Trump’s Imperial Overreach on Trade

The US attempt to control its allies’ trade policy toward China is not driven by economic considerations. Rather, it represents a geostrategic effort to isolate China. A column by Daniel Gros.

Daniel Gros
«The dream of a ‹Singapore-on-Thames› is unlikely to materialize.»

Two recent developments are bringing America’s trade strategy toward China into focus. The first, which affects bilateral trade negotiations, is no surprise: US President Donald Trump has abandoned his bluster for vague promises – to enforce property rights, loosen restrictions on foreign investment, and stop pressuring foreign companies to share their technology – that China has made before. The second development, which concerns America’s allies, is more revealing – and treacherous.

In the last few months, the Trump administration has released its negotiating objectives for a possible trade agreement with the United Kingdom after Brexit, as well as future talks with the European Union. Most of those objectives are not particularly surprising; they seek to maximize access to UK or EU markets, while protecting sensitive US sectors. But they do include one highly unusual provision.

In its document on the EU, the US states its intention to secure «a mechanism to ensure transparency and take appropriate action if the EU negotiates a free-trade agreement with a non-market country.» The «non-market country» is no doubt China. If the EU agrees to this demand, it would have to inform the US – which would have the right to intervene – even if it is merely negotiating a trade deal with the world’s second-largest economy.

Unprecedented level of interference

This objective has to be taken seriously, because the US had a similar clause added to the revamped North American Free Trade Agreement, now called the US-Mexico-Canada Agreement. In fact, the USMCA clause is even stricter, because it gives the US the right to intervene even earlier, when Canada so much as intends to start trade negotiations with China.

Asking a trading partner to ensure «transparency» when they negotiate with other countries may sound innocuous, but it represents an unprecedented level of interference in partner countries’ trade policymaking. Trade negotiations are already arduous, protracted affairs, not least because they involve easing protection of politically sensitive sectors.

Adding an unrelated third party to the proceedings – especially one whose intent might be to torpedo the negotiations – would make success even less likely. Moreover, action the US would deem «appropriate» if the EU started negotiating a free-trade agreement with China would presumably include the threat of tariffs against European exporters.

No economic justification

The EU currently has no intention of entering into a free-trade agreement with China. But, as a matter of principle, it is highly unlikely to accept such a clause. And, given that the EU is actually a bigger global trading power than the US, it is in a position to say no.

A post-Brexit UK, however, will probably have little choice but to follow Canada’s lead and hand the US an effective veto on its trade policy towards China. In the UK, Brexiteers used the slogan «Take Back Control» in campaigning to leave the EU. However, with these US demands, the UK will lose its autonomy over trade policy. The dream of a «Singapore-on-Thames» is unlikely to materialize.

There can be no economic justification for the US to object to one of its allies concluding a free-trade agreement with another country, even one without a pure market economy. Economic analysis has shown that regional trade agreements can have ambiguous effects on third countries. This is why such deals are subject to Article XXIV of the World Trade Organization (WTO), which says that regional free-trade agreements should cover «substantially all the trade» between the relevant partners. This bar might be difficult for the EU and China to clear, given that both still have rather protected agricultural sectors. The US could thus air any legitimate complaint about an EU or UK deal with China through existing WTO channels. This is yet another example of how the US could use the multilateral trading system to its advantage, instead of undermining it.

Like Napoleon’s Continental Blockade

But the US attempt to control its allies’ trade policy toward China is not driven by economic considerations. Rather, it represents a geostrategic effort to isolate China, thereby giving the US more leverage with its main global rival.

This is not the first time that economic weapons are being deployed in a great power rivalry. At the beginning of the nineteenth century, the French army had vanquished most other powers on the European continent. But Napoleon could not force his will upon the pesky British, whose navy dominated the seas and who had the financial resources to support his enemies. So, in 1806-07, at the peak of his military success, Napoleon erected the so-called Continental Blockade, forbidding any territory he ruled from trading with Britain.

The blockade proved extremely difficult to enforce, even in France, where smuggling proliferated. Worse, by forcing all of his allies to bend their trade policy to his will, Napoleon inadvertently fueled hostility to his rule, especially in Northern Europe, where trade with Britain had played a vital role in the local economy.

History’s lessons

Yet Napoleon was so obsessed with enforcing the blockade that he forced even Russia – the only power he had not defeated – to agree to it as a condition of peace. This proved extremely costly for Russia, which eventually disregarded the blockade and reopened its ports to the British. Napoleon took this as a casus belli and invaded Russia. The rest, as the saying goes, is history.

Napoleon’s imperial overreach was his undoing. If Trump sticks to his current course on trade policy, the US may well face a similar fate.

Copyright: Project Syndicate.