With the outcome of the trade war drama still up in the air, the only certain result is that we are all trade experts by now. Thus, I will spare you one more studious article on the subject, and elaborate instead on Trump’s strategic motivations, and why he is playing a winning hand.
The doctrine of «America first», interpreted literally, entails improving the country’s competitive position, at the expense of risking alienating allied countries. In this sense, the threat of tariffs corresponds to a blatant negotiation technique that makes use of a position of strength, and that seems directly taken from Trump’s bestseller book The Art of the Deal.
Being the US the world’ largest importer, it is understandable that it seeks concessions in bilateral trade agreements, while trying to repeal multilateral ones; since it is much easier to twist the arm of a small neighbor than to coerce the entire WTO. This explains withdrawing from the Trans-Pacific Partnership trade agreement, the threats to pull out from NAFTA, and the ongoing boycott to the WTO.
The economic impact of these protectionist policies is unlikely to be dramatic for the US. First because trade barriers are already ubiquitous, and no one can say for certain whether their realignment will pull the US economy farther away from the theoretical free-trade optimum. But even if the latter were the case, the impact would be marginal as long as the new tariffs are reasonable and trade does not come to a halt.
But behind the legitimate aim to achieve better terms of trade, a darker interpretation of the «America first» policy lurks; to make sure that America «ranks» always first. The American anxiety about losing its hegemonic role is not new and helps explain previous trade disputes. In the 80s, the fear that Japan would overtake the US triggered a wave of protectionist measures targeted specifically against the country. And more importantly, the US forced Japan to abandon the fixed exchange rate regime, which led to a sharp appreciation of the Yen and, ultimately, the «Lost Decade».
With Russia economically dwarfed and the grandiose European Union project wrecked, the clear threat is now China. However, the magnitude of the challenge this time is much larger. As a base for comparison, in the 80s the Japanese economy was 37% of that of the US’, whilst its population was just half. Today, China´s GDP is 60% of that of the US’, and its population is 4.3 times bigger.
The catch up potential is huge, but in order to close the gap China will have to challenge the US in the upper part of the value chain (hence the Made in China 2025 strategic plan). Moreover, this goes hand in hand with the country playing, quietly but relentlessly, an increasingly assertive global role.
The rapid rise of China as a superpower discomforts many in the US – who now regret having let China join the WTO – but the genie is out of the bottle and the situation cannot be easily reverted. Hence the temptation of a new version of the Opium Wars that relegated China to a secondary position for more than a century; this time being a war of an economic nature, since the political stability of the country depends crucially on maintaining the pace of economic progress.
With Japan, the US did not hesitate to put the country in economic collision route, but back then the economy was less globalized and Japan took the brunt. Nowadays, a recession in China would be heavily felt everywhere; but it is also true that Japan ventured into automobiles and electronics, leaving aside nuclear weapons and submarines. This is the big geopolitical gambit that president Trump is playing, force China to give in and secure an unquestionable political gain, or risk severe economic pain for keeping a long-term strategic advantage.
Fernando de Frutos, MWM Chief Investment Officer
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