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Trump, the death of 'free trade' and the rise of bilateral trade agreements

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Trump's promise of "better" trade agreements has led to the death of "free trade", but where to from here for Australia? Andrew Warrilow comments. 

THE PROMISE of more jobs through better trade deals has been cited as an explanation for the success of the Trump campaign in the recent United States election.

So how did free trade, often touted as one of the linchpins of our prosperity, go so quickly on the nose?

In theory, free trade makes sense. "Comparative advantage", although a difficult concept for many to grasp, holds intellectual water. Two hypothetical countries, producing two hypothetical products, can specialise in the production of one product each to produce more. This extra production can be shared between the two creating greater wealth.

These arguments were originally advanced hundreds of years ago to combat "mercantilism" — where one country piles up trade surpluses at the expense of others. In the 21st century, this is exactly what the organisations charged with overseeing world trade, such as the World Trade Organization, failed to police. Countries such as Germany, Japan, China and Taiwan were allowed to amass huge trade surpluses over decades, without any real pressure to increase imports from deficit countries. These countries were set up as exporting machines with a structural bias towards producing and then selling product overseas, built into their economic makeup.

One of the developments that promoted free trade was the multilateral trade agreement. For bureaucrats, multilateral trade agreements were advantageous, because they cut down the workload in negotiating and implementing what are incredibly complex arrangements between countries. For governments, multilateral trade agreements were very attractive indeed. Politically, governments are keen to appear to the electorate as if they are achieving something. From an economic perspective, multilateral trade agreements may keep certain business interests happy. Many governments rush to conclude multilateral trade deals for fear of becoming the country which is "left out".

During the era of the "bubble economy", instruments such as multilateral trade deals facilitated the shift of many workers’ jobs in manufacturing industries to lower-wage countries such as China, but the true state of unemployment had been hidden by the ebullient economy of the time. In the post-bubble era, the U.S. and many countries in Europe now find themselves with huge pools of urban unemployed and the citizens of these countries want their manufacturing jobs back.

Trump has picked up on this sentiment. Although he has threatened to raise tariffs on Chinese imports and also to raise tariffs generally, a more savvy assessment may be that Trump will use the threat of tariff increases as a bargaining chip in the trade renegotiations process. In doing so, Trump may have flagged his real strategy for tackling the U.S. trade deficit and increasing the number of Jobs in the U.S. manufacturing sector — the bilateral trade agreement.

Donald Trump has promised to throw out or renegotiate trade deals once he takes office in January next year. He has already done this with the proposed Trans-Pacific Partnership (TPP) legislation and other trade agreements are expected to be renegotiated or thrown out, such as NAFTA. Bilateral trade agreements between two countries offer the opportunity for countries to negotiate in a more precise way on issues concerning their specific situations, rather than taking a one-size-fits-all approach.

Bilateral trade agreements may allow certain countries to arrange a more favourable deal, instead of rushing to conclude a multilateral trade agreement for fear of being left out. Bilateral trade agreements would have the additional advantage of allowing each country to exact an offset of increased exports to a counterpart in return for agreeing to increased imports from that country. In this way, countries could build in enforceable trade targets so that one country could not gain a significant advantage over another.

Over the next few years, we can expect to see the U.S. starting a trend away from multilateral trade deals towards a more bilateral approach. Whether other countries follow suit remains to be seen.

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