Will 2018 be the year when the mists clear?
2017 saw the future of global and regional trade shrouded in
uncertainty, as negotiations towards a new European Union (EU) and United Kingdom (UK) relationship post-Brexit stumbled and President Trump faced challenges in implementing important parts of his manifesto. However, 2018 may see the mists clear to reveal the future direction of global trade more distinctly.
The European Council’s decision of 15 December 2017 to move to the second phase of negotiations with the UK marked a break-through following a lengthy period of deadlock.
2018 should now witness more concrete progress towards a transitional agreement (likely to be approximately two years and based on a ‘standstill’ arrangement, supported by financial contributions) and the emerging bones of the future agreement. Any agreement will be significant to the economic future of Europe – in 2016, the UK exported £236bn (or 12 per cent of the UK’s GDP) to the EU27, while the EU27 exported £318bn (or 3–4 per cent of the EU27’s GDP) to the UK.
At this point, the agreement’s shape is subject to speculation: will it be the ‘bespoke’ deal promoted by the UK government; something more ‘off the shelf’ like the so-called Norway model with the UK joining the European Free Trade Association (EFTA); or an enhanced version of the Canadian Comprehensive Economic and Trade Agreement (CETA) that concluded in 2017? In a worst case scenario where talks break down, both parties would revert to trading on the terms set out in the World Trade Organization (WTO) agreements at a time when the WTO is under some stress and struggling for resources, having lost its historic support from the US.
Whatever the result, it is a near certainty that businesses will face additional supply chain and trading challenges when dealing with customers or partners in the EU and UK, whether these are tariffs or regulatory hurdles. Businesses will need to make significant adjustments to accommodate these changes:
2017 saw President Trump act on his campaign promise to pull out of the Trans-Pacific Partnership (TPP). Domestic challenges have so far limited President Trump’s further action, although other US deals under negotiation (the Transatlantic Trade and Investment Partnership (TTIP)) and those already concluded are also at risk. This second group includes the North American Free Trade Agreement (NAFTA)(responsible for regional trade increasing from roughly $290bn in 1993 to more than $1.1tn in 2016) and the Korea–US Free Trade Agreement (KORUS FTA), worth approximately 0.4 per cent of South Korean GDP.
Martin McElwee, Antitrust Partner, Brussels and London
Pulling, or threatening to pull, out of trade deals has been President Trump’s highest profile trade policy. However, the US executive branch has also used other instruments, such as the imposition of high tariffs on foreign goods to counter alleged State aid and dumping. For instance, import duties on Canadian Bombardier’s aircraft rose to 219 per cent (more than tripling the cost of a single aircraft) after American Boeing complained of an alleged £40m of State aid from the Quebec regional government. The US Department of Commerce also recently imposed anti-dumping duties of 162 per cent on Chinese aluminium foil.
That said, recent remarks made by Makan Delrahim, the newly appointed head of the Antitrust Division at the Department of Justice (DOJ), may demonstrate a more internationalist institutional view. Delrahim has stated that protectionist use of antitrust laws – to discriminate against foreign firms and/or favour domestic firms – is counterproductive to domestic policy objectives as it undermines incentives to innovate and risks domestic stagnation.
Paul Yde, Antitrust Partner, Washington DC
Delrahim believes regulators that align closely with the interests of ‘national champions’ can ‘sap local economies of energy and entrepreneurship’, harming both domestic consumers and global markets.
Businesses will need to monitor the many messages coming out of the Trump Administration when it comes to US-related M&A activity and US imports. It would also be prudent to assess business exposure under NAFTA and KORUS FTA and build strategies to mitigate the impact of any treaty renegotiations, particularly for sectors where the US has a trade deficit with the trade partner(s).
Thomas Wessely, Antitrust Partner, Brussels
As the US has vacated its position as champion of trade liberalisation, so China appears to have seized on the opportunity to fill it – albeit arguably on its own terms. China has, of course, failed in many important respects to open its markets up, but its rhetorical stance has become markedly internationalist on trade issues.
Other Asian nations, most notably Japan, have fought to contain China’s trade ascendancy. Tokyo was instrumental in resuscitating the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP, previously the TPP) after the US’s departure. In 2018, negotiators from 11 countries, including Japan, Canada, Mexico and Australia – together representing about 15 per cent of the global economy – will revisit the CPTPP. Some have suggested that the parties could reach a deal as early as Q2 2018. Once concluded, businesses operating within the perimeter of the CPTPP will be able to reshape their operations to take advantage of the multilateral agreement. Businesses should be identifying and planning for any potential opportunities.
Looking ahead in 2018