Media  Global Economy  2018.11.09

Trump will not change even if he loses the midterm elections - Brace for a continuation of current US trade policy for another two years at earliest until the next presidential election

The article was originally posted on Webronza on October 22, 2018

The Republicans will keep the Senate and the Democrats will take the House of Representatives

There is a more interest in the upcoming US midterm elections in Japan than ever before.

Unlike the outlook for the US presidential election, which has been widely reported in Japan, the midterm elections, held halfway between presidential elections, have not traditionally drawn much public attention or media coverage in Japan. Behind the heightened interest this time however may be the expectations that if the governing Republican Party loses the November elections, effectively a vote of confidence in or referendum for President Donald Trump, things may return to normal, i.e., his policies--especially the trade policy that has considerable implications for or impacts on the Japanese economy and industry--may change.

Most observers predict that the Republicans will maintain their majority in the Senate, as it is questionable that the Democrats, who hold most of the contested Senate seats up for election, will be able to defend all of them in such a pro-Republican landscape. They also predict that the Democrats will win a majority in the House of Representatives, all of whose 435 seats are up for election. They cite female voters' backlash against the Senate's confirmation of Judge Brett Kavanaugh to the Supreme Court despite allegations of sexually assault, among other sexual misconduct allegations against President Trump himself.

Of course, what will happen remains to be seen. Against the odds, Hillary Clinton lost the last presidential election. More members of the Republican Party who support the President may go to vote, prompted by fears that the Democrats will win. Yet, for the purposes of discussion here, let me assume that the Republican Party will lose the House of Representatives as expected.

Trump's positions correspond to the traditional positions of the Democratic Party

From late September to early October, I visited Washington, D.C., where I met friends from several prestigious U.S. think tanks, as well as former high-ranking officials in the US government. I asked them about the possibility of President Trump changing his trade policy if the ruling Republican Party were to lose the midterm elections.

Their answers were all generally negative.

One of them ruled out that possibility altogether, saying that President Trump feels deep in his bones that export is victory, import is defeat. He maintained that a mere defeat in the midterm elections will not change his mind.

Most of them said that Mr. Trump's protective trade policy will be maintained even if the Democrats win, noting that by nature, the Republicans champion free trade while the Democrats, backed by labor unions, advocate protective trade. Another one of them suggested the possibility that if the Republicans were to lose because of Trump's trade protectionism, Republican lawmakers who support free trade might rebel. Yet, being in the minority, the Republicans would have little power to influence policy.

To begin with, the protectionist approach as exemplified by the withdrawal from the TPP and the revamping of the North American Free Trade Agreement (NAFTA) were advocated by Senator Bernie Sanders, who once cornered Hillary Clinton in the Democratic primaries by championing this approach. Seeing this, Trump began to make a similar argument and repeated it during the presidential campaign, beating Clinton in the Rust Belt, a Democratic stronghold. This was how Trump was able to successfully win the election.

In short, what President Trump is championing is what the Democrats have traditionally championed.

Trump revamped NAFTA more than the Democrats would have

NAFTA was recently renegotiated into the United States-Mexico-Canada Agreement (USMCA). The Trump administration successfully drove a wedge between Canada and Mexico, which were putting up a united front against the US. It reached an agreement with Mexico first and eventually securing a trilateral agreement including Canada. When Canada's participation was uncertain, I heard a joke that interpreted USMCA as "US-Maybe-Canada."

President Trump threatened Canadian Prime Minister Justin Trudeau, saying that he would go ahead with a bilateral deal with Mexico if Canada refused to comply. Yet the US Congress would not have possibly approved of any agreement without Canada, an important economic and trade partner for the US. He scored points by clinching the tripartite deal that also included Canada.

A look at the specifics of USMCA gives the impression that the deal was negotiated by an administration that is more liberal than the Democratic Party.

First, USMCA has maintained provisions on "trade and labor" and "trade and the environment," which are designed to prohibit relaxing working conditions or environmental standards for a competitive edge. These provisions have been strongly advocated by the Democratic Party--which is backed by labor unions and environmental groups--but traditionally criticized by the more pro-industry Republican Party, which has long been opposed to environmental measures, including those designed to tackle global warming.

The original NAFTA as negotiated by the Republican administration of George H. W. Bush did not contain such provisions. The succeeding administration of Bill Clinton, a Democrat, passed the bill to ratify NAFTA through Congress by adding two side agreements, one on labor and the other on the environment. Of course, the TPP as negotiated by the Democratic administration of Barack Obama included chapters on these two topics. A typical Republican administration would have deleted such provisions in the process of renegotiating NAFTA.

Second, USMCA has incorporated higher tariffs on steel and aluminum, which were originally introduced for security reasons. This was a welcome move for steel workers and labor unions in the Rust Belt.

Third, USMCA has included currency provisions that prohibit manipulating exchange rates to gain a competitive edge, making it the first US trade agreement to do so. Such provisions were strongly advocated by some Democrats but dismissed even by the Obama administration of the Democratic Party, which contended that they would allow trade policy to restrict financial or monetary policy. The Trump administration did adopt such currency provisions.

Last, but most important of all, unlike NAFTA, the title "United States-Mexico-Canada Agreement" does not contain the term "free trade" or FT. This might suggest that the USMCA is not a free trade pact in the first place.

USMCA is pending approval by the US Congress, probably next year. USMCA will likely pass Congress whether the Republicans win or lose the midterms. More precisely, Congress is actually probably more likely to approve USMCA if the Democrats win. Trump has effectively delivered two commitments he made during his presidential campaign: pulling out of the TPP and revamping NAFTA.

Managed trade policy originates from Japan

Some journalists in Japan argue that imposing a tariff as high as 25 percent on auto exports to the US from Mexico and Canada if they exceed a certain number of units is tantamount to imposing import quotas.

Imposing a 25 percent tariff on account of national security is problematic, but does not constitute import quotas as prohibited by GATT and WTO (if it is justified, or unless it is singled out as a serious problem).

In fact, this is exactly the trade policy that Japan often resorts to in relation to agricultural produce.

For example, this policy imposes or trigger a higher tariff on imports of items such as beef, rice, wheat, and dairy products if they exceed certain threshold levels under a low tariff --tariffs that are much higher than 25 percent. In fact, these tariffs are 50 percent for beef and much higher than 200 percent for other items. These journalists may want to criticize the US for adopting a policy of protective or managed trade, yet it was the Ministry of Agriculture, Forestry and Fisheries of Japan that taught this policy instrument in the first place.

Should we be pleased that the US has finally come to emulate Japan?

Will Trump be reelected?

At any rate, we should brace ourselves for the reality that the trade policy of the Trump administration will not change for at least two years--until the next presidential election.

The question is: Will Trump be reelected? The prevailing view in the US seems to be that he might be reelected against the odds, or rather, that his reelection is likely.

However, farming voters in the Midwest may bring a major upset to the presidential election.

China's higher tariffs on soybeans dealt a serious blow to soybean producers in the US. This prompted Washington to come up with an emergency bailout plan worth 1.3 trillion yen (12 billion dollars). This is called a one-time bailout.

But the problem does not end there. The Midwest boasts the most fertile land in the US known as the Corn Belt. Farmers there grow soybeans as well as corn. They rotate these crops, growing soybeans one year and corn the next. This arrangement, also practiced in Hokkaido, Japan, is designed to avoid replant failure resulting from the repeated planting of the same crop on the same land.

These two crops substitute each other as illustrated by the fact that a surge in corn prices in 2008 prompted US farmers to reduce soybean planting and increase corn planting.

This year, soybean prices dropped. Unless China lowers tariffs on soybeans, the situation will not be improved even next year. Then US farmers will naturally increase corn planting. This will in turn push down corn prices. Last month, I exchanged views with a renowned agricultural economist who once served as a high-ranking official at the US Department of Agriculture. He used the term "substitution" repeatedly. A chain reaction does occur in the economy.

To make matters worse, Brazil, a major agricultural competitor to the US, is hastening soybean planting at an unprecedented rate. China only has to wait a little longer to import soybeans from Brazil. Like the US, Brazil also rotates corn and soybeans. The difference is that being a warm country, Brazil adopts double cropping. Increased soybean planting means that more farmland is available for the production of corn, the second crop, as well. In short, corn production will be boosted.

This means a further drop in corn prices. American farmers are in a double bind. Planting corn does them no good; planting soybeans does them no good either. They are in a catch 22 situation. US agriculture may suffer a serious downturn.

The farming Midwest overlaps the Rust Belt. Though Midwest farmers who have supported the Republican Party for a long time may endure the current situation and vote for Republican candidates in this Midterm election, the reelection of Trump in 2020, seen by some as a sure bet, may be in danger.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on October 22, 2018.)