The recently signed EU-Japan trade deal stands in stark contrast to the current heightened risk of a global trade war precipitated by US President Donald Trump. That the world’s second- and fourth-largest markets have opened up to each other should have been heralded as a major leap forward for globalisation. Instead, any cheer was drowned out by the risks to the global trading order emanating from Trump’s Twitter page.
World leaders cannot ignore Donald Trump when he says he aims to correct the injustices the global trading order inflicts upon the US. Despite a gradual decline in its relative size and influence, the US remains the most important player in global politics and economics. For better or worse, the US president still has the clout to change the world order.
The checks and balances in Washington that have hemmed in past presidents, helping them to stick to a mostly predictable and logical path on foreign and trade policy, do not seem to restrain Trump very much, as he has started to administer what could turn into one of the biggest changes in US trade policy for decades.
Trump relied upon his presidential executive powers to introduce the first round of US tariffs on steel and aluminium earlier this year. In essence, he claimed that the US’s reliance on such imports from its peaceful northern neighbour and ally (Canada) presented a national security threat. With this small but telling precedent in mind, the US’s major trading partners must wonder whether Trump’s worse instincts on trade can be tamed.
Trump seems to have a penchant for confrontation and a deeply ingrained ‘deal’ philosophy from his days as a New York-based real estate investor. His apparent view that exchanges usually have a winner and a loser shapes his misguided approach to trade.
Instead of viewing, say, US-Mexico trade as mutually beneficial, Trump refers to the difference in imports and exports expressed in the trade balance as an indication of who benefits. Since the US runs a trade deficit with Mexico, Trump has concluded that the US loses. This is plain wrong.
Could Trump really go so far as to start a full-blown trade war between the US and its major trading partners? Is he just pandering to his base ahead of the November midterms? Or does he really have the ultimate objective of lowering trade tariffs after shaking up things first? These are profound questions. For Canada, China, Mexico, the EU and other countries at a direct risk from a punitive tit-for-tat escalation of trade tariffs, Trump embodies two diplomatic problems: he is unpredictable and his objectives are unclear.
The recent promise between Mr Trump and EU President Jean-Claude Juncker to hit the pause button on the US-EU skirmish and work towards lowering tariffs is welcome news. However, Mr Trump is only likely to agree to any deal that he thinks can correct imbalances in US-EU trade. Meanwhile, the EU is unlikely to agree to any terms that are not reciprocal. Progress on this front could be tough, to put it mildly.
So far, the US president has presented his trading allies with two options – cut tariffs on US products or face higher tariffs of your own. A third choice, which includes the US simultaneously lowering its own barriers along with its neighbours, would be the optimum.
The US president has presented his trading allies with two options – cut tariffs on US products or face higher tariffs of your own
In the event that he changes his tune on trade and offers this third option, countries should be ready to negotiate. However, countries that rely on a rules-based global order should not undermine the principles that they may need to rely on in the future in order to placate Trump.
If Trump is dead set on imposing unnecessary costs on the US economy, the world could not do much about it. Nothing prevents other countries from heading steadfastly in the opposite direction. By lowering trading costs elsewhere, countries can partly offset any higher costs of trading with the US. The recent EU-Japan trade deal provides a useful reminder that, even these days, not every conversation on trade needs to include the name ‘Trump’.
Kallum Pickering is senior economist at Berenberg Bank