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Will there be a Pacific trade war in 2018?

Trump likely to consider tough unilateral actions against China especially if North Korea crisis eases

| China
Unable to deliver on his election promises to remedy trade problems with Asia, President Donald Trump will likely feel compelled to take action.   © Reuters

This year is almost certain to see heightened economic tensions between the U.S. and Asia. Whether or not one describes the situation as a "trade war" is a matter of definition. But at the very least, we are likely to see significant trans-Pacific skirmishes and battles on the trade front in 2018.

President Donald Trump has set the stage for this in three phases. The first was his election campaign, during which he frequently denounced foreign countries for taking advantage of the U.S. economically and blamed past U.S. administrations for allowing this to happen. The second was his speech at the Asia-Pacific Economic Cooperation summit in Danang, Vietnam, on Nov. 10, where he declared, "From this day forward, we will compete on a fair and equal basis. We are not going to let the United States be taken advantage of anymore. I am always going to put America first." Finally, in his unveiling of the new National Security Strategy on Dec. 18, Trump averred, "[The strategy] calls for trade based on the principles of fairness and reciprocity. It calls for firm action against unfair trade practices and intellectual property theft. And it calls for new steps to protect our national security industrial and innovation base."

Trump's withdrawal from the Trans-Pacific Partnership last January, by extricating the U.S. from the 12-nation multilateral framework, has freed the U.S. to pursue a bilateral and, if necessary, a unilateral approach to trading partners in the region. Thus the U.S. can now, unencumbered by the multilateral constraints that the TPP would have imposed, take unilateral action to attack the "unfair trade practices" he decries and to ensure the "fairness and reciprocity" he seeks.

Thirty years ago, Trump's favorite foreign whipping boy was Japan. As early as 1987, he paid nearly $100,000 to place full-page ads in three U.S. newspapers to excoriate Japan for stealing American jobs, exporting but not importing, manipulating its currency, and for being a free rider on defense. But now, China has replaced Japan as his main villain, as evidenced on the campaign trail in May 2016: "We can't continue to allow China to rape our country and that's what they're doing. It's the greatest theft in the history of the world." And in the National Security Strategy: "We welcome all economic relationships rooted in fairness, reciprocity, and faithful adherence to the rules ... but ... will no longer turn a blind eye to violations, cheating, or economic aggression."

Once the North American Free Trade Agreement (NAFTA) renegotiations with Canada and Mexico and the United States-Korea Free Trade Agreement (KORUS) renegotiations with South Korea are concluded, the top U.S. priority on trade is likely to be China. The list of U.S. grievances is long -- trade deficits, tariffs, nontariff barriers, currency manipulation, forced technology transfers, theft of intellectual property rights, dumping, cyberattacks, subsidies to state-owned enterprises, etc. If negotiations fail to address these problems, the Trump administration may resort to unilateral measures including the imposition of tariffs on Chinese exports to the U.S. Three aspects of Trump's trade policy deserve particular attention as differing significantly from that of his predecessors.

On to China

First, there is a fixation on the size of bilateral trade deficits as a source, rather than as a symptom, of trade problems. Although most economists would dismiss the notion that bilateral trade deficits themselves indicate inequities and problems in a trading relationship, Trump and his advisers continue to adhere to this notion. China, with $347 billion, accounts for 40% of the U.S. trade deficit, and Japan, with $69 billion, is next.

Second, there is a clear preference for bilateral, rather than multilateral, negotiations and agreements. This may derive from the fact that so many of Trump's political appointees are by background business executives, who usually negotiate deals company-by-company, rather than lawyers or academics, who are more prone to appreciate the benefits of multiparty negotiations. And from an instinctive business perspective, negotiating one-on-one may be seen to yield better results for a well-endowed party such as the U.S., whereas a multiparty negotiation could result in smaller parties "ganging up" on the larger party, causing the U.S. to lose its negotiating leverage.

Finally, unlike most recent U.S. administrations, which in their trade policy have focused on opening foreign markets, Trump and many of his associates have a history of favoring trade-restrictive solutions. For instance, U.S. Trade Representative Robert Lighthizer proudly proclaims that when he was deputy U.S. Trade Representative in the 1980s, the U.S. protected its companies and workers by limiting Japanese exports to the U.S. of steel, automobiles, motorcycles, consumer electronics, and semiconductors. The appeal of such trade-restrictive solutions may surface in 2018, especially as a way to reduce trade imbalances with China, Japan, and South Korea.

The extent to which the U.S. takes an aggressive posture on trade with China, Japan and South Korea will be affected by several factors, including political and security developments in Asia. For instance, on April 16, Trump tweeted, "Why would I call China a currency manipulator when they are working with us on the North Korean problem?" This implies that once the issue is resolved, or it becomes clear that China is unwilling or unable to produce the desired results, Trump would feel no reason not to call China a currency manipulator --and perhaps take action.

Another factor to keep in mind is the U.S. economy. With steady GDP growth, low unemployment and high stock prices, Trump can claim credit for a healthy domestic economy. If the economy were to falter, however, and especially if unemployment rises, Trump may find it expedient to attribute the problem to foreigners, providing him the pretext to take unilateral trade measures that could have the effect of stoking his political base in such rust belt states as Michigan, Wisconsin, Ohio, and Pennsylvania, the same states that helped him win the election of November 2016.

Given his campaign promises, recent speeches and utter lack of progress in remedying trade problems with Asia since taking office a year ago, it would be surprising if Trump does not feel compelled to take action on trans-Pacific trade in 2018.

Glen S. Fukushima is a senior fellow at the Center for American Progress in Washington, D.C., and a former deputy assistant United States Trade Representative.

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