Trade: The 'phoney war' is over

April looks set to see a sharp escalation in trade tensions, triggered by the Trump Administration.

“When President Trump imposed tariffs on imported solar panels and washing machines, I was reminded of a line from George Orwell: ‘We have now sunk to a depth at which the restatement of the obvious is the first duty of intelligent men’.”

N Gregory Mankiw, The New York Times, 16 February 2018

The potential threat which Mr Trump’s deeply held beliefs on trade pose is still significantly underestimated, in my opinion. This despite his 22 January imposition of steep tariffs on imported washing machines, solar cells and solar panels which stands to hit China and South Korea especially (as well as costing the US itself up to 23,000 jobs in the solar panel sector alone according to the Solar Energy Industries Association).

I see three clear reasons for this, as follows.

  • As Greg Mankiw intimates in spelling out succinctly the case for free trade in the article from which the quote at the start of this article is lifted, there is the ‘surely Mr Trump must realise?’ argument. Unfortunately, this is not how the world is seen by Mr Trump or the economic nationalists who dominate his team (Gary Cohen being the sole important exception) — even putting to one side the (semi-related) ‘what will this do to my approval ratings?’ dimension which will always be of paramount importance to the President.
  • There is a geopolitical dimension, ie is it not counterintuitive for the US to be unilaterally imposing tough trade measures on close allies and countries with which it is seeking closer relations in the context of, notably, China (eg India, Vietnam)? Clearly, the answer is that it is. However, Mr Trump's 'America First' agenda appears to have fathered a major disconnect in thinking in Washington between economic nationalism on the one hand and the US’s wider strategic interests on the other.
  • Despite all his pre-election pledges, the withdrawal from the Trans-Pacific Partnership aside, Mr Trump did nothing particularly startling on trade through the whole of his first year in office — if, that is, one discounts the setting of several potential time-bombs!

This third point has resulted in what I think can reasonably be described as a ‘phoney war’ on trade. And, I believe, to a widespread degree of complacency based on the idea (which goes farther than just trade) that Mr Trump’s bark is worse than his bite.

Nowhere is this ‘bark vs bite’ idea more true, in my view, than on trade — where, to be fair to its proponents, it is supported not only by the shortfall to date in substantive steps by the Trump Administration but also by the deteriorating trade balance statistics. Nevertheless, the pattern to date is, I believe, consistent with my long-held opinion that: (a) trade would not come to the fore until after tax ‘reform’ was done and dusted, and (b) Mr Trump would be held in check to an extent by the technical complexities and political realities which are deeply ingrained in trade policy. So, I am personally not at all surprised that we are into his second year of office before we see Mr Trump’s true colours on trade being put into practice.

The 22 January tariffs have quickly been followed by the 16 February clearing of the way for action against imports of steel and aluminium on national security grounds on which Mr Trump must make a decision by mid-April. If he follows through, as I believe he will, even if the tariffs he imposes are less draconian than the 24% and 7.7% minimum respectively recommended by the Department of Commerce (which has offered him some other options), this would be a potentially very serious, not to say unprecedented, step. As Linette Lopez of Business Insider put it:

“If President Trump puts in place steel and aluminum tariffs recommended by the Commerce Department, his administration will be crossing an unspoken line in the sand no country has crossed since World War II. That is because the administration is invoking national security to justify these tariffs, which could hit our allies and rivals almost indiscriminately. Trade experts say that doing this opens up a Pandora's Box that World Trade Organization [WTO] member nations have been responsible enough to keep closed. This lowers the bar for starting a trade fight. National security can be used to justify almost any action when relationships are strained, and experts fear that now that it's on the table, countries can use it against each other — and perhaps against us.”

We may be sure that the US will not avoid retaliation, which is unlikely to be restricted simply to reference to the WTO even if Washington was not busily undermining its dispute settlement mechanism. China, for starters, will not sit passively by, as it has already made clear by imposing measures on imports of styrene from the US and launching an investigation into US sorghum. Although I expect Chinese — and, indeed, European Union — countermeasures to remain broadly proportionate (and to be carefully targeted against sectors which have strong lobbies in the US) they will not be taken lightly by a Trump Administration which is only likely to up the ante still further.

Meanwhile, the seventh round of Nafta talks is due to start on 25 or 26 February in Mexico City. An eighth round due next month is likely to slip into April because of the Easter break. By then I think we can safely assume that Mexico’s negotiators will be well and truly hamstrung by the country’s upcoming elections and that the entire process will be, at best, stalled.

With the USTR now expected to announce the outcome of its Section 301 investigation into alleged barriers to market access imposed by China around that time, April is beginning to look like it could be a real milestone in the roll-out of Mr Trump’s trade agenda.

It is possible that Mr Trump firmly believes that there won’t be a trade war, as he claimed on 23 January. And he may be right (possibly depending on how one defines ‘trade war’, as opposed to heightened trade frictions). But, with the phoney war now clearly coming to an end, avoiding a trajectory which stands to inflict significant damage on both the real economy and financial market sentiment is likely to require considerable restraint on the part of multiple parties. Mr Mankiw's Orwellian "restatement of the obvious" is helpful in that regard but is unlikely alone to be sufficient unto the day.

Alastair Newton

[Image credit: ThompsonReuters]

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