“Why should trade agreements last forever? Nothing else does.” On the perils of negotiating with the next U.S. Administration

On 25 November 2024, President-elect Trump took to social media to threaten higher tariffs on Canadian, Chinese, and Mexican goods if those trading partners did not prevent illegal migrants and certain drugs from entering the United States. On 30 November 2024, the President-elect threatened members of the BRICS group with 100% tariffs if they took steps that undermine the primacy of the US Dollar in global commerce.

The first of these threats elicited engagement from the Mexican President and the Canadian Prime Minister. In addition, in an interview last week the President of the European Central Bank recommended that European Union members offer to buy more American products. Other governments have been contemplating whether and how to engage the new U.S. Administration on trade policy matters. This briefing lays out several pertinent considerations in this regard.

An important first step is to take a dispassionate, empirical look at their nation’s goods export exposure to the United States. This should not be confined to calculating the share of national goods exports sold in the United States or sold to firms supplying that market from neighbours, such as Canada and Mexico. Sales lost in the U.S. market due to higher tariffs can be replaced by increased sales to third markets. That’s why I prepared Briefing #41, which calculated the number of years it would take to replace all exports to the USA by selling to third markets.

The United States’ share of world goods imports has fallen markedly this century. Nowadays for every US Dollar of goods imports shipped to the American market another $6 are shipped elsewhere. Such are cross-border goods trade flows that 69 economies could entirely replace their exports to United States within one year if they can merely sustain their current trend rate of export growth to third markets. China would recover all its lost exports in less than three years.

The estimates in Briefing #41 are the worst-case scenario of 100% loss in goods exports. One research group recently estimated that German exports would likely fall 25%, not 100%. Turns out that means trend growth in German exports to third markets would replace lost sales in America in 18 months.

Countries that are heavy services exporters to the United States are, in aggregate terms, less exposed as tariffs target imported goods (see Briefing #48.) Moreover, commodity exports tend to be redirected to third markets more easily. The point is not to diminish the adjustment that some exporting firms to the United States will face but rather to put lost sales in perspective by scaling other relevant export drivers mentioned above.

Contrary to the assertions of Mr. Lighthizer in his 2023 book, the United States is not the largest importer of goods and services in the world—the European Union is and China is catching up with USA in this regard. One advantage of living in a multipolar world is that the potential for export diversification limits the damage done when a large economy adopts a rogue trade policy.

Thorough exposure analysis will reveal what is at stake; substituting evidence for fear. The data needed is available to every trade ministry—they just need to get organised and focus on proper scaling rather than going down rabbit holes of econometric estimation and simulation.

A second step is to realistically assess what a deal with the Trump Administration amounts to in practice. Pacta sunt servanda is not an option. The Table at the end of this briefing summarises the renegotiations during the first Trump term of the US free trade agreements with Canada, Korea, and Mexico and the so-called Phase I Deal with China. Several observations follow.

First and foremost, making a deal with the first Trump Administration has not protected Canada, China, and Mexico from subsequent demands, as Mr. Trump’s recent threats make clear. See also the last column of Table 1 that details post-agreement threats made to these foreign trading partners before Trump left office. At most, a deal with the Trump team temporarily stabilises a bad situation. This may temper the price trading partners are willing to pay for brief respite.

Second, the United States-Mexico-Canada agreement has periodic reviews built in. Evidently, the President-elect was not ready to wait until the scheduled review before making demands recently and repeatedly on the campaign trail. Mr. Lighthizer wrote the statement quoted in the title of this briefing. No trading partner should be under any illusion that deals struck with a future Trump Administration will stick. Remember: nothing lasts forever.

Third, nor are such deals quick to negotiate. Each deal listed in Table 1 took over a year to negotiate. Such negotiations are going to take up a lot of official bandwidth. The opportunity cost of such bandwidth should be considered too—and may be measured in terms of other agreements with trading partners more likely to keep their word.

Table: Renegotiation of regional trade agreements during the First Trump Administration and the Phase I Deal with China.

Fourth, any hope of preserving existing market access should be set aside. The Trump Administration may raise import tariffs on a trading partner’s exports and decide to suspend their application rather than remove them as part of any “deal.” Under these circumstances, there is no escaping the implied policy uncertainty, that enemy of cross-border commercial engagement.

Fifth, in acquiescing to a deal, a trading partner makes themselves a “mark,” to use the phrase of the President-elect. See the account of his negotiating tactics in the Box below. Undoubtedly, trading partners will come under pressure from stakeholders to make concessions to the Trump Administration. One should ask those pressuring officials how many concessions they are going to have to make once their nation becomes a “mark.” Where does this process end? What happens if the U.S. side turns the negotiation into a contest between foreign suitors, each competing to offer better and better terms?[1]

There are at least three flanking measures that America’s trading partners can take to mitigate risk over time. First, measures at home and abroad to promote geographic export diversification should be reviewed and developed.

Second, causes of sub-par export growth to third countries should be identified and, to the extent that they relate to the domestic business environment, fixing them should have a higher reform priority. The price of short-changing private sector development and impaired competitiveness is about to get a lot higher. Since most nations cannot afford large subsidy packages for any firms—let alone those which have lost sales in the United States—there is little alternative to the hard slog of regulatory reform and increasing the predictability of the conditions faced by the private sector.

For sure, government or their central banks may seek to devalue their currencies against the US Dollar to cushion the blow. I mention this option without endorsement—as competitive currency devaluations can result in trade tensions.

Third, as the American market begins to close, then the premia on access to other markets and on augmenting goods exports with those of services—in particular digital services—increases. Greater emphasis should be placed on developing a suite of international collaborative instruments that encourage reciprocal opening of markets in the traditional sense, that allow for the creation of sub-regional and regional markets for digital commerce, and that reduce the costs for firms caused by regulatory heterogeneity.

In sum, while retaliation is the first thing that comes to mind to some officials as they prepare for aggressive unilateralism by the next U.S. Administration, America’s trading partners have much more to think through. They should set aside irritation and fear and determine how much is really at stake and how much they are prepared to concede for goods market access to a large, but increasingly erratic, trading partner.

Box: Donald Trump interviewed by Carl Bernstein and Bob Woodward in 1989.

Trump described his strategy of refusing to pay the property violations he received from inspectors until they disappeared or forgot about them.

“From day one, I said fuck them,” Trump said of the inspectors.

“When I was in Brooklyn, inspectors would come around and they’d give me a violation on buildings that were absolutely perfect,” Trump recalled. “I’d say, ‘fuck you.’ And they would give me more violations. And more. And for one month it was miserable. I had more violations—and they were unfounded violations. But they give it because what they wanted was if you ever paid them off one time, they’d always come back. So what happened to me, in one month they just said, ‘fuck this guy, he’s a piece of shit.’ And they’d go to somebody else.

“The point is if you fold it causes you much more trouble than it’s worth,” Trump said.

“You can say the same thing with the mob. If you agree to do business with them, they’ll always come back. If you tell ‘em to go fuck themselves—in that case, perhaps in a nicer way. But if you tell them, ‘forget it man, forget it, nothing’s worth it,’ they might put pressure on you at the beginning but in the end they’re going to find an easier mark because it’s too tough for them. Inspectors. Mobs. Unions. Okay?”

This was Trump’s basic philosophy.

Source: Bob Woodward (2024). War. Simon & Schuster. Quotation taken from page 8.

Simon J. Evenett, an international trade economist, is Professor of Geopolitics & Strategy at IMD Business School, Switzerland. He is also Founder of the St. Gallen Endowment for Prosperity Through Trade, home of the independent monitoring initiatives Global Trade Alert, Digital Policy Alert and the New Industrial Policy Observatory and Co-Chair of the World Economic Forum’s Global Futures Council on Trade & Investment.