By Fatemeh Mohammadipour

China ready to fill U.S. vacuum in global trade

May 29, 2017 - 11:21

TEHRAN - Professor Simon Reich of Rutgers University is of the opinion that China is ready to move in to fill the U.S. gap in global trade as China is the greatest beneficiary the current global free trade system.

In an interview with the Tehran Times, Reich says, “China’s leadership has already signaled its willingness to fill any void in terms of free-trade leadership vacated by the United States.”

What follows is the text of the interview:

Q: The Trump administration withdrew from the Trans-Pacific Agreement and it has adopted a protectionist trade policy. How can it affect Asia?

A: There is little doubt that the decision of the Trump administration to withdraw from the Trans-Pacific Agreement marks a watershed in American policy. A central component of what former President Obama described as the ‘Washington Playbook’ has included a commitment to global free trade for the last six decades – including in Asia. Occasional departures from that commitment - such as Ronald Reagan’s use of protectionist measures against Japanese auto, steel and machine tools companies in the 1980s in the name of ‘fair trade’ – have always been characterized as temporary expedients. The intent was always characterized as a return to free trade. President Trump has used comparable language. But in his case, there has been no suggestion that his use of protectionist measures will be temporary. They represent a significant change in policy that will require a wholesale reappraisal by Asia’s major exporters, pushing them to both establish bilateral agreements with the United States, closer ties with China, and new markets for their products.

Q: How do you assess the future of free trade in view of the Chinese president’s remarks at the World Economic Forum in January?

A: President Xi Jinping suggested at the World Economic Forum in January that China’s leadership has already signaled its willingness to fill any void in terms of free-trade leadership vacated by the United States. China is undoubtedly the greatest beneficiaries of the current global free trade system. Their trade and investment position has grown extraordinarily over the course of the last two decades in every major regional market. Lower profitability at home, couple with a consistently growing need for raw materials, has added further pressure for their firms to pursue profitable opportunities around the globe. China’s announcement of the ‘Silk Road Fund,’ The ‘One Belt, One Road’ initiative, and formation of the Asian Infrastructure Investment Bank are three key elements in doing so. President Obama was determined to respond to that challenge in the belief that the United States should be willing to assume some domestic costs to maintain its leadership of the free trade system. Trump, in contrast, has signaled his willingness to abandon that position in favor of an ‘America First’ policy that generates benefits his core domestic supporters – in manufacturing, fossil fuels – and to project American technological innovation from what he sees as Chinese theft.

Q: Aren’t Trump’s moves a blow to global trade order?

A: This is hard to judge at this point. To date, the Trump administration has spent a lot more time talking about what it will do rather than introducing substantial changes. From NATO or the proposed abandonment of the ‘One China’ policy abroad to health care reform at home, the new administration has had to either reverse its position or make compromises in the face of resistance. And it often does not speak with one voice: President Trump’s favorable comments about Russia, for example, have been contradicted by James Mattis, the Secretary of Defense.
Then again, the effective functioning of the global trading system depends as much on what political leaders say as what they do. Global markets pay attention when the economic ministers of the G20 countries met last week and the United States took the unprecedented step of rebuffing efforts to include in the meeting's joint statement language that stressed the importance of free trade and that it should be conducted in a "rules based" manner. The psychological effect could be significant as governments, corporations and markets plan their strategies on the basis of future expectations. They might understandably conclude that they can no longer rely on the assumption that free trade will go unchallenged – and that is destabilizing.

Q: In the absence of the U.S., will economic powers such as China will lead the global trade?

A: Yes, as I mentioned, the Chinese will in part hope to fill this vacuum. The role that the European Union will play is unclear at present. It depends on the outcome of forthcoming elections in several countries in 2017 – notably Germany. If the recent Dutch elections are any guide, the leadership European countries – led by Angela Merkel – will sustain a commitment to free trade. But even in Europe there has been a growing unhappiness about free trade with China. It is one of the less reported elements that has fueled right-wing nationalism and populism in many European countries. Economic insecurity is a major issue in public opinion polls – and the belief that China has taken jobs from Europe through unfair trade practices. So, regardless of the results of these elections, the European commitment to free trade faces serious strains in the next twelve months.

Q: What is possible alternative for NAFTA and Trans-Pacific Partnership?

A: President Trump has signaled a clear commitment to bilateral trade agreements coupled with a renegotiation of regional agreements under NAFTA. But the greatest resistance to these measures are likely to come from within the Congressional leadership of the Republican Party. They have long expressed support for free trade and enhanced financial flows. The Congressional Republican leadership is likely to coalesce around President Trump as long as he advocates things they favor, such as tax cuts. But the reform of healthcare has already exposed some fissures between the President and Congressional Republicans. And that gap may grow as he moves to implement renegotiated trade agreements that undermine free trade and require Congressional approval.

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