U.S. President Donald Trump, right, speaks as he stands next to Xi Jinping, China’s president, in front of a member of the Chinese People’s Liberation Army saluting during a welcome ceremony outside the Great Hall of the People in Beijing, China. (Photographer: Qilai Shen/Bloomberg)  

The Best Way Trump Can Squeeze China on Trade

(Bloomberg Opinion) -- Beyond the name change, President Donald Trump’s new U.S.-Mexico-Canada Agreement isn't that different from the North American Free Trade Agreement that it replaced. But hidden in the bowels of the new trade deal is a clause, Article 32.10, that could have a far-reaching impact. The new agreement requires member states to get approval from the other members if they initiate trade negotiations with a so-called non-market economy. In practice, “non-market” almost certainly means China. If, for example, Canada begins trade talks with China, it has to show the full text of the proposed agreement to the U.S. and Mexico -- and if either the U.S. or Mexico doesn’t like what it sees, it can unilaterally kick Canada out of the USMCA.

Although it seems unlikely that the clause would be invoked, it will almost certainly exert a chilling effect on Canada and Mexico’s trade relations with China. Forced to choose between a gargantuan economy across the Pacific and another one next door, both of the U.S.’s neighbors are almost certain to pick the latter.

This is just another part of Trump’s general trade war against China. It’s a good sign that Trump realizes that unilateral U.S. efforts alone won’t be enough to force China to make concessions on issues like currency valuation, intellectual-property protection and industrial subsidies. China’s export markets are much too diverse:

The Best Way Trump Can Squeeze China on Trade

If Trump cuts the U.S. off from trade with China, the likeliest outcome is that China simply steps up its exports to other markets. That would bind the rest of the world more closely to China and weaken the global influence of the U.S. China’s economy would take a small but temporary hit, while the U.S. would see its position as the economic center of the world slip into memory.

Instead, to take on China, Trump needs a gang. And that gang has to be much bigger than just North America. But most countries in Europe and East Asia probably can’t be bullied into choosing between the U.S. and China. -- their ties to the U.S. are not as strong as those of Mexico and Canada. Countries such as South Korea, Germany, India and Japan will need carrots as well as sticks if they’re going to join a U.S.-led united trade front against China.

President Barack Obama had an idea of how to provide those carrots. He attempted to involve the U.S. in two broad regional trade agreements -- the Trans-Pacific Partnership in Asia, and the Transatlantic Trade and Investment Partnership in Europe. Both would have formed large trading blocs that included the U.S. but excluded China. Those deals would have increased other countries’ integration with the U.S., drawn all of the non-China countries together politically, and created a natural bloc for negotiating with China over its questionable trade practices.

But the TPP fell victim to politics. Frustrated with decades of having their voices ignored on trade issues, progressive Democrats rose up against the deal, forcing even moderate presidential candidate Hillary Clinton to repudiate it. Trump, meanwhile, campaigned on a promise to nix the TPP -- a promise he promptly fulfilled once elected.

Many commentators at the time rightly saw the move as a gift to China. By abdicating leadership in East Asia, the U.S. helped drive countries toward doing separate deals with their giant neighbor instead. And the end of TPP means that the gang of allies available to Trump in his trade war against China will be that much smaller.

There is still time for Trump to change tack. The former TPP countries have kept the trade deal -- now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership -- alive, and have even removed many of the intellectual-property measures that critics of  the deal opposed.

There are some signs that Trump would be amenable to such a course reversal. After suspending TTIP negotiations with Europe, Trump called a trade truce with the European Union in July, and it looks as if the deal will survive in some form -- possibly, like Nafta, under a new Trump-inspired name. He has also floated the idea of rejoining the TPP.

What might a new, Trump-modified TPP look like? There probably would be a number of small differences favoring a few U.S. industries, especially autos. But the most important addition would be a clause regarding trade with China. Unlike USMCA, a new TPP wouldn’t be able to demand that East Asian countries get American approval before they sign any deal with China. But a new TPP could include a positive commitment from member countries to negotiate with China as a unified bloc, as well as a statement of principles about the improved behavior -- especially on matters of intellectual-property theft -- that TPP members expect from non-market economies.

Trump’s willingness to preserve Nafta mostly intact, and to reopen trade talks with Europe, are an encouraging sign. Asia should be next. In his struggle to win the U.S. a more favorable negotiating position relative to China, a new TPP would be Trump’s most potent weapon.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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