22.06.18 Publication:

A common saying among military men is that a country should never send troops into battle without having an exit strategy, a plan for how to end the conflict and withdraw. This is a good principle though it is often ignored by the military’s political masters. The same principle ought also to apply to trade wars. Which is why the biggest economic question right now facing the world is whether President Donald Trump has an exit strategy from the trade wars he has just started.

There are two quite extraordinary aspects of Trump’s trade wars. The first is that he has chosen to attack through tariffs even America’s closest allies, in Japan, Europe and Canada, countries which have been not just allies in defence and security but also in building the world trading rules themselves. The second is that he is attacking a more obvious trade enemy, China, just at the time when he needs that country’s co-operation in maintaining pressure on North Korea.

Readers will note that one thing that is not extraordinary is that Trump has chosen this fight over trade. It is not extraordinary because resentment about US trade deficits and accusations about unfair trading practices by other countries has been a consistent line of his over more than 30 years of expressing his political opinions. On many policy issues Trump’s views seem unpredictable and somewhat improvised. Not on trade.

During President Trump’s first year in the White House, it nevertheless appeared to outsiders as if two quite traditional counter-pressures were discouraging him and his administration from embarking upon a trade war. One was the view of big American businesses, which tend to worry that their own access to markets overseas will be threatened during a trade war. The other was the competing needs of US defence and security, and in particular the argument that fighting China over trade would put at risk the economic sanctions the two countries have co-operated over for North Korea.

This year, however, he was evidently decided to ignore both of these counter-pressures. Big US businesses have been bought off with corporate tax reductions and deregulation. His attitude towards China, though, is more of an enigma. Does Trump really think that his June 12 summit in Singapore with North Korea’s Kim Jong-Un happened only because of his powers of persuasion? And does he really think China will maintain tight sanctions on North Korea from now on?

If he does believe those two things, then he is likely to be disappointed. Kim Jong-Un came to Singapore in a strong position, with North Korea’s nuclear and missile capability already demonstrated and with a renewed alliance with China. Having made no visits to China since he took power in 2011, this year Kim has already visited China three times for talks with President Xi Jinping, and he flew to the Singapore summit on an aircraft provided by China.

While he may not wish to be excessively dependent on his Chinese neighbours, their political and economic support is what Kim most needs right now. In fact, as long as he can maintain Chinese support and open up trade across the China-North Korea border again, his position will be sufficiently secure that he will be able to ignore any pressure from the United States to take real steps towards denuclearisation.

This brings us back to the point about the need for an exit strategy when you start a war – whether the war is of a military, trade or diplomatic nature. There is no sign that President Trump has an exit strategy in mind either for his trade wars or for his diplomatic battle with North Korea. In fact, his North Korean needs remain in contradiction to his needs over trade.

It is possible, as some commentators argue, that Trump’s needs are simpler and more limited than his language has implied. It is possible that on trade all he needs is to be demonstrating that he is tough and defending American interests, so as to win votes for his Republican Party in the mid-term Congressional elections in November. It is possible that on North Korea all he needs is to show a de-escalation of military tensions and a continuation of seemingly friendly dialogue, and Kim Jong-Un has no incentive for denying him either of those features.

If this view proves to be true, then we can all relax: in the context of an expanding world economy, the trade war measures announced so far will not do major damage, even if they are regrettable, and an arrangement for North Korea which amounts to a non-hostile form of containment will preserve peace and stability in East Asia.

That is a comforting thought, but it is probably too complacent, particularly on trade. Based on his consistent argument about unfair trade, it would be surprising if Trump were to desist from a further escalation of his tariff battles. The US trade deficit is not going to diminish, especially while domestic US consumption is growing strongly thanks to his own tax cuts, which will increase imports. And neither China nor the US’s allies in Europe, Canada and Japan is in a political mood to make concessions to the American bully.

It is more likely that trade restrictions will spread during 2018 and 2019 to a lot of other products, including cars. China is in a strong, confident period, so that President Xi will feel able to stand up to Trump in order to demonstrate that his country has arrived as a mature economic power.

A stand-off over North Korea could be more benign, for if Kim Jong-Un does maintain Chinese protection then Trump would have to be very foolish indeed to threaten or provoke a military conflict.

This still means, however, that President Trump after the November mid-terms is going to look beleaguered, frustrated and quite angry. The consequences for trade and for US relations with its allies are bleak. He doesn’t have an exit strategy, and neither does the world.