It is time to realise that Trump’s America is not only an unequal partner, but also an unreliable allyby George Magnus / June 5, 2018 / Leave a comment
If you’re not yet been concerned about the outbreak of a global trade war, then perhaps this is a good time to start. None of the world’s biggest trading blocs, the US, China and the EU will be spared—but it is likely to be especially uncomfortable for smaller, open economies like the UK, whose entire trade structure could, in any case, be torpedoed by Brexit.
To recapitulate, President Donald Trump came into office in January 2017 with fiery, aggressive ‘America First’ trade rhetoric. True, Trump pulled the US out of the Trans Pacific Partnership trade agreement straight away and kicked off a renegotiation of the North American Free Trade Agreement (NAFTA) with Canada and Mexico, but for a year very little happened.
Trump and China’s President Xi Jinping met in Florida and later in Beijing, the rhetoric was friendly, supposed agreements were publicised, and all seemed sweetness and light. But from January this year onwards, things have gone from bad to worse.
Initially, the US imposed tariffs on washing machines and a few other products. Then the White House threatened to impose a 25 per cent tariff on steel and 10 per cent on aluminium, which, after an interim period, were recently activated—much to the anger of the EU, but also other allies including Canada, Mexico, and South Korea. The latest on trade between the US and China is that a third meeting of top officials this week ended in an impasse.
Things may go quiet now ahead of the planned US-North Korea Summit in Singapore on 12th June, but the thorny issues of global commerce are sure to revive soon.
If nothing happens to resuscitate the talks, $100 billion of bilateral trade will be at risk in the first instance. China has stated it would void all commitments to buy more US goods, and lower some tariffs.
It would also probably pull back from vague promises to open its markets up to US firms, if the US decides to implement tariffs on China’s key industries.
The US has plans to impose tariffs on a further $100 billion of Chinese exports to the US. China would doubtless retaliate, and no-one can know where this tit-for-tat might end—and at what cost to world trade, the global economy and people’s living standards.
What does it all mean?
There are four things that are remarkable about what is happening to the global trade and investment environment right now.
First, although the headlines focus on trade in a variety of goods, make no mistake that the heart of the conflict between China and the US and the West, more generally, is advanced technology. Ultimately, it is about the new cutting-edge knowledge and know-how that is going to drive defence, commerce, and global leadership.
Second, this is why the US is potentially looking to penalise China in its pursuit of the so-called Made in China 2025 and other industrial policy strategies that set out China’s state-capitalism path to technological dominance.
It also explains why conflict is not restricted to trade but includes also Chinese investment in the US, and EU tech sectors, and the purchases by state enterprises—and private firms that are de facto agents of the Chinese state—of sensitive tech products.
Third, the consequences of higher tariffs—at least so far—are not likely to be of huge consequence, as such. But, bit by bit, the effects of higher tariffs and fragmentation of the investment environment will start to push up inflation, cut jobs and undermine business confidence and spending.
Fourth, one could argue that the relationship between the US and China, the world’s two major powers and rivals, was bound to deteriorate at some point, and yield to a new era of competition or, perhaps conflict. But there was no reason for the US to cut its allies loose, isolating itself in the process and, threatening the sinews of global governance in the process.
Indeed, the message that comes across loud and clear from Trump’s policies towards the EU (for example) is that America, instead of being the main prop for a rules-based global trade system, is now the source of erratic and impulsive trade policy that flows from the President’s ego or whims, not US national interests.
There is simply no basis for the use of ‘national security’ to justify current US policies as far as its allies are concerned. If disputes over steel or other products are referred to the World Trade Organisation, and the US was unwilling to subscribe to its rulings—or worse, quit—then the world’s structure for carrying out trade could be seriously weakened or collapse.
The threat to the UK
This is all happening at the worst possible time for the UK. The British steel industry matters, of course, to its 31,000 steelworkers, but the impact of US steel tariffs will not unhinge the UK economy. But Trump has announced that the US is looking at the car industry through the same national security legislation.
If similar auto tariffs were introduced the consequences would be far more serious. The UK car industry employs 169,000 people directly, and 814,000 including components suppliers and broader support activities. It’s a core, and highly efficient, part of our manufacturing and its exports, 15 per cent of which go to the US, account for 12 per cent of total exports. This is to say nothing of the effects on Germany or Japan, for example.
For Brexit Britain, it is time to realise that Trump’s America, our biggest export destination after the EU, is not only, like China, an unequal partner in terms of size and trade negotiating leverage and experience, but also an unreliable ally. It is time to realise that world trade, and even the WTO, are under threat or at risk of being undermined—and these are what we would depend on under various Brexit outcomes. Without a credible and respected WTO, there will be trade anarchy.
It is time to realise that the Global Britain, free-trade rhetoric, beloved of Brexiteers was never realistic, and is rapidly being shown to be a sham. Frictionless trade with the much more trade-savvy EU is indeed the solution for the UK. Last time I checked, there was only one way of having it.