Abstract
With Donald Trump as President of United States, multilateralism in the world economy is facing an unprecedented challenge. The international economic institutions that have evolved since the fifties are increasingly under the risk of being undermined. With the growing assertion of the emerging and developing economies in the international fora, United States is increasingly sceptical of its ability to maneuvre such institutions to suit its own purpose. This is particularly true with respect to WTO, based on “one country one vote” system. The tariff rate hikes initiated by the leader country in the recent past pose a serious challenge to the multilateral trading system. The paper tries to undertake a critical overview of the US pre-occupation of targeting economies on the basis of the bilateral merchandise trade surpluses of countries, through the trade legislations like Omnibus Act and Trade Facilitation Act. These legislations not only ignore the growing share of the United States in the growing invisibles trade in the world economy, but also read too much into the bilateral trade surpluses of economies with United States and the intervention done by them in the foreign exchange market.
Keywords
Introduction
With the emergence of the Donald Trump as the president of the United States, the agenda of America First has gained precedence over any other objective in the concerns of international economic policy of the United States. Be it the approach of the Trump administration towards the multilateral trading system of World Trade Organization (WTO) at the Buenos Aires, or the sort of rhetoric he aired at Davos, the strategy of America First is being carried forward by the current administration much to its own peril and also to the detriment of the growth prospects of the emerging economies. In the recent past, President Trump has continued with this approach by raising tariffs on steel by 25 per cent, drawing the wrath of China which has retaliated by increasing tariff on number of commodities.
The approach of the president of exiting from free trade areas and agreements under the argument of increasing bilateral trade deficit with the other countries in the same seem to be least behoving from the part of a country, which is in a leader role in the global economy. The decision of Trump to do so from US-Korea Free Trade Agreement (KORUS) and North American Free Trade Agreement (NAFTA) apart, the United States has also been continually expressing disenchantment with the multilateral trading system under the premises that action initiated against different countries on the basis of its complaint in the Dispute Settlement Board has not been sufficient. It looks literally childish from the part of the leader country of the world economy to exit from trade deals and even find fault with the multilateral trading system in the name of the bilateral trade deficit which it has with some country or the other.
Although under the compulsions of a domestic electorate, the same was put forward as part of the election rhetoric, it seems that the current presidency feels that for any effort from the part of the United States there should be a sense of reciprocity. In other words, it is not interested in performing its global role towards assuring reasonable stability in the world economy. Has the leader country of the world economy reached such a situation that it cannot own up global responsibilities? Is the performance of the US economy too wanting, as it is made out to be by the politics of the right in the United States?
For a long period of time, since the early 1990s, the United States has had a large current account deficit. In fact, in 2006, the current account deficit of the United States was as high as 6 per cent of its GDP. While till the mid-1990s, Japan has played an important role in the financing of the current account deficit of the United States, since the mid-1990s till the early part of the current century, this role was shared by the East Asian economies as well as oil producers. Since the early part of the current century, China has been a major buyer of the US Treasury securities. However, in the recent past, Germany has emerged in the international economy as a major surplus economy. The current account deficit of the United States, notwithstanding the fact that the same was crossing certain limits, did not result in the dollar coming under any serious threat, precisely for the reason that here were these set of economies in East Asia, which were ready to purchase these Treasury securities. In fact, the safe Treasury securities of the United States purchased by the Asian economies, with Japan and China being the main buyers, has worked towards preserving the stability of the value of dollar.
The leader country, the United States was able to have its currency strong in the international markets, but the Treasury securities also served as a collateral of sorts as against its varied investments in Asia. Confronted by the inundation of capital inflows, which under non-intervention would have resulted in the appreciation of the currencies, the central banks of East Asia were forced to intervene in the foreign exchange markets so as to keep their real exchange rates at a depreciated rate. Moreover, it perfectly made no sense for the East Asian economies to dump their Treasury holdings at one go, for this would result in the value of dollar crashing, causing much damage to the Asian economies too. In fact, for a long period, by virtue of the reserve currency status it has been enjoying and the large demand for the Treasury securities by the central bankers of Asia and the oil rich countries, the United States has been a net capital importer, without any serious threat to the challenge of the supremacy of its currency or to its overwhelming status in the international financial markets. This informal system of sorts which enabled the dollar to continue on with the reserve currency status despite burgeoning current account deficits through the official purchases from the economies of Asia with current and financial account surpluses is referred to by Dooley, Folkerts-Landau, and Garber (2003) as Bretton Woods II. The tenability and sustainability of the same as a viable system has been a matter of contention ever since the financial crisis. 1
This article is divided into four sections. The first section sheds light directly on the composition of the current account and financial account of the balance of payments sheet of the United States. In the second section, it further tries to explore the data of the balance of payments sheet of China to examine as to whether there is any merit in the big issue being made out by President Trump about the bilateral trade surplus which China has with the United States, as an excuse for the escalation of tariff barriers on different commodities. The third section challenges the very basis of the arguments which serve as the premises for initiation of action by United States through its Omnibus Act and Trade Facilitation Act and Trade Enforcement Act 2015. After having a cursory glance through the US efforts in megaregionals in the next section, the article ends with some concluding observations.
Current Account and Financial Account of the United States
The role of the United States continues to be of pivotal significance in the world economy. It counts for around a quarter of the world economy. As per the data of the Bureau of Economic Analysis, United States, the ratio of the exports and imports of goods and services of the United States, as a proportion of its GDP, rose from 19.2 per cent in 1991 to 29.9 per cent in 2014. In serving as source for demand, the United States played a key role till up to the beginning of the global financial crisis. Indeed, in 2006, it had a current account deficit amounting to US$806 billion, that is, almost 6 per cent of its GDP. It has declined from its high levels in 2006 to US$451.7 billion (2.43% of its GDP) in 2016. Figure 1 shows the current account of the United States.
A cursory glance through the current account disaggregates of the United States would be in order. Even as the United States has a large merchandise trade deficit, it has surplus both on the invisibles front as well as on account of balance of primary income. In the secondary income front, it has been having a deficit. Let us look at the disaggregates of the US current account from Figure 2.
The figure illustrates that the balance on merchandise trade was at its highest level at US$837.29 billion in 2006, ever since though it has decreased in the period in between, by 2017, we find that this is almost reaching the levels of 2006. But, that said, it should be noted that due to significant increases on account of balance of services as well as investment income, the current account has not got back to the 2006 levels.
A large portion of the current account deficit is due to large merchandise deficit. Notwithstanding the fact that the United States has a large merchandise trade deficit, one cannot ignore the fact that both on the export as well as import front, a good portion of the trade is of intra-firm nature, given the organisation of production on the basis of a global value chain. In the backdrop of the recent issue which has been raised by President Trump on the bilateral trade deficit with China, it is pertinent to note that there are number of studies which reveal that at least 37 per cent of the US imports from China consists of parts and components on which the US manufacturers rely.
The maturing of global value chain has contributed to large intra-firm transactions which, according to UNCTAD (2016), account for about one-third of the total exports. Further, the arms-length trade has contributed to a source of trade weakness, due to affiliates of the United States abroad catering to local as well as regional markets. 2 In 2013, more than 90 per cent of all goods and services supplied by majority-owned foreign affiliates of the US companies went to foreign markets.
According to the 2016 World Investment Report, the United States accounts for 11 per cent of the total global goods trade and 23 per cent of the foreign direct investment (FDI) stock. In fact, the multinational corporations headquartered at the United States account for 30 per cent of the sales of the world’s 100 largest non-financial multinational enterprises. The stock of outward foreign investment of the United States at US$6.3 trillion, which accounts for a quarter of the total outward foreign investment in the world, is the single largest for any country in the world. 3
In fact, the United States has been continually alleging that the merchandise trade surpluses which the economies had were on account of keeping their exchange rates at a depreciated rate through the intervention by the central banks in emerging market economies. This argument ignores the benefit which accrues to these economies on account of the abundant labour reserves in these economies. Notwithstanding the earlier allegation, in the recent report of the US Treasury, they have not been able to find the argument of intervention in the currency market to be valid for China, for their intervention has been in the form of sales of foreign exchange towards preventing the depreciation of the Yuan (see US Department of Treasury International Affairs, 2018).
In fact, both on account of invisibles as well as on account of primary income, under which figures the category of investment incomes, the United States has consistently been registering a surplus. As can be seen from Figure 3, the balance on invisibles has increased from US$78 billion (1999) to US$242 billion (2017) that is by more than three times. It is also pertinent to note that there has been a continual increase, with no decline, on the balance on services ever since 2007. In fact, the balance on services has literally tripled in the post-global financial crisis period.
The balance on primary income, which captures the net investment income earned has been witness to an increase from US$11.1 billion (1999) to US$216.99 billion (2017) registering a trend rate of growth of 16 per cent per annum during this period. 4 In fact, this largely explains as to why the United States has been in the forefront, trying to negotiate hard for liberalisation of services and taking the lead in the same even through plurilaterals. The strong advocacy of the US administration on issues relating to intellectual property rights, trademarks and copyrights in the international fora is precisely because much is at stake for the United States on this account. One should note that this advocacy is being made by the United States, on behalf of different corporations, in particular pharmaceutical companies, notwithstanding the countervailing pressures from the part of the civil society and patient groups, both from within and outside the United States.
Yet another avenue where President Trump has been raising serious concerns has been with the immigration policies pursued by the United States. Taking the figures of the Pew Research Centre, he has been relating the unemployment rates amidst the lower-middle class Americans to the liberal immigration policies of the United States. In the course of this initial year itself, he has brought forward various legislations which are highly restrictive with respect to immigration. But, the data on the secondary income account reveals that the deficit of the United States on this account increased from US$40 billion (1999) to US$114.8 billion (2017) that is at a trend rate of growth of 5.2 per cent, far lower than the rate on the surpluses on the primary income or on the invisibles front. Moreover, to find the growing trade deficit to be responsible for the growing unemployment is beside the point, for there are surplus economies too, where unemployment is a serious issue. In fact, the nature of technological change and the organisation of production has much more important a role than trade deficit or immigration in the growing problem of unemployment.
Moreover, a comparison of the data relating to the surpluses and deficits in some of the accounts would be in order here. Whereas, the United States had a surplus on the invisibles account and the primary account in 1999 of US$78 billion (0.81% of GDP) and US$11 billion (0.12% of GDP), the net outflow on account of secondary income was US$40 billion. On the other hand in 2016, whereas the numbers on the first two counts rose to US$247 billion and US$173 billion, the net outflow on account of remittances that is on secondary income account was merely $120 bn. Whereas in 1999, the net outflows in the secondary account was about 44 per cent of the surpluses on the invisibles and the primary account put together, by 2016, it came down to 28 per cent. Given the importance of migration towards improving the prospects of the developing countries, the policy shift with respect to immigration would be of severe consequences in meeting their development goals. Moreover, would it be possible to sustain the prospects of the hospitality and tourism sector in the United States, which makes an important contribution to the surplus on invisibles account of the United States, without immigrant labour?
The restrictions on the immigration front from the part of the United States turn out to be all the more important and have to be seen in the light of the declining share of contributions made by the United States on account of official development assistance (ODA). In 2014, the US bilateral ODA of US$33 billion was only 0.19 per cent of the US GDP. In contrast, such assistance amounted to 1.09 per cent of Sweden’s GDP, 1.02 per cent of Norway’s GDP and 0.88 per cent of Denmark’s GDP. 5
The current account deficits which have accumulated over a long period of time has as its logical counterpart, the cumulated increase of financial liabilities by the United States, making it a debtor to the rest of the world. It should be noted that whereas, a lion’s share of the liabilities are in the form of low yielding, safe, secure, less risky financial instruments like US Treasuries, its assets abroad are largely in the form of direct or portfolio foreign investment, with higher yield. This also explains the high increase in the surplus on the primary income, despite the huge holdings of the US Treasury securities by different countries, in particular, Japan and China.
But in this regard, too, it should be noted that during certain periods, notwithstanding the increase in borrowings over a long period of time, there has been an improvement in the net international investment position (NIIP), due to the increase in the value of the assets held abroad, in the course of the depreciation of the dollar. Figure 4 on the NIIP of the United States, it can be seen that notwithstanding the large increase in borrowings done by the United States in the backdrop of the increasing current account deficits, the NIIP of the United States has registered an improvement between 2003 and 2008. 6 Even as the borrowings of the United States in the period from 2002 to 2007 had increased by a cumulative total of US$3.4 trillion, this did not result in the NIIP rising by as much and becoming −40 per cent of the GDP, instead it only deteriorated by as low as US$400 billion. In terms of GDP, the position in fact improved. The same was on account of the real effective depreciation of the dollar by 25 per cent and the value of the stocks of assets of the United States held abroad increasing at a far faster pace compared to the liabilities owed to the foreigners by the United States. 7
This brings us to the movements in the US Dollar Index in the last 5 years. In fact, while the trade-weighed US Dollar Index was reasonably stable between 2013 and 2014, it has appreciated from a level of 76.7 in July 2014 to 96.8 in December 2016. Ever since, it has declined to 86.26 in March 2018. In other words, for the last full year under Trump, tariff or no tariff, there has been a depreciation of the dollar as against the other currencies that there has been not just an improvement in the competitiveness of the US economy, but an imminent improvement even in the net international position of the United States is in the offing, the initial signs of which is evident from Figure 4 on NIIP of the United States. And the steady deterioration in the time period from 2009 to 2015 has to be seen in the context of the appreciation of the dollar, by virtue of the United States being able to attract investments to the US Treasuries, which has been serving as a safe haven during uncertain times. Notwithstanding the deterioration in NIIP during the period, we have already seen that there has been a steady increase on the primary income front, for the returns which accrue to the United States from its investments in ventures abroad have been far higher compared to the returns accruing to foreigners on their assets within the United States.
President Donald Trump’s outpourings apart, the United States has been one of the most important beneficiaries of financial globalisation. In fact, through the series of financial innovations which evolved in the course of the housing bubble in the US financial markets, they were able to sell the asset-backed securities and transfer the risks far and wide to Europe and Asia that when the housing bubble in the United States popped, the ramifications were felt worldwide, in particular, in Europe, with number of the banks collapsing.
It is only logical that for the exorbitant privilege enjoyed by the United States during normal times by virtue of the dollar being a reserve currency, there is a duty of providing liquidity during times of crises. In fact, during the 2007 global financial crisis, the Federal Reserve set up dollar swap lines with 14 central banks, enabling them to exchange dollars for the currencies held by them. The Federal Reserve purchased long-term debt instruments like mortgage-backed securities and the US Treasury bonds, expanding balance sheet from US$900 billion to US$4.5 trillion between 2009 and 2014. Further, it initiated unconventional monetary policies towards keeping the long-term interest rates low. But, the reluctance towards pursuing expansionary fiscal policies has hurt the world economy a lot. And, even when fiscal expansion has been planned, Trump wants to avoid the benefits of the same percolating to other economies. That is exactly why he is all set to go ahead with policies based on tariff escalation. But, is the same fair and just from the part of a country which had successfully diversified risks of its housing market to the rest of the world through the asset-backed securities?
In fact, the weak performance of its strategic partners, such as Europe and Japan, till the recent past has added to the strength of dollar, which serves as currency of denomination in the important markets of commodities as well as commands large share of the reserves in central banks. Notwithstanding the periodic fluctuations, the supremacy of the dollar continues uncontested in the international financial markets. This data from the US Treasury International Capital is revealing in this regard.
Not just that the share of the dollar in the reserve holdings of the central banks of the world remains intact, in the aftermath of the unconventional monetary policies unravelled by the United States, the rate of growth of dollar credit outside the United States has been far high compared to that within the United States. A study by the Bank of International Settlements (BIS) reveals that there has been a faster increase in the growth of US dollar credit outside the United States even as compared to that within in the post-2008 period. In their study, McCauley, McGuire, and Sushko (2015) reveal that since 2008 there has been a rapid growth of dollar credit outside the United States. In fact, as per the BIS statistics, there is dollar credit outstanding of US$9.8 trillion to borrowers outside the United States. It should be noted that this amounts to almost half of the GDP of the United States and 17 per cent of the non-US GDP of the world economy. In fact, of the same, at least US$0.3 trillion is to the emerging market economies, and another US$558 billion is to the nationals of the emerging market economies towards financing their projects in other parts of the world. Although, of course, all of this adds to the external vulnerabilities of the emerging market economies, it also reveals that dollar credit to the rest of the world is not just large but is growing too. There have been empirical studies in this regard from the part of Bruno and Shin (2015), which argue that the various forms of borrowings done in dollars could also be exposing these emerging market economies to different types of external vulnerabilities.
Even in the aftermath of the global financial crisis, contrary to what is being projected by President Trump, the situation of the United States is not such that it should go for such sort of protectionist moves as is being attempted now. But, even the data released by its own recently released report on Macroeconomic and Foreign Exchange Strategies submitted to congress fails to pin down on any country against which allegations of currency manipulation with an intent of harnessing unfair trade advantage has been raised. 8
In fact, in the next section, we try to look into to the trends in the balance of current account of China to look at the merit of the arguments raised by the Trump presidency in the recent round of tariff escalations.
Bilateral Trade Deficit with the United States: Is the Attack on China Justified?
Before looking specifically into the issues of China, let us have an overview of the bilateral balances of the Untied States with other regions/countries, which has now become the major point of contention in US trade policy prescriptions. In Table 1, we have the data from Bureau of Economic Analysis on the balance of international transactions with other regions/countries, in 2015. A negative in this implies that the United States has a deficit with that region. As far as balance of goods is concerned, the United States has a bilateral trade deficit with most of the important regions/countries. With East Asia, it has a deficit of US$534.91 billion, of which with China it has a deficit of US$347.3 billion. With Europe, it has bilateral merchandise trade deficit of US$166.69 billion, of which with Germany the deficit is of US$65.25 billion. It has bilateral trade deficit with Japan, similar in figures to that of Germany, of US$70 billion. Including India, Latin America and the Organization of the Petroleum Exporting Countries (OPEC), it has a bilateral merchandise trade deficit. However, from the overall balance on goods deficit which the United States had in 2006 of US$837.29 billion, there was decline to US$510 billion in 2009. Ever since, though there has been an increase to US$752 billion in 2016, it has not reached its 2006 levels.
Bilateral Balances of USA with Countries/Regions (2016) in US$ Million
It should also be noted that of the total balance of goods deficit of the United States in 2006, the East Asian region accounted for 49 per cent, and its share has increased to 71.8 per cent in 2016. Understandably, the share of China has increased from 28 per cent (2006) to 46 per cent (2016). After all, the large amount of intra-firm trade happens between the US corporations and its affiliates there. In fact, the share of the EU too has increased from 14 per cent (2006) to 20 per cent (2016). In fact, Latin America and OPEC accounts for large decline, from 14 per cent (2006) to 5.5 per cent (2016) and from 13 per cent (2006) to 0.94 per cent (2016), respectively. 9
In the case with services, the surplus of the United States has increased from US$75.57 billion (2006) to US$247 billion (2016). In fact, a perusal of the following table would reveal that the United States has a bilateral surplus on services with all countries other than India and Germany. Compared to 2006, only India registered an increase in its surplus on the services front with the United States; even Germany registered a decline. While in 2006 China accounted for 0.6 per cent of the overall surplus of the United States in services, by 2016 it accounted for 15.34 per cent of the same. In fact, while the share contributed by East Asia remained intact at 36 per cent that of Europe declined from 27 per cent (2006) to 20 per cent (2016). Most importantly, of the total increases in surplus of the United States on the invisibles front between 2006 and 2016, of US$172 billion China accounted for US$37 billion that is 21 per cent of the total increase. While East Asia contributed for 36 per cent of the increase in surplus of invisibles in this period, Europe accounted for 30 per cent of the increase.
With respect to primary balances, too, the surplus of the United States has increased from US$26 billion in 2006 to US$173.23 billion in 2016. On the primary account, while the United States has bilateral deficit with Japan, China and Germany, it has a growing bilateral surplus with Europe and Latin America. But, of the total increase in surplus on the primary account of US$146.3 billion, East Asia accounts for 20.72 per cent and Europe for 55.79 per cent. Other than Germany and OPEC, the other regions (including China) have contributed to the increase in the primary surplus of the United States in the period after 2006.
It has been the contention of the US president that the bilateral trade deficit of the United States with China has been on the increase. One, in a world where trade happens not just in goods, but also in services, the very premises of looking at merchandise trade alone is inappropriate. One should look at the overall current account surplus of China, rather than its bilateral trade balance with the United States. Let us look at what the data in this regard has to reveal (Figure 5).
It is a fact that China has a bilateral current account surplus with the United States of US$332.61 billion in 2016; this has been on the increase since the early part of the century. It is lower than the merchandise trade deficit which it has with the United States of US$347 billion. But is should be borne in mind that the overall current account surplus of China is lower at US$249 billion, which implies that with the rest of the world other than the United States, China has deficit on the current account of US$80 billion approximately. Indirectly, China is providing demand for the rest of world to this extent.
Further, it should be noted that purely from the point of view of the international economy, it is the changes in the overall current account surplus of China since the global financial crisis which matters the most. The Chinese current account surplus at US$348 billion in 2008 has reduced by as much as US$100 billion, to US$249 billion in 2016. In terms of its GDP, current account surplus has reduced from above 9 per cent in 2008 to a mere 2 per cent in 2016.
At approximately US$250 billion, China and Germany are two countries with the largest current account surplus, but in comparison with their respective GDPs, the German current account surplus is far larger than the Chinese one. This brings us to the fundamental objections to the method deployed by the United States towards locating countries resorting to unfair trade. The assumptions of the same are fundamentally flawed.
American Approach to Major Trading Partners: A Flawed Approach Based on Mercantilist Logic
As part of the provisions of the Trade Facilitation Act, Trade Enforcement Act 2015 and The Omnibus Trade and Competitiveness Act of 1988, the Treasury in the United States prepares a report to congress on Macroeconomic and Foreign Exchange Policies of Major Partners of the United States. The partner countries are evaluated on the basis of three criteria: (a) the bilateral trade deficit with the United States is US$20 billion (b) material current account surplus is at least 3 per cent of the GDP and (c) whether persistent one-sided interventions occur when net purchases of foreign currency are conducted repeatedly, with a total of at least 2 per cent of the country’s GDP. In its report of April 2018, none of the major trading partners were found to be meeting these three criteria simultaneously during the four quarters ending in December 2017. But according to the custom, if any country meets two of the three criteria, it would be included in the Monitoring List. In the report submitted in April 2018, China, Japan, Korea, Germany, Switzerland and India have been included in the Monitoring List, India was added to the Monitoring List for the first time in this report.
But none of these criteria make any sense if the global economy is taken into consideration. A country can very well have bilateral trade surplus with the United States and have an overall trade deficit, like Mexico. It could very well have a large bilateral trade surplus with the United States but could have a far lower overall trade surplus, like in the case of China. And, why should there be a fixed number in the form of US$20 billion as a number to decide at to whether a country should be included or not? And most importantly, in a world, where there has been increasing servitisation, the veracity of using trade balance per se is suspected; rather the focus should be on current account balance. Indeed, though the United States has a large bilateral trade deficit with these countries, the bilateral current account deficit with the United States is far lower. It is only with India that the bilateral current account deficit is higher compared to the bilateral trade deficit; this is on account of the surplus earnings which India has with the United States on the invisibles front.
The very idea underlying the report is purely mercantilist in its origins, and the report continues to try to give veracity for this approach. Even under this pure US-centric approach, it should be noted that Treasury could not hold any of its major partners responsible for unfair practices. And, at the same time, it tries to be silent on the depreciation of the dollar during the last four quarters. It also tries to play hide and seek on the issue relating to the large increase in invisibles surplus of the United States, in which too, a major contribution occurs from China.
Worst is the inclusion of India in the Monitoring List. Yes, it has a US$20 billion surplus with the United States on a bilateral basis, but it is also a known fact that India has an overall merchandise trade deficit; the United States is one of the few countries with which it has a trade surplus on the commodities front. Worst is the argument that India has done one-sided intervention in the foreign exchange markets crossing 2 per cent of the GDP to resist the appreciation of the rupee. In a world, where free mobility of capital has been playing havoc with the exchange rates of currencies and putting it to trouble of losing competitiveness, it is by incurring a severe fiscal cost that the central bank in India is intervening, in the large context of low interest rates in an epoch characterised by unconventional monetary policies. In the wake of the Asian crisis, when the international financial establishment was not ready to extend the much needed liquidity, the emerging market economies have learnt the lesson the tough way and have been resorting to forex accumulation as a hedge against capital flight. When the import cover possible through forex reserves had declined during the taper tantrum in 2013, the country was clubbed under ‘Fragile Five’. Even when the Treasury finds India’s intervention in the forex markets in the last year to have been against the free determination of exchange rates, in the current context, when there is large net capital outflow from India, this is holding India relatively strong. What business does the United States have in interfering with the foreign exchange intervention of emerging economies, in case, it cannot take the lead in reforming the international monetary system? After all, in the specific case of India, it does not even have a current account surplus.
United States and the Megaregional Initiatives
Right from the time of the Obama administration, through the office of the United States Trade Representative, efforts have been made towards challenging the developing economies through the Dispute Settlement Board at WTO. In fact, Obama’s tenure as President was witness to large increase in the number of cases filed by the United States at WTO, on many of which the verdicts were in favour of the United States.
The structural shift of the United States from being an advocate of multi-lateralism in the 1960s to being a protagonist of the megaregionals, as well as plurilaterals, has to be seen in the context of the share of the advanced economies in the world trade in goods declining from 80 per cent to 60 per cent between 1990 and 2010, with the share of the emerging and developing economies continually being on the rise. Coupled with this has been growing assertion of developing countries at the WTO Ministerials. All of this has resulted in it being impossible for the advanced economies to unilaterally decide the rules of the game of the international trading system or to introduce disciplines of their choice. Through the lead taken in the establishment of these megaregionals such as TTIP and TPP, the United States has been resorting to the sort of idea of Commonwealth generated by Britain towards preserving its share in the world trade intact in the interwar years. All of this is being done ignoring the fact that the advanced economies continue to command the lion’s share of the export of services in the international economy.
The developing economies have been more than obliging towards reduction of tariffs towards attracting multinational capital towards their boundaries so as to be part of the global value chain of production. Over the years, the strategy of the emerging economies has moved from what Baldwin characterises as from ‘my markets for yours’ to ‘my factories for your reform’ (see Baldwin, 2016). This has resulted in the increasing participation of emerging economies in world trade.
It is in this context that the United States and advanced economies, through the introduction of disciplines such as investment treaties, intellectual property rights as well as labour clauses in the megaregionals, are trying to cut to size the share of the emerging economies in world trade. In fact, the rise of megaregionals under the patronage of Obama Presidency, through its US Trade Representative, Michael Froman, has to be seen in the backdrop of the rising stakes of the United States, Japan and the EU on account of investment incomes, as well as the disenchantment they have with clauses relating to the special and differential treatment to the developing economies within the WTO dispensation.
Indeed, the very organisation of business in WTO, even when it was based on ‘one country one vote’, once it was serving their purpose, was much to the liking of the United States and its allies. The megaregionals such as TPP and TTIP have been part of their response to Doha issues raised by the developing world at the fora of WTO. Given that the initiatives on the front of megaregionals have been undertaken by the Obama Presidency, in the initial year of his Presidency, Donald Trump was quick to call it quits from TPP, which had not been concluded by then. His office also decided to withdraw from TTIP. Even at that time, there were observers, who noted that the same were purely short term in nature. They have been proven right, for in April 2018, President Trump’s dispensation has endeared himself to these megaregional initiatives again. This temporary withdrawal from the grouping should be seen as part of the Trump’s strategy to enhance the US bargaining, so as to extract a far more favourable deal from the other members of these megaregionals.
In the context of the discussion on megaregionals, it is to be noted that the challenge posed by President Trump to the multilateral framework of decision-making has been contributing to the air of uncertainty to matters pertaining to the international economy. The intervention of Posen (2018b) presumes importance in this regard. He argues that the ideas of Trump based on economic nationalism, relying on aggressive bilateral bullying of countries and sidestepping of the rules-based international economic order would take the world far faster into the post-American world economy. He puts forward the case in no uncertain terms that unless the United States tries to work out a mechanism within the rules-based international economic order, it even risks losing the leadership role which it currently has. Contrary to the expectations of President Trump that his policies would entice corporates back to the United States, the figures from the Bureau of Economic Analysis of the United States reveal that the net FDI to the United States has declined from US$146.5 billion (2016 Q1) to US$89.7 billion (2017 Q1) and then further to US$51.3 billion (2018 Q1). 10
The rationalisation provided for the trade policies of President Trump by Peter Novarro, his trade policy adviser, through an op-ed in The New York Times that the era of complacency of the United States in the field of trade was over, was received with a large amount of criticism. 11 Bergsten and Kolb (2018) came up with an annotated criticism of the same arguing that it was fallacious to argue that the trade deficit of the United States was due to the trade policies of the other economies, further attributing that the same had much to do with the stronger dollar and the US investment being more than the US saving. Although their brief on behalf of the other advanced economies is indeed logical, one fails to understand why they do not extend the same argument for the rest of the world.
The love–hate relationship of the Trump regime to the megaregionals apart, the long-term strategy of the United States seems to be to keep the same alive. To stay with this strategy of nurturing megaregionals is of utmost importance for the US foreign economic policy regime, the avowed objective of which has been to upend the currently prevalent multilateral trading system. It is expected that the megaregional blocs would enable the United States and a group of economies to introduce disciplines within those regions and enable them to insist on such standards on those countries which engage in trade with these megaregionals. With political opposition building up within different countries, it is yet to be seen as to whether the acceptance of new disciplines by the member countries would occur without any friction. The United States considers these megaregionals as an interim arrangement, till the rest of the world would ultimately acquiesce into accepting the introduction of the twenty-first century issues within the multilateral framework, sidelining the larger developmental aspirations of the developing world. 12
Some Concluding Observations
As a leader country in the world economy, which has its currency used as a vehicle currency in international trade and invoicing, as well as for the denomination of different liabilities, the United States owes much to the world for the benefits it enjoys in this regard. In fact, the triennial survey of foreign exchange of Bank for International Settlements further reasserts the dominance of dollar in the foreign exchange markets. The United States should be realistic on its perspectives on international economic policy with respect to the fact that it would not be able to have a strong dollar and, at the same time, have a trade surplus too. (You cannot have the cake and eat it too.)
Rather than using the rhetoric behind the bilateral trade deficit, which it has with a few countries as an excuse for pulling down the multilateral trading arrangement in the world, the United States should rather try to provide leadership to the world economy, which has not yet fully recovered from the aftermath of the global financial crisis, by serving as source of demand. Rather than targeting countries like China, of which the current account surpluses as percentage of GDP have come down drastically since 2006, the United States should focus on initiating efforts towards sustaining growth under a multilateral framework.
The efforts and initiatives taken by the previous President Obama through the US Trade Representative Michael Froman, through the megaregionals such as TPP and TTIP, with an intent of cutting to size the increasing share of emerging economies in world, was hitting at the foundations of multilateralism in the world economy. Trump era seems to carrying it a little too far, giving an impression of crossing swords with the advanced economy trading partners too, through the retreat from these megaregionals, though, of course, the same has been only for a short period.
The efforts from the part of the Trump administration to go ahead with steps of tariff escalation brings to the fore the beggar-thy-neighbour attitude which the United States intends to pursue towards carrying forward its America First strategy. In fact, the United States seems to be exploring possibilities of redesigning a multilateral trading system which would cater to its priorities. After having filed maximum cases through the Dispute Settlement Board of WTO against many economies, over these years, and having won many of them, the United States is expressing its disenchantment on the participative institutional framework of decision-making prevalent in WTO. Knowing only too well about its limited ability to manoeuver under the rules-based multilateral framework, the United States is trying to upend the same. But this is going to be at its own peril.
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The author received no financial support for the research, authorship and/or publication of this article.
Footnotes
Acknowledgements
This article has benefited from the author’s doctoral work at Centre for Economic Studies and Planning, Jawaharlal Nehru University on ₹Capital Flows, Global Liquidity and Emerging Market Economies: Revisiting the Bretton Woods II Postulate’, under the guidance of Professor C. P. Chandrasekhar. The usual disclaimer applies.