World Leaders Didn’t Take Trump at His Word on Trade
Perhaps the world should have taken him a bit more literally. In his 2000 book, The America We Deserve, Donald Trump wrote:
What I would do if elected president would be to appoint myself US trade representative; my lawyers have checked and the president has this authority. I would take personal charge of negotiations with the Japanese, the French, the Germans. Our trading partners would have to sit across the table from Donald Trump and I guarantee you the rip-off of the United States would end.
At the meeting of the Group of Seven finance ministers—a coordinating meeting ahead of the upcoming G7 summit in Canada—US Treasury Secretary Steven Mnuchin acknowledged what has become increasingly obvious for months: Trump has done exactly that. Whatever the names of the individuals notionally holding the posts of US trade representative or commerce secretary, on trade there is only one view that matters: the president’s. Mnuchin is reported to have told his Japanese counterpart Taro Aso that when it comes to trade policy, “In all honesty, this issue, I can’t do anything about it. You have to say it directly to Trump otherwise nothing will change.”
The leaders of the G7 nations will have their chance to speak directly to Trump this weekend at the annual summit of leaders in Charlevoix, Quebec. Their message should be clear: They will work with Trump to address some of his legitimate grievances on trade, but if he refuses to take yes for an answer they will hit back as hard as they can. No more paeans to old alliances and taken-for-granted friendships. It is time for a tough, hard-minded negotiation to find a new equilibrium that allows global trade to move forward. The alternative is to blunder into an escalating and economically damaging trade conflict.
It’s time for world leaders to accept reality. One by one, all of the rosier scenarios of how a trade war would be avoided have been discarded. At first the great hope was that the “axis of adults”—Gary Cohn, Rex Tillerson, H.R. McMaster—would tame their boss’s worst impulses. All are gone now, replaced by men far less inclined or willing to stand up to Trump.
Then it was supposed to be the negotiating skill of the nominal USTR, Robert Lighthizer, who cut his teeth in the 1980s using the threat of tariffs to force concessions by a then-rising Japan. Lighthizer’s threat strategy has so far produced a standoff in the North American Free Trade Agreement (NAFTA) negotiations with Canada and Mexico, a flat refusal to bargain from the European Union, and a China strategy that has been handed off to the nominal commerce secretary, Wilbur Ross (who also came home empty-handed from last weekend’s visit to Beijing).
Then the firewall was supposed to be a courageous Congress, in which right-thinking Republican leaders who have long championed freer trade would assert congressional authority and force the president to back down. Instead, Paul Ryan, Mitch McConnell and others have set aside their principles and fallen meekly into line behind Trump.
The final brake was supposed to be the potential damage of the tariffs themselves. Surely Trump would not use trade sanctions against close allies like Mexico, Canada and Europe; surely the threat of retaliation, with its harm to manufacturers and farmers, would give him pause. Nope: Broad US tariffs on steel and aluminum imports were imposed on June 1 using the phony pretext of a national security threat. Europe, Canada and Mexico are all set to retaliate against the United States, targeting billions of dollars in agricultural exports in particular. And the Trump administration has launched a new investigation on the dubious claim that imported cars—all those Subarus and Mercedes—are imperiling the US defense base, setting the stage for the next round of tariff escalation.
What the optimists failed to recognize—despite the abundant evidence Trump has provided over decades of speeches and writings—is that the president simply believes in tariffs. He thinks that protecting US manufacturers will force companies to invest more in the world’s largest economy, the United States, creating new high-paying blue collar jobs that will more than offset any harm from retaliation against US exports or from the rising cost of imports.
His trade adviser Peter Navarro – whose convictions are the closest to Trump’s—wrote last week about the opening of a new aluminum rolling mill in Kentucky, which he attributed to Trump’s tariffs and the recent tax cuts: “There can be no better way to make America—and American manufacturing—great again than to start to rebuild those communities of America most harmed by the forces of globalization.”
It is time for the world to drop its illusions about US trade policy under Donald Trump. He is prepared, indeed eager, to ignore the global rules of trade built under US leadership for the past 75 years, to block imports from friends and adversaries alike, and to walk away from any trade agreements he dislikes.
So what is an appropriate response? Clearly, if the G-7 leaders spend this weekend lecturing Trump about alliance friendships and the virtue of stable global trade rules, they are wasting their breath. He simply does not believe in any of this.
It is better to start with the recognition that Trump has broken the system, the same way Richard Nixon did in 1971 when he abandoned the dollar’s link to gold and slapped a temporary 10 percent surcharge on all imports, including those from Canada and Mexico. Nixon’s shock led to a series of tough negotiations that resulted in Germany, Japan and other major economies boosting the value of their currencies to help bring the US trade deficit back into balance.
Similar high-level negotiations are needed now, though the circumstances are in many ways far less promising. The United States is less dominant economically than it was in 1971; US allies are less prepared to accept the legitimacy of Trump’s complaints; and the Trump team is far less competent and experienced than were Nixon’s advisers, who included Paul Volcker, Pete Peterson, Robert Hormats and Henry Kissinger.
Still, it behooves the other leaders to put forward serious proposals to address the legitimate elements of Trump’s complaints. Germany and Japan both run large trade surpluses with the United States, and should look at offering unilateral measures to boost consumption and/or open markets to help address those imbalances. Mexico could finally make serious commitments to boost wages, a long-standing and justified concern for the United States. Canada’s restrictions on dairy imports have long been an irritant in trade relations.
It is not clear, however, that Trump can take yes for an answer. On the NAFTA negotiations, for example, his administration so far has mostly refused to negotiate seriously toward an agreement, clinging to proposals that will never be acceptable to Canada and Mexico, such as the elimination of binding dispute resolution procedures and a five-year “sunset” clause that would regularly put NAFTA’s future in doubt.
If that remains the case, US allies will have little choice but to hit back and to hit back hard, targeting products that harm Trump’s electoral base. Financial markets have so far remained remarkably calm in the face of escalating trade threats; concerted pressure that temporarily triggers a Wall Street selloff could be exactly what is needed to make the president realize his trade policies come at a cost.
Neither of these approaches is easy, nor without serious political and economic risk. The most likely scenario is that other G-7 leaders will hope they can wait out Trump, containing the damage until 2020 when a new president may take office. But whatever strategy they pursue, it is time to drop the wishful thinking. On trade, Trump is doing exactly what he has long promised he would do, and the rest of the world must now find a way to live with it.
INTO THE DALGONA COFFEE TREND? MMM, THANKS TRADE.