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TRUMP'S WAR
ON TRADE

President-elect Donald Trump won over millions of voters with pledges to renegotiate or rip up free-trade deals – a staunchly protectionist stand that could dismantle decades of progress. James Bradshaw reports from California, ground zero for U.S. trade, on the high-stakes battle that is sparking worries of a global trade war

The TraPac LLC shipping terminal in seen in this aerial photograph taken over the Port of Los Angeles in March of 2016.

The TraPac LLC shipping terminal in seen in this aerial photograph taken over the Port of Los Angeles in March of 2016.

Tim Rue/Bloomberg

It is the morning after election day in San Pedro, Calif., where a sweltering sun beats down on the busiest shipping port in the United States. Six massive gantry cranes are each swinging 25 to 30 containers an hour ashore from a ship named the Maersk Erving, stacking them like Lego blocks in neat rows at Pier 400.

Sprawled across more than 3,000 hectares and 69 kilometres of waterfront, the Port of Los Angeles is one of the United States' key gateways to the world, handling $270-billion (U.S.) in cargo each year. Its rhythms, from the steady flow of trucks hauling containers to the tug boats chugging along its channels, are the pulse of trade for California and large swaths of the United States.

On this morning, business grinds on as usual. Yet, unlike at any moment in recent decades, it no longer seems sure to continue that way.

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Throughout the bruising U.S. election campaign that wound its way to a startling conclusion last Tuesday, free trade was loudly vilified by a major candidate to a degree not seen since at least the election of 1992, when the North American free-trade agreement, or NAFTA, was still being crafted. With Donald J. Trump's unlikely triumph now written into history, the U.S. economy faces a turning point – a reversal of the a decades-long march toward more open markets and liberalized trade.

That is, if he delivers on his promises.

Mr. Trump made trade a punching bag for an angry electorate, but his pitch to a frustrated base was oversimplified at best, crafted for stump speeches and soundbites. In the Trump assessment of the American economy, factories have been emptied out by "disastrous" trade deals cut by Washington insiders for their own benefit.

He has pledged to renegotiate those agreements and rip up the terms of the existing trade relationship with China to make them more favourable to the U.S. Failing that, he'll walk away from existing pacts altogether and boost tariffs. His campaign advertising promised to halt "the destruction of our factories and our jobs as they flee to Mexico, China and other countries," and allow Americans to manufacture their own destiny once again.

"We don't make things any more," Mr. Trump would say at his rallies. It might surprise many of his supporters to learn that the United States is still one of the most successful countries at making things and selling them to the rest of the world. In September, U.S. real goods exports hit $123.6-billion (in 2009 dollars) – a record. Industrial production is also rising, up 29 per cent since 2009, when the U.S. economy was emerging from a global recession.

That's one reason trade experts are aghast at a Trump presidency and the prospect that he could spark a trade war if he doesn't get his way. There's a lot to lose – not only for America's trading partners, but for this city, the state and the U.S. as a whole.

San Pedro, in south Los Angeles, would be ground zero in any trade war, and the bustling activity at the port is a reminder that the U.S. economy, in fact, depends on good trading relationships with other countries. In the most dramatic scenario Mr. Trump has floated – slapping a 45-per-cent tariff on China and 35-per-cent tariff on Mexico (an average U.S. tariff is about 2 per cent) – Los Angeles County would be hit hardest. The region would shed 176,000 jobs by 2019, more than any other U.S. county in absolute terms, according to a model created by the generally pro-trade Peterson Institute for International Economics in Washington. Across California, 640,000 jobs would vanish.

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The factors that leave L.A. so vulnerable to shifts in trade policy start with its size, but also include a large manufacturing base, flourishing high-tech and finance sectors, and close ties with major trading partners.

"Basically, everything we do with China and Mexico, L.A. County has it. So when you start disrupting [that] trade, L.A. County really gets hit," said Marcus Noland, co-author of the study. "You also get a big impact up in Silicon Valley. That's more because of the ties with China."

With his postcard plan for restoring American jobs, Mr. Trump has set himself a hugely complicated task. Even at the Port of L.A. – where scrap paper, cotton and almonds are hauled alongside aircraft parts, cellphones and diamonds – officials are sometimes confounded by the tangle of supply chains meeting at the docks.

"It's changing all the time," said Jim MacLellan, the port's director of trade development. "You know, this is a very volatile and constantly moving matrix. It's almost beyond three-dimensional."


Trade's naysayers

To many voters, the equation wasn't so hard to solve. At an early voting station on the El Camino College campus in Torrance, Calif., on Sunday, the scene was tranquil and orderly, a far cry from the wild rallies and angry clashes that made headlines during Mr. Trump's divisive campaign.

Michael Low, 52, considered joining a snaking lineup of some 250 voters.

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"I haven't been happy with any of the free-trade agreements myself," he said, peering through dark sunglasses. "They tend to create a race to the bottom as far as workers' rights and environmental issues, jobs leaving the country."

Clad in a black T-shirt and jeans, the computer consultant native is no admirer of Mr. Trump. He wanted someone "sane" in the Oval Office and supported Ms. Clinton, hoping to see the Senate turn blue, while backing local ballot initiatives legalizing recreational marijuana use and taxing the wealthy to fund education.

Another Clinton supporter, 22-year-old A'sha Cobb, was more equivocal about America's trade ties. But the soft-spoken employee of a downtown L.A. hotel was in no doubt where the buck stops.

"I don't feel like it's a problem to do trade. It helps the world go 'round. But I would like to keep the jobs in America, so if it's me or them, I choose me," she said, laughing.

Since 2001, California has added about two million jobs, says Robert Scott, senior economist at the Economic Policy Institute. Compare that with Ohio, one of the Rust-Belt states where anti-free-trade sentiment runs deep and where Mr. Trump won easily. It added only 24,000 jobs, "which is four tenths of 1 per cent, over 15 years."

But even in California, Mr. Scott sees an underlying problem. The state, which does brisk trade in computer technology and IT services, aerospace and medical devices, has added jobs for programmers, designers and marketers, while trade deficits swelled.

"We've had this big surge in trade with low-wage countries and imports in particular have gone up. And that has had a depressing effect on wages, not just for workers in manufacturing, but on all workers without a college degree," Mr. Scott said.

Louie Diaz watched that shift up close. As vice-president of Teamsters Local 848, he represents workers at TABC, Inc., a Toyota manufacturing plant in Long Beach, north of the Port of L.A. Until 2005, it was a hub for making truck beds. "Well, that went across the border to Mexico, to Baja. That was the guts of TABC," he said. "With that, we've shrunk in numbers."

In early 2007, TABC had about 830 employees. It has 300 now, 250 of whom earn an hourly wage. Under free trade, "we haven't been faring well at all. And although things seem to be kind of holding their own, I don't see them improving," Mr. Diaz said.

Yet he still thinks a Trump presidency is "potentially devastating" for his members. "I just don't have any confidence in Trump being at the helm," he said, and while he's hopeful some of the job base that has left can return, he knows what were once core industries have eroded beyond the point of no return.

Even some ardent free-trade opponents don't see Mr. Trump's logic.

"The change has been good in some ways, and it's been bad in others. On balance, the bad has exceeded the good," Mr. Scott said. "That doesn't mean we can tear it up and go back to where we were."

After NAFTA Back in August, The Globe's Barrie McKenna probed whether Trump could pull out of NAFTA – and how Canada would be affected.

No turning back

For a glimpse of the immediate impact if Mr. Trump overhauls the rules that govern how goods cross U.S. borders, first look back to 2001.

In the aftermath of the Sept. 11 terrorist attacks, the U.S. tightened controls on the Mexican border, creating a logjam of trucks trying to cross. Within a week, parts shortages threw U.S. auto makers off kilter, as the cars Americans assemble often contain about 15 per cent content from Mexico.

"It is a very dense relationship, especially in motor vehicles and electronics. And I don't think people have really thought this through," the Peterson Institute's Mr. Noland said.

If NAFTA were to unravel, the auto manufacturers, electronics makers and thousands of suppliers who rely on cross-border supply chains would adapt and rebuild their routes to meet the new reality. But that adjustment period could be slow, costly and even painful for consumers, who could expect to pay higher prices. There would be consequences for all three countries involved, and it isn't certain the U.S. and Canada would emerge the winners in terms of adding jobs.

"It's a really big ship that takes a long time to turn around," said Mark Hirzel, chairman of the Los Angeles Customs Brokers & Freight Forwarders Association, whose members act as the travel agents and accountants for cargo.

Canada remains a vital U.S. ally – trade between the two countries totalled an estimated $662.7-billion in 2015, with Canada absorbing a slim $11.9-billion deficit. At an October event announcing Thomson Reuters Corp. will create 400 jobs in Toronto, Prime Minister Justin Trudeau told the audience: "The fact is, we're not going to be able to, as a world, turn back the clock on trade, on globalization – nor should we."

"And I know that rhetoric gets heated in election campaigns. But the fact is that NAFTA has been incredibly good for all three of our economies and for workers across our economies," he added.

But this week, Canada's ambassador to Washington, David MacNaughton, said that if the U.S. wants to talk about reopening NAFTA, which protects a largely tariff-free trading zone with common rules, "we're ready to come to the table." Once there, both sides would likely press for concessions on lumber, dairy, automobiles and intellectual property.

For California, trade is shaped mostly by Mexico and China, whereas opportunities for growth are often in Asia. The web of supply relationships is dizzying to consider.

Mexico is the state's largest export market, purchasing 16.2 per cent of California's goods at a value of $26.8-billion, up 5.5 per cent from 2014. In recent years, it has also climbed to be the No. 2 source of imports at $45.1-billion, trailing only China at $143.6-billion. In many cases, 40 per cent of the content of a U.S. import from Mexico – parts, materials and labour – actually originated in the U.S. in the first place, according to state figures.

So what if Mr. Trump gets tough with Mexico? Ironically, it could drive more Mexicans to move north to America, which is exactly what Mr. Trump promised to curb with his much-ridiculed border wall.

"Right now, the net flow of migrants is from the United States into Mexico. If you damage the Mexican economy, you will reverse that pattern and we will once again be absorbing Mexicans looking for work," Mr. Noland said.

Accounting for trade flows with the rest of the world, the knock-on effects multiply exponentially.

Roy Paulson is a Trump supporter, but also an advocate for free trade who thinks the president-elect has a lot to learn. As president of Paulson Manufacturing Corp., based 90 minutes southeast of L.A. in Temecula, he has carved out a niche crafting industrial safety eye and face protection, such as face shields for firefighters' helmets. A quarter of its $20-million in annual sales are exports to 70 countries. But another 25 to 35 per cent of domestic sales are components used in other products that are later shipped out of the U.S.

"Most manufacturers depend on inputs or imports of material that is at competitive pricing to be able to build products that they currently have," Mr. Paulson said. "So if you go and do some sort of a draconian measure of making great changes to the rules of import and the tariff structure, it will imbalance the whole economy in the United States as far as manufacturing is concerned."

That balance is especially delicate because free-trade agreements are anything but the free-for-all some may imagine. They are laboriously crafted, and predictability matters.

"Free-trade agreements really are rules-based trade agreements. There's no chaos there. It's very specific," said Mr. Hirzel, the brokers' chairman, said. "As it becomes more complex, you become more dependent on that consistency."

But for now, the outlook for U.S. trade is clouded with uncertainty.

President-elect Donald Trump delivers his acceptance speech in New York in the early hours of Nov. 9, 2016.

President-elect Donald Trump delivers his acceptance speech in New York in the early hours of Nov. 9, 2016.

Chip Somodevilla/Getty Images

Dead on arrival

There is one major trade casualty that seems all but assured by Mr. Trump's victory. The president-elect has flatly promised to reject the Trans-Pacific Partnership, or TPP, a pact linking 12 countries responsible for nearly 40 per cent of global economic output, including Japan, Canada and Mexico. Even Hillary Clinton opposed the deal, which has been agreed upon but not ratified.

In fact, any remaining hope that President Barack Obama would squeeze through ratification during his lame-duck session was dashed on Friday as his administration suspended efforts to pass the deal.

A trade deal being hammered out between the U.S. and European Union, the Transatlantic Trade and Investment Partnership (TTIP), could suffer a similar fate.

Mr. Trump called the TPP "the death blow for American manufacturing," but tech executives from companies such as Cisco Systems, IBM and Microsoft have lined up to plead for its passage, which would reduce tariffs, strengthen patents and copyrights, and apply safeguards to the flow of data across borders.

"An important element that is being missed in the debate about trade, and the desire to bring back manufacturing jobs to America, is that the growth of manufacturing jobs in America is going to be in smart manufacturing, which is as much about information services as it is about making the physical good," said Peter Cowhey, dean of the School of Global Policy and Strategy at the University of California, San Diego, and a trade adviser to the U.S. government.

For some pockets of California, the stakes are especially high. More than 97 per cent of the San Diego region's exports go to TPP signatories, compared with 42 per cent of the state's total exports.

The $604.7-billion aerospace-defence industry, which nurtures countless suppliers of parts, systems and repair services, could feel the death of the TPP acutely. Its exports have increased annually since 2010, to $142.8-billion in 2015, and the sector is rebounding from a period of decline in California. But U.S. market share has grown just two percentage points over that period as competitors such as France and Russia gain ground.

"The United States could find itself in the position of not being the lead exporter in aerospace for very much longer if that trend continues," Aerospace Industries Association spokesman Dan Stohr said. "Forty per cent of American aerospace exports go to TPP member countries. If we are to maintain our share of that growing market, we need to participate in an agreement like TPP or risk missing out."

Smaller businesses with ambitions to expand have similar fears. In California's Napa Valley, a renowned source of fine wines, the regional vintners' association was keen to see the TPP ratified to put U.S. wine exporters on equal footing with signatories – and competitors – such as Australia, New Zealand and Chile. And since Canada remains Napa's thirstiest export market, a rewrite of NAFTA terms could be cause for grave concern.

If the protectionist tone in the White House prompts the U.S. to turn inward, and tariffs rise, the higher cost of exporting wine will "get passed on" to consumers, said Michael Honig, 54, who owns Honig Vineyard and Winery. He took over his family's local wine business in Rutherford, Calif., at age 22 and credits his wife, who had worked at Champagne maker Veuve Clicquot Ponsardin, for pushing him to look abroad. Honig now sells about 5 per cent of its stock, which costs between $18 and $45 a bottle, to nearly 30 countries, and hopes to double that share to 10 per cent.

The greatest potential for growth is in Asia, notably China, Japan, Singapore and India, where demand is rising. But suddenly it's unclear how open those markets might be.

"The world is smaller. You can't just protect your little neighbourhood and only be concerned about what's happening in your 50 states," Mr. Honig said. "Napa really makes some of the best wines in the world. So when we can compete based on quality, we win. And that's what free trade really allows us."

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