Why Trump’s big G7 free trade idea is probably going nowhere

Overwhelmed and overshadowed by Donald Trump’s weekend efforts to blow up the US’s longstanding G7 alliances over a perceived slight from Canada’s Justin Trudeau was a provocative idea: what if the G7 became a free trade bloc?

Imagine an industrialised free trade area for the ages with no tariffs or other barriers to commerce and only a goal of shared prosperity in the 21st century? From Europe in the Atlantic east to Japan in the Pacific west it would cover a $36tn economic zone and almost half of global output. It would be a remarkable free-market alliance against a rising China and its brand of state-directed capitalism.

Talk about a presidential legacy project. It would be huge. It also appears unlikely to ever happen.

Mr Trump’s rejection of decades of polite economic diplomacy and strategic alliances at the G7 has already done more to fray fragile relations than bring about the dawning of a new free trade era. But the idea is still worth discussing. If nothing else, it is what Mr Trump and his supporters now offer as the US president’s grand vision.

Mr Trump, the spin from the White House goes, is not a protectionist. He is instead a visionary free trader in search of repairs for a broken global trading system. The tariffs he is imposing are tools he is using not to erect new protective economic walls around US industries but to provoke change.

“He went through those two days of conference [at the G7] talking about the need for a new free trade system [and] no tariffs,” Larry Kudlow, Mr Trump’s top economic adviser, told CNN on Sunday. “He is a trade reformer.”

Mr Trump’s main goal, as the president himself expresses it, is to close the US’s goods trade deficit with the world, which stood at $795bn in 2017. He wants “reciprocal” trade that is balanced and based on like-for-like tariffs.

A move to drop tariffs to zero would benefit the global economy, most economists argue. But the benefits would also be limited and it is unlikely they would help Mr Trump reach his deficit-reduction goal in any dramatic way, which may amount to one big strike against the idea of a G7 free trade bloc. 

For their latest survey of the US economy, released last week, OECD economists looked at the potential impact of dropping tariffs to the lowest level for a procession of products now charged by any G20 economy, which turns out to mostly be zero. Such a move, the OECD economists found, would lead to an expansion of global trade (now valued at more than $17tn annually) of more than 3 per cent. In the US the increase in exports would be slightly more than 2 per cent and slightly higher than the concurrent increase in imports. But that amounts to only a $30bn increase based on the $1.5tn in goods the US exported last year, most of which would be offset by a similar increase in imports.

The better argument for that path is the cost of going in the other direction, it turns out. The same OECD number crunching exercise found that the equivalent of a 10 per cent tariff on all imports would, after the cost of other countries retaliating was factored in, lead to a fall in US exports of more than 14 per cent, or $210bn.

The more immediate strike against the idea of a tariff-free G7 may be that such an idea would be a political non-starter for many countries and many influential industries within them.

The US steel industry has been hailing as a lifesaver a 25 per cent national security tariff on imports at the centre of the current trade tensions within the G7. Why would it suddenly buy into the idea of zero tariffs? The US auto industry has benefited for decades from a 25 per cent tariff on imported light trucks. Would it suddenly back a zero tariff on trucks if the EU dropped its 10 per cent tariff on passenger vehicles? And vice versa with European carmakers?

The idea is interesting within the context of the World Trade Organization, where comprehensive negotiations to reduce trade barriers have been stalled since the so-called Doha Round came crashing to a halt in 2008.

The main reason for that WTO stalemate has been a stand-off between industrialised countries (ie the G7) and developing economies such as China and India. With 164 members and a rule that its decisions are made by consensus, the WTO is an unwieldy negotiating forum. Very little progress has been made in its negotiating rooms since the body was created with the 1990s Uruguay Round. Its main achievement since then has instead been to establish itself as a venue to resolve trade disputes, albeit a plodding and occasionally controversial one.

So might a new G7 compact, which would mark a de-facto return to the post-second world war negotiating days that yielded the General Agreement on Tariffs and Trade, be easier to negotiate?

As advanced, Mr Trump’s concept is radically simple. If all G7 economies simply agreed to reduce all tariffs between them to zero, it could yield the shortest trade agreement in history and put a lot of trade negotiators out of work. But inevitably something would surface to help bog it down.

The first hurdle is obvious. The four European members of the G7 (France, Germany, Italy and the UK) have delegated their trade negotiating powers to the 28-member EU. They are by treaty not allowed to negotiate trade agreements, even if the UK is in the process of leaving. 

But even an EU-US-Canada-Japan trade treaty would be complicated. The first negotiation, presumably, would be over how much time any transition would take and how many products would be covered. Before long the aforementioned politically powerful industries would weigh in and begin seeking different timelines for different products, pleading the risk of job losses and closed factories. Eventually the issue of non-tariff barriers would surface. Would the EU agree to a zero tariff on beef raised on hormones? Or chicken produced with a chlorinated wash? What about auto safety and emission standards? Would the highly protected US sugar industry sign on? Would services be included? What about data flows? How would it all be policed? How would anti-dumping cases be handled?

Trade agreements, even among friends, quickly get complicated. Just ask Mr Trump’s predecessor, Barack Obama, whose administration launched talks for a Transatlantic Trade and Investment Partnership with the EU in 2013, promising to conclude talks on a “single tank of gas”. And watched its plan for a Trans-Pacific Partnership get ripped up by Mr Trump on his first full working day in the White House.

Douglas Irwin, a Dartmouth College economic historian and author of Clashing Over Commerce, A History of US Trade Policy, says the idea of a transatlantic trade agreement has been floated since the 1960s. He doesn’t remember the idea of a G7 pact ever surfacing.

He does see one possible parallel — both in acrimony and substance — to the latest weekend consultations in the 1933 London Monetary and Economic Conference. That was called by major western powers to draft a plan to stabilise exchange rates and co-ordinate policies to deal with the Great Depression.

While Franklin Delano Roosevelt did not attend, the US president eventually blew up the meeting from afar by issuing a statement declaring exchange rate stabilisation a bad idea altogether after a draft accord had been reached.

“Roosevelt was right to blow up the meeting because countries needed a further easing of monetary policy to combat the Depression, not exchange rate stability for its own sake,” said Mr Irwin. The president was also strongly supported by economists such as John Maynard Keynes and Irving Fisher. 

“The big difference today, of course, is that it is hard, if not impossible, to find any independent economists or diplomats who would agree with [President] Trump that Canadian or European trade policy is so egregious as to merit the diplomatic slap that he delivered,” said Mr Irwin.

Further reading (G7 edition)

From the FT

  • The FT View: Other G7 economies need to band together to resist Trump
  • The Big Read looks inside the chaotic Trump trade policy machine
  • Car bosses round on Trump’s auto tariffs idea

From our colleagues elsewhere

  • The Economist looks at Trump’s lobbying of a grenade into the G7
  • The NYT’s David Leonhardt on Trump’s efforts to “destroy the west”
  • The Bloomberg editorial board on how the G6 can get Trump to back down

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Why Trump’s big G7 free trade idea is probably going nowhere

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