A Guide to International Trade in 2018

17 Jan, 2018

A Guide to International Trade in 2018

According to a Council poll from December 2017, 34 percent of respondents anticipate overall trade policy to be their toughest international challenges heading into 2018. With much speculation on what to expect from trade in the coming year, below are the issues most likely to make headlines.

NAFTA. The last few rounds of the NAFTA renegotiation have been marked by pessimism from both Canada and Mexico, with Canada recently speculating that President Trump is more likely than ever to pull out of the agreement. While Trump is allegedly softening his stance on NAFTA, many industries that would be affected, particularly the automotive, energy and agricultural sectors, are increasingly concerned about the renegotiation outcomes. Tensions between the United States and Canada also continue to rise. Earlier last week, the U.S. Commerce Department announced an increase in countervailing duties on imports of Canadian uncoated groundwood paper, while Canada launched a new case at the World Trade Organization (WTO) against U.S. countervailing duties on Canadian softwood lumber and other products. Both sides have also criticized each other for failing to provide workable NAFTA policy solutions that will benefit all of the parties involved.

Currently, Canada and Mexico account for one third of U.S. trade. If negotiations were to fall apart, and the United States were to withdraw from the agreement, highly synchronized supply chains would be compromised, potentially impacting costs of production, investment and jobs. Cooperation on other questions, such as intelligence sharing, narcotics, immigration, cross-border security and tourism, could be negatively impacted. There is hope that the next round of negotiations, which took place in Montreal from January 23-27, will provide a clearer outlook on NAFTA’s more contentious issues, such as automotive rules of origin.

NAFTA discussions are slated to wrap up in March 2018, with the possibility of extending talks complicated by Mexican elections, scheduled to take place on July 1. If President Trump chooses to formally notify Canada and Mexico that the United States intends to withdraw from NAFTA, Mexico is likely to walk away from the negotiating table.  The result would likely lead to the dismantling of the twenty-year-old trade agreement. Even if the renegotiation is successful, the controversial nature of some of the Trump administration’s negotiating proposals makes it difficult to gauge how much support it will receive in Congress, from either pro-trade Republicans or politically conflicted Democrats. As the negotiations progress, it remains to be seen how much of the negotiation process will be based on a mutually beneficial and strategic vision, versus a nationalistic approach that negates the benefits of the original pact.

China. Tensions between the U.S. and China are likely to increase as President Trump promises to take a more aggressive stance on Beijing’s trade practices. Several high-profile cases are currently under consideration to address market distortions caused by China’s trade practices, including on steel and aluminum imports (Section 232), solar panels (Section 201), and trade secret theft and forced technology transfer (Section 301). Earlier this month, the U.S. imposed steep tariffs on imports of Chinese solar panels. More potential retaliationary action is expected in the next 90 days, ranging from dispute settlement consultations to the imposition of further duties and tariffs, which could set the tone for more aggressive future trade policy against China.

The WTO is another forum where tensions between the United States and China could escalate. The United States is likely to pursue a WTO case against China’s domestic support for rice, corn and wheat crops.  China is pursuing a challenge against the U.S. and the EU regarding their respective designations of China as a “non-market economy,” as both the U.S. and EU argue that China has still not made the transition to a market economy. If China wins the challenge, U.S. political support for the WTO could be undermined even further, while the risk of a trade war with China could rise.

KORUS. Earlier this month, the U.S. and Korea wrapped up the most recent round of review talks on the bilateral trade deal between the two countries. Known as KORUS, the FTA has been labeled a failure by President Trump, who has focused on America’s trade deficit as the primary indicator of the trade deal’s success. The talks wrapped up without major developments or changes to the current agreement, and it remains to be seen how much of a priority the negotiations will be for the Trump administration for the rest of the year. The process could either become more complicated due to the United States’ partnership with South Korea on defusing North Korea’s nuclear program, or could drive the two parties to reach an agreement with more urgency.

Protectionism. Eurasia Group cites protectionism as one of its top risks for 2018. Various sectors of the economy, such as intellectual property and cross-border data flows, could be affected as more “behind the border” barriers to free trade and investment are imposed by global actors. Such heightened protectionism directed at the “twenty-first century” economy could make the global trade landscape even more fractured and difficult to operate for both government and private sector parties.

The WTO, one of the pillars of the international trade system, is also in the spotlight. Critics of the organization claim it has fallen short in promoting trade agreements that benefit developing countries, and the United States, once one of its biggest advocates, has taken a more skeptical position towards the WTO under the new administration. The organization’s dispute settlement system is plagued by a heavy case backlog.  The United States continues to block the process for filling Appellate Body seats in an effort to address concerns about panel activism and decision-making. The recent ministerial meeting, held in Argentina in December 2017, saw no substantive negotiated outcomes, further undermining the organization’s role as the center of the international trade system.

New trade deals. While President Trump came into office promising to negotiate new bilateral trade agreements, his agenda so far has mainly focused on renegotiating NAFTA and KORUS. However, this doesn’t mean that the rest of the world has stopped trying to deepen their economic ties. The European Union has been actively working to finalize new deals with Canada and Japan. The TPP-11 are also forging ahead without the United States in talks to pin down priorities for the 11-country multilateral agreement, which has been rebranded as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The agreement could be finalized later this year, and even the United Kingdom has expressed interest in joining the CPTPP. While the UK cannot officially negotiate any trade deals until Brexit negotiations wrap up, representatives from the UK have been actively working to line up potential trade deals once a post-Brexit deal is reached. As the U.S. takes a less active stance on creating new trade deals, a more aggressive pursuit of trade agreements can be expected from other countries looking to take advantage of the United States’ receding role in global trade.

Despite these potential challenges, it’s not all bad news for trade in the coming year. As economies around the world continue to strengthen, global output is expected to grow by 3.6% in 2018. The reality of this prediction will be driven by the many factors mentioned above, as well as how the U.S. trade policy agenda either detracts or adds to the global outlook.