Disrupting global trade will hurt America's economy, former US diplomat says

Trump has struck protectionist chord: Expert

The White House ramping up a protectionist agenda will likely disrupt not just global trade, but also the U.S. economy, a former U.S. ambassador to Singapore told CNBC.

Newly inaugurated U.S. President Donald Trump on Monday formally pulled the U.S. out of the Trans-Pacific Partnership, or TPP, which would have created a 12-country free-trade bloc. The TPP, which was negotiated during President Barack Obama's term in office, hadn't yet been voted on or ratified by Congress.

Trump also signaled he planned to renegotiate the North American Free Trade Agreement (NAFTA), enacted in 1994, which eliminated most tariffs between Mexico, the U.S. and Canada.

But David Adelman, who was the U.S. ambassador to open-economy Singapore from 2010-2013 and led eight regional trade missions during that tenure, expressed concern about how those policies might affect not just the global economy, but also U.S. businesses.

Trump's "decidedly protectionist chord" so far "undoubtedly has American businesses, not just manufacturers, but also service providers, very concerned," Adelman told CNBC's "Squawk Box" on Wednesday.

"The globalized economy is here to stay and American firms have done very well globally because they're up for the competition. And these global supply chains, I think, are not easily disrupted without also disrupting the American economy," he said.

Adelman, who is currently a partner at global law firm Reed Smith, which focuses in part on trade issues, also expressed concern about Trump's campaign vow to label China a currency manipulator for the purposes of a competitive trade advantage.

Cargo ships sit idle in the Singapore Strait as the sun sets over a hazy Singapore skyline.
Andrew Rowat | The Image Bank | Getty Images

"It will be interesting to see what evidence is provided in support of that argument because most of the evidence really suggests otherwise, that government leaders in Beijing are propping up the Chinese currency rather than artificially depreciating it," he noted.

In the wake of the surprise Trump win, fell to nearly eight-year lows against the dollar, touching its weakest since at least January 2009, during the global financial crisis. But analysts attributed the slide primarily to the strength of the dollar, with the dollar index, which measures the greenback against a basket of currencies, surging to a 14-year high after the election. Based on currency movements within the yuan's trade-weighted basket, policymakers appeared to be supporting the Chinese currency, analysts said.

But if Trump still follows through with his threat, "could set into motion certain changes in American policy and laws that could disrupt a global economy that is performing quite well for the U.S.," Adelman said.

He also expressed concern that the situation could escalate.

"The White House needs to be careful to give enough space and enough face to leaders in Beijing so that they can carefully reconcile some of the campaign rhetoric for what is really practical and what would ultimately promote growth and the health of both the U.S. economy and the Chinese economy," he said. "We run the risk of a spiral here. If the rhetoric from the White House continues to escalate, there really will be no room to move for the leaders in Beijing and the leaders in Washington, who really need each other if we're going to promote continued global growth."

Other analysts have expressed concern even over the alternative Republican options to Trump's more radical trade rhetoric.

For example, Republicans in the House of Representatives were considering a controversial "border adjustment tax" as part of their corporate tax reform plan.

Currently, U.S. corporations are taxed on their worldwide profits at 35 percent. The House GOP plan would tax domestic revenue (minus domestic costs) at a much lower rate of 20 percent.

The net effect would theoretically favor exports over imports and create incentives for domestic production as companies also would no longer be able to reduce taxable income by deducting their overseas expenditures. The plan would essentially subsidize exports, and lead to a 20 percent tax on imports for corporations.

William Lee, head of North America economics at Citigroup, expected such a proposal wouldn't get passed in a "pure" form.

"The heavy importers are saying, you cannot destroy us like this and I think what we'll see over time are exceptions and exemptions made at various times for various products, various sectors," Lee told CNBC's "Squawk Box" on Wednesday.

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But he still expected Congressional Republicans would pursue the program as they would need the revenue to offset the hit from planned tax cuts.

However, in a note published mid-January, Lee noted the program would have "dire market consequences," especially as proponents were assuming the dollar would instantaneously rise to offset the rising cost of imports. Lee noted that the dollar adjustment would instead likely take many years.

The border tax "will promote domestic production and exports for some years, but ultimately could generate losses for holders of foreign-denominated assets and may induce global capital market selloffs," he said in the note.

Other analysts have also expressed serious concerns about how the border tax plan could impact the U.S. economy.

For example, in a report dated Monday, Deutsche Bank estimated that if the U.S. introduced a "border adjustment" for imported products, it would increase the cost of the average vehicle by $2,300, reducing U.S. demand by 1.2 million units a year in the short term.

—Michelle Caruso-Cabrera contributed to this article.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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