Trump’s treatment of Saudi Arabia, and China, shows trade is built on trust

  • David Dodwell says the hard line the US has drawn on Beijing shows China needs to build trust in its reliability, and economic liberalisation would be a start
PUBLISHED : Friday, 19 October, 2018, 2:31pm
UPDATED : Friday, 19 October, 2018, 10:46pm

Baron de Montesquieu observed more than 250 years ago that, “Peace is the natural effect of trade. Two nations who differ with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling; and thus their union is founded on their mutual necessities.”

One has to wonder what spin Donald Trump and Saudi Arabia’s Mohammed bin Salman can provide for this ancient truism at the end of two appallingly mesmerising weeks focused on Jamal Khashoggi and the Saudi consulate in Istanbul.

With the full facts of the final hours of Khashoggi still ghoulishly unclear, the grisly snippets suggest a barbaric and unforgivable disregard by Saudi’s autocratic leader-in-waiting for the niceties of diplomatic civility. They also reveal the embarrassing haste of Trump and the White House to concoct alibis on bin Salman’s behalf that might whitewash such brazen uncivilised murderousness.

It was surreal to watch Trump complain that his good Saudi friend was – like Brett Kavanaugh, his recently appointed Supreme Court justice – being treated as guilty until proven innocent, and then leaping to assure US workers that he would not willingly renege on orders to sell US$110 billion of arms to Saudi Arabia. Montesquieu would have clearly understood: here is a union “founded on mutual necessities”.

Barak Barfi, at the New America think tank, captured well Trump’s Faustian dilemma this week, saying “Saudi Arabia wears too many hats for America to abandon it easily”. Thanks to its shale reserves, he notes, the United States is no longer dependent on Saudi oil, but Riyadh plays the role of stabilising markets, as well as providing billions to American defence contractors, intelligence for preventing terrorism and serving as a “bulwark” against Iran.

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While for most of the world’s economies, Montesquieu’s view that people who trade with each other don’t fight wars with each other holds true, it seems that Saudi Arabia provides a special case.

Most relevant may be fascinating research by Professor Erik Gartzke, at the University of California, San Diego, on armed conflicts between 1816 and 2000. He found that countries with low levels of economic freedom were 14 times more likely to fight wars than those with high levels of economic freedom. Perhaps the concentration of economic and political power in a country like Saudi Arabia, and its reliance on a single strategically crucial commodity – it is the world’s leading exporter of crude oil – diffuses the normally reliable linkage between trade and peacefulness.

The bizarre and embarrassing events in Istanbul, and the clear obsequiousness of Trump towards his Saudi friend, contrasts starkly with the trade war now recklessly carried out by the US administration against China (and in a less inflammatory fashion with numerous other trading partners). It is a worrying reminder of how easily trade war can deteriorate into fully fledged armed conflict.

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It is also a troubling reminder that trade cannot easily be engaged in without trust – and that the US president’s wilful disregard for the need for trust is a much deeper challenge to the foundations of our global trading system than any economic harm the tariff war might inflict.

As Trump has trampled underfoot commitments made in good faith by his predecessors – like withdrawing from the Trans-Pacific Partnership, or the Paris climate accord– he has undermined the US’ long-standing reputation as a reliable trading partner and investor.

By attacking the trade policies of long-standing allies like Canada, Japan or the European Union as threats to national security, Trump has profoundly shaken the trust of the US’ closest trading partners.

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By abandoning a carefully developed system of compromise at the heart of hundreds of trade agreements forged both bilaterally and multilaterally, and putting in its place a blatantly beggar-thy-neighbour zero-sum strategy befitting a playground bully, he has taken a wrecking ball to the US’ reputation for reliability and trustworthiness.

It would be wrong to claim that the US’ reputation has yet been irreversibly harmed, though. Research by the Pew Foundation in late September showed clearly that, if forced to choose, most people across the world would still trust the US over China. We all must hope that we will never be forced to choose, even though some recent provocations have made me wonder.

Costs of a US-China break-up are too high for either to bear

One obvious casualty of the collapse of trust must surely be contraction of the long and often complex manufacturing supply chains built (in particular by US multinationals) across the world. For manufacturers who need absolute faith in the strength of each link along such supply chains, the erosion of trust must be fatal – especially if the links involve critical materials or technologies.

We will see very soon a shortening of supply chains, and keen concentration on speedy domestic development of all technologically critical components. Note the European Union’s recent alarms over European car manufacturers’ heavy reliance on batteries made in Asia. With trust, such a reliance is unproblematic. Without trust, it is impossible.

The sooner Xi and Trump meet, the better

If China is to deal successfully with the onslaught from the US, then in key meetings in the coming months it needs to build trust in its reliability. Its talk of liberalisation needs the support of real change. The coming month may be crucial – from Shinzo Abe’s Beijing visit and the China International Import Expo in Shanghai, to Asean and Apec leaders’ meetings and the G20 meetings in Argentina.

One can cynically say that with friends like Mohammed bin Salman, Trump hardly has need of enemies, but the reality is that US reliability over past decades has built a store of goodwill and “soft power” with many economies that will not easily erode. Yuval Harari wrote in his recent book Sapiens that “trade cannot exist without trust, and it is very difficult to trust strangers”. For many, China is still a stranger, and this needs to change.

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