World headed into a major trade war
US is now behaving in ways that could easily lead to a breakdown of the whole trading system and a drastic, disruptive reduction in global trade
In one way, United States President Donald Trump’s attack on America’s foreign trade partners resembles his attack on immigrants: In each case, the attack is framed as a response to evildoing that exists only in his imagination. No, there isn’t a wave of violent crime by immigrants, and MS13 isn’t taking over American towns; no, the European Union doesn’t have “horrific” tariffs on US products (the average tariff is only 3 per cent).
In another way, however, the trade crisis is quite different from the humanitarian crisis at the border. Children ripped from their parents and put in cages can’t retaliate. Furious foreign governments, many of them US allies that feel betrayed, can and will. But all indications are that Trump and his advisers still don’t get it. They remain blithely ignorant about what they’re getting into.
Back in March, as the US was imposing tariffs on steel and aluminium imports — and yes, justifying its actions against Canada (!) on the grounds of national security — Peter Navarro, the White House trade tzar, was asked about possible retaliation. “I don’t believe any country will retaliate,” he had declared, basing his claim on the supposed upper hand America has because we import more than we export. Now, Canada — a country that, by the way, imports about as much from America as it exports in return — has announced retaliatory tariffs against $12.6 billion (Dh46.34 billion) of US products.
The EU and China have also announced retaliatory tariffs. Mexico, with its new leftist president-elect, is hardly likely to be accommodating. And the EU has warned that it will go much bigger if Trump follows through on his threat to put tariffs on European cars, potentially imposing retaliatory tariffs on almost $300 billion of US exports.
It’s important to understand that this isn’t the normal give and take of trade disputes.
The rules of world trade, established under US leadership in the 1940s and enforced by the World Trade Organisation (WTO), do allow some flexibility. For example, countries are allowed to impose temporary tariffs in the face of import surges, like the tariff Barack Obama imposed on Chinese tyres back in 2009.
Rejecting the rules of the game
But both the scale and the motivation behind the Trump tariffs — their obviously national security rationale — are something new. They amount to rejecting the rules of the game we created; the EU, in its warning, bluntly calls US actions “disregard for international law.” Sure enough, Axios reports that the Trump administration has drafted legislation that would effectively take us out of the WTO.
The US is now behaving in ways that could all too easily lead to a breakdown of the whole trading system and a drastic, disruptive reduction in world trade.
Yet, Trump appears to believe that the whole world will bow down to US economic power and his deal-making prowess. “Every country is calling every day, saying, ‘Let’s make a deal’” on trade, he told Fox News. Of course, he also declared that the head of US Steel called to tell him that the company was opening six new facilities. It isn’t, and the conversation apparently never happened.
What’s especially striking right now is that even industries Trump claims he wants to help are protesting his policies, urging him to reverse course. General Motors warns that proposed auto tariffs could lead to “less investment, fewer jobs and lower wages for our employees”. The Motor & Equipment Manufacturers Association has urged the administration to stand down, declaring that “counterproductive unilateral actions” will “erode US jobs and growth” while doing nothing to protect national security.
But, as I said, none of this seems to be getting through. For what it’s worth, I don’t think most businesses, or most investors in financial markets, are taking the threat of trade war seriously enough. They’re acting as if this is a passing phase, as if the grown-ups will step in and stop this downward spiral before it goes too far.
A full-blown trade war looks all too possible. In fact, it may already have begun. ■ Paul Krugman is a Nobel Prize-winning economist and distinguished professor in the Graduate Centre Economics PhD programme and distinguished scholar at the Luxembourg Income Study Centre at the City University of New York.