Question: Is U.S. President Donald J. Trump serious about moving down a protectionist route?
Answer: He has consistently “surprised” and delivered on election promises, whether that is cutting taxes, moving the U.S. Embassy to Jerusalem, fiscal, deregulation, appointing far-right Supreme Court judges, “warming” the relationship with Russia, talking tough with North Korea, getting tough on NATO allies to pay their way, re-negotiating NAFTA and now imposing tariffs on steel/aluminium. Therefore we have to assume that more of the same is to come, as Trump looks to fundamentally reshape U.S. trading relations globally, and securing better deals for the U.S., and JOBS, JOBS, JOBS!
Question: But does Trump want a new protectionism new world order?
Answer: Given Trump’s business background, where he operated “cross-border,” you have to assume that he understands the benefits of free and easier global trade – after-all he used globalization to his advantage by expanding his Trump business brand, and manufacturing cheaply offshore branded products to import into the U,S. But I think it is important to understand Trump and his populist agenda. He understands that globalization worked for some, but not for many in the U.S., and especially not for his own “rust-belt” core support base and this was reflected in his win in 2016, Brexit and recent election results in Italy. The GOP will stand or fall in mid-terms in November and Trump at re-election in 2020, on U.S. votes and voters, not from some global elite who have loved and benefitted from globalization the most. He has to deliver enough feel-good on the economy to ensure GOP victory in November and his re-election, and remember therein that a GOP victory in November is also key to Trump avoiding impeachment or worse from the Robert S. Mueller inquiry. This is survival stuff from Trump. So forget about cozy win-win trade outcomes, for Trump this is a zero-sum game for the U.S. and his electoral prospects. So this is a big –renegotiation, it is about overturning the apple cart, and assuming that the U.S. is bigger and stronger to ensure that in the melee to collect up all the apples the US will get more than its fair share – thereby ensuring Trump’s own electoral success and survival.
So it is clear to me that we are going to see a whole stream of these trade spats emanating from the US, and all aimed at shocking, giving the U.S. first advantage in negotiations to come and getting better deals, and better access for US companies offshore. This is what it says on the tin, “America First.”
So I guess while Trump does not want a new protectionist world order, he is not afraid of that being a consequence of his current lurch in that direction – and he believes in what he says that the US is well placed to win any such battle.
Question: Surely strategic allies will be exempt?
Answer: Not necessarily. Again, its America First, and Trump’s re-election first, and it’s all about using leverage to deliver on that agenda. Trump thinks that the US as (still) the biggest global economy, the largest global market, and with the U.S. still as the single global superpower, the U.S. holds all the cards, and others will inevitably have to bow to the US in one way or another. Now deals can be cut in various ways – and Trump’s indication to its NAFTA partners, Mexico and Canada, suggests that this can be something of a quid pro quo. Allies like Mexico running an annual trade surplus with the U.S. of $71 billion, Japan $69 billion), Germany ($64.3 billion), Ireland $38 billion), Italy ($32 billion) are not exempt from the Trump treatment, and look vulnerable. In many ways, with the U.S. accounting for 15 percent of global trade, they will have to “pay-to-play” or trade in/with the U.S., and likely this could mean paying deference to Trump by cutting big-ticket trade/investment deals – buying U.S. military equipment, planes or enabling market access for U.S. banks and corporations. So, for example, forget about the use of Countering America’s Adversaries Through Sanctions Act sanctions against those buying Russian military equipment, as Trump is likely to use the trade tariff route instead. Turkey might like to think long and hard there on plans to buy S400 missiles from Russia, given that the U.S. is an important market for Turkish steel.
Q: But what about the sanctity of existing trade deals/architecture?
Answer: In business, Trump tended to view a contract as a framework and is much more fluid or flexible, and in the end, business is about the negotiation, leverage and ultimately power in the game. So I think Trump views existing trade deals as works in motion. I do think he believes the idea that the globalists were wrong in trying to construct a multilateral trade framework where perhaps global trade and global GDP were maximized but in so doing the U.S. surrendered a larger slice of the admittedly larger cake to friend and foe alike. Mixing metaphors again here but I don’t think Trump cares about the size of the global cake, but just how big the U.S. slice is in absolute and relative terms. And I think there that given the U.S. is the 500-pound gorilla in the room still in any scenario it can take more cake than anyone else, and indeed its hegemony – keeping the gorilla fed – depends on it being able to eat much more than any potential newcomer (the Chinese). I guess for Trump, Peter Navarro, et al., globalization inevitably means the erosion of U.S. hegemony over time, as the US gets richer but so does everyone else and the relative gap narrows weakening the U.S. in relative terms in the process. So it’s now every country for themselves and this is a new trade world order, let’s get real and used to it.
Q: But what about the case that the global momentum is still towards free trade?
Answer: Sure, the Trans-Pacific Partnership is going on without the U.S., and the trend still is towards more free trade deals being conducted by many parties. But the U.S. is still the largest single market in the world and the danger is that if Trump’s policy works that others will seek to follow – especially in a world where the politics of populism are becoming more dominant. If the U.S. adopts a pay-to-play approach to keeping its market open, and this succeeds in, for example, winning defense, energy and other contracts, then the pressure/temptation will be on others to similarly use their leverage.
Q: How does China fit into this?
Answer: The Chinese are keeping their powder dry, minimizing any commentary around this issue, and waiting for Trump and the U.S. to more clearly reveal their hand. So far the tariffs on steel and aluminum have appeared more harmful to U.S. allies, than to China given the import of the European Union, Mexico and China in the steel/aluminum space. But if Trump is about rebalancing trade and cutting the U.S. trade deficit, then eventually Trump is going to target China’s annual $375 billion trade surplus with the US. The sense is that this is something of a phony war at this stage, with the two opponents circling one another, and China content to let U.S. allies such as Canada, Mexico and the E.U. do its running or bidding to talk Trump down. But given the declining U.S. hegemony over China, with globalization playing such an important part therein, you have to assume that Trump will eventually strike, and it seems that the first strike will be over the section “super” 301 of the 1974 Trade Act and a likely large fine lodged over intellectual property rights. With expectations of a fine likely amounting to hundreds of billions of dollars, it is hard to see China not responding with tit-for-tat sanctions of its own. That is unless China is willing to come up with some fairly hefty concessions of its own, pre-emptively which seems unlikely as they are in the waiting game. Unless China can come up with something very significant to allay the looming US action, surely it has to prepare and assume the worst.
Q: What about emerging markets?
Answer: Well I think countries running large trade surpluses with the U.S. should be worried. They will need to think long and hard over their “strategic” relationship with the U.S., and what they can offer Trump to “rebalance” the relationship so as to avoid being caught up in new tariff regimes. This is the first round effect, but the second round effect will be felt by the assumption that we are going to enter a more protectionism global trading environment, likely with less trade – and likely less global growth to go around. I mean just think what are the big political trends that dominate at the moment? These are populism, and the re-discovery of the nation-state, whether that is the United Kingdom, Poland, Hungary, Turkey or the Philippines, and the impulse seems to be away from multilateralism and to take more power and decision making back to country capitals. This might suggest that we are in fact at a turning point in terms of global trade, and perhaps also growth – unless a new super-charged U.S.under Trump, is again able to pull the rest of the global economy with it, but importantly for Trump well behind/in its slipstream (as no one can eclipse the glow of Trump and the US of A). And then I guess there is the big question mark around China – and how a durable China can be in a much less globalized world, remembering that its success over the past 30 years or more has been built on the opening up of the global economy to China (Trump/Navarro would, though, argue that the problem is that China has not been adequately opened up to the global economy, which is the whole problem). I guess the only solution/counter to Trump from China would be just the latter, i.e., major concessions from China to open up its economy to the U.S. – albeit that does not mean necessarily to others, aside from the U.S. So far, emerging market vulnerabilities lie in over-dependence on the US economy, global trade and perhaps also China.
Q: Can China create some parallel structure to trading relations with the U.S., building on the TPP with stronger ties to the E.U.?
Answer: I just don’t see it, as in the end, despite China’s big check book. And I don’t see it as U.S. strategic, historic and cultural relations just run so deep still for so many countries. If the E.U. has to choose between the US and China, it will always side with the U.S., because of the U.S. strategic umbrella, but also the dominance still of the U.S. dollar, and U.S.-dominated global financial architecture at least – in the U.S. Treasury we still all trust.
Q: And what is the biggest risk to Trump’s protectionist agenda?
Answer: Special counsel Robert S. Mueller, as Trump is now trampling on so many entrenched vested interests, that Washington, D.C., elites might just feel that his agenda is just too radical and that the easier option is now to let Mueller do his job, and allow Trump to be moved aside. Perhaps the surprise move on tariffs was driven by the fact that the Mueller investigation was getting closer to the bone, and Trump had to mix things up again. Interesting now that Kim’s surprise move to reach out to Trump likely has bought Trump some time yet, as it seems unlikely Mueller would be unlikely to move while the chances of some peace deal on the Korean peninsula was within reach.
