What if Donald Trump is a one-term president? Why three trade issues can wait

America’s trade partners are closely watching the November presidential election
Whether it is the WTO, China or carmakers, decision makers could be preparing for the possibility that the Trump administration will be voted out

Stephen Olson

Published: 10:00pm, 21 Jul 2020

Why you can trust SCMP

With four months to go until the US presidential election, current polls give presumptive Democratic challenger Joseph Biden a commanding lead over President Donald Trump. Although two weeks can be an eternity in politics, America’s trade partners are closely watching the race and some are preparing for the possibility that the Trump administration will be voted out in November.

Trump’s sharply declining political fortunes have begun to impact the disposition of three important trade issues in particular.

First, leadership of the World Trade Organisation.

The current director general, Roberto Azevedo, will step down at the end of August, one year ahead of schedule. This has triggered an unexpected – and extremely critical – process to identify his successor. The WTO is fighting for its life and the next director general will either revitalise it or preside over its demise.

The selection process normally works on the basis of consensus rather than as a formal vote. The candidate list is gradually whittled down through a series of consultations with members, until it’s clear that a single candidate can garner unanimous support.

Eight candidates have thrown their hats into the ring, and the hope is to have a director general ready to step into the role in September. If a consensus cannot be reached, one of the four deputy directors general may take over as an interim caretaker.

11:17

WTO nominee vows to bring US and China to negotiating table

The Trump administration, whose actions have crippled the WTO’s operations, will undoubtedly seek to play a role in the selection process. US Trade Representative Robert Lighthizer has said, for instance, he would veto a candidate with “any whiff of anti-Americanism”.

If Trump is presumed to be winning, his administration’s views will be factored into the selection process. On the other hand, if there is a realistic possibility that a Biden administration (holding a more traditional viewpoint on the WTO) will take over in January, then delaying the appointment of a director general until next year and opting instead for an interim caretaker may be considerably more appealing.

Why the US is talking tough on South China Sea now

Second, the fading phase one trade deal.

The economic slowdown precipitated by the pandemic has almost certainly strained China’s commitment to increase purchases of US products by US$200 billion, and phase two of the trade negotiations has essentially been dropped.

Over the space of a few months, a deal that was expected to be a major selling point for Trump’s re-election has been transformed into an acute political liability – one further amplified by the growing rift in the US-China relationship as a result of bitter bickering over the handling of Covid-19. The Biden campaign will attempt to build a case that Trump has gravely mishandled the China relationship, and it will make the phase one trade agreement “Exhibit A”.

An incoming Biden administration would therefore be unlikely to hitch its wagon to a faltering agreement negotiated by its defeated rival, especially if that agreement was the object of withering criticism on the campaign trail. Expect the Biden administration to opt for a coordinated approach to China, including like-minded partners such as the European Union, Japan and Australia – rather than Trump’s go-it-alone approach.

Given the dim prospects for the phase one deal under a prospective Biden administration, China has little incentive to fulfil any obligations that are difficult, and is more likely to meet only those that are in its interests. At least for now, the much-heralded phase one trade agreement appears to be fading, along with Trump’s re-election prospects.

Why Covid-19 will power investment in data centres

Third, the repatriation of manufacturing may be put on hold.

The Trump administration has sought to use trade and other policies to bring manufacturing back to the United States. The centrepiece of this strategy is the revised North American Free Trade Agreement (now known as the US-Mexico-Canada Agreement), which attempts to reconfigure North American automotive production through more stringent rules.

Under the revised agreement, at least 40 per cent of the parts for a tariff-free vehicle must be produced by workers earning a minimum of US$16 an hour. Since this is considerably higher than prevailing wage rates in Mexico, the expected and desired result is manufacturers shifting production to the US.

01:14

US Democratic presidential candidate Joe Biden takes aim at Trump’s handling of protests

Automotive producers have noted the changing electoral dynamics in the US, however, and are hedging their bets while weighing the possibility of a new US administration with a different approach to trade.

Manufacturers such as Honda and Toyota are opting to triple wages at factories in Mexico to observe the tougher rule of origin, rather than shift production to the US. Staying put for now seems to make more sense than absorbing the cost of disruption and moving to the US, especially if the administration that wrote the new rules might be on the way out. One executive at a Japanese carmaker summed up the prevailing view well: “We don’t want to be whipped around by a policy that we don’t know how long it will last.”

Companies in other industries that have been cajoled by Trump policies into moving production back to the US may share similar sentiments (notwithstanding indications that a Biden administration will also seek to “onshore” manufacturing).

Between now and November, a lot can still change. Trump was counted out in the 2016 election and it would be a mistake to count him out in 2020. But for now, the trade landscape is being altered by the growing belief that Trump could be a one-term president.

Stephen Olson is a research fellow at the Hinrich Foundation

This article appeared in the South China Morning Post print edition as: Watching and waiting

Post