Kevin Nealer, November 10, 2016

Observers in Asia could be forgiven for imagining that the U.S. presidential election was fought over the fate of the Trans-Pacific Partnership trade pact. From early on, when the key presidential candidates repudiated the deal, the future of American trade policy became the subject of heated commentary. Do not be confused. The voters cared very little about trade in general - and even less about the TPP.

The real economic policy debate -- over income stagnation, wage inequality, and the uneven recovery -- never happened. Why? In part because neither the Republican nor Democratic parties had convincing answers to the difficult structural problems that face the U.S. economy and give voters such anxiety. Globalization is a fact that all sides recognize, then ignore, because the tools for a policy response are beyond them.

But Donald Trump harnessed anxiety about economic and social change and forged it into an isolationist and populist narrative. Hillary Clinton elected to run an issue-free campaign as the status quo candidate who would protect the Obama legacy. That proved to be fatally flawed, suppressing votes among her base while feeding into the Trump narrative that she was incapable of solving the challenges facing America in the global economy.

American reliance on the external sector is undiminished by a Trump win. The fact that traditional, pro-trade Republicans were returned to the Senate may chasten Trump and force a more adaptive approach to trade issue. But elections have consequences. The few influential advisors around him fought Republican orthodoxies for more than a year and won. They are not in the mood to be taught Ricardian economics by the old guard, and a president's freedom of action in the international sphere is much greater than on domestic policy. It is imprudent not to expect him to act early and decisively on the trade policy promises that brought him to the highest office. 

The trade policy dilemma is not new in retail American politics, nor symmetrical. Democrats have long struggled with the trade and growth message. Their natural allies in organized labor have supported only one trade deal, despite former President Bill Clinton's embrace of the North American Free Trade Agreement and President Barack Obama's TPP deal, the largest trade agreement in history.

But the "real" political lesson of trade for Democrats is more complicated. Labor has not followed through on its threats to defeat pro-trade agreement Democratic candidates. If Democrats expect to maintain their political lead among their two "future" constituencies -- younger voters and Latinos -- they need to rethink whether opposing trade deals reflect the attitudes and interest of those constituencies.

The problem for Republicans is very different. Perhaps no feature of Republican candidate Donald Trump's embrace of populist themes has done more to challenge the Republican party leadership than his anti-trade position. Not only did he repudiate the TPP, but he threatened to pull out of the North American Free Trade Agreement and -- much more consequential -- to repudiate the World Trade Organization, the multinational body that sets the rules for global trade.

Under a Trump administration, what is left of the pro-trade consensus? Can the TPP be the organizing principle for that effort?  Popular American understanding of the TPP is very low. It may be the largest trade deal in history, but its elements are not well appreciated in the U.S. or elsewhere. In part because of that complexity, American companies have found it a challenge to create a politically safe space for the deal through lobbying and advocacy.

A vote on approving the TPP would have been possible in the closing hours of the "lame duck" Congress - the session that follows the presidential and congressional elections but precedes the Jan. 20 inauguration of the new president and elevation of newly elected senators and members of congress. There are certainly enough votes in the Senate. House members -- with the pressure of the election behind them -- could insist that some Democrats join a Republican majority in getting the bill passed. But with their party's new standard bearer as the deal's most fervent opponent, the prospects of action are near zero.

So has Trump's rejection of trade undermined a century of Republican policy, and does the party now believe that protectionism is a necessary ingredient of Republican governance?

More immediate is the question of whether there is anything that could induce Trump to revisit and change the TPP? That is most unlikely. Keep in mind that Trump's aversion to trade deals dates back to his 1999 presidential bid. It helped define his image and there is no record from the campaign of any move to change his views to support Republican orthodoxies. That said, he has shown himself to be totally protean, not tied to his own policy history.

Two things might encourage him to "reimagine" the TPP: First, the WTO's Doha Round of trade talks was declared dead in 2015, having been moribund since 2008, without a notable impact on global markets. Why? Because it took place when trade liberalization was occurring at a breathtaking rate as the U.S., Japan, China, and the European Union engaged in a proliferation of bilateral and multilateral trade deals, convincing markets that political support for free trade was stronger than ever.

With real trade growth now at risk, central bank stimulus options exhausted and no "next big thing" to support trade liberalization, Republicans and Democrats alike may conclude that ignoring TPP is an unacceptable risk to the continuation of brittle growth in the U.S. and around the Asian region.

Second, Obama's "rebalance to Asia" initiative is not going to go away. Trump inherits an Asia-focused policy. Given his antipathy to NATO and Europe -- and his obsession with China's economic dominance -- it is likely he will "re-imagine" a version of the rebalance strategy that presents him with economic options that support his "America First" agenda. The economic energy of Asia and the complexity of regional security issues require American stewardship, which has enjoyed bipartisan support for seven decades.

Republicans may re-examine their free trade orthodoxy, but if they also reject their commitment to national security they are left with only a devotion to small government.

The risk to America's role as trade policy leader -- and therefore to the global economy -- is real and immediate.