Why counter-puncher Trump’s looming trade war scares everyone
If the US goes ahead, the options that other parties have for retaliation are immense
US President Donald Trump’s is arguably the closest thing America has ever seen to a Potemkin presidency.
Using tweets, bombast and interviews with sympathetic journalists, Trump spent the first 405 days in the White House spinning his administration as “running like a fine-tuned machine.” Washington learned to ignore his rants, slights and malapropisms. It was all political showmanship – more entertainment and farce than substance.
On Mar. 1, though, Trump suddenly did something the establishment feared deeply: he tried to govern, starting with sudden tariffs on steel and aluminum of 25% and 10%, respectively. The giant tax cut passed in December was the work of Congressional Republicans. The tariff policy, though, was Trump’s doing, and his alone. The global economy hasn’t been the same since Trump fired the first shots of a coming trade war – and proved he’s every bit the bungler it thought.
Is the sense of dread overdone? Slapping taxes on metal imports won’t devastate a global economy enjoying its first synchronized recovery in over a decade. But the worry isn’t so much what Trump did, but why he did it.
The what – the nitty-gritty of his trade gamble – is this: it’s a shot across globalization’s bow. Initially, the tariffs were imposed on a blanket basis. Since March 1, though, intensifying howls of protest from lawmakers and US allies forced the president to backtrack. First, he exempted Canada and Mexico. Then he acquiesced to other allies applying for their own carve-outs.
For now, at least. The why relates to Trump’s long-held belief America is being cheated. The very essence of Trumpism is a zero-sum view that if The Donald isn’t making close to 100 cents on the dollar, a deal isn’t fair. It’s also the misguided belief that a trade deficit means the other country owes the US loads of money. Trump might want to read some Adam Smith, complimented with a touch of David Ricardo.
Trump is, it is often said, a skilled counterpuncher. To him, the steel and aluminum taxes weren’t first punches; those came from China long ago. Yet Trump thinks he’s the first US leader with the courage to hit back. Given his tendency to jab back with escalating force, there’s every reason to think things are about to get very messy.
The retaliation could be massive
China has been measured in its response. Europe has gone the other way, displaying masterful trolling skills. The European Union came up with a list of symbolic targets for possible retaliation to get the attention of specific Washington powerbrokers. On it are Harley-Davidson motorcycles, which is headquartered in Wisconsin, the home state of House Speaker Paul Ryan. So is bourbon, an export vital to Senate Majority Leader Mitch McConnell’s home state of Kentucky.
Yet Asia possesses even greater leverage over the Trump White House. Take China, whose scale as a trading partner and its role as a vital customer of US farmers affords it considerable influence. It has already fired one warning shot Trump’s way: investigating curbs on imports of American sorghum, a cereal grain fed to livestock.
Xi Jinping has a smorgasbord of options to punch back with. The president could devalue the yuan, for example. Canceling all Boeing orders would eliminate about 180,000 US jobs. Slapping exit taxes on goods Apple, General Motors, Walmart and other names assemble in China would slam Wall Street. Targeting soy beans would savage the economies of states from Mississippi to Missouri. Beijing could limit imports of everything from Hollywood movies to beef to pharmaceuticals. And then there’s the ultimate weapon: a fire sale of China’s US$1.2 trillion of US Treasuries.
Japan could do the same of, course, with its US$1.1 trillion of Treasuries. Doing just that has dawned on Tokyo before. In 1997, Prime Minister Ryutaro Hashimoto made a jaw-dropping admission: that “several times in the past, we have been tempted to sell large lots of US Treasuries” to gain diplomatic leverage. One moment of temptation was during tense auto-sector talks.
As Trump’s closest friend among world leaders, today’s prime minister, Shinzo Abe, is unlikely to go down that route. At least for now. Abe, though, must be feeling some serious buyer’s remorse over cozying up to — and normalizing — Trump in global circles. Along with reneging on the Trans-Pacific Partnership, and recent tariffs, Trump favors a weaker dollar, imperiling Japanese exports. Yet Trump would probably view any reaction by Abe as a personal slight, and hit back accordingly.
Abe could go the other way and give South Korea’s Moon Jae-in a call. Wisely, Abe is working to preserve TPP with the other 10 members. Why not lobby Moon to join? Why not also woo India, Indonesia, the Philippines and others to add heft to the grouping?
Moon might take Abe’s call. Tensions over World War II and disputed islands tend to keep Japanese and Korean leaders apart, but Moon is being squeezed by both Trump and Xi. Aside from Trump’s “fire and fury” theatrics toward North Korea, he has forced a renegotiation of the Korea-US free-trade agreement, in effect since 2012.
The very essence of Trumpism is a zero-sum view that if The Donald isn’t making close to 100 cents on the dollar, a deal isn’t fair
Given Trump’s zero-sum worldview, Moon can’t expect a fair outcome. Trump is sure to use Korea’s reliance on US protection to win concessions. China, meantime, is livid over Seoul hosting US missile-defense systems. Trump’s bluster and erratic behavior could indeed facilitate an unlikely alliance between Tokyo and Seoul. Abe and Moon might do better to wait for the next U.S. president than prostrate their economies before Trumplandia.
Not that such moves would restrain Trump. In fact, they might provoke him. Trump has talked often about how Washington should ignore World Trade Organization rules (of which his tariffs may already be in violation). That would mean emulating the same Chinese tactics Trump has long abhorred. Nor does shame work on Trump, who just bragged about misleading Canada’s Justin Trudeau on trade dynamics.
In fact, there’s every reason to think the New Economy will be a bigger Trump target. His move this week to kill a bid by Singapore-based Broadcom for San Diego-based Qualcomm was a shot that really landed. Normally, officials at the Committee on Foreign Investment in the US (CFIUS) slap down a deal after it’s completed. Trump shut Broadcom-Qualcomm down preemptively, an unprecedented act by a White House and another red flag about the types of policies to come.
Americans can only hope he won’t act as rashly on, say, reining in North Korean dictator Kim Jong Un. Or shoot from the hip – literally and figuratively – with Iran, or other geopolitical rivals.
For now, though, the battleground is trade.
If “America First” turns into “Fortress America,” the global economy will suffer – and no one more so than U.S. consumers, including the 35% of voters who still think Trump is making their finances great again. That’s the thing about counterpunchers: sometimes they hit the wrong target. Trump’s trade war is as obvious a miss as they come.