Trump’s art of war
His cunning is in knowing that trade wars make excellent politics
What are the secrets of US President Donald Trump’s trade wars, first with his neighbours and now with China? There are several.
First, the wars are likely to make almost no difference.
The US is in talks with China and both sides said they’d made good progress in the past week. The negotiations follow the ballooning of the US deficit, which is now close to the record high of 2003-2008. In 2017 the US trade deficit with China was $375bn, with imports outgunning exports four to one.
Last year Trump slapped import tariffs of 25% on steel and 10% on aluminium, which took effect in July and affected imports worth $34bn, about 10% of total imports. In retaliation China stopped buying US lentils. In September 2018 the US, Canada and Mexico signed a new North American Free Trade Agreement (Nafta), though it is yet to be ratified.
So that would mean the US’S trade balance is smaller, right? Not so much. The US trade deficit did fall in early 2018, but then jumped up again. Trade is ruled by more powerful forces than tariffs, including relative standards of living and economic conditions. Chinese per capita GDP is about $16,000; in the US it is $60,000. This places China at an advantage. Trade is a complex web of interactions. Currency flows are crucial.
The strong dollar has meant the US now runs a record deficit with the EU, estimated in 2018 at $130bn.
The second secret is that trade wars are excellent politics. The US trade deficit with China is, as Trump’s cunning understands, a problem for the US but a bigger problem for China. Observers were amazed that the new Nafta deal was signed so quickly, but for the country with the surplus, it makes sense to give a little ground. So Canada and Mexico signed quickly, handing Trump a big political victory, even though the economic gains were small. It’s also good politics because the new, competitive China has hurt US blue-collar workers (and those in SA). While US unemployment is at record lows, bluecollar pay is down and 30% of manufacturing jobs have been lost since 2008.
The third secret is the most scandalous. In the Nafta talks, instead of imposing import quotas, the US insisted that car companies based in Mexico pay their workers more or less what they do in the US. Mexico could hardly refuse. This removed the incentive to shift manufacturing south of the border. It is a novel dimension in trade deals, and however hard it is to admit, we have Trump to thank for it.