Trade Background

BACKGROUND NOTE¹

Feb 2024 

Trade in the Political Crosshairs: Implications for the Western Hemisphere and Asia Conference 

This note provides a summary of the key developments in trade since the 1970’s, describes the financial shock of 2007-2009, and illustrates the effects thus far of the Trump and Biden administrations’ tariff policies, all with a focus on the implications for the Western Hemisphere and Asia. We summarize the Biden administration’s adoption of a ‘Worker-Centered Trade Policy’ and its potentially significant consequences for the U.S. economy, U.S. trading partners, and multilateral cooperation. We summarize the shifting trade patterns with important partners such as China, the broader Asia region, Mexico, and the Western Hemisphere, providing a concise narrative of the progression of these relationships. 

The Era of Great Integration 1970’s to early 2000’s – Trade Liberalization and Economic Cooperation  

The early 1970’s heralded a period of robust global economic integration, with trade (imports & exports) as a share of global GDP rising from 25.0% in 1970 to 56.5% by 2021. This era saw trade growth consistently outstripping GDP growth, resulting in an unprecedented level of global interconnectedness. Notably, the trade elasticity, which measures the percentage change in trade flows to global GDP growth, saw significant fluctuations, peaking in the 1990’s with values surpassing 2.0 before falling substantially post the 2008/09 financial downturn at around 1.0 in 2011, and then recovering to 1.5 (approximately the very long-term average since the turn of the century) in 2017 and varying significantly since. ²  The surge in global trade was partly catalyzed by strategic alliances formed through multilateral agreements, Free Trade Agreements (FTA) and domestic and international policy reforms that fostered deeper trade integration and technological growth, supercharging the development of regional and global supply chains. Some of the key countries in the Western Hemisphere, notably within NAFTA, CAFTA-DR, and MERCOSUR, boosted economic ties and cooperation, increasing both intra-and extra-regional trade.³  In a similar move toward integration, countries in Asia formed the ASEAN Free Trade Area (AFTA), aiming to maintain market competitiveness and stimulate regional trade by minimizing trade barriers.⁴

2008 to 2012 – The Great Trade Collapse  

The financial crisis of 2008-2009 marked a pivotal moment in global trade, with deep contractions in trade volumes, as exports fell by 26% and imports by 34%.⁵ This crisis, triggered by a global financial shock, led to a deep recession affecting both supply and demand in commodity and manufacturing sectors. U.S. imports declined by $238 billion and exports by $202 billion.⁶ Despite the steep trade collapse, trade integration continued, with the East Asian economies, particularly China, signing more bilateral and regional trade agreements.⁷ In the following years, a series of multilateral initiatives were launched, including the 2013 Trade in Services Agreement, which covers 70% of global trade in services,⁸ and the 2017 WTO Trade Facilitation Agreement, aiming to reduce trade costs by 14.3% and increase global exports value by $1 trillion.⁹

2013 to 2018 – A Trade Recovery and the Rise of Protectionism 

The Trump administration withdrew from the TPP in 2017,¹⁰  and subsequently applied tariffs on $283 billion¹¹  of Chinese goods in 2018. This started a significant global trade policy shift by the U.S. These policy shifts are estimated to have significant negative effects on the U.S. GDP and an estimated annual loss in U.S. real income potential gain of $131 billion from the TPP withdrawal alone.¹²  The Chinese tariffs imposed by the Trump administration are estimated to reduce U.S. income by a further $6.9 billion in 2018 and an extra $12.3 billion burden on U.S. consumers and importers.¹³  However, these trade policy changes were accompanied by significant fiscal and monetary policy stimuli that stimulated the economy far more than the trade policy losses. These U.S. policy changes were then followed by the largest global health pandemic in history, which caused a drop in value exports to $17.58 trillion in 2020, an 8% global decrease.¹⁴ As global trade realigned due to these shocks, particularly during the COVID-19 pandemic,¹⁵ the U.S. shifted its import sources, cutting China’s share from 21.6% in 2017 to 16.5% in 2022¹⁶  and enhancing trade with other Asian countries and Mexico, with Vietnam’s import share to the U.S. doubling to 4% on 2022 and Mexico’s exports increasing to nearly 16% in 2022.¹⁷  And in many cases it appears that China is now exporting indirectly to the U.S. market through third countries, so while direct exports declined the net effect is less certain. China’s exports to Mexico have increased, while Mexico’s exports to the U.S. increased enough to supplant China as the largest source of U.S. imports.  Despite the tariffs in China, overall U.S. imports rose, highlighting that while trade deficit with China was reduced, the overall trade deficit shifted to other countries. This experience clearly shows that tariffs may alter the composition of trade deficits but do not generally affect the total trade deficit (aggregate trade balance) which is driven by broader macroeconomic forces. New U.S. policies boosting investment in the U.S. economy have attracted significant inflows of investment and nearshoring to North America and a surprising amount of that investment is from China. 

2018 to the Present: The Biden Administration’s ‘Worker-Centered Trade Policy’ 

Under the Biden Administration the U.S. has shifted toward executing ‘mini-deals’ for trade regulation through executive action, thus circumventing Congressional authority and streamlining global trade integration.¹⁸ President Biden has adopted a nuanced trade policy approach, with an emphasis on a ‘Worker-Centered Trade Policy.’ This strategy seeks to recalibrate global economic relations by fostering trade ties that are designed to promote mutual economic growth and address contemporary challenges such as climate change and technological innovation, rather than focusing on tariff reduction and other forms of increased market access. Notable efforts include the Indo-Pacific Economic Framework for Prosperity (IPEF), the U.S.–Taiwan 21st Century Trade Initiative, and the Americas Partnership for Economic Prosperity, as well as initiatives to effectively implement the USMCA, to enhance the North American Leaders Summit competitiveness agenda, and to develop the US-EU Trade and Technology Council. These initiatives aim to bolster regional and bilateral ties, address global economic challenges, and enhance U.S. industry competitiveness on an international scale.¹⁹ Under both the Trump and Biden administrations, U.S. trade policy has undergone a significant shift, moving away from an emphasis on enhancing regional and global integration and cooperation towards a strategy that favors unilateral actions, limits the areas of engagement, and scales back cooperative efforts by focusing on “friends” or “potential friends.” 

Going Forward – A U.S. Policy Shift to Nearshoring and Friendshoring 

In 2023, the U.S. continued to reconfigure its trade strategy, aiming to shift manufacturing imports from China to closer allies like Mexico, now its top trading partner.²⁰  This nearshoring is a response to geopolitical shifts and the need for supply chain diversification. Under the Americas Partnership for Economic Prosperity (APEP), President Biden’s initiatives include leveraging the CHIPS Act’s ITSI Fund to foster a sustainable semiconductor industry with Costa Rica taking the lead,²¹  and in partnership with the IDB and DFC, aiming to address a $2.2 trillion infrastructure gap in Latin America and the Caribbean.²²  Latin America and the Caribbean (LAC) faced severe economic slowdowns post-2008, further exacerbated by the COVID-19 pandemic, impacting efforts to reduce poverty.²³   The region historically has grappled with political instability, income inequality, and climate change challenges, which necessitate enhanced domestic welfare systems for more equitable growth (LAC Equity Lab). The trade bloc MERCOSUR is in turmoil, with Brazil pushing reforms, Argentina’s President Milei considering withdrawal, and Uruguay exploring trade with China amid economic downturns, adding to the regional uncertainty.²⁴  Global elections in 2024, including Mexico’s, will shape the geopolitical and economic landscape, and likely influence the future of USMCA.²⁵  In the past 30 years the U.S. signed numerous FTAs aimed at reducing trade barriers and promoting economic growth; for a detailed analysis, refer to the USTR’s active list of FTAs or visit the International Trade Administration U.S. Department of Commerce. The recent trade realignment has notably boosted Western Hemisphere economies, with Asian countries, aside from China, also benefiting. U.S. imports from China fell by $35 billion, while countries like Vietnam and others received $21 billions of this redirected trade,²⁶ showcasing their manufacturing prowess. In 2019, ASEAN’s trade engagement with the U.S. rose, hitting $520.3 billion in trade in 2022.²⁷  The combined exports of merchandise goods and commercial services from APEC members, excluding China, totaled $10.256 trillion, and their imports amounted to $11.173 trillion in current U.S. dollars.²⁸ Vietnam’s economic surge since 2000, post-Doi Moi reforms, shifted from central planning to a market-driven approach, focusing on export-led growth.²⁹ This shift led to industrial growth and global market integration via ASEAN and WTO, buoyed by FDI and a robust private sector. Despite progress and a more diverse economy, Vietnam still faces hurdles in policy, firm restructuring, and industrial strategy to enhance export quality and competitiveness.³⁰

 The Future of Global Trade, what happens now? 

Will the recent shift in trade patterns persist? What economic and policy factors are propelling these changes, and can they be maintained? While the Trump Administration raised tariffs, and the Biden Administration has maintained many of them, and at the same time stopped tariff reduction negotiations economist generally observe trade costs continuing to fall due to technological changes, agreements such as the TFA, but also more recently numerous large economic actors are increasingly subsidizing major economic sectors, which ironically, lower trade costs. How can businesses, governments, and citizens leverage trade opportunities for benefits such as accelerated economic, reduced product costs, increased variety, access to broader markets, and higher wages in export-oriented sectors?