Turbulent week for Trump trade tactics has the world on edge


The scope of President Donald Trump’s trade overhaul has been sweeping, ranging from overhauling the North American Free Trade Agreement to proposing tariffs on up to $150 billion in Chinese imports.AP Photo/Evan Vucci

Over five days, the U.S. called off a trade war with China, cast doubt over the framework of talks with Beijing, and threatened tariffs on car and truck imports to protect national security.

In other words, it’s been just another week for the volatile trade policy of President Donald Trump. The coming days aren’t looking much calmer.

Commerce Secretary Wilbur Ross is scheduled to visit China June 2-4 for more talks with Vice Premier Liu He, with a long list of topics that can ease tension with Beijing or ramp it up again — from narrowing the trade gap to the fate of China’s telecommunications giant ZTE Corp.

In his second year in office, Trump has been on a mission to deliver on his election promise to crack down on unfair trade practices by foreign countries and rebuild America’s manufacturing base. The scope of the president’s trade proposals has been sweeping, ranging from overhauling the North American Free Trade Agreement to proposing tariffs on up to $150 billion in Chinese imports. On Wednesday, the Trump administration opened a new front, launching a probe into whether auto imports imperil national security.

Meanwhile, exclusions from metals tariffs for the European Union, Canada and Mexico expire June 1. If the U.S. imposes permanent levies, the EU has threatened to retaliate with duties on iconic American products such as Harley Davidson motorcycles and Kentucky bourbon.

Temporary Exclusions

Still, Trump hasn’t followed through on his worst threats. While his administration imposed duties on foreign steel and aluminum, it granted temporary exclusions to some allies. The U.S. hasn’t levied any major tariffs on Chinese goods. Nafta remains intact, and it could take months before the Commerce Department finishes its auto industry review.

The president’s trade threats have led to market jitters, but the economic impact has been limited. With trouble simmering in emerging markets such as Argentina and Turkey, the broadest upswing in the global economy in years looks more vulnerable. Trade growth is outpacing economic growth in a throwback to the time before the financial crisis, but the International Monetary Fund is growing wary of protectionist threats.

Other Asian economies would suffer more than China’s if Trump does deliver on threats to slap US$150 billion of tariffs on shipments from the world’s biggest trading nation, according to Bloomberg economists Fielding Chen and Tom Orlik. They estimate that for every 10 per cent drop in China’s exports, the growth rate of Asian economies would fall 1.1 percentage points on average while China’s would decrease by just 0.3 percentage point.

“Trump has an approach that hasn’t shown much fruit yet, and that is to lead with these various tariff threats and hoping that tilts the negotiating playing field in favour of the United States,” said Edward Alden, senior fellow at the Council on Foreign Relations.

The strategy’s most notable outcome was an agreement-in-principle on an update to America’s trade deal with South Korea. While Seoul increased market access for U.S. cars, trade experts called the changes incremental. “That’s a pretty modest harvest,” Alden said. He also pulled the U.S. out of an Asia-Pacific trade deal, which Congress hadn’t yet passed.

Trump’s approach may come down to the simple fact that he favours tariffs as a policy tool, said Phil Levy, a senior fellow at the Chicago Council on Global Affairs and former senior economist for trade in President George W. Bush’s Council of Economic Advisers.

The administration doesn’t appear to have fully anticipated the consequences of the tariffs, such as the eagerness of countries to retaliate and the complexity of America’s economic relationship with China, Levy said. “He keeps ending up in blind alleys,” he said.

Industrial Champion

Meanwhile, China is considering encouraging state-owned carmakers to bring in private automakers as investors as it seeks to create an industrial champion to compete with global peers such as Toyota Motor Corp. and Volkswagen AG, according to people with direct knowledge of the matter. A policy paper outlining the proposal is being studied by government departments, said the people, who asked not to be identified.

To be sure, the risks of Trump’s brinkmanship shouldn’t be ignored. The threat of car tariffs piled on top of steel and aluminum duties adds to uncertainties that could impact the spending plans of Canadian businesses and potentially the Bank of Canada’s decision on interest rates, CIBC chief economist Avery Shenfeld said in a research note.

Tense Relations

The European Central Bank on Thursday flagged protectionism as a key source of uncertainty for the euro-area economy, saying the risk of it had “become more prominent and warranted monitoring.”

Longer term, America’s relations with some of its closest allies may be at stake. The threat of car tariffs will only complicate the Trump administration’s already tense relationship with the EU, which has pushed back against U.S. steel duties.

“The Europeans and others, having seen how negotiations have gone in other contexts, will factor that into how they negotiate in this context,” said Rod Hunter, a partner at law firm Baker McKenzie and former senior counsel in the U.S. Trade Representative’s office. “International trade is a repeat game. People learn, which is why credibility matters.”

There’s also the threat to the global trading order the U.S. helped build following World War II. World Trade Organization member countries are allowed to take steps that are in their “essential security interests.” Governments have generally refrained from invoking that clause, but that may change with Trump.

“If we open the Pandora’s box to countries invoking national security as a way to get out of their trade obligations, my sense is we’re going to find ourselves in a very difficult position in terms of other countries closing their markets to our products,” former U.S. Trade Representative Michael Froman said Wednesday in a Bloomberg Television interview.



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