Originally published by the Journal of Commerce – November 2016
Fans of ESPN’s College Game Day© will recognize this tag line from the reaction of Lee Corso when he disagrees with others when panelists predict winners of selected college football games. If you prefer a different sports metaphor, there is Aaron Rodger’s 2014 now famous – RELAX! Without meaning to make light of the outcome of the Presidential election, we all need to take a breath and pause. Every campaign at any level finds candidates saying things to fire up their base. The same thing happened in this Presidential cycle, admittedly to a somewhat magnified degree. True, you had one candidate with lengthy position papers covering a wide variety of issues, and another who dealt only in broad statements. We all know who won and the fact he had little substance to his proposals has many understandably nervous about what the future holds.
Let’s start with some obvious and basic truths. First, business will continue. Second, cargo will continue to flow across borders – in and out. Whether costs will go up and delivery times be delayed remains to be seen.
Yes, Article 2205 of NAFTA does allow any party to withdraw from the agreement upon six (6) months’ notice. Interestingly, the President-elect has not said he wants to withdraw from NAFTA, rather also he wants to renegotiate it. For international traders, we understand that means the U.S. will sit down with our Canadian and Mexican partners and explain the provisions it wants changed. Traders also understand that means the Canadians and Mexicans will have provisions each wants changed as well. In other words, it won’t be quick and it won’t be easy – and since all one can do at this point is speculate, how likely is it that if the negotiations get really contentious, any one of the parties could say enough and walk out!
If we continue to speculate and assume the U.S. withdraws from NAFTA in earnest, then what? Sure, trade wars are possible. Sure, the U.S. imposing a surcharge on China’s currency is possible. Yes, there could be 201, 301, antidumping, countervailing or other trade remedy proceedings pursued in the U.S. Traders understand the exercise of any of these options triggers the dispute resolution mechanism before the World Trade Organization or under the given trade agreement. Again, that takes time and while that lengthy process continues, all these non-tariff and tariff barriers are imposed. Traders also know that if such steps were to be taken, our trading partners would impose similar restrictions on U.S. goods being imported into their countries. We have already seen examples in recent memory where the U.S. failed to live up to its commitments, lost the complaint brought against it and ended up having serious surcharges imposed on key American products imported into the victor’s country. Time and again, our trading partners figure out who is the primary opposition in the American government, identify key products made by their constituencies, impose significant surcharges on those products, yielding American companies sitting down with government officials and explaining the harm caused – and that is when the view of the government changes. Yes, the current environment may be a bit different, but there is no reason to think the give and take will end up any differently. The key different fact now is the President-elect has business interests in a particular industry. It won’t be difficult to get his attention by making it very hard for that industry to do business in individual countries. Our trading partners readily understand how the American government works.
It is important to also think in terms of the role of the United States as a world leader. As a practical matter, if the U.S. starts to renege on its trade deals, it won’t take long for our trading partners look elsewhere. There is, after all, already an Asian pivot. The most likely impact of any trade war triggered by U.S. actions would be for that pivot to become more pronounced. Given the serious issues facing the world, the U.S. losing its leadership position is dangerous for America and the world.
The handwringing that has occurred so far has also omitted any consideration of what Congress might do. One party is now in charge across the board. That party has been viewed as typically favorable to business. There are three (3) branches of government. Having the Members, Senators and President all from one party does have the potential to result in laws being enacted more smoothly. At the same time, there is no reason to think Congress will ignore its role in the checks and balance process that is the American government. Most Members and Senators will be there long after the President-elect leaves office, so the leadership can be expected to do what is best for the Congress while still cooperating with the President-elect.
Yes, things are uneasy right now. At the same time, traders understand history. By way of example, the Smoot-Hawley Tariff Act of 1930 and the 1971 Nixon 10% import surcharge are actions which seriously and negatively impacted the U.S. economy. Protectionism did not work then, when the world was less globally connected. There is no reason to think it will work any better now.
There is no question the new administration could nonetheless have an immediate and disturbing impact on traders. We should keep in mind much of the export license reforms that have occurred in the Obama Administration were the result of executive orders. Similarly, there is the ACE computer system that CBP is finalizing. Much of the push for its completion came by way of executive order. Executive orders can be countermanded, so the fate of both could change – but will they?
The Transpacific Partnership is done, at least for now. The Transatlantic Trade and Investment Partnership got its burial with the outcome of the Brexit vote. In the immediate future, no more trade agreements. What happens instead? Business will not stop. Whether revisions to the tax, trade and immigration rules are favorable or hinder business remains to be seen. No one really knows what will happen, and so wisdom suggests we wait to see what the President-elect actually proposes. Once there is something concrete to discuss, we should by all means have a vigorous, but courteous, discussion. Just because the administration changes, that does not mean the trade community will be any less vocal about what is best for it in the global marketplace, even while the new administration seeks ways to address manufacturing and jobs.