The renegotiated US trade agreements include a clause for nations to notify the US about any trade arrangement with China.
In the beginning of the 19th century, when the French army under Napoleon subjugated other powers in Europe, Britain continued to dominate the seas and generate substantive financial resources through maritime trade operations with the rest of the world (including its own colonies). To erode Britain’s comparative advantages in trade at sea, Napoleon—at the peak of his military might—in 1806-07, erected the Continental Blockade, restraining any territory he ruled to trade with Britain.
It became extremely difficult for the French to implement the Blockade in Europe, particularly in Northern Europe, where local economies pre-dominantly depended on British goods. At the same time, Russia—the only power that Napoleon had not defeated—was forced to accept the Continental Blockade and not trade with Britain. When Russia refused to do so and opened its ports to Britain, Napoleon ended up starting a war by invading Russia, and the rest is history.
More than two centuries since the Napoleonic Blockade, something similar is being seen now with the US administration under Donald Trump re-negotiating its regional trade agreements with the EU and NAFTA (now called USMCA: US-Mexico-Canada). Each of the renegotiated US trade agreements includes a clause for nations to notify the US about any trade arrangement with China and thereby, restrict China’s trade partnership with these regions (as was targeted against Britain by Napoleon).
In its proposed trade arrangement with the EU, the US wants to secure “a mechanism to ensure transparency and take appropriate action if the EU negotiates a free-trade agreement with a non-market country”. The “non-market country” is a sure reference to China and if the EU agrees to this—still a long shot—what it means is that every time the EU discusses its trade agreement with China (or thinks of renegotiating it), it would have to inform the US for “transparency” purposes.
A similar clause was earlier renegotiated by the US in its revised NAFTA agreement with Canada and Mexico, where Canada was asked to accept similar conditions. In more recent times, a US-UK trade proposal (in the post-Brexit scenario) expects the same position to be maintained by the UK against China (if it signs onto the agreement).
Such an unprecedented level of interference, reflected by the Trump administration with clear third-party ramifications (on China’s own trade interests) seems indicative of the US’ own insecurities and self-doubt to lead trade partnerships across major trading blocs—at a time when China is almost about to overtake the US economy in GDP terms.
In a way when a bilateral trade dispute with the Chinese couldn’t yield significant economic success to the US (ignoring the political rhetoric it did generate), the imposition of such indirect measures appears to be another political route for Trump to inhibit China’s trade reach with other US trade partners. However, using such subtle clauses in trade agreements to (re)direct with third parties isn’t something new.
Over the past two decades, the proliferation of RTAs across the globe have empirically resulted in three key concerns on third parties owing to their discriminatory nature of trade preference (i.e. giving preference to one nation over others): (a) increase in trade diversion with third parties to accommodate concerns of special interest groups of trade partners; (b) a near-end of multilateral trade arrangements and (c) increase in unequal trade liberalization levels across and within regions (entering or not-entering in a given agreement).
A preferential trading arrangement—for some viz-a-viz others—has led to what Jagdish Bhagwati earlier termed- The Spaghetti Bowl Effect. The Effect, further makes it difficult to ascertain rules of origin for manufactured goods and services that get entangled in complexities of intermediate production (via assembling) or legal norms under intellectual property laws.
Despite these reasons, one must also acknowledge that the motivation for Trump to restrain China’s proliferating trade reach with major trading groups-EU, UK, Canada is also, to a certain extent, mutually echoed by other nations. A lot of trade actors—including EU nations and India—have voiced concerns on China’s unfair trade practices and pushed for reciprocal trade reforms in China for a number of reasons. Some of these include: imposition of high tariff and non-tariff barrier structures for foreign firms operating in China; restrictions imposed by the Chinese state on foreign ownership of domestic firms, a dismal record of sharing intellectual property knowledge by Chinese firms with foreign multinationals (operating in China) and so on.
The real question here is: Whether an anti-China approach by Trump— restraining China’s trade partners via RTAs with partners like the EU—seems to be an appropriate move?
Like Russia disregarded Napoleon’s conditions of Continental Blockade, quite similarly, the EU too, can call Trump’s bluff and decide against any such clause to avoid bartering its autonomy in (re)negotiating its trade relationship with China. A scenario like this is possible considering the trade dynamics between US-China-EU.
EU’s top five exports to China include motor vehicles, machinery and equipment, chemicals, medical instruments and transport equipment, which is pretty much the same basket of goods (or trade substitutes) that China predominantly imports from the US. For EU manufacturers and exporters, trade complementarity ensures both the US and Chinese markets feature as good prospective trade partners, requiring the EU Trade Commission to maintain a flexible, more autonomous trade relationship with both these countries—and that seems difficult with Trump’s Napoleonic move.
If Trump continues with the same path he has embarked upon in his trade policy, to avoid meddling in US-China tensions, it is quite possible that the EU—for future prospects—may ignore Trump (and the US) altogether and maintain a greater degree of trade autonomy with China and other South-East Asian nations. At the same time, the EU has good enough reason to avoid getting entangled in any tri-lateral trade dispute, given its own intra-regional concerns and a messy divorce arrangement on the table with Britain.
Amidst all the political uncertainty that prevails and whatever scenario plays out in the months to come, one may safely assert that Trump’s imperial overreach in his trade policy—similar to Napoleon—is more likely to do more harm to US’ trade ambitions (with EU and other partners), possibly resulting in disastrous consequences.Deepanshu Mohan is Associate Professor at O.P. Jindal Global University. The Great Diwali Discount!
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