Fashion companies whose businesses are built on a global supply chain may find it  harder to win trade policy support from the Trump administration

Fashion companies whose businesses are built on a global supply chain may find it harder to win trade policy support from the Trump administration

There's no doubt the Trump administration has been very active on the trade front – but what exactly is its trade policy, what is it hoping to achieve, and what are the implications for the textile and apparel industry? Dr Sheng Lu, assistant professor at the Department of Fashion and Apparel Studies at the University of Delaware, takes a look.

Just eight months in office and President Trump has issued at least five executive orders related to trade, launched a dozen new trade remedy investigations (from anti-dumping, global safeguard measures to Section 232 on national security), and triggered the renegotiation of the 23-year-old North American Free Trade Agreement (NAFTA).  

But what is the logic behind the Trump administration's apparently unconventional approach to trade? Is it true that President Trump always deals with trade policy in a "transactional" manner? And what are the implications of Trump Administration's trade philosophy for the textile and apparel industry?

Trump administration's philosophy on trade policy

A recent remark delivered by US Trade Representative Robert Lighthizer at the Center for Strategic and International Studies (CSIS) provides us with some unique insights into the Trump administration's thinking on international trade and trade policy.

First, it favours the mercantilist view on trade. Mercantilism refers to a school of economic thought dating back to the 16th century, which believes that maximising net exports is the best route to a nation's economic prosperity. In general, mercantilists believed that "export is good and import is bad" and "a country should produce everything by itself."

A different school of thought on trade is the so-called "comparative advantage" proposed by David Ricardo in 1817. Ricardo demonstrated that nations enjoy higher productivity or lower production costs when they specialise in making and exporting certain products; and that when they trade freely, every nation will eventually be better off.

On trade, the Trump administration has chosen the side of the mercantilist. In his latest remark, Lighthizer argued that Americans can "compete successfully with anyone in the world" as long as the competition is on a level playing field.

Concepts like "supply-chain friendly trade policy," "global value chain," and "regional production network" have been omitted completely from policy documents

The message is clear: the Trump administration has no intention of giving up any sector, even those where the US no longer enjoys a comparative advantage.

Also, instead of embracing the concept of laissez-faire, the administration supports active policy intervention on international trade. Lighthizer said it would proactively use all instruments to "make it expensive" for US trading partners to engage in non-economic behaviour, ensure they treat US workers, farmers, and ranchers "fairly," and demand "reciprocity" both in the domestic and international markets.

Second, the Trump administration believes trade deficits matter. A nation runs trade deficits when the value of its imports exceeds exports. However, both classic economic theories and a high number of empirical studies have suggested there is no clear-cut correlation between the trade deficit and a country's economic prosperity.

Limiting trade flows will also do little about the trade deficit, which is mostly influenced by a country's monetary policy. However, consistent with its mercantilist view on trade, the current administration sees trade deficits harmful to the US economy and regards cutting the US trade deficit as one of its top trade policy agendas.

Moreover, according to Lighthizer, it believes trade policy is among the primary causes of the US trade deficit. In his remark, Lighthizer confirmed the administration is reviewing all existing US free trade agreements (FTAs) to determine whether they are working to the US economic benefit – against the criteria of trade balance.

For the same reason, the administration has treated the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP) quite differently, because TTIP could be used as a tool to improve the US trade balance with Germany.

Lighthizer further warned the administration wouldn't hesitate to demand renegotiation of any FTAs when it finds the trade flows and other factors indicate a "disequilibrium." Most recently, the United States has unilaterally tried to push South Korea to renegotiate the US-Korea Free Trade Agreement (KORUS) in the name of cutting the US trade deficit. For sure, this won't be the last drama of its kind.

South Korea declines trade pact renegotiation with US

Third, regarding the governance of trade, the Trump administration believes in the law of the jungle and values little of the power of the institution. One interesting example to consider is its alleged preference for bilateral trade agreements over plurilateral and multilateral ones.

In Trump's view, given the sheer size of the US economy, bilateral trade agreements will provide the United States with more negotiation leverages and ensure better enforcement. Likewise, in his remark, Lighthizer named China as THE top challenge facing the US on trade, which is also largely because of China's growing economic might and influence.

In comparison, the administration appears to be highly sceptical of the rule-based multilateral trading system managed by the World Trade Organization (WTO). While the US is one of the most frequent users of the WTO dispute settlement mechanism, Lighthizer said the system doesn't work well and has imposed new obligations for the US and reduced a lot of US benefits.

Ironically, in the past decade the US has won almost all trade dispute cases it has filed at the WTO against China, whereas pushing China on trade through bilateral channels such as the Strategic and Economic Dialogue (S&ED) and the Joint Commission on Trade and Commerce (JCCT) has yielded limited concrete results.

Implications for the textile and apparel industry

The textile and apparel industry should pay close attention to the Trump administration's demonstrated philosophy on trade policy and prepare for an impact on business.

First and foremost, textile and apparel companies may have to deal with a long-term uncertain and turbulent policy environment.

On the one hand, to artificially reduce US trade deficits it may use trade instruments, including unconventional ones, much more actively than previous administrations. For example, any free trade agreements enacted in the United States, which are supposed to be permanent, can now be the target of renegotiation or termination.

On the other hand, the administration's preference for a unilateral approach on trade is also more likely to enrage US trading partners, resulting in unnecessary retaliatory measures and an even more adverse business environment.

Industry executives see "the protectionist trade policy agenda in the United States" as their top business challenge this year

Not surprisingly, in the '2017 US Fashion Industry Benchmarking Study' released by the US Fashion Industry Association (USFIA), surveyed industry executives reported "the protectionist trade policy agenda in the United States" as their top business challenge this year.

Trade policy tops sourcing concerns for US fashion firms

Moreover, fashion companies whose businesses are built on a global supply chain may find it even harder to win trade policy support from the Trump administration. Notably, not only in policy documents but also in USTR Lighthizer's remarks, concepts like "supply-chain friendly trade policy," "global value chain," and "regional production network" have been omitted completely.

In the past, the advocatory priority of apparel companies has been to better inform policymakers about the value of imports to the 21st century US economy. But today's industry may have to directly confront an entirely competing ideology about trade and the direction of US trade policy.

One recent example is the stance on rules of origin in the NAFTA renegotiation. Even though the typical business model for fashion companies is "making anywhere in the world and selling anywhere in the world," USTR has proposed adding more national content requirements to the agreement and eliminating mechanisms intended to make textile raw material sourcing more flexible and less costly.

Industry groups call for TPLs to continue in NAFTA

Above all, it is not entirely accurate to describe the Trump administration's trade policy as "transactional" based. Rather, President Trump's record on trade so far has been highly consistent with his believed philosophies.

Nevertheless, how to deal with a not like-minded administration and wisely respond to its unusual trade policy actions will remain a challenging task for textile and apparel industry leaders for some time to come.