Is ‘The Art of the Deal’ author taking a page out of Sun Tzu’s ‘The Art of War’ with his trade dispute feint?
If – as Sun Tzu declared in The Art of War – “all warfare is based on deception”, what type of trade war is the US President Donald Trump seeking to wage on his enemies, to make America great again?
Can we expect the full frontal assault deployed, for example, against Japan in the 1980s? Or in these days of asymmetry and misinformation – a strategy the Russians call Maskirova – can we expect something a little less obvious, more nuanced, but packing just as powerful a punch?
Certainly, the underwhelming market response to news last week - that the US had imposed trade tariffs on South Korean washing machine and Chinese solar panel manufacturers - suggests only a low probability of a tit-for-tat trade war breaking out. In fact, equity markets in Seoul and Shanghai actually closed higher in the days after the tariff news was announced.
Can Trump really provoke China with meaningful trade tariffs and risk losing its cooperation over containing the North Korean nuclear military threat? Probably not.
And, ahead of critical midterm elections in November, can Trump really risk upsetting the US consumer base – even the economic recovery itself - with the sharply higher prices that a retaliatory trade war with China would likely entail? Again, probably not.
But it’s also possible, of course, that the focus on tariffs is a clever flanking manoeuvre designed to obscure a substantially larger and more far-reaching strategy at work; a strategy, indeed, that has the potential to entirely reset the US’s trading and commercial relations with the rest of the world.
I’m talking, of course, about the seismic – and profoundly disruptive - implications of the US tax reforms, which will see US companies go from paying 35 per cent, the highest corporate tax rate in the developed world, to 15 per cent, the fourth-lowest behind Ireland, Hungary and Switzerland.
The extraordinary impact the package of fiscal incentives will have on US businesses, and the US economy, cannot be underestimated. Unless there is an equally compelling reduction in taxation from countries such as China, Australia, France, Germany and Japan, all of which levy a corporate tax rate of around 33 per cent, there is a meaningful risk US companies will unwind their offshore activities to relocate and repatriate investments back home.
Trump suggests the tax cuts will mean more jobs and more investment in the US, and it’s hard not to agree. Apple’s decision to repatriate the vast majority of its US$250 billion cash held offshore is likely to be followed by the likes of Microsoft, Google, Cisco and Amazon.
Inevitably, in a zero-sum game, what the US gains, others lose. Almost certainly, jobs will be created domestically in the US and lost across the global economy.
After a cost-benefit analysis, investments in services and manufacturing that might have been destined for lower cost destinations in emerging markets may now be established in America. Euphoric earnings projections – and record high equity prices - underscore the optimism towards the US’s domestic economic renaissance.
Of course, trade wars are often fought on several fronts and it’s not just tax reforms that are underpinning America’s growth dividend. The US dollar also has been weaponised. Since the start of 2017, for example, Japan’s yen has appreciated by 8 per cent against the US dollar, China’s renminbi by 10 per cent and the euro by a meaningful 21 per cent.
Indeed, the pace in the decline of the dollar has actually accelerated, with the US Dollar Index down 4 per cent in January alone.
Obviously, a weaker dollar suggests higher import costs and a higher likelihood that US consumers will buy relatively cheaper locally produced goods and services. American politicians rarely say out loud that a weak currency is good for the economy, but Treasury Secretary Steve Mnuchin came close when he stated at last week’s World Economic Forum that “a weaker dollar is good for us as it relates to trade and opportunities.”
Meanwhile, any attempt to rebut Mnuchin’s weak dollar comments in Trump’s first State of the Union earlier this week were notable only for their complete absence.
In my view, the rise in populism, protectionism and economic nationalism go hand in hand, and is possibly an unfortunate, but inevitable consequence, of the move away from globalisation towards a multipolar world. It may be that the US is ahead of the game in this respect, but I’m pretty sure the rest of the world eventually will follow.
Ironically, in a multipolar environment, global trade conflicts is likely to diminish simply because global trade itself is likely to diminish.
The apparently half-hearted effort by the US to prosecute a sanctions strategy suggests they appreciate this reality. China’s half-hearted opposition to the same sanctions suggest they do too. Perhaps we should view sanctions through a domestic prism, more important to a local electorate than international trade partner.
As far back as 1987, in his book The Art of the Deal, a young Donald Trump declared: “I understand the Chinese mind”. Perhaps they too understand his?
John Woods is the Chief Investment Officer, Asia-Pacific, at Credit Suisse.
