Junck Bond?

The EU/US trade ‘ceasefire’ is good news as far as it goes; but the EU should not take Donald Trump’s word as his bond.

The 25 July agreement between European Commission President Jean-Claude Juncker and US President Donald Trump to put on 'hold' the imposition of further trade tariffs pending discussions between the EU and the US on eliminating transatlantic trade barriers (tariff and non-tariff) for industrial goods and on reforming the World Trade Organisation (WTO) is, on the face of it, good news. Certainly, from the perspective of the EU, for which this was a last ditch effort, undertaken with low expectations, to stave off a further escalation in trade tensions, it was by no means a bad outcome. And Mr Trump can claim personal credit, which may help to ease some of the mounting domestic pressures on him over trade — an important consideration in the context of the midterms and the ‘corn belt’ in particular. Furthermore — and as was almost certainly the case with his twitter assault on Iran last weekend — the US President has created a ‘good news’ story which usefully distracts from his travails over Russia (not least his former ‘fixer’ Michael Cohen’s latest claim), an art at which he is particularly skilled.

If one wants to be optimistic — and without sinking to the depths of sycophancy demonstrated by the Republican Chair of the House Ways and Means Committee Kevin Brady who has just described Mr Trump as “the best negotiator to deliver fair and lasting changes to America’s trade relationship with China” — one could reasonably hope that, because this agreement was struck by the US President himself rather than by (say) Commerce Secretary Wilbur Ross or Treasury Secretary Steve Mnuchin, there may be a reasonable probability that it will hold.

However, no-one should get carried away on the basis of one side of paper which is remarkably vague even on future process, let alone substance (an echo of Mr Trump’s agreement with Kim Jong-un?). It is certainly not the major breakthrough which the US President and his aides are claiming. Indeed, it is hard not to agree with Philip Levy, a former trade adviser to President George W Bush (quoted in the Financial Times (FT) today — subscriber access only), that:

“At best this might get us back most of the way to where we were before [steel and aluminium] tariffs [imposed on 1 June]. That’s not a huge achievement.”

Consider.

  • Contrary to Mr Trump’s claim to an audience in Iowa yesterday that he had “just opened up Europe to” US farmers, the deal struck on the 25th avoids any mention of discussions on farm products. Furthermore, as an EU official (quoted, again, in the FT) has pointed out ‘Europe’ per se does not buy farm products and it is market forces which will determine whether Europeans buy more US soybeans or not. (This being said, with the price of US soybeans around a 10-year low thanks to Mr Trump’s trade ‘war’ with China, Europeans may well be buying more in any case.)
  • As for Mr Trump’s claim that Europe will buy more US Liquid Natural Gas (LNG), infrastructure to do just this (as a hedge against over-dependence on Russian gas) has been under construction for years, with the main barrier to US sales to Europe being Washington’s own export restrictions.
  • It would be unwise to assume that the threat of tariffs on auto imports from Europe has gone away. The Department of Commerce’s Section 232 investigation is continuing and will report back, at the latest, early next year. If (as many commentators expect) its conclusion is that auto imports are harming US national security, Mr Trump may well follow through as he has with aluminium and steel (where the tariffs imposed against imports from Europe on 1 June under Section 232 remain in place).
  • The elimination of non-tariff barriers would be extraordinarily difficult politically not only in Europe but also in the US, as the total stalling of the Transatlantic Trade and Investment Partnership (TTIP) negotiations in late 2016 readily demonstrates. (And note that the EU and US had, in fact, agreed to eliminate tariffs on 97% under the proposed terms of the TTIP.)
  • WTO reform may well be both necessary and essential to sustain free trade, as articles in the 21 July edition of The Economist (subscriber access only) make abundantly clear. And, certainly, to have the EU and US working together to this end would be a minimum prerequisite if a reform process were to have any chance of success. But, as Anthony Gardner, a US ambassador to the EU during the Obama era, has pointed out (again, to the FT), it is hard to see how this fits with what looks very much like a deliberate attempt by the Trump Administration to undermine the WTO entirely.
  • Finally, there is Mr Trump's propensity to change his mind. Notably, it would be as well to keep firmly in mind that, although it was Mr Mnuchin rather than Mr Trump who actually struck the 19 May trade deal with China (under which the US agreed to freeze the threat of new tariffs in return for increased Chinese purchases of US soybeans and LNG!), the US President had personally engaged with Chinese envoy Liu He during that process, only to tear the agreement up just days later.

Of course, having seemingly averted a transatlantic trade war for now at least, Mr Trump may stand by the 25 July agreement simply to give himself more scope to pursue the hard line he is threatening with Beijing. And, for sure, this week’s announcement of a USD12bn relief package for US farmers hit by retaliatory tariffs would seem to be consistent with a further ratcheting up by Washington.

Or, buoyed by his ‘success’ with Mr Juncker, Mr Trump may decide to follow Mr Brady’s urging (see above) and sit down personally with President Xi Jinping to try to reach an agreement on the China front too.

But, one way or the other, we can be sure that Europe’s leaders, Mr Juncker included, will not be taking the mercurial Mr Trump’s word as his bond.

Alastair Newton

www.alavan.biz

**[**Image credit: AP**]**

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