Inside Out & Outside In

A global united front is needed to combat the scourge of America’s trade war

Countries must begin talks on a new global trade agreement under World Trade Organisation to preserve multilateralism, with or without the US

PUBLISHED : Sunday, 08 July, 2018, 12:49pm
UPDATED : Sunday, 08 July, 2018, 8:32pm

And so it begins, and there can only be apprehension about where trade war will end.

The conflict will be confusing, attritional, with no clear sense of cause and effect, with harm inflicted on who knows how many innocent bystanders.

Having unleashed the dogs of trade war, Donald Trump is now doing what he does best – moving on to another subject. He is off to theatrical sparring on the future of Nato, before stopping off for friendly fireside chats with Queen Elizabeth and Brexit-battered Theresa May, and sorting the world’s problems with old friend Vladimir Putin. This is what attention deficit disorder looks like when it appears in grown-up people.

Hundreds of academics, and thousands of newspaper column inches, are being devoted to tracing the progress of the tariff war, attempting to calculate the cost to all parties concerned, and elaborating the economic illiteracy of a conflict based on bilateral visible trade balances.

But this is all spitting in the wind to a blithely unconcerned Trump trade team that lives with naive confidence in a universe uncluttered by any inconvenient facts. Kaushik Basu, former World Bank chief economist and now economics professor at Cornell, intelligently and accurately notes that: “Arguing against globalisation is as instructive as blaming gravity for a building collapse.” But who among Trump’s “core” cares?

Who among them cares that railing against a trade deficit with China is as relevant as railing against a bilateral trade deficit with your grocery store? All of us over the course of the year build a massive bilateral trade deficit with our hairdresser or our favourite restaurant, but do we storm in with threats until they redress the haircut imbalance?

Of course not. Rather, we look at our household income, realise that we are spending too much and need a better-paid job or need to cut back. That means eating out less often, going to cheaper restaurants, or making do with more modest meals at home. What is true at the household level is true at the national economy level – which cuts to the heart of the US’s true challenge: it spends too much, saves too little, and has not found the productive potential to earn more. But who wins elections in the US by telling families that they have to cut back, buy cheaper cars or buy them less often? Certainly not Trump. Better an easy-to-win trade war with China.

At this point it is impossible to gauge where the main impacts of trade war will fall. And this suits the Trump team well. As Ken Hassett, who chairs Trump’s council of economic advisers, noted last Friday: “There isn’t clear evidence in the data that the anxiety over trade is being harmful to the industries that we would most watch.”

For Trump, the longer it stays that way the better. He has midterm elections to win in November, and wants no definable harm to be visible before then. Confusing is good. All that should be clear is that he is strong, putting America first, and delivering on electoral promises. There is no circumstance in which waging trade war with China can lose him votes – except if significant collateral damage to important and definable parts of the electorate appears before October.

That is perhaps why he worries about iconic Harley-Davidson, soybean farmers, or Kentucky bourbon. There is a danger that evidence of harm will emerge inconveniently early. That is perhaps why the battle over auto imports is running behind the steel and aluminium tariffs put in place last Friday. Auto industry dislocations will be large and will be concentrated in some very sensitive political constituencies. Measurable impacts cannot emerge too soon.

For this reason, the launch by the US Chamber of Commerce, arguably the US’s largest business grouping, of state-by-state analysis of the likely harm arising from a tariff war, must be deeply unhelpful.

The chamber, which represents 3 million US businesses, argues that the new tariffs risk a global trade war that will harm Americans. It calculates that US businesses will face billions of dollars in retaliatory tariffs. For example, Texas could see US$3.9 billion worth of exports targeted, Tennessee US$1.4 billion, and South Carolina US$3 billion – and this is only the harm arising from the current early steel and aluminium skirmishes.

“We should seek free and fair trade, but this is just not the way to do it.” said the chamber’s president, Tom Donohue. Donohue is right, and too many in US business have been supine, or too politically correct, to say as much to Trump and his team.

But what is the right way to do it? As the tariff war begins, there is no time to lose finding an answer. Harm is already severe, will become rapidly more severe, and may soon be irreversible.

In the short term, there may be no choice but to stand firm against the belligerence and the bullying. This is “Art of the Deal” bluster, and should be dismissed as such. Since liberalisation is certainly needed, a first step would be to acknowledge the need to reduce discriminatory barriers, in particular within China and in specific sectors in Canada, Mexico, Germany and the European Union.

This means refusing to bow to any beggar-thy-neighbour bilateral deals preferring US companies. It also means working hard to complete multilateral (or at least plurilateral) deals like the amended Trans-Pacific Partnership and the long-stalled Regional Comprehensive Economic Partnership (RCEP) embracing the 10 Asean countries plus China, India, Japan, Korea, Australia and New Zealand.

Most ambitiously, it means creating an “alliance of the willing” to begin talks towards a new global trade agreement under the stewardship of the World Trade Organisation. Multilateralism needs to be preserved, with or without the US.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view