Trade and Trump

19.05.18 Publication:

During President Donald Trump’s first year in the White House, an English saying was often invoked when analysing the gap between what he said and what he did: the saying, based on our English love of dogs, is that “his bark is worse than his bite”. His actions had proved less damaging than his words. Now that we are nearly halfway through his second year, the situation has changed: Trump’s bite has caught up with his bark. And we must all expect it to stay that way.

We Europeans feel very conscious of this. In our case, the reason is President Trump’s withdrawal in May from the Iran nuclear deal which America, alongside France, Germany, Britain, Russia and China, had signed only three years earlier, and his decision to renew tough economic and financial sanctions on the Iranians, which are now set to harm many big European companies too.

He did this in a way that was particularly humiliating for European leaders, for he welcomed visits to Washington, DC, by French President Emmanuel Macron and German Chancellor Angela Merkel to try to persuade him to stay in the Iran deal, followed a few days later by the British foreign secretary, Boris Johnson, but then simply ignored these requests from America’s long-standing allies.

At least we Europeans now know how Prime Minister Shinzo Abe must feel, having similarly made big efforts to become close to President Trump, but then being denied exemptions for Japanese firms from the steel and aluminium tariffs the Trump administration is imposing on imports. And of course there has also been the humiliation of Trump choosing neither to consult nor inform Abe of his decision to accept North Korea’s proposal of a summit between him and Kim Jong-un.

The conclusion European and Japanese businesses and governments must now draw is that under this American administration, the many long decades of security alliances and economic collaboration over world trading rules count for nothing. The policy is not just one of America First, nor simply, as many commentators have said, America Alone, but it is also one of an America that does not care if its allies are damaged by its policies.

Given that the United States remains the world’s largest single economy, this means that many European and Japanese businesses are going to have to expect a considerable amount of new frustrations and real obstacles as the Trump trade and foreign policies play out.

One outcome that should not be expected, however, is any sort of major deal between the US and China over trade and economics. Such a deal, while welcome in terms of providing some stability and certainty, would risk discriminating against other countries, notably Japan and Europe. But this is not likely to happen, for the Trump administration is determined, it seems, to embark on a trade conflict with China.

President Trump and his trade officials, including the US Trade Representative Robert Lighthizer with whom Japanese trade officials became familiar during the 1980s when he was deputy US Trade Representative in the Reagan administration, have an approach towards America’s big bilateral trade deficit with China that can be fairly described as an ideology: the large deficit “proves” that trade is unfair. They also see China as a major technological competitor for US companies and potentially the US military.

For those reasons, while there may be small episodes of concessions and agreements, the course of American policy has been set towards confrontation. And this is not a confrontation from which President Trump is likely to want to back down. He will be even more determined to put sustained economic pressure on China after his June 12thsummit with North Korea’s leader ends in stalemate or failure.

The US-North Korea summit is heading for failure because there is no basis for a deal between the two sides: North Korea has no incentive to dismantle the nuclear capabilities it has spent decades developing, and having taken the initiative to open talks both with South Korea and the US, Kim Jong-un will be in a good position to blame America for the lack of progress. Once that happens, China will likely ease its economic sanctions on North Korea, angering the US.

The coming 12 months are not going to be pleasant for any business trying to plan their future strategy. At least the world economy is growing strongly, providing some support for profits. But by the end of this process, the basic structure of trade rules, established by the World Trade Organisation, is likely to be in danger.

Whether those rules become permanently damaged or just temporarily will depend on how popular President Trump’s trade policy becomes with the American people, and how well his Republican Party performs in the mid-term Congressional elections in November. We are all going to have to fasten our safety belts for a bumpy ride ahead.