The Wider Picture: Trump, Trade & Power

04

October, 2018

  • Four months have passed since the US and China began to impose tariffs. Since then, little progress has been made as the two sides find themselves gradually turning their dispute into something resembling a trade war.
  • Trump has threatened to impose tariffs on numerous other countries including Mexico, Canada, Turkey as well as the European Union, in an effort to implement his ‘America First’ policy.
  • Economic and political consequences are already being felt on the international scene, adding support to the belief Trump is steering the US towards an isolationist stance.
  • The domestic repercussions of Trump’s commercial policy are yet to be seen, but with mid-term elections round the corner recent polling appears ominous for the President.

‘Trump is on a relentless push to fix what he sees as unfair practices that harm both American consumers and businesses.’

Over the past 7 months, President Trump has shown a willingness to weaponize his commercial policy in a bid to manage the USA’s trade balance with its global partners. He has attempted to do so while cementing the country’s diplomatic influence over and in contention with other major international players. Threats of new tariffs on steel and aluminium have been issued against China, the EU, Mexico and Canada. In early July the US released its plan to impose tariffs on $60 billion worth of Chinese imports. Beijing replied swiftly, announcing they would retaliate with their own tariffs on $60 billion worth of U.S imports. Since then, the US imposed an additional levy of 25% on $16 billion worth of Chinese goods which came into force on 23 August and threatened to impose another $200 billion tariff package mid-September. Trump is on a relentless push to fix what he sees as unfair practices that harm both American consumers and businesses.

In keeping with the application of the ‘America First’ policy on global trade, the Federal Reserve is helping to bolster Trump’s position. The ‘Fed’ is raising interest rates in response to strong economic growth and rising inflation in the US. This will reduce the amount of money in circulation which up until now has sent the US dollar soaring against rivals while shrinking its $4.5 trillion balance sheet at the same time. Perhaps a more pressing concern for Trump would be the much-discussed and often maligned trade deficit. In simple terms, a trade deficit occurs when a country imports more goods and services than it exports. As Harvard Professor Martin Feldstein argues, the trade deficit can be explained by the US spending more money than it makes. The Trump administration has made no secret of their desire to reduce the US trade deficit, aligning it to national security interests.

 

Trump’s ambition to redefine US trade relations with the rest of the world has already been displayed, along with its first results. On Monday, the White House came to an agreement on a new trade deal with Canada and Mexico, replacing NAFTA (North American Free Trade Agreement) with a revamped version named UMSCA (United States-Mexico-Canada Agreement). Trump claimed victory over the negotiation as he tweeted: “It is a great deal for all three countries, solves the many deficiencies and mistakes in NAFTA, greatly opens markets to our farmers and manufacturers, reduces trade barriers to the US and will bring all three great nations together in competition with the rest of the world.” Details of the treaty’s content are slowly emerging from sources inside the US and Canadian governments; however, these should be treated with caution as both sides inevitably want to show that they got the better deal.

Earlier this summer, the US and the EU agreed to work towards “zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods.” Other trade barriers are to be removed as well. The two sides also displayed their shared will to reform the World Trade Organisation (WTO), with two main aims. Firstly, to make its dispute settlement mechanism work more efficiently, considering its failure to handle recent events. Secondly, to find solutions to new trade-distorting practices like subsidies, intellectual property violations and currency manipulation, which China has notoriously used and been heavily criticised for by the Trump administration. President Trump may have put an aggressive trade policy at the centre of his plans for the economy, yet the absence of tariffs is now being used to maintain US ambitions. Trump is showing a willingness to adapt and manoeuvre based on the situation at hand.

China has not reacted well to these events. The world’s second-largest economy has shown little sign of de-escalating tensions, and its leader Xi Jinping said there would be ‘no winner’ in the trade war with the USA. China’s economic stability is an important facet of Xi Jinping’s authority. While Chinese exports went up 13% in July due to a weaker Yuan, which marked its worst 4-month fall on record since April, imports unexpectedly grew 27.3% against analyst forecasts. A steep decline in the value of the yuan versus the dollar could put a significant dent in the Chinese economy. Moreover, this comes at a time when China is already facing important domestic challenges including both stabilizing and modernizing its domestic economy while confronting its rapid debt accumulation.

Turkey has been another victim of Trump’s policy. Despite the country being a NATO ally, the US threatened sanctions if the country does not free pastor Andrew Brunson who has been accused of helping the group behind a failed military coup in 2016. The announcement was followed by a freefall of the lira, Turkey’s national currency, leading to fierce diplomatic reactions from Ankara. Since then, there has been a growing a growing rejection of the US and NATO in the country from Erdogan’s friends and foes alike. According to figures from the Pew Research Centre, 72% of Turkish citizens now see the US as a “major threat”. This aligns with a continuous loss of trust in Turkey since Trump came to power.

For Trump, the international consequences may not be as important as those back home. The President is sticking to his campaign promises and displaying a tough stance on global trade, which will likely please his electoral base ahead of the midterm elections. The latest developments of his trade policy appear to be a strategic political choice. However, the results may not be quite as expected. The tariff policy has already shown signs of unpopularity in three critical states for the Republican Party. A NBC poll in Illinois, Pennsylvania and Texas (both Republican wins in 2016) revealed that, on average, only 28% of the people surveyed thought Trump’s trade policy would bolster the economy and protect jobs, while 43% thought it would harm the economy and put a burden on consumers.

This is not the first time the US are using economic sanctions and tariffs as a foreign policy tool. While many commentators regard Trump’s policy as isolationist, the supposed decrease in influence does not mean US presence on the international scene has retracted. The US has flinched from international treaties and institutions, no doubt. But Trump is using other modes of foreign policy, from aggressive trade measures to monopolizing global media attention. The US is turning its attention to becoming a major international player which, as Trump proclaimed proudly on the campaign trail, puts America first regardless of potential diplomatic hurdles.

 

Written by Sebastien Coudert. Edited by Abdi Buwe. 

Warwick Congress Blog

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