Many people can recall where they were when they first heard about specific events or watched them on television. For some inexplicable reason, my personal panoply of such memories includes a Tuesday night in November 1993, when I can vividly remember watching then-Vice President Al Gore and Ross Perot debate the North American Free Trade Agreement on Larry King Live. I can even now picture Gore holding up a framed black-and-white photo of Senator Reed Smoot and Representative Willis Hawley. He argued that the tariff increases wrought by the eponymous Smoot-Hawley Tariff Act of 1930 contributed in no small measure to the Great Depression and he cautioned that failures to embrace free trade in the 1990s could have similarly dire consequences for the U.S. economy.

Gore was widely credited with winning that debate and, in doing so, helping to persuade the American public – and, through them, Congress – that ratification of NAFTA was a good thing. In some ways, that evening marked a key symbolic waypoint in the extended period of worldwide efforts to eliminate trade barriers that came to be known as “globalization.”  For almost a quarter of a century thereafter, opposition to free trade was largely relegated to the fringes of politics in the U.S. and elsewhere and, despite setbacks along the way such as the collapse of the Doha Round of World Trade Organization negotiations, its pace seemed relentless.

Times have changed. In 2016, then-candidate Donald Trump made plain his distaste for many of the free trade agreements the U.S. had signed in previous decades, while both Hillary Clinton and Bernie Sanders joined him in promising to withdraw the U.S. from negotiations on the Trans-Pacific Partnership. Since taking office, rhetoric has become policy. President Trump ordered renegotiation of NAFTA and the Korea-U.S. agreement and imposed tariffs on a host of imported goods from China, the European Union, Canada and elsewhere. The fact that many of those jurisdictions quickly retaliated led to fears that the global economy was descending into a sustained period of quid pro quo trade wars reminiscent of Smoot and Hawley’s efforts in the 1930s and against which Al Gore railed 25 years ago.

For businesses that trade internationally and for those that lend to them, the principal question must be whether the world really is turning its back on trade or whether recent events are an aberration that will right itself in due course. The answer, unfortunately, is not altogether clear and this article sets out some of the key issues that will influence that debate.

U.S. and Global Attitudes to Trade

Any discussion about the present and future course of global trade policy must be premised on the understanding that trade is still widely perceived around the world as a good thing. In 2018, the Pew Research Center surveyed people in 27 different countries and found that a median of 83% of respondents thought that trade benefited their country. Support for trade in the U.S. was lower, at 74%, but that represented an increase from the results of a comparative survey conducted in 2014. Perhaps the intervening trade-related debates and policy changes actually helped to make the U.S. public more aware of its benefits?  

However, the picture is not completely rosy. While people around the world might view trade as valuable at a macro level, their attitudes become decidedly more mixed when they are asked about its specific benefits. For example, in that same 2018 Pew Research Center survey, only 36% of Americans saw trade as a job creator in the U.S., while only 31% felt it boosted wages in the country. By contrast, in other advanced economies where Pew conducted its polling, the median responses were 45% for job creation and an identical 31% for wage growth. Results were higher in emerging economies at 56% and 47%, respectively, but that is to be expected given recent patterns of manufacturing shifting to lower-cost, developing markets where the benefits of such investment will consequently be more readily apparent.

At the very least, governments perhaps need to consider whether a better job can be done to convey the benefits of trade to a skeptical global public. However, it is also possible to see in this data the reasons why some political leaders have sought to take advantage of divided public opinion to revive the political debate on trade. Appreciating the ebbs and flows of national and global attitudes to trade is an important component in understanding the future course of this debate and the particular direction in which momentum is swinging at any given point in time.

Nevertheless, it is equally important to recognize that this debate is not confined to the United States, despite the fact that many of the current anti-trade tremors emanate from Washington. Last year, the Indian government increased tariffs and customs duties on, among other things, agricultural products, solar panels and electronics – not in retaliation for U.S. actions, but to protect domestic producers. Furthermore, a number of resource-rich countries have introduced laws forbidding exports of raw resources, mandating that they must be processed in-country as a way of generating additional revenue and employment. For all countries, trade policy is ultimately driven by their own domestic political dynamics. If critical sectors are perceived to be at risk from trade, governments will often act accordingly, even if that runs counter to the globalization narrative. That dynamic will not disappear anytime soon.

A Trade War or a Trade Skirmish?

There is no doubt that businesses, workers and consumers have already been affected directly or indirectly by last year’s flurry of tariffs and related policy changes. However, a credible case can be made that there is still an opportunity to step back from the brink. Certainly, at present, many of President Trump’s grievances remain unresolved to his satisfaction, but some have apparently gone away. Only time will tell whether events of the past two years constituted the opening salvoes of a long trade war or simply a skirmish which was ultimately quelled by cooler heads.

For instance, while a number of free trade agreements were renegotiated, the revised treaties are not hugely dissimilar from their predecessors. South Korea doubled the quota of imported U.S. automobiles permitted under the Korea-U.S. Free Trade Agreement, but the original quota was not yet even being met. Canada and Mexico conceded to some U.S. demands in the NAFTA renegotiations (now renamed the U.S.-Mexico-Canada Agreement), but certain key provisions which President Trump previously claimed were unfavorable to U.S. interests – such as the dispute resolution mechanisms – remain largely unchanged. The president has even suggested that the U.S. might recommence talks to enter the Trans-Pacific Partnership, despite having made withdrawal from that process one of his first executive acts.  

Last year’s decisions have also sparked a debate about the level of Congressional oversight of future trade policy. The White House is encouraging Congress to pass the U.S. Reciprocal Trade Act, which would give the president greater unilateral authority to impose tariffs. However, other Republican legislators have introduced the Global Trade Accountability Act, which would give Congress a greater role in the process. Moreover, there are also court challenges to some of the tariff increases, particularly those made on grounds of national security. Legislative and judicial uncertainty offers no immediate respite for businesses, but it may help to create a more predictable policy framework in the longer term.

Of course, at the time of writing, significant issues remain unresolved. In Europe, there is still no clarity as to if or when and on what terms the United Kingdom will exit the European Union. This is creating considerable uncertainty for businesses that use the UK as their launchpad into European markets. In the U.S., while the President may have signed the USMCA, it remains subject to Congressional ratification – a process complicated by the change in control of the House of Representatives in last year’s midterm elections. President Trump has threatened to withdraw the U.S. unilaterally from NAFTA as a way of provoking Congress into action, but that might just create further regulatory uncertainty for business. Even more significant is whether the U.S. and China will reach a meaningful bilateral trade deal that will defuse tensions over tariffs, address underlying concerns such as intellectual property protection and currency manipulation and yet still not appear to constitute any form of climbdown by either government. Even if a deal is reached, many observers are skeptical as to whether it will prove both verifiable and enforceable. We are not out of the woods yet.

Trade Wars and Geopolitics

Mention of U.S.-China bilateral trade relations serves as a useful point at which to note that the current debate on trade is inextricably linked to broader geopolitical circumstances.  While China remains an important economic and trading partner of the United States, it is also increasingly viewed as a strategic competitor. These conflicting concepts might prove increasingly hard to reconcile. Strong economic arguments favoring robust trade relations may always be outweighed by broader national security concerns and such arguments can often resonate with the general public. 

It is no coincidence that President Trump has framed many of his actions on tariffs in terms of those national security interests and that he has availed himself of various legal provisions permitting protectionist behavior in circumstances where those interests are thought to be threatened.  To be fair, governments throughout history have used concerns about national security to justify economic policies that are otherwise protectionist or even autarkic. In this case, however, tariffs have also affected close military and political allies of the U.S., albeit with some exemptions subsequently introduced. This has caused some to question whether the national security argument is simply being used as cover for policies that could otherwise prove difficult to justify under global trading rules.

While the focus of this article has been on trade, it is worth noting that the conjoining of national security concerns to economic policy is equally as robust in cross-border investment regulation – and not just in the United States. Over the past few years, the European Union and some of its individual member states such as France, the UK and Germany have all introduced or enhanced laws allowing governments to limit foreign investment in the defense and high-technology sectors, in critical infrastructure, and even in companies controlling large volumes of sensitive personal data.  The U.S. followed suit last year with the enactment of the Foreign Investment Risk Review Modernization Act, which significantly expanded the remit of the Committee on Foreign Investment in the United States to assess the national security implications of inbound foreign investment. 

Much as the current trade policy environment seems a far cry from periods of relentless globalization, the geopolitical environment is no longer characterized by universal comity and trust between states. Suspicions are rising, strategic power is shifting and, at times, interests are clashing. In those circumstances, it will prove increasingly hard to separate commercial and economic policies from those related to the political and security environment. That, in turn, will affect the conditions under which antagonism over trade might abate.

Managing Policy Risk and Uncertainty

For trading businesses and their lenders, the challenge lies in trying to manage and mitigate risks over which they may have little control, other than lobbying for changes in policy. For the reasons set out here, there are some grounds for cautious optimism. The global public still largely supports trade, albeit with some skepticism about its direct benefits. Any evidence of an emerging economic slowdown related to tariff increases could also amplify political pressure to reverse them, particularly as the 2020 election cycle nears. And yet, many questions remain unanswered. What effect will Brexit have on global trade?  Will the U.S. and China reach a meaningful deal to quell trade tensions? What new grievances could emerge that could cause President Trump to renew his calls for tariffs?    

Many businesses are not waiting to mitigate their exposure. Some U.S. firms with large export markets are already shifting production offshore in order to avoid retaliatory tariffs, even if this means spending considerable time and money. Others are making use of a concept established in the 1930s to help U.S. businesses deal with the effects of the Smoot-Hawley Tariff Act – the foreign trade zone. These are areas within U.S. territory and under U.S. Customs & Border Protection supervision, but through which businesses can import goods from overseas at zero or lower tariff rates, provided they are subsequently re-exported out of the U.S. The Foreign-Trade Zone Board, the relevant government oversight body, estimated in 2017 that $669 billion in goods were shipped through these zones – and that was before the current bout of tariff raising began. There is also increased interest in use of bonded warehouses and some businesses are adjusting product designs in order to get them reclassified under categories subject to lower U.S. or foreign tariff classifications (a process known as tariff engineering).

Of course, the simpler solution would be for things to go back to the way they were. A U.S.-China trade deal would go a significant way in achieving this, albeit dependent on both the verification and enforcement provisions and the extent to which the trade relationship can operate independently from geopolitical uncertainties and tensions. All eyes will also be on the crowded field for the 2020 Democratic Party presidential primaries. Will candidates embrace a free trading United States or will some form of protectionism be the order of the day? It is worthwhile noting, as well, the potential for other economic policies of foreign governments to influence the debate on trade. France, for example, is proposing a digital tax on the revenues of large technology companies, most of which are American. To what extent will pursuit of those types of measures affect attitudes to trading relationships among the U.S. public and elected officials?   

There was a time not too long ago when globalization seemed unstoppable. Barriers to trade fell. Goods and capital flowed across borders in ever greater numbers and that, in turn, was seen as a key driver of international cooperation. There are many reasons why that situation has changed and the current “trade wars” are but one of many components of a policy environment that is now much more volatile and unpredictable. Nevertheless, understanding the forces which will affect that debate going forward will serve as a useful indicator of whether businesses are confronting a new normal or whether we are simply in the midst of an aberration.   TSL