How the US election outcome will impact Australia's trade settings

The outcome of the upcoming US presidential election may have adverse effects on global and national trade agreements, writes David Uren.

The fate of the world trading system hangs on the outcome of the US presidential election, with Donald Trump’s top trade official flagging his readiness to operate outside the World Trade Organization unless its membership agrees to an impossibly ambitious agenda for reform.

Democrat contender Joe Biden is no free trader, having put a protectionist “Buy American” program of government procurement that appears to contravene WTO rules at the centre of his economic strategy. However, Biden is a multilateralist. He has vowed to recommit the US to the Paris Climate Accord and the WTO, and has said he will work with “allies and partners” on world trade.

Trump has long made clear his disdain for the WTO. In 2018, he had White House staff draft legislation withdrawing US membership, and has frequently threatened to implement it. The Trump administration has torpedoed the WTO’s ability to adjudicate disputes by vetoing all nominations to its appellate panel, resulting in the loss of a minimum quorum of judges to hear appeals.

While other nations, including Australia, have made suggestions over the past few years for reforming the WTO, the Trump administration has only now revealed its sweeping agenda. With the WTO conducting a search for a new director-general, the US Trade Representative Robert Lighthizer outlined his five core demands in an article for the Wall Street Journal on 20 August.

His first demand is that all nations should reduce their tariffs on all products to a single rate, ideally the industrialised nation average, with only limited exceptions. While that would not be an insuperable obstacle for China, where average tariffs of 3.4 per cent compare with a high-income nation average of two per cent, it would never win support from countries such as Brazil, Nigeria, Pakistan and Egypt, with average tariffs in excess of eight per cent.

Lighthizer’s second demand would be brutal for Australia: the end of what he calls the “free trade agreement land grab”. The only agreements that would be permitted would be those between “contiguous states”. The US agreement with Canada and Mexico would be acceptable, as would the free trade area of the European Union, but most other free trade agreements would go. Australia might hold onto the Closer Economic Relationship with New Zealand, but none of its other trade deals, including with the US. Lighthizer argues that the special tariff exemptions given in free trade agreements are an abuse of free trade, and should be offered to all.

His third demand is that large emerging nations such as China and India should follow the same trade rules as advanced nations, losing their access to “special and differential treatment” under WTO rules. The gains from this treatment are fewer and less valuable than widely believed. While China could probably live with their loss, India, with a GDP per capita barely three per cent of the US, would never agree.

The fourth reform is to “stop the economic distortions that flow from China’s state capitalism”, saying it is impossible to retain public confidence in the trading system in the face of non-market practices. China is not going to roll back the place of the state in its economy, while there are large state-owned sectors across both the emerging and industrialised worlds.

Finally, Lighthizer wants trade disputes to be resolved through arbitration in ad hoc panels, rather than by the existing judicial process which is building a body of international trade jurisprudence.

In the absence of a commitment to these reforms from like-minded nations, Lighthizer would deal with trade issues bilaterally — as the US has with China, where it is able to obtain outcomes that reflect its economic power.

If a re-elected Trump administration does withdraw from the WTO — and no-one can discount that possibility — Australia’s US trade agreement would be of paramount importance.

The US has three tariff regimes — a free trade agreement rate, a “most favoured nation rate” for all other WTO members, and the “Smoot-Hawley” tariff rate imposed during the 1930s depression, which applies only to Cuba and North Korea. But if the US pulled out of the WTO, the depression-era tariffs, averaging 32 per cent, would apply to everyone without a US FTA until they could negotiate one. That includes Europe, the UK, Japan and most of Asia.

The decision on the new WTO director-general is scheduled for 7 November. The successful applicant will not know what they are taking on until the dust from the 3 November US election has settled.

David Uren is a non-resident fellow with the US Studies Centre at the University of Sydney.