The United States Turns Inward

The United States Turns
Inward: Thoughts on US
Trade Policy and US-Asian
Trade Relations
KEITH MASKUS, UNIVERSITY OF COLORADO BOULDER ECONOMICS
HKUST IEMS & IPP – EY EMERGING MARKET INSIGHT SERIES
HKUST CENTER FOR ECONOMIC DEVELOPMENT 20 APRIL 2018

Introduction
Thanks to HKUST Economics Department and Business School
CAVEATS
Brief background on my time as Chief Economist of the State Department and OCE
I have been out of the government for 6 months and my comments are solely my opinion. I do
not speak for the State Department or the USG in any way and my comments should not be
taken to reflect USG policy or strategy.

Introduction
You have seen the headlines from candidate and President Trump:
“There are people who wish I wouldn’t refer to China as our enemy. But that’s exactly
what they are. They have destroyed entire industries by utilizing low-wage workers, cost
us tens of thousands of jobs, spied on our businesses, stolen our technology, and have
manipulated and devalued their currency, which makes importing our goods more
expensive – and sometimes, impossible.” 2015
“The Trans-Pacific Partnership is another disaster done and pushed by special
interests…” June 2016
"NAFTA is the worst trade deal maybe ever signed anywhere, but certainly ever signed
in this country," September 2016
“Trade wars are good and easy to win.” March 2018

Introduction: policy pronouncements
US withdraws from TPP (January 2017).
Administration announces a study of the sources of bilateral trade deficits and effects of unfair trade
practices (May 2017).
US, Mexico and Canada launch a renegotiation of NAFTA (August 2017).
Administration threatens to withdraw from KORUS agreement (September 2017).
US investment-review body (CFIUS) intervenes more to block technology-based acquisitions, such as
Broadcomm-Qualcomm (March 2018).
Section 202 (National Security) steel and aluminum tariffs announced (March 2018).
Administration announces an intention to impose tariffs on $60 billion of Chinese imports under
Section 301 regarding China’s restrictions on investment, ownership, and intellectual property (March
2018).
An impressive record of anti-trade announcements, if not always implemented policies.

Are American people turning inward?
How much does this policy trend reflect US voter attitudes? A complex question, often caught
up in debates about deep American political divisions.
Conventional anti-trade wisdom (with much truth in it):
◦ Many US households in particular regions have suffered economic stagnation. Until recently
there has been little growth in average household real income for the bottom 60% of
households.
◦ Trade is seen widely as a source of sharp rise in inequality.
◦ Major job losses in manufacturing and other blue-collar work. Chart: 8 million jobs in
manufacturing displaced from peak in 1979 to trough in 2010 before recent recovery. Mostly
related to technological change and Great Recession, but many locations suffered from
import competition.
◦ It’s easy to ascribe these problems to offshoring, emergence of production networks, and
import growth from China. (Sometimes seems impossible to find consumer goods from
anywhere else.)

Turning inward?
Conventional wisdom
◦ Startling emergence of massive trade deficits since late 1990s (Chart). Not easy to explain.
◦ And the corresponding rise in US trade deficit with China from $84 billion in 2000 to $375
billion in 2017 (or 66% of the total deficit). This is a poor measure of actual two-way trade
(services, value added trade reduce the properly defined deficit to perhaps half) but easy to
target politically.
◦ Feeds the narrative that China sustains unfair trade practices. May be overestimated in the
public’s mind but there is much evidence for it.
◦ Conflicting stories about gains and losses from major trade agreements, such as NAFTA.
◦ Growing dissatisfaction with and distrust in remote policy elites (e.g., trade negotiators, WTO,
TPP). Should WTO rulings really interfere with US policies?
◦ What do complex regulatory issues in modern trade agreements (IPRs, investment, services
liberalization) achieve for ordinary citizens?

Are American people turning inward?
How true is the conventional wisdom?
Going into the 2016 Presidential election, majority American attitudes were mostly pro-trade
(Gallup poll, mid-2016). There has been no real decline since then.
And majority American attitudes were positive toward legal immigration as a benefit to the
economy (Pew research poll, early 2016). Again, not much suggestion of any changes in these
attitudes since then.
In fact, both pro-trade and pro-immigration majorities are at their highest in a long time.
So there is little real evidence of the American people as a whole turning inward or denying the
benefits of trade.

What has changed?
Political opinions in the United States (like elsewhere) have become highly polarized, perhaps
more than at any time since the 1930s.
To oversimplify these differences:
◦ Rural towns and manufacturing areas that have experienced economic hardship versus urban centers
with rapid growth and booming employment.
◦ Lower-educated blue-collar workers under employment and income stress versus higher-education
professionals who thrive with technological change.
◦ Religious and social conservatives versus life-style progressives.
◦ Younger voters, who are largely more open to technology, trade and immigration, versus older voters.
One thing that is almost universal: distrust in the federal government to accomplish much.
◦ 9% of Americans approve of Congress.
◦ 10% approve of Communism.

Implications
Political polarization generates fragmentation of political interests and candidates.
Trade skepticism may be in the minority but it is strongly held among a large minority of voters.
And it correlates with wider-held concerns: distrust of elites, exhaustion with policy stagnation,
concerns about inequality.
All of this led to greater acceptance of the Trump campaign platform for a different approach to
politics and a rebalancing of trade (and immigration) rules and obligations.
His election may have been unique but it was not random: there was an appetite for change.

Trump trade policy principles
What is this new approach to trade? It can seem chaotic but (my opinion) it seems to revolve around 6 “America
first” pillars.
1. National security interests take precedence over trade relations.
2. Competition for technological leadership is about both national security and future market shares in leading
industries.
◦ Corollary: China is engaged in mercantilist technological industrial policy and must be confronted. “Made in China 2025”.
3. US manufacturing and mining workers have paid too much of the burden of globalization and need protection.
◦ Corollary: To shorten supply chains by bringing assembly operations back to the US is a goal, not a cost.
4. Trade agreements and the multilateral system (WTO) place too many constraints on US policymaking and not
enough on countries that do not follow the rules (especially China).
5. The rules-based approaches of past administrations was ineffective at changing behavior. Confrontation and
uncertainty will achieve better results.
6. The US can negotiate better bilateral trade agreements (including in Asia) than regional deals.

An early assessment
These pillars amount to a strategic “new” vision but its implementation so far is
more bluster than actual intervention. Can it work? Some arguments, pro and
con.
Advantages and promising ideas:
◦ Modernizing some old trade agreements (e.g., NAFTA) was overdue.
◦ Raising pressure on the WTO might unblock some rigid positions and set the
stage for advancing the system.
◦ Bolder attempts to open markets and restrain industrial policy (especially
China) may bear more fruit that prior attempts. If successful it would benefit
both countries. This strategy is (mostly) popular in the US and even among
economists.

An early assessment
Disadvantages and questionable ideas:
Misplaced and poorly informed policy emphases are not sustainable:
◦ Emphasis on bilateral trade imbalances as measures of unfair trade is ideological, not analytical, and irritates
trading partners. A misguided focus on outcomes rather than market access.
◦ Temporary trade protection will not help industries deal with long-term structural problems. US needs
policies to address problems of skills, training, and adjustment in the US.
◦ Countries are leery of bilateral negotiations with the United States.
The administration seems intent on treating trade policy as a series of transactions to be negotiated,
not a real strategy.
Many objectives would be better achieved by cooperating with other major economies with similar
concerns. (Again, Chinese high-tech industrial policy is the main example.)
The failure to link trade policy with international relations is short-sighted. Pulling out of the TPP was
a mistake on many levels.

Pushback
These problems suggest that elements of the strategy may be politically unsustainable.
The Trump Administration has discovered that the US business community generally opposes
significant trade barriers or changes in trade agreements.
Examples:
◦ Exclusions from steel and aluminum tariffs. Remaining targeted import flows are a small percentage of
original flows.
◦ Automobile sector pushing back hard in NAFTA.
◦ Agricultural export interests oppose losing market access in Mexico and China. Also remain upset with
losing Japanese market in TPP (now CPTPP).
And other major countries continue to raise objections to elements of US trade policy.
Result: we remain in a situation of flux and uncertainty about what will happen, and why.

What is sustainable?
With all of these headwinds it seems unlikely the Trump Administration can push a protectionist
agenda very far or for very long.
That means “routine” trade policy is likely to revert to standard management: anti-dumping and
subsidy cases, WTO complaints, perhaps occasional safeguards tariffs. Largely indistinguishable
from prior administrations.
But some newer elements will remain, even after the Trump Administration. Think of it as
“conditional cooperation”: further cooperation is conditioned on positive Chinese responses.
◦ Enhanced investigations and caution about foreign takeovers of US-based technology companies
and facilities. China-specific or SOE-specific guidelines may emerge.
◦ A greater tendency toward reciprocal treatment of high-tech investment restrictions. Upgraded
export controls, limits on research cooperation, and so on.
◦ Active and forceful engagement with China to try to get a more balanced playing field in
technology sectors.
◦ Bilateral or regional negotiations on elements of key US interests, such as data protection, e-
commerce and intellectual property.

The bigger picture
But routine trade policy cannot address the major long-term issues in US-Asian trade.
The United States cannot really “pivot away” from Asia. Mutual economic interests are far too
large and will continue to grow.
At the same time, the enthusiasm of international businesses for operating in China is slowing
down. China faces a potential era of lagging competitiveness.
So China and the United States need a strong and sustainable bilateral economic relationship.
And the rest of Asia needs both countries to be reliable economic partners.

A (semi) optimistic future
Given this set of mutual economic interests, how might we see policy evolve over the longer
term?
1. US re-engages:
◦ The USG develops a clear strategy for working with the region, with economics at its center.
◦ Reconsider the decision to withdraw from TPP and attempt a beneficial renegotiation. TPP countries
would benefit from the expansion of the market.
◦ Re-engage with regional institutions such as APEC and Asian Development Bank on investment and
trade norms in the region.
◦ Continue to address unfair foreign trade practices in the region without violating international
commitments.
◦ Invest in domestic infrastructure, skills, and conditions needed to compete.

A (semi) optimistic future
2. China cooperates:
◦ Offer clear signals of an intention to open markets and reform restrictive investment and
technology transfer policies. Establish a shift toward market-driven innovation incentives in
technology sectors.
◦ Certify compliance with existing WTO commitments and recognize that its eventual
designation as a market economy depends on more domestic openness.
3. Collaboration:
◦ Complete negotiations on a high-quality bilateral investment treaty.
◦ Address continuing problems of overcapacity that invite foreign protection responses.
◦ Sustain a continuing dialogue within the region on expectations and norms in trade and
investment.
◦ Jointly reinforce the centrality of the multilateral trading system in settling disputes.
◦ And work together on regional security issues.

But maybe not
China may choose to reject this “conditioned cooperation” and continue using market
restrictions and industrial policy to achieve dominance.
This would invite more trade-policy responses from the US (and likely EU and Japan) and would
place considerable stress on the multilateral system, perhaps encouraging its breakup.
Both countries – and the region – stand to lose considerably from that outcome. Trade wars are
not “easy to win”.
It can be avoided but that will require mutual understanding and a commitment to cooperate.

The United States Turns Inward

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