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on geopolitics

Jul 24, 2018 | 09:00 GMT

11 mins read

The Real Target of Trump's Trade War

Senior Global Analyst, Stratfor
Matthew Bey
Senior Global Analyst, Stratfor
A shipping container is offloaded from a Chinese container ship at the Port of Oakland on June 20.
(JUSTIN SULLIVAN/Getty Images)
Highlights
  • Rather than attempt to dismantle barriers to U.S. exports, the Trump administration is seeking to keep imports out of the United States.
  • European Commissioner Jean-Claude Juncker will strive to head off the possibility of new U.S. tariffs on vehicles and their parts by offering a trade deal when he visits the United States this week.
  • Because Germany has the most to lose in the current trade climate, Berlin will seek French support for a small trade deal that will solely focus on manufactured goods.
  • But with few prospects of a deal, the United States is only likely to pull back if Trump is subjected to domestic pressures, rather than as a result of Europe's offer.

European Commission President Jean-Claude Juncker hopes to do what no leader has managed to do so far: appease U.S. President Donald Trump with a trade deal. When he travels to Washington this week, Juncker will present Trump with an offer aimed at staving off a trade war between two of the world's largest economies. But the odds are not in his favor. Instead of making arrangements to break down trade barriers around the world, the Trump administration has worked to seal the United States off behind higher tariffs on goods such as aluminum, steel, washing machines and Chinese industrial products. And so long as the goal of this campaign is on shielding the domestic market – and not on opening up foreign markets – Juncker's efforts, and those of other world leaders, may be in vain.

The Big Picture

The Trump administration has threatened to place more tariffs on imports of vehicles and their parts, upping the ante in the trade fight he’s launched against foes and allies alike. One aim of this, of course, is to break down barriers to U.S. exports; so far, however, the policy has largely sought to protect U.S. manufacturers from competition and imports. The European Union – and principally Germany – has faced the brunt of his threats on car tariffs. This week, Brussels is sending a high-level delegation to Washington to offer a possible trade deal in exchange for a cessation of threats, but their task will be difficult.

Making a Mercantilist

Trump has been complaining about the U.S. trade deficit since long before he entered the political arena. As a guest on The Oprah Winfrey Show in 1988, for instance, he said of U.S. trade with Japan: "It's not free trade. If you ever go to Japan right now and try to sell something, forget about it. Just forget about it. It's almost impossible. … They come over here, they sell their cars, their VCRs, they knock the hell out of our companies." Thirty years later, he's still singing the same tune (albeit about China and smartphones instead of Japan and VCRs, and from the White House rather than on daytime television). For all of the criticism Trump has faced in the past for changing his position on issues, he has been nothing if not consistent in his message on trade.

It is quite clear that Trump’s definition of fair trade has to do not with the rules that govern trade but with the end result: If one side exports more than the other, it is winning. It's a view that dates back to 16th-century Europe and one that has prompted even Republican politicians to accuse the president of harboring a mercantilist trade policy. Economists as far back as the 18th century have dismissed the strategy as misguided; in The Wealth of Nations, Adam Smith argued, "Nothing … can be more absurd than this whole doctrine of the balance of trade." Rather than focusing on sheer volume, classical liberal economists like Smith, David Hume and David Ricardo encouraged countries to specialize in and trade the goods they produce the best for the goods they produce poorly to maximize productivity and wealth.

Of course, Trump and a contingent of American voters disagree. In their eyes, 60 years of specialization and free trade has hollowed out the U.S. manufacturing industry and the communities it once supported – Detroit, for instance, or Gary, Indiana. Trade has been a process of creative destruction for the United States, making and breaking great cities across the country over time. From those communities that have experienced more destruction than creation lately, a political backlash was bound to emerge. The response is Trump's trade policy, which the president now appears inclined to pursue, heedless of economists' warnings to protect his voter base and to do what he thinks is right for the U.S. economy.

A Focus on the Domestic Market

To that end, the White House has focused first on restricting imports. The issue is not about ensuring market access abroad, as Washington's tariffs on steel and aluminum demonstrate. The Trump administration argued that restricting imports was necessary to boost domestic production and bring operations at U.S. steel mills up to 80 percent of their capacity, citing national security concerns. (At stake was economic and industrial stability – in other words, employment levels – not the capabilities of the U.S. military.) And when granting exemptions from the tariffs, Washington entertained requests only from countries that had agreed to cap their exports to the United States. The Trump administration didn't even flinch at the tariffs trading partners imposed on U.S. exports in retaliation because protecting domestic industry was the point of the endeavor.

The same is true for the negotiations over the North American Free Trade Agreement (NAFTA) and the United States-Korea Free Trade Agreement (KORUS). Throughout the NAFTA talks, the United States has remained steadfast in its commitment to revising the agreement in favor of the domestic automotive sector. Washington initially pushed for stricter rules of origin in the sector such that U.S.-made content would make up at least 50 percent of the added value for vehicles sold in the trade area. It has since eased up on that stipulation, calling instead for Mexican auto manufacturers to raise their minimum wage or for requirements to pay automotive workers a percentage of value added if their wages exceed $15 per hour. Either way, U.S. automotive workers stand to gain. Similarly during the KORUS talks, Washington insisted on going back on a previous promise to open its market for heavy-duty vehicles, such as pick-up trucks, to Korean competition.

A chart showing U.S. trade balances with its 25 partners.

Trying for a Trade Deal

In light of these discussions, and of the European Union's own experiences with the U.S. administration – Trump called the bloc a "foe" on trade while touring the Continent earlier this month – Juncker has his work cut out for him. The main priority for his trip is to try to avoid the auto tariffs Trump has threatened to impose on the European Union. Tariffs are a grim prospect for European automakers, which exported $43.9 billion worth of passenger vehicles to the United States in 2017. And for Germany, whose cars accounted for roughly half of that figure, the threat is even more serious; the United States is Germany's second-largest export market for vehicles, behind only the United Kingdom.

But Germany has a special place in Trump's trade agenda, as the object of some of his harshest rebukes. The president believes the country is "winning" at trade because of a large trade surplus – something that must be evidence of unfair trade practices on its part. Germany, meanwhile, is concerned that a 20-25 percent tariff on imported vehicles could cost its automotive industry access to the U.S. market.

Enter Juncker's trade deal. While its specifics are unclear, the offer appears to be a modest trade agreement in which both sides would remove tariffs on industrial goods, leaving out more sensitive sectors such as agriculture. The arrangement would be ideal for Germany. For one thing, German industrial goods are so competitive that rival U.S. products wouldn't pose much of a threat on the EU market. (They would first undercut the goods of less competitive EU members.) For another, Germany, industrial juggernaut that it is, could benefit if the United States were to lower some of its trade barriers for EU members. A trade deal covering just manufactured goods, moreover, would need the approval of only a qualified majority of EU members to pass, rather than a unanimous vote. That means that smaller member states such as Portugal or Latvia would be less likely to derail the agreement.

France, however, may be a different story. Although France doesn't have much to lose in the prospective deal, since it excludes agriculture, it doesn't have much to gain, either. France, after all, exports far fewer vehicles to the United States than does Germany. The French government also has repeatedly stated that it would not negotiate with the United States under pressure. Furthermore, in its quest to enhance the European Union's "strategic autonomy," Paris would want to be sure Washington had agreed to lift tariffs on steel and aluminum before making any concessions to the Trump administration.

Problems Without Borders

And the complications don't stop at the European Union. A narrow trade deal like the one Juncker is preparing to lay out conflicts with the rules of the World Trade Organization, which typically requires bilateral deals to be comprehensive. In addition, Trump may lack the authority to sign the deal himself. The U.S. Trade Promotion Authority Act – which lays out the process whereby Congress can delegate trade negotiation authority to the president – prescribes several prerequisites that a trade deal must satisfy to be eligible for fast tracking. These provisions would require the deal to cover issues, such as investment protection, that could, in turn, necessitate a unanimous vote in the European Union to approve. Germany may well be better off trying to convince the bloc to reduce its own 10 percent auto tariffs to match the United States' current 2.5 percent level. (In exchange, the Brussels would probably demand that Washington remove its 25 percent tariff on truck imports.)

Feasibility aside, a small trade deal on industrial goods may not be in the United States' best interest. The country claims its greatest competitive advantage – its specialization, in the parlance of Hume, Smith and Ricardo – in agricultural exports, not in industrial goods. Likewise, it is the U.S. agricultural sector that has borne the brunt of the global retaliation against Washington's tariffs. The United States would probably press to include agriculture in a trade deal with the European Union, a request that wouldn't sit well with France. What's more, consumption is such a deeply ingrained part of American culture that a consistent trade deficit is all but inevitable. Lowering trade barriers to European goods could end up widening the United States' trade deficit with the European Union – all the more so since a strong U.S. dollar will give American consumers more purchasing power overseas.

Sooner or later, Europe may get relief from Trump's trade war – not by their own actions, but because of the groundswell of domestic opposition to the administration's trade policies.

Dim Prospects for Success

From this perspective, it's hard to imagine that the United States and the European Union will reach a quick deal to avert auto tariffs, despite Juncker's efforts. Trump, by all appearances, is simply less interested in breaking down trade barriers to U.S. goods overseas than he is in restricting imports into the United States. Consequently, the European Union, and other U.S. trade partners, will probably keep reaching the same impasse in their attempts to negotiate with the United States on trade.

Sooner or later, though, they may get relief from Trump's trade war – not by their own actions, but because of the groundswell of domestic opposition to the administration's trade policies. Economists have already pointed out that while tariffs may help U.S. steel and aluminum producers, they could hurt the industries that consume those metals – which employ more people and could lose more than 146,000 jobs, according to some estimates. The tariffs on Chinese goods so far focus on parts, meaning that they, too, could drive down U.S. employment. And the United States could lose some 830,000 jobs if Trump follows through with the auto tariffs, according to the Center for Automotive Research. Even aside from the risk to workers, the tariffs – taxes on U.S. consumers by any other name – could cause inflation to rise. In time, the domestic consequences of Trump's economic policies may force the president to retreat or else face a backlash from voters, floundering industries and lawmakers.

For Juncker and other world leaders, that moment probably won't come soon enough. Trump may accept the European Union's offer of a trade deal, but only if his proposed tariffs provoke sufficient uproar at home. Despite their hopes for a deal with Trump, Juncker and the European Union may not have much say over the matter. With each progressive battle, Trump's trade war is turning into a war on trade itself.

Matthew Bey is an energy and technology analyst for Stratfor, where he monitors a variety of global issues and trends. In particular, he focuses on energy and political developments in OPEC member states and the consequences of such developments on oil producers and the international oil market. Mr. Bey's work includes studies on the global impact of rising U.S. energy production, the recent fall in oil prices, Russia's political influence on Europe through energy, and long-term trends in energy and manufacturing.

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