Byzantine bilateralism

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World Policy Blog | 6 April 2017

Byzantine bilateralism

By James H. Nolt

James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.

President Donald Trump has often said he prefers bilateral commercial talks to multilateral treaties such as the Trans-Pacific Partnership (TPP), North American Free Trade Agreement (NAFTA), or even the European Union (EU). Trump and several of his key staff have often linked bilateralism with the slogan “America first.” The presumption is that bilateral negotiations provide better opportunities for specific American interests to prevail over diffuse global interests represented in multilateral talks.

Albert O. Hirschman’s classic study, National Power and the Structure of Foreign Trade, emphasized how bilateral commercial negotiations can enable strong countries to dominate weaker ones. His main case study was the strongly bilateral trade policies of Nazi Germany. The Nazis effectively used currency controls along with countertrade (essentially international barter deals) to bind a number of weaker countries to Germany economically and politically. These tactics were particularly effective with China, Eastern Europe, and Latin America. Most of the overseas deals became defunct, however, when World War II broke out and the British effectively blockaded German overseas trade. These deals typically enabled Germany to import necessary raw materials in exchange for machinery exports without needing bank financing or currency exchange.

America today is in a very different situation than the one Nazi Germany faced during the Great Depression with the collapse of world trade and finance. Leading U.S. banks are among the foremost financiers of modern trade relations. Unlike Nazi Germany, which had difficulty financing vital imports, the U.S. is so effective in attracting capital that it is able to import more than it exports. Essentially, foreigners in countries like China, Japan, and the Arab oil states lend America the money to finance massive importation. This foreign confidence in American credit worthiness is evidence of the strength of American capitalism, but Trump sees it as a weakness. Americans are able to consume more than they produce, but that also means that U.S. debt to foreigners is mounting and many products that used to be made predominantly in the U.S. are now imported.

Nazi Germany’s greatest bilateral successes were with relatively weak countries, such as Sweden, Hungary, Turkey, Chile, and Romania. However, the most important relationships Trump needs to manage are with the EU and China, both of which are larger trading powers than the U.S. itself. Therefore, if indeed national power is important for getting a better deal in bilateral negotiations, the U.S. might be better off continuing to support and develop the multilateral institutions and trade agreements that it has championed since World War II.

Administratively, bilateral commercial relations are more complex than multilateral. Multilateral rules-based systems strive for universality and equality of treatment. This is simpler both for businesses, which need to learn only one set of rules, and for the governmental and intergovernmental organizations that implement multilateral agreements. Rules can be worked out one issue area at a time. For example, multilateral rules for monetary and currency relations can be developed independently from the rules for trade, immigration, human rights, or collective security.

On the other hand, for bilateralism to be effective, it must involve negotiations across every issue area simultaneously to allow the widest scope for mutually beneficial horse-trading. A country might make a concession on currency arrangements in order to achieve a preferred trade concession, or a security guarantee might be the price for securing lower carbon emissions. There are so many different countries and issues to negotiate with and address that bilateralism requires much more staff preparation and coordination across government agencies. Trump wants to downsize most federal agencies and has not yet filled hundreds of jobs just below the level of the cabinet secretaries, so his administration would have a particularly difficult time ripping up multilateral precedents and renegotiating everything bilaterally.

Finally, successful bilateral negotiations either require asymmetrical power, so the strong can force their will on the weak, or complementary interests so that each side can gain something valuable in the deal. As I already mentioned, with key partners like China and the EU, U.S. power is not overwhelming. Trump could be stonewalled if he does not make concessions to foreign interests in return for what he wants from them.

In the case of China, this will be hard. This week, Trump and Chinese President Xi Jinping are meeting for the first time to begin bilateral talks. Trump has a long list of major concessions he wants from China across major issue areas. Most importantly, he wants China to reduce its vast trade surplus by importing more from, and exporting less to, the U.S. Trump also wants China’s help to restrain North Korea’s nuclear weapons and long-range missile development. He wants China to stop developing military bases in the South China Sea. It is not clear if he has much to offer in return to induce China to cooperate on any of these other important issues.

There are two ways Trump could achieve his trade goals with China, both of which he mentioned during his campaign and since the election. The first is to impose tariffs on Chinese goods to raise their U.S. cost and thereby reduce imports from China. The other is to raise the dollar value of the Chinese currency (RMB), which would make U.S. goods relatively cheaper for Chinese to buy and Chinese goods more expensive for Americans, thus helping to rebalance bilateral trade. This idea is at the root of Trump’s efforts to label China as a “currency manipulator.” Ironically, under current market conditions, if the Chinese government does nothing, then the RMB is likely to decrease further relative to the dollar. Therefore, Trump actually needs China to be a sustained currency manipulator in order to increase the RMB’s dollar value.

China would raise the value of the RMB by selling off part of its large stock of dollar denominated assets, mostly U.S. Treasury bonds. Such massive sales would tend to lower the value of those bonds, thus increasing the U.S. cost of borrowing. If Trump could succeed in pressuring China to rebalance trade, it would likely come at the cost of higher interest rates in the U.S., making investment more expensive and potentially slowing down U.S. growth. If he could succeed in pressuring China for a stronger RMB, he might regret it, particularly since his proposed tax cuts and massive infrastructure spending are likely to add to government borrowing, which would push up interest rates even more.

Trump’s sympathies are toward bilateralism and nationalist “America first” protectionism, but it seems increasingly unlikely that he will be able to accomplish much. He may discover, as he did with health care, that international trade and monetary relations are more complex than he thought. Existing multilateral institutions have much more support and credibility than he might expect. The Republicans in Congress are divided, with most supporting open multilateral trade. He may have to abandon his radical nationalist ambitions, such as his travel ban, and muddle through on the basis of existing arrangements.

Unfortunately, as I mentioned in a previous blog, war is the one shortcut through the Gordian Knot of byzantine commercial complexity. Rather than backpedaling on much of his nationalist agenda, Trump might be tempted to provoke a conflict that would allow more direct and radical action against the commercial status quo. I hope not, but I cannot entirely discount the possibility. I will consider the specific dynamics of U.S.-China bilateral bargaining next week.