Donald Trump and the Weaponization of International Trade

Donald Trump

and the

Weaponization of International Trade

The Liberal World Order under Threat

Magazine Desk

Trade policies of Trump administration are causing more problems than they solve as they treat friends like adversaries, thereby weakening alliances. They are further complicating an already fragile US-China relationship. By discarding the current multilateral system in favour of a bilateral approach, the Trump administration is encouraging other countries to view trade negotiations as a zero-sum game and a power-driven process. In an era of renewed geopolitical competition, this is eroding the dividing line between economic and security issues and, more broadly, undermining the foundations of the liberal world order.

The nature of US’s engagement with the rest of the world has emerged, of late, as a key cleavage in US political culture, and no public figure has done more to facilitate this phenomenon than the current President of the United States, Donald J. Trump. When Trump campaigned for president in 2016, he blamed international trade for some of America’s biggest problems. He argued that previous administrations had betrayed Americans by “aggressively” pursuing “a policy of globalization, moving our jobs, our wealth and our factories to Mexico and overseas.” And in order to “Make America Great Again,” he promised to revamp US trade policy, as part of a broader drive to extract concessions from allies and trading partners. In the process, however, he is contributing to the partial de-globalization of the international system.

Trump’s critique of globalization does hold water. Economists debate the scale of the problem, but major trade deals such as the North American Free Trade Agreement (NAFTA), and the impact on the US manufacturing sector of China’s integration into the international economic system – the so-called China Shock – have had a significant impact on key sections of the economy. The United States probably experienced overall net growth because of trade liberalization but many Americans saw their lives change for the worse; they have endured falling income levels or long-term unemployment, decreased life expectancies, and so on. Not surprisingly, a considerable percentage of this cohort has been politically radicalized.

Trump’s trade agenda is designed to appeal to these people who think the globalization has harmed them. In some respects, he has succeeded. At home, Trump has cemented the bond with his political base and earned the approval, or at least acquiescence, of most Republicans – more than 80 percent of whom approve of his job performance. Abroad, he has forced, in particular, Europe and China to reopen existing arrangements and to look for ways to avoid tariffs and other barriers to the US market. His approach has also reinforced that policies should be based on a dispassionate assessment of US interests, rather than concerns about international stability, the maintenance of longstanding alliances, or the health of the liberal world order (LWO).

In spite of these short-term successes, Trump’s trade policies are counterproductive. He is the first post-1945 US leader to treat allies as if they were competitors. The clear message from Washington is: friends will need to pay more to maintain good relations. And, this strikes many as little more than extortion. Some European policymakers even believe that Trump seeks the dissolution of the European Union. This misreads Trump. The European Union’s destruction is not a top-tier objective, but the president clearly dislikes Brussels and does not hesitate to undermine it.

The China Strategy

Trump administration’s China strategy is also short-sighted. Instead of a careful approach combining sticks with carrots, the president has instigated a trade war, and done so bilaterally. This is jeopardizing the world’s most important economic relationship and destabilizing the international order. Inevitably, trade tensions are inflaming other areas of disagreement – a worrisome prospect when it comes to the world’s most powerful nations.

At a time when increased collaboration and more intelligent policymaking are urgently needed to address challenges such as global warming and the recrudescence of extremist and illiberal political movements, Washington has embraced unilateralism and nationalism. This is undermining the LWO, and is making the world a more dangerous place.

Trump’s Worldview and Lighthizerism

The current spate of renewed geopolitical competition is reminiscent of a pre-1945, more anarchic era of interstate relations. Similarly, the trade policies of the United States and China call to mind a troubling phase of international history – the heyday of mercantilism. Aspects of the mercantilist worldview resonate with Trump. He has long viewed the LWO as detrimental to US interests. During the late 1980s and into the 1990s, Trump accused Japan of unfairly limiting access to its markets even as it depended on the protection of a formal security alliance with the United States. In a 1987 advertisement that appeared in several major newspapers – at a time when Trump was floating the possibility of a run for president in 1988 election – Trump accused “Japan and other nations” of “laughing at America’s politicians as we protect ships we don’t own, carrying oil we don’t need, destined for allies who won’t help.” In a 1990 interview, again amidst speculation about a run for higher office, Trump vowed that as president he would “throw a tax on every Mercedes-Benz rolling into this country and on all Japanese products, and we’d have wonderful allies again.” These populist forays served as dry runs for Trump’s 2016 campaign. He is hardly the only politician to exploit voter anger about the vicissitudes of international politics, but he is the first to reach the White House with an explicitly nationalistic trade and national security agenda.

Several senior officials have played a role in implementing the president’s agenda. The most important has been US Trade Representative (USTR) Robert Lighthizer, a trade lawyer and Republican operative. In theory, Lighthizer favours trade liberalization, but he is sceptical of multilateralism. Lighthizer and other administration officials are especially disdainful of the World Trade Organization (WTO). They contend the organization, which admitted China in 2001 as a developing country puts the United States at a disadvantage when it comes to dispute resolution. In particular, they argue that the WTO too often rules against Washington’s use of anti-dumping and anti-subsidy measures. Lighthizer further argues that multilateral policies have led to the accumulation of a massive US trade deficit – USD 566 billion in 2017. Though most economists view the trade deficit as benign, or at least not necessarily the result of unfair policies, it has emerged as a crucial consideration in shaping administration policy. For Trump and his advisors, a few trading partners are of special concern. The deficits with China and the European Union, which topped 300 billion and 139 billion USD, respectively, stand out. Mexico, Germany, Japan, South Korea, and Canada also enjoy surpluses with the United States. Not coincidentally, the Trump administration has targeted each of these countries for coercive trade measures.

In lieu of multilateral negotiations, Lighthizer prefers bilateral formats, which allow the United States to more effectively wield its massive economic, military, and political power. Trump agrees. He views China as the biggest threat to US interests and argues that the Chinese model of state capitalism has allowed Beijing to undercut the US edge in technology through the use of unfair practices. To an extent, he has a point. In addition to Beijing’s pervasive espionage activities, there are extensive restrictions on foreign companies operating in China. For instance, in the automotive industry, foreign companies must operate joint, 50 percent ventures with local partners.

The antidote to at least some of these problems, suggests Lighthizer, is the use of punitive tariffs, which will hopefully force Beijing to reform its policies. Meanwhile, he has been encouraging other trading partners to embrace so-called voluntary export restraints. These form part of the United States–Mexico–Canada Agreement (USMCA), the renegotiated version of NAFTA, and appear to be a goal of US negotiations with Europe.

Trump’s Trade Strategy

In 2018, following a so-called Section 301 investigation, the Trump administration imposed 25 percent tariffs on more than 50 billion USD of Chinese goods. When the Chinese retaliated in kind, the president imposed 10 percent tariffs on another 200 billion USD of Chinese goods. However, extracting “significant concessions from China” is yet awaited, but there is reason to believe that its approach will yield results, at least in the short term. Most analysts believe that, though both countries will suffer as a result of the current trade war, China has less leverage because it exports more to the United States than vice versa, and that it has less tolerance for economic pain. China’s growth rate, which has been high since the early 1990s and which has been a cornerstone of the Chinese Communist Party’s monopoly on power, appears to be slowing as its economy matures. At the time of publication, Washington and Beijing were in the midst of intense negotiations, with indications that China would make at least modest concessions.

The administration is designing other trade deals in order to intensify the pressure on China. Trump’s China policy is much different from that of his predecessor, i.e. Barack H. Obama. Trump administration views the USMCA as a model, and is currently seeking bilateral trade pacts with key countries in East Asia, including Japan, the Philippines, and Vietnam. President Trump initially indicated that he opposed the Transatlantic Trade and Investment Partnership (TTIP), but in recent months his administration has been negotiating with its European counterparts about a deal that would include similar features. At the same time, he has sought significant concessions from Brussels. In addition to the steel and aluminium tariffs, which affect all European steel exports, he has threatened to impose 25 percent tariffs on European (and Japanese) automobiles.

Trade and Geopolitics: China

Trump’s presidential campaign and early months in office offered conflicting indications about his intentions toward China. On the stump, he vowed to take a tougher stance than previous presidents. He also surrounded himself with advisors with anti-Chinese views, such as former campaign manager and chief strategist Steve Bannon, and Peter Navarro. In a transparent effort to extract concessions on trade, he questioned the “One China” policy and, in an unprecedented move for a US leader, accepted a phone call from Tsai Ing-wen, President of the Republic of China. The US 2017 National Security Strategy featured antagonistic language, accusing Beijing of wanting “to shape a world antithetical to U.S. values and interests.”

Trump also selected some advisors with less extreme views, such as former National Economic Council Director Gary Cohn. The president’s November 2017 visit to Beijing was characterized by strong personal chemistry with Chinese President Xi Jinping, and he has taken some steps to assuage China.

This inconsistent behaviour, and high staff turnover in the administration, has confused Chinese policymakers. Nevertheless, there is broad agreement about the outlines of a potential deal. The two sides are in negotiations that could: increase purchases of US goods and services, open access to China’s markets, protect intellectual property, and reduce subsidies to Chinese companies.

One potential obstacle to any deal is Washington’s insistence that Beijing be able to provide credible verification. Yet any agreement could be overshadowed by several areas in which trade tensions are merging with political disagreements. At the request of the United States, Canada recently arrested Meng Wanzhou, chief financial officer of Chinese tech giant Huawei, on suspicion of breaching US sanctions on Iran. This goes beyond a simple legal dispute. The Chinese government has condemned the arrest of Meng and, in apparent retaliation, arrested several Canadian citizens.

The friction over trade practices comes at a tense time in US-Chinese relations. In the light of the shrinking imbalance in military power between the two nations, Washington is anxious about President Xi’s centralization of political power and formulation of a more assertive foreign policy, especially in the South China Sea. US officials have responded to Beijing’s expansive claims in the region, and its militarization of natural and manmade islands, with increased overflights and freedom of navigation exercises. The risk of an accidental outbreak of hostilities is rising. Even the prospect of a major trade deal appears to be of limited value when it comes to addressing structural problems in the relationship.

Trade and Geopolitics: Europe

According to Trump, Europe’s shortcomings on trade and NATO are interconnected. He argues that spending less on defence has given countries such as Germany an unfair advantage when it comes to fostering economic growth, and he has not hesitated to treat US allies as competitors. For instance, following disagreements with French President Emmanuel Macron about NATO and a European army, he threatened to impose tariffs on French wine imports.

Trump has also used trade to sow political discord on the other side of the Atlantic. He has not masked his dislike for the European Union and his preference for a more nationalistic, less integrated Europe, and has openly encouraged Britain to withdraw. In the wake of the 2016 election, he promised London a favourable trade deal in order to limit any economic problems caused by Brexit. However, after Prime Minister Theresa May agreed with her European counterparts on the terms of Britain’s withdrawal, Trump criticized the deal and suggested it would prevent a US-UK trade pact.

A Threat to the International System

Trump has demonstrated that economic blackmail by the United States works, at least in a narrow sense. In every case that the administration has threatened to limit access to the US market, trading partners, in spite of vows to the contrary, have agreed to negotiate and offered at least modest concessions. But, in spite of modest concessions from trading partners and some potential short-term political benefits, the president’s nationalistic trade policies are profoundly damaging. They are also undermining the international economic system that Washington and its allies spent decades constructing after World War II. This complex, interdependent system is now in danger of collapsing, and the alternative that Trump envisages would harm all parties involved. Such an arrangement would be less efficient than the current multilateral system, which better reflects how international trade works in an interconnected global economy, where supply chains often stretch across numerous countries. Bilateral deals also do a much less efficient job of harmonizing standards and regulations.

Conclusion

The consequences of such a development would be dire. Powerful nations would frequently take advantage of weaker trading partners, fueling distrust and, in general, making the international system more dangerous. There would also be a tendency for economic disagreements to lead to political and even military conflict. China and the United States should serve as a cautionary tale in this regard, as they have entered a vicious cycle, wherein trade measures are inevitably seen as designed not just to increase wealth, but to weaken the geostrategic position of the other country.

Trump’s attacks on the underpinnings of the international system, if sustained, could boost nationalist and extremist political movements in many countries, as it undermines the trust necessary to sustain international institutions and democratic norms. In fact, once the process of de-globalization gathers momentum, it will be difficult to resuscitate the old order.