New proposed US trade policy towards China, UK and EU

By Andy Busch, Political Economist and Contributing Author

The Trump administration has rolled out a new trade policy — "America First." What does this mean for the U.S.'s relationship with China, the U.K. and the EU?

The early days of the Trump administration have been busy with the president issuing executive orders on a wide range of issues impacting the U.S. economy. In addition, President Trump has been fulfilling his campaign promise to act quickly on regulations including scaling back Dodd-Frank and moving ahead with fellow Republicans on a repeal and replace plan for the Affordable Care Act.

The Trump administration’s new trade policy is a distinct shift from the traditional free trade approach of past administrations. On the front page of the Office of the U.S. Trade Representative’s website, the Trump administration outlines the “America First” trade policy. It states “The Office of the United States Trade Representative is committed to ensuring that American workers are given a fair shot at competing across the globe. USTR is working to reshape the landscape of trade policy to work for all Americans. On a level playing field, Americans can compete fairly and win. This new America First trade policy will make it more desirable for companies to stay here, create jobs here, pay taxes here, and rebuild our economy. Our workers and the communities that support them will thrive again, as companies compete to set up manufacturing in the U.S., to hire our young people and give them hope and a real shot at prosperity again.”

Following this new path, Trump’s new National Trade Council director, Peter Navarro, recently told the Financial Times that the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany an advantage over its main trading partners. According to the article from January 31, 2017,“In a departure from past US policy, Mr. Navarro also called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a US-EU agreement, known as the Transatlantic Trade and Investment Partnership, dead.”

Regarding China, Trump threatened to put 45 percent tariffs on Chinese imports and has sent tweets out over the unbalanced nature of the Chinese-U.S. trade relationship. More recently at a joint news conference in February with Japanese PM Shinzō Abe, Trump noted he has long complained that China’s currency was undervalued and said, "I believe that we will all eventually and probably very much sooner than a lot of people understand or think, we will be all at a level playing field."

Here are the key takeaways from the Trump administration’s initial actions on trade:

  • The Trump administration has targeted trade partners that run large surpluses with the U.S. including China, Mexico and the EU
  • The office of the President of the United States has broad latitude to act on trade, and President Trump is exercising his authority to renegotiate trade deals his administration believes are unbalanced. In this vein, the Trump administration officially provided notice to withdraw from the Trans- Pacific Partnership
  • The administration’s trade priorities appear to be geared towards redirecting the international supply chains or global value chains to work in favor of the United States and not the multi-national companies which rely on them
  • President Trump held talks with U.K. Prime Minister Theresa May in January and discussed a potential bilateral free trade agreement after the U.K. exits the EU

What follows is a brief review of evolving trade policy with China, U.K. and EU:

U.S. - China trade policy
During the 2016 presidential campaign, then Republican candidate Trump made trade with China a focus of how he would change U.S. trade policy. He pointed out the large U.S. trade deficit with China and said he would name China as a currency manipulator on his first day in office. However, the official naming of China as a currency manipulator will fall to the new U.S. Treasury Secretary Steven Mnuchin. On February 23, 2017, Secretary Mnuchin stated on CNBC that the Trump administration would stick to the existing process to judge whether China was a currency manipulator. Last October, the U.S. Treasury found that China only met one of the three criteria for being a manipulator. The one match was for having a “significant” bilateral trade surplus with the U.S. larger than $20 billion. According to the U.S. Census Bureau, China had a $347 billion trade surplus with the U.S. in 2016.

In addition, there have been concerns that the Trump administration would hurt a long-standing U.S.-China foreign policy of “One China” after President Trump held a phone call with Taiwanese President Tsai Ing-wen in December. On February 9, 2017, President Trump told China President Xi Jinping that the United States would honor the “One China” policy and thus reduced a major source of tension between the countries. Overall, it remains to be seen what the Trump administration’s next steps are with China over trade and how it will implement the “American First” trade policy.

Potential U.K. free trade deal
In January, President Trump hosted U.K. Prime Minister Theresa May at the White House. At that meeting, PM May stressed the importance of the economic relationship between the U.S. and U.K. and the $1 trillion worth of investments the nations have in each other’s economies. At a joint press conference, PM May said, “We are discussing how we can establish a trade negotiation agreement, take forward immediate high-level talks, and lay the groundwork for a U.S.-U.K. trade agreement,” according to The Hill. “And I’m convinced that a trade deal between the U.S. and the U.K. is in the national interest of both countries and will cement the crucial relationship that exists between us, particularly as the U.K. leaves the European Union and reaches out to the world.” In the past, Trump has stated he would like a trade deal with the U.K. but will need the U.K. to officially leave the EU first. Therefore, the U.S.-U.K. trade policy will be governed by the existing EU trade agreement plan. In 2016, the U.S. had a small $1 billion surplus in goods with the U.K. and thereby, the U.K. will not likely be subject to additional scrutiny under the “America First” trade policy.

Free trade negotiations with the EU


The EU and the U.S. began negotiations for the Transatlantic Trade and Investment Partnership agreement in July 2013 with the goal of increasing exports and investment flows between the countries involved. Unlike the TPP, the T-TIP was not in legal trade agreement language nor had it been presented to Congress. In January, the USTR provided an update on the negotiations:

Our negotiators have made significant strides since 2013, identifying landing zones for certain issues, finding common ground on other important issues, and clarifying the remaining differences. For example, we have:

* Exchanged offers to eliminate duties on 97 percent of our tariff lines, a large majority of which would be phased out immediately upon entry into force of the agreement or phased out quickly.

* Identified steps to reduce unnecessarily burdensome requirements and delays at our borders.

* Agreed that T-TIP must include strong obligations to protect the environment and fundamental labor rights and should encourage cooperation to support strong labor and environmental standards in our trade partners.

* Negotiated a dedicated chapter in T-TIP focused on small and medium-sized enterprises, which, among other things, would help SMEs better navigate the transatlantic marketplace through the provision of enhanced on-line information and new mechanisms for U.S.-EU cooperation.

* Agreed on the importance of transparency and due process in trade remedy procedures and competition policy.

Given the uncertainty over Brexit and U.S. National Trade Council Director Peter Navarro’s recent comments, T-TIP looks unlikely to proceed at this time. No new discussions on T-TIP have been planned.

In a January interview with German newspaper Bild, Reuters reports that Trump criticized German carmakers such as BMW, Daimler and Volkswagen for not producing a higher volume of cars on U.S. soil. "If you want to build cars in the world, then I wish you all the best. You can build cars for the United States, but for every car that comes to the USA, you will pay 35 percent tax. I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35 percent tax, then you can forget that," Trump said. This is consistent with the Trump administration’s policy changes toward trade. The U.S. has a large, $146 billion trade deficit with the EU and will likely receive additional focus under the “America First” trade policy.

Overall outlook: expect more change
President Trump and his administration have acted quickly to change the long-standing U.S. free trade policy into an “America First” trade policy. For China, this has led to uncertainty over both trade and foreign policy. For the U.K., this has led to a strong likelihood of a free trade deal after Brexit. For the EU, this has led to the likely ending of the free trade T-TIP deal and threats of 35 percent tariffs on German cars imported into the U.S. from Mexico.

The “America First” trade policy appears to be geared towards nations that run large trade deficits with the U.S. and will attempt to reshape trade relations to reduce those deficits. The goal is for the policy to make it “more desirable for companies to stay here, create jobs here, pay taxes here and rebuild our (U.S.) economy.” At this time, it’s difficult to predict where the new policy will lead, but what we do know is that the new administration seems to be headed towards rethinking U.S. trade relationships with deficit nations.

The views and opinions expressed in this article are solely those of the author and do not represent the view of MB Financial, its Board of Directors, employees or shareholders.