Trump's trade war and the global trading system

Muhammad Mahmood | Published: June 30, 2018 21:24:07

President Trump's protectionist trade policies have increased tensions with US trading partners worldwide and prompted challenges before the World Trade Organisation (WTO). He even invoked the Trade Expansion Act of 1962 to erect protectionist wall for US steel and aluminium producers at home on national security grounds. The use of national security pretext is aimed to enable the steel and aluminium industries to increase their capacity utilisation rates above 80 per cent for the first time in years.

Until a month ago Trump's trade policies were thought to be benign compared to his protectionist threats. That is not the case any more, his administration is showing every intention of pushing his protectionist agenda full steam ahead. This is further widening the gulf between the United States and its biggest trading partners.

The Trump administration has now imposed sweeping tariffs on US$ 50 billion worth of Chinese goods and in retaliation China imposed 25 per cent tariffs on 106 US products, including soybeans, automobiles, chemicals and aircraft, worth US$ 35 billion. The administration slapped 25 per cent tariff on steel and 10 per cent on aluminium worldwide; and this tariff will particularly hit the European Union (EU) and Canada who together account for close to US$ 1.0 billion steel exports to the USA making them the largest steel exporters to the USA. Tariffs were imposed on Mexican goods also. In response the EU imposed tariff on an array of US products especially targeting President Trump's constituency, like bourbon, motorcycles and orange juice. The EU retaliatory tariffs targets US$3.2 billion of US goods. The current EU position is to retaliate but not to escalate. Mexico has also retaliated with their own tariffs on US goods. Canada also announced "dollar for dollar'' retaliatory tariffs on US goods. The Canadian measures include 25 per cent tariff on all US steel products and 10 percent tariffs on 84 other products. Trump has now upped the ante with a threat to impose 20 per cent tariff on all imported car which will hit Germany particularly.

As the opening salvoes of the trade war have been fired, the Dow plunged at the lowest level for the year despite the strong economy.  The British FTSE was down by more than 2.0 per cent and the European STOXX  600 index dropped 2.0 per cent. Market analysts in the USA are ramping up their forecast of a recession resulting from a decline in business confidence and supply chain disruptions caused by the trade shock. But opinion surveys in the USA indicate a very high level of support not only for Trump's trade policies but also for his immigration policies. As the US economy is performing well and the unemployment rate is 3.8 per cent, that make the president to feel confident that he is on the right track, at least politically.

Trump is now confident in his political position at home and wants to further enhance that position. He is planning to go further tightening the import restriction by invoking the International Emergency Economic Power Act of 1977 which allows the President to impose sanctions on the grounds of national emergency. This act has already been applied to countries such as North Korea and Iran.

It is becoming evident that the Trump administration is increasingly blurring the line between economic challenges and national security challenges. Such a policy orientation raises the fear that the US is on a path to escalate trade war measures. Like in any other wars, in a trade war no one wins and everyone loses. More precisely, trade wars do not play out according to the plan because one cannot strike precise target without collateral damage including self-harm.  Tariffs could have a very small and very short-lived beneficial effect but will lead to higher cost to the consumers in particular and the whole economy in general.

Meanwhile, Trump's "emergency powers'' is most likely to be directed at China to clamp down on technological trade with that country. Both Peter Navarro, Trade Adviser to the President and Robert Lighthizer, US Trade Representative, believe that the core issue in trade dispute with China is not the US trade deficit but China's drive to enhance its technological base under the programme "Made in China 2025''. They, along with other members of the administration like Wilbur Ross, US Commerce Secretary, firmly believe that materialisation of such a programme poses an existential threat to the USA, both economically and militarily. Meanwhile, China has warned that US tariffs could torpedo any chance of a future trade deal between the two countries.

President Trump, emboldened by a well performing US economy and the EU's weak economic performance, expanding political turmoil and threatened territorial disintegration as exemplified by Brexit, practically stormed into the G7 meeting at Quebec City in Canada in a combat mood. He arrived late and left early. Before his arrival he placed tariffs on goods coming from the EU and Canada along with China and Mexico. He wanted to make his point very clear that the policies of US allies hurt US workers and the US would do everything possible to redress that. He then linked the issue of military spending to trade negotiations. The US has carried the disproportionately very high financial burden of Western military alliance and its expansion across the world. He said that the US paid close to the entire cost of the North Atlantic Treaty Organisation (NATO). To add to the disarray at the conference he asked Russia be reinvited to the summit. But it is most unlikely that Moscow will be keen to come back as it has already found a much better green pasture elsewhere. The meeting ended with both President Trump and the host Prime Minister Trudeau exchanging insults at each other from press conference podiums.

The economic logic of Trump's tariffs may not be apparent but he made sure to make their political effects very clear. The EU-US relationship has many other fronts that are also under serious strain and they extend from NATO to the Iran Nuclear Deal, the Paris Climate Agreement and the decision to recognise Jerusalem as Israel's capital. And now on top of all these, the very future of an open global trading system is under serious threat from the USA.

 President Trump is firm in his belief in economic nationalism, a belief on which he has staked his political future rather than on the globalisation agenda pursued of the G7. By doing so he fractured the core of the Western economic alliance which since its inception set the economic agenda for the rest of the world including the agenda for the WTO. Now, the WTO, the very edifice of promoting and sustaining the free and open flow of trade, is under threat due to the Trump administration's unilateral actions flouting its rules. The USA is in more than one way sabotaging the working of the WTO by stalling the replacement of retiring three members of the WTO Appellate Body.

The EU and China have agreed to defend the multilateral trading system and to set up a working group to update the WTO to deal with emerging situations. Also Finance Ministers 6 of the G7 countries issued a statement where they said President Trump's recent trade policies undermined open trade and confidence in the global economy and required decisive action response. But President Trump seems to have firmly taken a position on trade relation - and that position is unilateralism. That is clearly demonstrated when he said the WTO had been a disaster for the USA. If he continues on this path unopposed within his own country, the risk of a serious breakdown of the global multilateral trading system will only accelerate.

Muhammad Mahmood is an independent economic and political analyst.

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