Trade kills the American economy. Either America wins (and emerging markets lose), or vice versa.
Right or wrong, that was one key message of Donald Trump’s presidential campaign, and it worked. Though the actual causes of American economic difficulty (especially the fall of the middle class) are far more complex and deep-rooted, this simplistic message resonated with many voters, and Trump won the American presidency.
One of his first acts was to cancel the Trans-Pacific Partnership (TPP), an agreement dating back to Obama. Truth be told, Trump’s order was only the nail in the coffin: already, the TPP had faced tough resistance in Congress and from the general public, mainly because of a perception that the TPP’s benefits would accrue only to shareholders, corporations, and foreign governments, rather than American workers. Trump also promised to renegotiate NAFTA, again hammering home the message that American gains from protectionism would equate to emerging market losses. Though it’s supremely inaccurate to say that trade agreements, by nature, are a zero-sum proposition, it’s an easy (and popular) political point for politicians to make.
But is that actually the case? Can emerging markets survive without trade agreements?
The answer, as expected, is somewhat more complicated than you may think.
What are trade agreements?
First, it’s helpful to define what trade agreements are, and how they work. Even though as a whole alphabet soup of terms like NAFTA, TPP, and WTO have entered the common lexicon, people still remain decidedly unclear about what trade agreements actually entail.
At its most basic level, a trade agreement is a pact between two or more nations concerning the terms of trade. These pacts will determine tariffs (taxes and duties) on imports and exports between member nations, and can be between two nations (bilateral) or more (multilateral). As the number of nations involved increases, the complexity also rises accordingly.
NAFTA, the North American Free Trade Agreement, is one multilateral pact (if a small one), whose signatories are the US, Mexico, and Canada. In this particular instance, the trade agreement removes barriers between the nations: this included eliminating tariffs on imports and exports, most favored nation status (non-NAFTA countries couldn’t get better deals), patent protection, easy travel, and a way to mediate trade disputes.
Whatever its intentions, NAFTA still led to a host of unintended advantages and disadvantages. For instance, tax-free zones in Mexico (maquiladoras) did indeed become hotbeds of outsourcing, which led to some job losses in the US; unfortunately, maquiladoras were also home to widespread abuses, crime, and corruption, as well as intense social inequality. Yet at the same time, under NAFTA, goods like groceries and oil became cheaper–and other jobs in the US grew, because even as Mexican production increased, companies still based their design and technical teams in America.
Note that these confusing, subtle effects resulted from one multilateral trade agreement between only three countries. For larger endeavors, there are groups like the World Trade Organization, or WTO, which is essentially an international body (like the United Nations) which operates trade rules, negotiates trade agreements, and settles disputes between members.
Do Emerging Markets Need Trade Agreements?
This brings us to the multi-million dollar (and multilateral) question: can emerging markets survive without trade agreements? After all, the model followed by most emerging markets is to rely on exports as an engine of economic growth, relying on cheap labor costs to attract foreign direct investment–and from that, further develop the nation, its economy, and social and political institutions.
Yet by most estimates, this model isn’t sustainable anymore; prior to the Great Recession, emerging markets were able to rely on exports only because of the unsustainable, credit-fueled consumption from more developed nations. With the Recession, this demand cratered–which also took down the growth rates of many emerging markets. Some nations, like China, rebalanced their economies from industry to services and from exports to domestic markets–perhaps setting an example for others to follow.
Even so, export-driven growth remains a key paradigm for emerging markets. The collapse of agreements like the TPP, which will undoubtedly hurt several emerging markets (for instance, Vietnam, whose companies would have been bound by international labor and environment standards, and which lost a considerable amount of foreign direct investment). In that sense, emerging markets (or at least those without undiversified economies or huge consumer bases) likely do need to rely on trade agreements for continued growth.
But here’s the caveat: just because America is pulling out of trade agreements, doesn’t mean that emerging markets can’t sign with other nations. Put simply, emerging markets do need trade agreements–but such pacts don’t have to be with the United States. In fact, this is already happening with the TPP: negotiators from 11 nations (including Canada, Australia, Malaysia, and Vietnam) are meeting in the Japanese city of Hakone to revive the agreement. Japan, in particular, has emerged as a leader in reviving the TPP, even as it negotiates trade deals of its own with Europe.
Still, this new, revised TPP is likely going to bear some differences, especially when compared to the original text of the contract. Vietnam and Malaysia, at least, are seeking to alter TPP provisions in their favor, relaxing rules on labor, environmental protection, and overall transparency. Many of these conditions, set forth by previous negotiators under the Obama administration, were accepted by nations like Vietnam and Malaysia as a condition for access to large, profitable American markets. With this sort of access off the table, these nations argue, stringent regulations should also be cancelled.
The long and short of it? Yes, trade agreements go very far in helping emerging markets compete by ensuring a steady flow of FDI, cheap exports, and smooth trade. But remember: the world is increasingly a multipolar one, and if protectionist countries don’t step up to the plate, don’t expect emerging markets to simply keel over and die.
Originally published at pingjiangcapitalmanagement.com on July 17, 2017.