US Manufacturing – A Revival at the Cost of Global Trade

With less than a month in office, the Trump administration has already made significant policy changes, first of which was an executive order pulling the US out of the Trans-Pacific Partnership deal. This will impact trade in Asia and throw further doubts over the future of the 12-nation Trans-Pacific Partnership Agreement. The deal, had it stood, would have strengthened trade ties between the partner countries accounting for more than 40% of the global GDP. However, abiding by his presidential campaign promises, Trump passed an order to pull the US out of the agreement, citing reasons like a surge in unemployment, decreased domestic wages, loosening environmental regulations and lapse in public policies of member countries. With the Trans-Pacific Partnership agreement in shreds, China will most likely step right in and hijack the situation by negotiating a smart regional trade deal, which will likely serve as an Asian version of the TPPA driven by China.

The United States’ decision to pull out of the TPPA will benefit their domestic manufacturing sector significantly. The key problem cited before pulling out of the deal was the high trade deficits the US was running with Asia, which resulted in biased trade deals that led to the shutdown of US factories and workers losing jobs. However, this decision will likely dent trade ties with Asia significantly. Now that the TPPA is under jeopardy, Vietnam, Malaysia and Singapore will be particularly susceptible, given these nations’ trade exposure to the US and their high dependence on exports/imports as a percentage of GDP.

China will look at grabbing this opportunity with both hands to boost its exports and establish itself at the centre of Asian trade, thus isolating the US further. The Regional Comprehensive Economic Partnership is expected to take off between the 10 member states of the ASEAN and the existing partners. The RCEP will gain importance and be seen as a substitute to the TPPA for now. Further, disputes between the US and China over factors such as trade, currency situation and investments are likely to further deteriorate the relationship between the two world leaders. With the US effectively out of the TPPA, Australia is now likely to spearhead trade talks in bringing in other interested members into the TPPA (minus one). Already, Indonesia has expressed an interest and Japan will ratify the agreement for the deal to come into force soon.

In keeping with his campaign promises, Donald Trump plans to renegotiate the 25-year-old NAFTA as well. Major points of discussion will be around border taxes, immigration and security at the border. With the US pulling out of the TPPA, their “Pivot to Asia” aspirations are now buried and, with major changes foreseen in NAFTA agreements between Mexico and Canada, major trade changes will be seen in 2017 that will shape the global trade map. On the bright side, US manufacturing will witness improvements in domestic jobs and increased domestic wages in the coming years but, on the downside, trade ties between the US and other prominent countries could be significantly damaged.