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 Knowledge@Wharton 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 you keep the growth rate north of 3%?”
Those questions bring into focus the big drivers of growth, according to Garrett. “The big drivers in the past 20 years or so are technology and globalization,” he said. “The challenge that comes with both of them is that they have had a narrowing effect — not a broadening effect — when it comes to income distribution. If your growth drivers also narrow the benefits, that creates a big political and social challenge, but that is also an economic challenge.”
What could Trump do to make sure everybody can benefit from globalization? “Using the bully pulpit to begin with is important,” said Garrett. “To my mind, the most important thing to say is that everyone in America does benefit from globalization. We benefit because the things that we consume on a daily basis are just much cheaper. ‘Made in America’ is a lovely slogan, but if we sourced, produced and made everything in this country, prices for the stuff we buy would be much higher.”
“‘Made in America’ is a lovely slogan, but if we sourced, produced and made everything in this country, prices for the stuff we buy would be much higher.”
The similarities between the two growth drivers of technological change and globalization form one of Trump’s biggest challenges ahead. “One similarity is [both have] reduced demand for less skilled labor,” said Garrett. “We saw that in the Rust Belt states swinging to Trump from the Democrats. So now, President-elect Trump really has to take that one on.”
What Helped Trump Win?
In drawing insights from Trump’s victory, “the big story is economic, not social,” said Garrett. “The temptation to focus on the uniqueness of Donald Trump as a candidate is clear. But what he was actually doing was riding a big structural wave of change in the United States.”
That “structural wave” revolved around inequality and stagnant incomes, and “Trump’s unique personality probably catalyzed that,” Garrett explained. “Think about inequality, for example: We tend to associate that with post-2008, post-financial crisis, but inequality in the U.S. started increasing dramatically in the latter 1980s and went up a lot under Bill Clinton in the 1990s.” Similarly, many Americans have coped with stagnant incomes over the past 15 years or so, he continued.
Now, in taking forward his election pitch, Trump has to “pivot from campaigning to governing,” said Garrett. “It also creates the Trump agenda, which should be to increase growth, but to do so in a way that includes more people in it.”
The First 100 Days
Could one expect to see policy action on some of those issues in Trump’s first 100 days as president? “The ‘100 Days’ thing tends to be mostly about symbolism,” said Garrett. “I would expect a lot of symbolic chart-the-course kind of things. The realities of governing tend to take much longer than that. High-level political theater is bound to be a core part of the game. And of course Mr. Trump has proved incredibly adept at that.”
In addition to symbolic actions, Garrett predicted that Trump will also send out some “big international signals” in his first 100 days. Those would include assertions that the U.S. is going to get tough on terrorism and that it doesn’t like the nuclear deal that the Obama administration cut with Iran, he said. He also expected some negative actions such as the repudiation of the current TPP agreement, but hopes “there would be some signaling of a forward path as well” on that front.
Article by Knowledge@Wharton