Wharton Dean Geoffrey Garrett discusses the foreign policy and trade implications of a Donald Trump presidency.
As President-elect Donald Trump “pivots from campaigning to governing,” some realities at home and abroad will become clear, said Wharton Dean Geoffrey Garrett, who is also a management professor at the school. For one, while Trump has sharply criticized international trade deals like the Trans-Pacific Partnership (TPP) and NAFTA, his best options may be to rewrite the former and make peace with the latter, Garrett noted. Another challenge is in delivering on his promises to Americans who have suffered from growing inequality and stagnant incomes in recent decades as globalization and technological change drove economic growth.
The way forward is to convince people that the U.S. does benefit from globalization, but make it inclusive at the same time, Garrett said. At the same time, the U.S. would see substantial “positive impact” if it manages to achieve a sustainable annual GDP growth rate of 3% or more, he added. He discussed some of the challenges and options facing Trump on the [email protected] show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
“There’s less certainty around what the core of the Trump agenda will be internationally than domestically,” said Garrett. He noted that much of Trump’s domestic agenda, led by the promise of tax cuts, is “conventional Republican” fare.
Garrett described Trump’s comments on international affairs as essentially “general statements” that are critical of U.S. policies. Here, he referred to Trump’s argument that the U.S. is not getting “enough bang for its buck with allies” in the Middle East and also that it is “losing to China and losing on trade.”
“If your growth drivers also narrow the benefits, that creates a big political and social challenge, but that is also an economic challenge.”
Walking the Talk on TPP, NAFTA
Of the various international issues on Trump’s agenda, “the more burning and the more pressing issue is what to do with TPP,” according to Garrett. “My preferred go-forward path would not be to try to ink the TPP deal as it is currently written, but go back closer to scratch.”
Putting the TPP in perspective, Garrett said the idea behind it was important in that it espoused a free trade agreement spanning both sides of the Pacific, uniting the U.S., Canada and Mexico with the big East Asian countries. The TPP deal that Barack Obama championed was not about economics, but about geopolitics, he added. “It was an effort by Obama to say to the world that we write the rules of the road to the 21st century, not China.”
However, Garrett said “the TPP is, in essence, dead on arrival as written in Washington, D.C.” He noted that unwinding the TPP as it stands “potentially creates some real challenges in Asia, because a lot of the Asian countries that signed up to the TPP did so because the U.S. asked them to do that.”
One crucial shortcoming of the TPP in its current form is that it doesn’t include China, even though it is the world’s largest trading nation and Asia’s largest economy, said Garrett. He argued that China should be a part of such a deal.
Trump will need to come up with some alternative to the TPP, “and the alternative that I would encourage is one that includes China,” said Garrett. “Mr. Trump said he is good at negotiating deals. The Chinese are deal makers. I’d encourage him to try to strike a deal that’s win-win for China and the U.S. on trade.”
Why Strike a Deal with China?
Garrett said there is a strong case for China to be included in the TPP. “Obviously, Asia has become an incredibly important growth engine for the world so we should never forget that,” he said. “But when it comes to China in particular, all Americans are going to have to come to terms with two very important realities. One is the centrality of the Chinese market and Chinese consumers to American firms.” He noted that while Apple assembles its devices in China, that country accounts for a quarter of the company’s worldwide market. “It’s a massive consumer market, and American firms benefit enormously form that.”
The second reality Americans have to appreciate is Chinese investments in U.S. companies, said Garrett. Outbound Chinese investments in the last 20 years or so have found their way into U.S. companies that covet the Chinese domestic market, he added.
“Mr. Trump said he is good at negotiating deals. The Chinese are deal makers. I’d encourage him to try to strike a deal that’s win-win for China and the U.S. on trade.”
“Going forward, we are going to be dealing with a lot of outbound Chinese investments,” said Garrett of what the Trump administration would need to factor in. “Of course, we have seen that movie before,” he added, citing Japanese investments into the U.S. in the 1990s. “It took a while for Americans to come to grips with that, but having a lot of Toyotas — good cars made cheaply in the U.S. — has ultimately been a great benefit to the U.S. I hope and expect that would be true with Chinese investments; maybe not tomorrow, but if we measured in 10-year chunks, that would be an important new reality for this economy.”
Compared with the TPP, Trump may have much less opportunity to walk away from the North American Free Trade Agreement, or NAFTA, between the U.S., Canada and Mexico. “It would be … very difficult to unwind NAFTA, and very unwise to do so,” said Garrett.
Garrett referred to the “gravity model of trade” in international economics that explains how bilateral trade flows work based on the economic sizes of trading partners and the distance between them. “It makes more sense to do more trade with countries that are closer to you,” he said. “The fact that the U.S. shares very large land borders with both Canada and Mexico makes trade among those three countries an absolute natural.” He predicted that despite the anti-NAFTA rhetoric in the campaign, that trade agreement will probably endure.
GDP Growth Challenge
Many commentators have talked of a GDP growth rate of 4% in Trump’s presidency. But Garrett doesn’t think such a growth rate is sustainable. Historically, GDP growth in the U.S. after World War II has ranged between 3.25% and 3.5%, he noted. “If the U.S. could get back to that … that would have an enormous positive impact, not only economically but also politically in the country,” he said. “I wouldn’t be thinking of a sustainable 4% [GDP growth rate]; you might be able to juice it up to that with some short-term stimulus.”
Economic growth is the pot of gold the financial markets want as they welcomed Trump’s victory. The markets cheered him for two reasons, according to Garrett. One is the prospect of corporate tax cuts, and the other is his promise to invest in infrastructure improvements. “Both of those stimulate the economy in the short term,” he said. “But the bigger issue is the longer-term one: Can