Trading Trump

The results of this week’s US election went widely unanticipated by polls and markets. Now that Trump is switching from candidate mode to presidential mode, many questions remain surrounding the composition of the Trump administration and what that could mean for policy with Republican control over the presidency and both houses of Congress over at least the next two years.

Focusing on trade policy, Trump made numerous remarks on the campaign trail about closing US borders to imports: particularly renegotiating key agreements currently in force and engaging in economic warfare with China. It is fairly likely that most of this will be chalked up as cheap talk. Renegotiating existing agreements is extremely difficult and rarely leads to significant changes (partly down to the two-level game described in the previous post). There may be increased use of temporary safeguards to restrict import competition in some (politically important) declining industries, but a more vigorous fiscal policy would be more effective in either assisting or economically relocating those losing out from trade. Similarly, there’s little to be done with China over trade-related issues that would not lead directly to retaliation. There’s a lack of evidence of ongoing currency manipulation, but China’s industrial policy may run afoul of WTO standards on some goods, allowing for the use of temporary measures. Across the board, any move to protection will negatively impact Trumps core supporters first, through higher consumer prices.

The remaining question is what this would mean for agreements currently in the works. Given the lack of enthusiasm in Congress prior to the election over the TPP, it’s not likely that there will be any change in the very low probability that the US signs the agreement in the near future. TTIP faces a similarly bleak future, complicated significantly by uncertainty surrounding Brexit. 

Trading Trump

International negotiations as a two-level game

One of the recurring themes in IPE research is that domestic politics can have a significant impact on international outcomes. From institutions (Broz & Plouffe 2010; Mansfield, Milner & Pevehouse 2007) to the influence of partisanship (Putnam 1988; Milner & Rosendorff 1997), variations at the domestic level shape both policy makers’ actions and policy outcomes.

The past couple of days give us two nice illustrations of these dynamics.

In Europe, the Walloon regional parliament has blocked ratification of CEFTA, the free-trade agreement between Canada and the EU. In this case, there’s something more like a four-level game at play: a sub-national body blocks ratification at the national level, which prevents ratification at the EU level. The fourth level in the negotiating game is between Canada and the EU. Of the CEFTA features to which the Walloons objected, it is perhaps a bit ironic that agriculture takes center stage, illustrating in a microcosm the issues facing progression in the WTO’s Doha negotiations. In a nutshell, the two biggest complications are the institutionalization of agricultural protection in developed countries (which reduces their negotiating space), and the large number of potential veto players involved in the negotiating process.

In the second example, Theresa May finds herself constrained by a Parliament skeptical of the government’s Brexit strategy (as well as a domestic public increasingly feeling buyer’s remorse over Brexit) and an EU council unwilling to make anything close to the concessions promised by the pro-Brexit campaigners earlier this year. The difference in this case from the usual two-level negotiating game is that EU preferences are not necessarily in favor of Brexit occurring. In a trade or investment deal, negotiating governments have interests in seeing talks lead to a successful conclusion and ratification. The EU has strong incentives to maintain a hard line to prevent further defections in the future. It will be interesting to see which side wins out, although that may have to wait until the ongoing case against the UK government (over Parliament’s right to vote on Article 50) is concluded.

International negotiations as a two-level game

Post-Brexit Trade

The French president, Francois Hollande, has reiterated what I expect to be a standard line among EU leaders: no common market without free movement, which stands in stark contrast with the Leave campaign’s pipe dream of full common-market access and no movement. Intuitively, the solution to this bargaining game will lie somewhere between these two points.

Patterns in liberalization (or, for that matter, protection) that are likely to emerge will reflect lobbying by groups both within the EU and UK, assuming the Norway solution is out of the picture (it’s not, but other potential outcomes are a bit more interesting at the moment). In most cases, these forces will come from producers, but may also arise from consumers, although for some industries in the UK, consumers may be viewed as having voiced their stances through the Brexit vote (because just about everything is getting read into that; if someone said UK citizens rejected climate change 51-48%, I wouldn’t be surprised).

What might this mean for the topography of trade policy? European products with clear UK substitutes are likely to face trade barriers at the border. For example, much of the British shoe industry is based around Northampton (the county was 58% for Leave), and domestic brands (Joseph Cheaney, Church’s, Crockett & Jones, Loake, John Lob, etc.) can rely on domestic materials while competing with foreign brands (Ferragamo, Gucci, Bruno Magli, Magnanni, Santoni, etc.). There is a fair amount of product differentiation within the industry (UK designs are typically more conservative and chunkier than continental designs), but there will be domestic lobbying efforts for protection on finished shoes within the UK.

This can be contrasted with Britain’s nascent watch industry, which relies heavily on imported movements and movement components from Switzerland and East Asia. Cases, dials, and hands can be manufactured domestically, but investing in highly specialized machinery and materials required for minute components like hairsprings is well beyond the means of most manufacturers (even in Switzerland). Sourcing movements and other key components has become more difficult in recent years simply because of ETA’s (the largest movement producer) restrictive policy towards non-affiliated brands. Rather than worrying about import competition on finished watches, the British industry will focus on maintaining open access to the inputs they need to continue to produce new watches and service existing pieces. Product differentiation again plays a role here, as the most prominent British brands don’t necessarily have a direct substitute from outside the UK, and there tends to be more brand and design awareness in watch-purchasing decisions than with shoes (Bremont creates very rugged watches with classic designs, probably most closely competing with Breitling; Christopher Ward focuses on the value end of luxury watches, competing most directly with Frederique Constant, but with a different design language).

Moving outside manufactures, the financial sector is probably the most directly impacted by potential changes in trade policy (both finance and hospitality will be lobbying for retaining some form of open immigration). UK efforts to retain financial access to continental markets will be bolstered by lobbying from London as well as financial-service providers keen on not having to move existing offices and staff and being able to serve both UK and EU markets from one location. Efforts at introducing protection may be driven by German leaders with aim of building financial clusters in Frankfurt and other cities.

Agricultural negotiations will be interesting to watch, as Britain imports much of its food. Leaving the common market means domestic producers will compete with those supported by the Common Agricultural Policy. A replacement domestic policy would be expensive to implement and maintain (and would not assist a significant portion of the British population). A politically and fiscally more efficient solution would be to implement trade protection on a range of imported agricultural products, but it is difficult to identify exactly which products will receive protection and which won’t. This is, after all, the sort of environment where US apple producers lobbied for import bariers to be imposed on bananas, because ‘cheap bananas could lead people to stop eating apples’.

In any case, any tariffs imposed on European imports to the UK will not exceed the WTO’s most-favored-nations (MFN) rates; the bigger issue is the potential imposition of non-tariff barriers, such as sanitary and phytosanitary measures to restrict food imports. If these become excessive, many UK residents will have to become acquainted with higher bills.

Post-Brexit Trade