Trump’s Tariff Strategy: Positives and Risks, China

11 March 2018

President Trump has so far achieved a great deal economically and in foreign policy. Mr Trump’s harsh rhetoric and economic sanctions on North Korea have brought the rogue state to the table. The purpose of Kim Jong-Un’s coming to the table is likely nefarious but the point is Mr Trump’s foreign policy so far has eclipsed his predecessor, Obama, and his 25% tariff on steel and aluminium imports is likely the manifestation of a strategic economic plan. Remember, Trump promised this tariff during his election campaign, so no one should be surprised by the President acting on a previously announced platform, something done many times already during this administration. Introducing these tariffs importantly affirms his commitment to the people who voted him into the White House.
Policy-wise, tariffs are a protectionist policy used to prop up industries that cannot support themselves, simultaneously placing other sectors of the economy under great stress. Job losses can occur in complimentary industries because of this. And it is true that any job losses in the steel and aluminium industry are through technology advancements replacing jobs, not because the work is being shifted offshore. And trade deficits, which Mr Trump has made so much of, are never an issue. For example, Venezuela runs a trade surplus but would you rather live there or in the US?
Committed to those who voted for him, Mr Trump has overseen a booming resurgence in the US economy, admittedly blowing the budget deficit out to $1.5 trillion. The trade tariffs are a further and pragmatic commitment to non-coastal Americans. The strategy Trump is employing in introducing tariffs is to renegotiate international trade and security arrangements with allies and competitors. He believes that some agreements are being flouted by their co-signatories and that the US may be getting a bad deal. At the very least he wishes to review current international agreements; a sensible policy as times change. All governments would be wise to review the cost-benefits of their international agreements on a regular basis.
It should be expected that Mr Trump’s negotiating efforts will lead to more favourable economic conditions and possibly more jobs for these middle Americans. Pragmatic and a businessman, he is utilising the immeasurable threat of fragmenting some countries engagement with the world’s largest economy and the possibility of a withdrawal of the world’s most advanced and vastly deployed defence force to achieve favourable results for his country. Mr Trump has frequently said that NATO must start meeting it’s defence expenditure commitments, that the US military should no longer be a free service and that American interventionism may not be in the US’s best interests. This should concern the US’s allies reliant on their military presence. Mr Trump is bargaining from a position of strength, and is calling on others to make a change that accordingly recognises the advantages of being in the US sphere of influence.
To further emphasise Trump’s planning in this area, though the initial tariff announcement left a few people in the administration red-faced, it is likely he was going to exempt Canada and Mexico anyway and honouring the NAFTA.
This has made some countries, such as our own, Australia, which America has a trade surplus with, hopeful of similar exemption. The Prime Minister, Trade Minister, Foreign Minister and Ambassador to the US were forced to negotiate like beggars with their hats in their hand. Ultimately successful, the swift reaction of Australia’s top politicians and diplomats is indicative of the superior negotiating power of the US when the country is understood by its President as the global leader it is. The Australian contingent moved with an urgency on the issue that has not been seen in Australian politics or government for ten years. Prime Minister Turnbull has denied a new security arrangement was reached. If that is the case then there may be a deal Mr Trump will want to redress in the future; likely involving an increase in the percentage of defence equipment sourced by Australia from the US.
By making exemptions a possibility, news that has rebounded around the world, countries/unions will now negotiate to avoid the tariffs and the possibility of a trade war. The European Union must now negotiate an exemption from the tariffs which will be much trickier than the independent and relatively small Australia. Citizen’s discontent with the EU’s increasingly undemocratic ways may increase exponentially and the potential for more ‘Brexit’ style secessions would worry even the safest unelected members of the Strasbourg and Brussels contingent. Watch for serious demands to be made on US economic penetration into the EU and a revision or greater adherence to security commitments. A failure to accept US requirements would likely have grave security and economic consequences.
Any trade war, though bad for all involved, would be much worse for the local politicians who bear the brunt of it. Any backlash in the US might hit Republicans in the 2018 mid-terms, but it will probably be too early to see the effects. And Mr Trump has until the 2020 election, politically a long way off. That said, a trade war with China would be a lose-lose situation.
How the President decides to deal with China is the biggest question dogging the tariff talk. For all his bluster, claiming the US can win a trade war with China, pundits should know by now that Mr Trump speaks with bellicosity and aggrandises his demands to bring the target to the table. From there he negotiates something sensible and it should be expected he will attempt to do so with China. Issues on the table may include China’s military expansionism and island building, charge to become the Asian regional power, currency manipulation and, of course, trade.
The biggest worry is that China has the world’s friendliest diplomats. They turn on the charm offensive, as evidenced by Mr Trump’s recent statements about Xi Jinping. Mr Trump called Mr Xi “great” and was clearly swayed by his personable style. (A sidetone is that Trump was joking when he said he would give president for life a shot one day: settle down snowflakes.) Could China’s full charm offensive cause Trump to falter? Here’s hoping not.