Implications of a Trump Presidency: Trade, and South Africa

Implications of a Trump Presidency: Trade, and South Africa

It’s official. Donald Trump will be the next occupant of the White House. Angry whites, and blue collar, voters have responded to his populist messaging. Central to that messaging is the perceived misfortunes of industrial America, in a globalising world. As the Brexit vote showed, and as the rise of populism in Western Europe affirms, the politics of the old industrial west have now shifted decisively in the wake of the global financial crisis.

These are sobering days for the world, and particularly for the fortunes of the global trade and investment system. Why? Consider two pre-elections blogs that set out the key contours of a potential Trump trade agenda, and the powers he will shortly exercise should he seek to deliver fully on his promises.

In the first piece, Deborah Elms dissects the Trump economic plan, in which trade features centrally. At the heart of the Trump ideology is a mercantilist view of the world, in which the US trade deficit is caused by ‘cheating’ trading partners, from which it follows logically that the US, being the most powerful nation on earth, must use trade instruments to correct the perceived imbalances.

On the cards, therefore, are high, across the board import tariff increases targeted at two trade ‘cheaters’: China (45 percent), and Mexico (35 percent). China, Japan, and Germany are also singled out as currency manipulation cheaters, the proposed remedy for which is countervailing import duties on their exports to the US. Canada, and South Korea, are fingered for benefiting unduly from their trade agreements with the US – NAFTA and KORUS respectively – which accordingly must be renegotiated and made more ‘equitable’, or face a US withdrawal from the treaties. Just in case the US’s trade partners in the WTO object to any of this, the US, being the most powerful nation on earth, will also withdraw from that organization should the rest of the world get too uppity. And, obviously, the Trans Pacific Partnership, and the Transatlantic Trade and Investment Partnership, should now officially be considered dead unless by some miracle President Obama can get the former through the looming ‘lame duck’ session of Congress.

RIP US leadership of the global trading system; enter from stage right the spectre of a global trade war, in a worldwide economic context of stagnant growth and major, unresolved, financial system imbalances. This is more than shades of the 1930s.

Would President Trump have the legal authority to implement such policies? Gary Hufbauer argues that he does, and that the full extent of his powers is actually far greater, and potentially far more damaging, than most people realise. President Trump could draw from at least 6 statutes on the US legislative books, one dating back to 1917, without recourse to Congress, and likely with little push back from the US judicial system. Business groups are bound to challenge these trade policies but, if President Trump sticks to them, seemingly to little avail.

Shipyard workers at a cold frame bending machine

So, if President Trump enacts candidate Trump’s agenda, the entire post World War Two trade and investment institutional architecture would be at risk.

And that is before we consider the potential implications of President Trump’s foreign policy. He clearly has little respect for the cross-party foreign policy consensus built up over many decades since World War Two, and may well seek to unravel it. This sentiment lies behind his repeated statements that US allies, such as Japan and Germany (remember those ‘cheaters’) must pay their ‘fair share’ of maintaining the Western Alliance system, and particularly NATO.

To say that the Japanese are concerned would be an understatement – during my visit to Tokyo in July this year great concerns were expressed about what President Trump might do once in office. Recalibrations must now be in full swing across the Asia-Pacific; a region already circling around a geopolitical knife-edge with the US and China at the centre of its axis of tension.

Indeed, we may be witnessing an event of epochal proportions, signalling an end to the Western Liberal International Economic Order, as we know it. This may please some, such as Russia’s President Vladimir Putin, and perhaps a few of his BRICS counterparts including elements of South Africa’s foreign policy elite, but definitely not all. For those, like myself, that recognise the enormous stability that US leadership of the international system has brought over the past few decades, warts and all, this is indeed a brave new world we are heading into, and the skies are darkening, rapidly.

If you’re looking for hope in this rather bleak picture, you could perhaps take refuge in this sage observation on the US role in the world, widely, but perhaps incorrectly, attributed to Winston Churchill: ‘you can always trust Americans to do the right thing, but only after they’ve exhausted all available alternatives’.

Personally I think that Trump is serious about his agenda. So what does all this mean for South Africa, and our trade relations with the US?

US & South African Presidents at Luncheon for World Leaders

First, should the darkest scenarios unfold, it is highly likely that global trade, investment, and growth will be seriously, and negatively, affected. This would be likely to tip South Africa into economic recession, which would undoubtedly exacerbate our already heated politics, and deepen our social crisis.

Secondly, we would largely be a bystander in the ensuing ‘fight of the elephants’. As the sayings go, when this happens the grass gets trampled, and it is better to stay out of the jungle.

Third, I cannot see us staying out of the fray. Nor should we, where matters of principle concerning international trade governance are at stake. However, given these principled issues, and that on our side of the Atlantic the overt prejudices that President Trump represents will poison the atmosphere, we are likely to be openly critical of the US. That country already regards us somewhat suspiciously in light of the ANC and its alliance partners’ foreign policy pronouncements, and this is likely to feed into a negative spiral of US recalibration of its trade relations with us, and vice-versa.

Fourth, and finally, the future of our bilateral trade relations with the US is already in balance, as the fracas over AGOA renewal last year showed. Negative reinforcement along the lines I anticipate means our exit from AGOA would now be almost certain.

The only way to replace the ensuing loss of tariff preferences would be to negotiate a trade agreement with the US. However, SA is extremely unlikely to want to go that route given its own protectionist inclinations, while the US will also recalibrate its entire approach to trade agreements.

Therefore, the future of the bilateral trading relationship must now be very much in question.

I can only see two silver linings in this otherwise gloomy, and admittedly preliminary, assessment. First, President Trump and his entourage’s protectionist instincts will resonate in SA. Who knows, that may provide some basis for reaching a deal. But that is a big stretch.

Second, perhaps Mr Trump will only serve one term. But right now, who would bet against him pulling another rabbit out of the hat, or of someone more populist than him taking his place?

Fasten your seatbelts; we are in for a most interesting ride.

President Jacob Zuma attends the 8th BRICS Summit, 15 to 16 October

Photo credit: Diego Cambiaso via Visualhunt.com / CC BY-SA

Photo credit: Tyne & Wear Archives & Museums via Visual hunt / No known copyright restrictions

Photo credit: United Nations Photo via Visual hunt / CC BY-NC-ND

Photo credit: GovernmentZA via Visualhunt / CC BY-ND

 

 

Can rules of origin in sub-Saharan Africa be harmonised? A political economy exploration

Can rules of origin in sub-Saharan Africa be harmonised? A political economy exploration

Rules of Origin InfographicBonn: German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

The number of preferential trade agreements has increased sharply over the past decade as a response to stagnant multilateral trade negotiations. Political economy features centrally in these negotiations, for instance in the context of the Continental Free Trade Agreement (CFTA). In this paper, we discuss the challenges of rule-of origin harmonisation in this process, which is a critical element for any further integration initiative in the continent. In particular, we review different approaches to the formulation of rules of origin, determining which firms qualify to take advantage of negotiated concessions.

We focus on the experiences of the three African regional economic communities (COMESA, EAC and SADC) that are busy merging into the Tripartite Free Trade Agreement (TFTA), and assess the potential for rules of origin harmonisation, drawing also on the examples of similar efforts being made around the globe, such as for the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).

Strict rules of origin – as implemented by the European Union and the United States – require strong state institutional capacities to implement them. Firms incur high compliance costs if they wish to take advantage of them. South Africa insists on strict rules of origin, yet most African countries have weak state capacities, and the private sectors are weak and cash-strapped. Therefore, in order to maximise African countries benefits we caution against adopting rules of origin using the South African model in the CFTA.

Authors: Peter Draper, Cynthia Chikura and Heinrich Krogman. The paper is available on the German Development Institute website.

Who captures the value in global value chains? A perspective from developing countries

Who captures the value in global value chains? A perspective from developing countries

ECDPM who captures valueStructural economic change occurs ever faster today, and challenges for individual workers, firms, and political entities grow in tandem with it. The global value chain (GVC) paradigm opens many opportunities and challenges for firms and workers both in developed countries and the emerging world. Their competitive situation is changing far quicker than before. Four paradigm changes can be attributed to the emergence of GVCs:

The strategic focus shifts from countries to networks, GVCs, or firms, meaning that specialisation is intensifying and comparative advantages are more dynamic.

The unit of analysis moves from industries to tasks and functions, implying that the units of decision-making become smaller and more decentralised.

Factor endowments and stocks are less relevant economically compared to flows, reflecting the enormous increase in speed and the dynamic nature of production today — knowledge has to be written off faster and acquired continuously.

A change of relevant barriers and stimuli from the public to the private shows that trade policy moves from taxing goods and services at the border, to a broader set of ‘behind the border’ measures, encompassing private standards.

Parallel to these recent developments in world trade is the increase of trade in services with foreign direct investment (FDI) flows shifting from the secondary to the tertiary sector. Services multinational companies (MNCs) are also establishing services GVCs in their own right. Further, the operation of GVCs increasingly depends on the availability of supportive services, which have become a key component of value added.

These changes are particularly important from the perspective of developing and emerging economies, which want to enter into upgrade in GVCs. The challenges are sharpened by the fact that GVCs are not evenly distributed, and not all countries are equally well placed to leverage them.

New options for multinational companies

To understand the problems for developing countries, one should consider the matter from an MNC point of view, in which locational decisions are the dominant criterion. The primary issue is what motivates the investment: resource-seeking; efficiency-seeking; or market-seeking.

If the purpose is to extract natural resources from the host nation for export, the investor is not likely to consider horizontal investments in ancillary activities unless these are wholly lacking and the investment cannot proceed without them.

Efficiency-seeking investment consciously seeks to access low-cost, productive labour and take advantage of broader efficiencies in infrastructure and logistics. Some kinds of efficiency-seeking investments, such as in the clothing industry, are very low margin activities sensitive to marginal cost increases. Other kinds, such as logistics or transportation companies seeking to leverage their locations, can be more enduring and have wider, positive developmental impacts.

Market-seeking FDI is generally there for the long haul and is the most sustainable. Over time, MNCs investing for this purpose are likely to locate more of their tasks in the host nation and its broader region, through constructing regional value chains (RVCs).

With this in mind we now briefly consider three core issues in the broader debate.

Key issues for developing countries: entrapment in comparative advantage?

Since resources are furthest upstream in GVCs, it follows that simply extracting and exporting them does not generate much value for the host economy. Therefore, critics worry that developing country resource exporters risk becoming embroiled in ‘resource traps’, and advocate diversification from resource exports to higher value-adding activities, especially manufacturing. The primary objection to the GVC narrative, therefore, is that its liberalising impulse will simply entrap developing countries in resource-intensive comparative advantage. To encourage domestic value addition, various coercive instruments are advocated, ranging from export to investment restrictions. This ‘resource nationalist’ perspective is gaining currency around the world.

The notion of resource traps is contested. The evident success of modern resource exporters such as the US, Australia, Sweden, Chile and Botswana suggests there is more to the story than the resource trap literature implies. Central to this is what happens to the rents derived from resource extraction. If they are invested in economy-wide cross-cutting enablers that upgrade conditions for business as a whole, positive outcomes are foreseeable. Much depends on the governance capacities and arrangements in the host nation.

Iniquitous outcomes?

Another concern applies primarily to labour-intensive GVCs. The fact that much of the value and profits, associated with, for example, the clothing-textiles-retail value chain are captured by ‘lead’ MNC retailers reinforces perceptions that the gains are unevenly distributed, while the human cost can be high.

Many observers also worry about the footloose nature of this FDI, since it is driven by low costs. MNC investors soon relocate to the next favoured destination. The core concern, then, is that the erstwhile host would not have built sufficient domestic value addition capability to reorient its participation in that GVC, notably to upgrade or diversify into other productive activities. Further, while the wage structure would have improved, and people would have been employed in low-wage activities for a while, some worry that the country risks becoming caught in a middle-income trap, unable to make the transition to higher levels of development. In addition, the low-wage jobs would have moved on. The notion of a middle-income trap is contestable on the same intellectual grounds as resource or poverty traps. Nonetheless, most GVC proponents would recognise these concerns.

However, regarding the ethical environments characteristic of low-wage, assembly driven GVCs, proponents note that MNCs, especially from developed countries, operate under various codes of conduct promulgated at the national and multilateral levels. MNC home nations enforce these codes, and so do domestic pressure groups, principally through generating negative publicity leading sometimes to consumer boycotts, for example. Developing country MNCs, by contrast, often do not operate under the same ethical constraints.

As in the case of resource governance, the role of the MNC host state in regulating and enforcing domestic working conditions is crucial. For example, targeted investments into training facilities and trainers in the industry concerned can make a difference. If approached collaboratively, MNCs’ global networks could be leveraged towards this end. Further, in the process of incorporation into GVCs, even if at the lower end, some skills and technologies will be transferred. The more absorptive the domestic environment is, the more likely this will lead to upgrading; host states can enhance the absorptive environment.

Race to the bottom?

A third argument derives from the liberalising logic inherent in the GVC perspective. Essentially, the business of attracting MNC FDI into host nations is akin to a beauty contest in which the contestants try to outdo each other to be noticed, and favoured, by the MNC ‘judges’. The logic of providing generous incentives is particularly prevalent in the manufacturing sector, but also applies in certain services GVCs, notably finance and the attraction of headquarters FDI. This could have substantial implications for host nations’ overall fiscal position as governments become increasingly generous in a competitive ‘race to the bottom’ of the fiscal pool. Such an outcome would have deleterious consequences for necessary developmental expenditures.

This argument is essentially one for adopting sensible incentives packages. Further, international investment promotion experience suggests that while incentives play a role in FDI location decisions, they are probably not decisive. Strategic factors, notably comparative advantages; competitive advantages; and the overall orientation of the host state towards FDI are more important. And of course MNCs are not likely to go where they are not wanted, meaning competition to attract them could conceivably lead to a ‘race to the top’, through business environment reforms in particular.

Policy implications

Thus developing countries face a strategic choice over their stance towards MNCs and GVCs. The core policy prescription advocated by critics is formulating conscious industrial strategies underpinned by ‘deliberative targeting’, in which the state consults actively with business in an iterative, bottom up process of identifying key blockages to domestic industrial development. This approach is gaining ground in Africa.

In this light, infrastructure is a decisive bottleneck to development in many developing countries. Further, the workforce has to be fit for the requirements of GVCs, which implies a solid knowledge and skill base (stocks) and — more important — the ability to adjust to new challenges (flows). Therefore, education plays a decisive role. Crucially, where skills are not available domestically, foreigners can be harnessed to fill the gap, and, in the process, train locals.

Additionally, business environment reforms are essential to improving economy-wide competitiveness, benefitting both local firms and MNCs. These are key horizontal elements of industrial strategy. But for many developing countries ‘just’ these horizontal elements require strong state capacities. Targeted interventions for particular firms or sectors also require strong state capacities but arguably deliver substantially lower benefits, and may also impose substantial costs.

Ultimately, the success of all policies depends on institutional qualities of the state, and on the market power the country has relative to MNCs that have other choices. Moreover, rather than coercive policy approaches, we prefer that governments should minimise political barriers to trade. This includes tariffs, subsidies, and other non-tariff barriers. This would enable MNCs targeted for inward FDI to establish their tasks in the host nation as efficiently as possible, thus maximising sustainability and linkage potential.

Therefore, governments, especially in developing countries, should consider the importance of the institutional quality and governance structure in their country. Corruption, poorly defined property rights, weak rule of law and the like, render all measures directed at investment conditionalities, human capital formation, infrastructure investments, and trade facilitation ineffective.

This article is part of the European Centre for Development Policy Management (ECDPM) GREAT Insights Magazine’s Sustainable value chains edition.

Restoring Multilateral Trade Co-operation: Developing country woes

After the relative success of the Bali deal the WTO faced a familiar foe, apathy. In what has become the 14th year of the Doha round stalemate the organisation needs ideas to revive dialogue especially on the different positions economies hold on emerging trends in global trade. Therefore, the project on restoring multilateral trade co-operation is in part a response to years of stagnation in ministerial gatherings, combined with the threat posed by plurilateral and megaregional negotiations diverting developed states’ attention away from the putative Doha development agenda.

The project focuses on the future of the WTO from the view point of key developing states, and their broader regions, and draws out major concerns arising from these quarters. As the Coordinator of the South African round table, Peter Draper discusses the project overview in an interview with the host, the South African Institute of International Affairs.

[youtube link=”https://www.youtube.com/watch?v=IFCPm5RqHbU” width=”590″ height=”315″]

The WTO Project on restoring multilateral trade co-operation resources page is available on this SAIIA webpage which hosts a number of publications including presentations, research papers, reports, and recommendations on restoring multilateral trade co-operation.

Dumping and tariffs in the steel industry

Dumping and tariffs in the steel industry

Giraffe in city street [News]In mid October Evraz Highveld Steel and Vanadium avoided liquidation by accepting an acquisition offer from Hong Kong-based International Resources; a conclusion of a 7 year long struggle to recover from the 2008 global financial crisis. However the Highveld case is not seen as an isolated incident but rather a symptom of an ailing industry, and to say that the South African steel industry is in trouble would be accurate but not entirely fair as the global steel industry is suffering from depressed prices, rising input costs, and reduced demand. With the steel industry marked as a ‘key strategic industry’ the dti pushed to increase tariffs to WTO bound rates, but with a tariff rate increase of 10{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} downstream industries are likely to feel the pinch first.

In this Classic Business podcast the context of the problem, possible solutions, and their effects are discussed with a national panel of experts.

Download MP3 podcast (7.74MB)

Hosted by Michael Avery, Classic Business, Classic FM

Guests:

Tutwa’s own Peter Draper;

Henk Langenhoven
Chief Economist at SESIFSA;

Siyabulela Tsengiwe
Chief Commissioner International Trade Commission (ITAC);

George Geringer
Owner of International Trade Solutions which is a professional advisory firm dealing in international trade law.