More Thinking About Trade As Pence And Ross Head To Tokyo

US Vice President Pence and Commerce Secretary Ross will go to Japan this week. In addition to regional security issues, trade relations will likely be featured. Earlier this year, US President Trump and Japan’s Prime Minister Abe agreed to hold bilateral trade talks, led by Pence and Japan’s Finance Minister Aso. Ross, charged with reducing the US trade deficit, will join in some Tokyo talks.  

After withdrawing from the Trans-Pacific Partnership negotiations, the US is exploring the possibility of a bilateral trade agreement with Japan. This possibility has long been suggested, but it is not clear the priority the Trump Administration will give it. It had seemed that renegotiating NAFTA was given top priority. Earlier this month, China and the US agreed in principle to begin “cabinet-level” trade talks. Ross apparently is seeking additional concessions from Japan in addition to what was offered under TPP. Ross characterized those concessions as “minor gains” for US agriculture and intellectual property rights.

Ross, like many others in the Trump Administration, views the Bretton Woods system as flawed, apparently building a multilateral system. They seem to think that the WTO and IMF have contributed to the US trade deficit. The rolling 12-month average of the US trade deficit peaked nearly 11 years ago. In August 2006, the 12-month average shortfall hit $67.82 bln. As of February, it stood at $41.95 bln.  

We are struck by the naivete of the understanding of trade implied. Below the claims, seems to be the belief that 1) if exchange rates are truly floating and 2) if there is truly free trade, then there should be not sustained trade imbalances. That the US runs a chronic deficit is evidence of some malfeasance in either the first or second part or both.   

To be sure, there is clearly room to more robustly enforce existing trade agreements. The conflict resolution mechanisms are as important a component of free-trade agreements as the rules themselves. The US does not have free-trade agreements with the EU, Japan or China. As of the end of  2015, the US recorded a small trade surplus (goods and services) with the 20 countries with whom it had free-trade agreements.