Trump Executes TPP

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This morning, some unexpected breaking news rocked the world: The next Star Wars movie will be called The Last Jedi. Oh, and Donald Trump signed an Executive Order pulling the US from the Trans-Pacific Partnership (TPP), which would have been a free-trade deal among the US, Japan and 10 other nations if it were allowed to live. As markets go, it's a non-event: The Obama administration declared TPP DOA last year, and both Trump and Hillary Clinton campaigned against it. Markets move most on surprises, and this was a foregone conclusion. Naturally, the move is giving rise to speculation there is more to come. But this is wildly premature. There is little evidence the global tide is turning toward protectionism, and none of Monday's trade-related developments are reason to be bearish.

Markets like free trade, and a free-trade deal encompassing 40% of global GDP would have been a long-term positive. But its death isn't bearish. Not having TPP doesn't mean new trade barriers are rising. Rather, it extends the status quo, which has been fine for the world economy and markets and can remain so.

Some say Trump's Executive Order shows he means what he said on trade.^[i] Philosophically, we do agree actions speak louder than words. Yet Trump's rhetoric on trade hasn't exactly been consistent. He calls himself a free-trader while threatening tariffs. He says he wants to trade a lot, but also that America should make its own stuff. The contradictions make us suspect it's all a big headfake, ploys from the man who ran to be America's Negotiator-in-Chief. Art of the deal and all that.

Consider the verbal volleying surrounding NAFTA, which also made headlines Monday. Early in his campaign, Trump spoke broadly of scrapping it, blaming it for untold US manufacturing job losses. That softened over the campaign's course, with "renegotiate" becoming the key verb. Now staffers say a forthcoming Executive Order will kickstart the renegotiation process. Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau are due in town for NAFTA talks soon.

This isn't reason to be bearish or bullish about NAFTA's prospects-wait and see what shakes out. "Renegotiate" could mean anything, and there is currently no reason it can't mean "update" and "improve." Trump frequently says he doesn't consider any of America's "free trade" deals to be truly free, and he is not alone in claiming this. Last year, development economist Hernando de Soto^[ii]made a strong case that extant bilateral deals, despite their many merits, codify protectionism and pick winners and losers:

[Mercantilism] has made a comeback in the 21st century. One way is through the emergence of complex bilateral trade agreements-surely better than no trade at all but riddled with labyrinths through which special interests prowl to capture surplus value and smuggle in low-cost labor.

Mr. Trump's "100-Day Action Plan to Make America Great Again" calls for "special task forces" to identify and close the loopholes through which privileges are granted in complex trade agreements. This, if done properly, could improve trade while bringing greater benefits to a broader number of people.

Today, in developing countries, these same trade agreements are frequently challenged-not by governments but by the people excluded from their privileges. Why is this coming to the fore now? Because after the defeat of communism 27 years ago, ordinary people expected to be allowed to benefit directly from international trade agreements but most of them received only the kind of sops that mercantilism gave them.

The devil is in the details and execution, but an updated NAFTA that makes trade freer is possible. After all, President Obama made nearly identical pledges to renegotiate or scrap NAFTA when he ran in 2008-then he lifted the nearly two-decade ban on Mexican trucks entering the US, completing NAFTA's implementation. This time around, perhaps the three amigos expand it to cover digital markets, which didn't broadly exist when NAFTA was born. When Trump announced his plans to host Peña Nieto and Trudeau, he spoke of his desire for a "very good result for Mexico, for the United States, for everybody involved." Again, actions speak louder than words, but this doesn't sound like code for "border's closed, don't let the tariffs hit you on the way out."

Perhaps this all sounds highly speculative to you, but that is the point. All we have so far is talk and guessing, nothing actionable for investors. Markets move on probabilities, not possibilities. It's too early to assign probabilities to NAFTA's survival, improvement or demise. Our sole point is that the claim "Trump kills TPP" means "Trump will kill NAFTA" is a galactic jump to conclusions.^[iii]

It is also too early to get excited over the "very big border tax" Trump promised yet again Monday during a meeting with several business leaders. Specifically, he threatened a 35% tax on American firms that offshore production of goods destined for the US market. This could make production costlier and less efficient, and it would amount to government picking winners and losers, neither of which would thrill markets. At the same time, targeting companies with tariffs is likely illegal under the current law, so it is not something Trump could do unilaterally. It would require legislation, which pro-trade Republican senators-of which there are many-would do their darnedest to block. Some House Republicans have mooted a blanket border adjustment tax, which would tax all products (raw materials, components and finished goods) imported by US firms, but Trump has already denounced this. Behold, the wondrous powers of intraparty gridlock.

Then, too, it's a big world out there, and trade is still getting broadly freer. While Japanese Prime Minister Shinzo Abe said a TPP without America is "meaningless," other signatories are more optimistic and might try to pick up the pieces. Even if the broad group pact doesn't survive in some fashion, we could end up with a bunch of smaller free-trade deals among some participants. TPP talks already yielded a side deal between Japan and Australia, and more bilateral or trilateral deals could emerge from the wreckage. Heck, the US could even get in on the fun-Trump has always said he prefers bilateral deals to group pacts, where too many pet peeves and competing interests get in the way. Speaking of which, UK Prime Minister Theresa May visits the White House later this week, and both camps suggest a free-trade deal is high on the agenda. US trade policy matters, but always think globally.