Markets

Is there a strategy in Trump’s trade war?

By Steve Spencer

THE TURBULENT regime of US President Donald Trump has overturned virtually every bastion of public administration, in pursuit of delivering on a suite of promises to be a president like no other before.

Not only has he attempted to dismantle or reverse almost anything notable that was a legacy of his predecessor, he has walked his country from several global treaties and commitments — on climate change, human rights and the environment.

It is like that Seinfeld episode where George tries to attract a girl by being “everything you don’t expect to see in a person”.

Trump is keeping the faith with his “base” by talking tough, so they should continue to expect the unexpected and it will all be in their interests.

It is clear he has little understanding of or time for rules, just as he aspires to be “above the law” — a claim he used (when he talked of pardoning himself) in his preparation for allegations that may come from the Mueller investigation into Russian involvement in his campaign.

Trump has gone on a wild, divisive and mostly destructive ride. So, is there a coherent strategy in 2018 US trade policy?

Let’s remember the loose threads that drive Trump’s trade “strategy”, which is meant to ensure America comes first, and that there should be more fairness in opening markets. Achieving both is challenging.

First and foremost, the agenda is to protect the jobs and livelihoods of “forgotten America” — farmers and manufacturing workers in the middle of the country — especially steel and coal workers.

It aims to reduce trade deficits — certainly with specific countries — China, the NAFTA partners and a few others.

Further, Trump has often spoken about correcting inequities in dealing with China — stopping intellectual property (IP) theft, uneven finance and investment laws and removing manipulation of currency.

Refreshing the NAFTA accord was promised, but the ante was lifted when punitive tariffs on steel and aluminium were not only levied on Mexico and Canada, but also against the EU and other traditional allies, in the name of national security.

Not only does that narrow penalty bring unintended consequences for the cost of manufactured goods and jobs in the US by raising input costs, it brought retaliation from China and Mexico targeted directly at Trump’s support base — by harming US farm commodity markets and trade in manufactured products. Further action is promised.

The potential damage to dairy markets is so far moderate — the US may lose some of its most important cheese market (Mexico) but its largest trade in whey powder (to China, where it has more than half total whey product trade).

If these measures remain in place for a while, markets and milk use will adjust, export prices for cheese might suffer as US producers chase sales in other markets.

Bigger risks lurk if this drags on with further action and reaction, which will stall the stunning recovery in world dairy markets since early 2018. The wobbles are already appearing.

If Mexico strikes at US milk powder trade, it gets much worse for the US dairy industry. If the corn trade with Mexico is disrupted, feed markets will crash further.

If China’s broader trade with the US is damaged, the impact on the Chinese economy, and the health of the world economy may worsen.

It’s hard to see how a protracted trade war will end well for the US.

Trump’s heartland will pay more for consumer goods, while prices to farmers will be weaker and market access less certain. Trade protection can only reduce the competitiveness of the US economy.

Logic says Trump will be motivated to end the trade war quickly to avoid media backlash and potentially weaken strong Republican selling points offered by the faster-growing US economy and tax reform … ahead of mid-term elections in November.

A short war will also be good news for investors, as financial markets dislike unpredictability. But relying on logic and consistency with this guy is a huge mistake.

Trump appears to care little about societal values, economic facts or the Republican party. He is increasingly operating as an independent rather than being party-bound, which will worsen if November elections go as polls suggest.

The GOP likes the current situation, holding all the levers of federal power, despite Trump’s unhinged antics It can get its favoured policies — lower taxes, corporate freedoms, lower welfare — across the line.

But the GOP are a party of free traders and running out of time to reverse negative voter sentiment ahead of mid-term elections.

Trump’s motivation isn’t policy — it’s purely about the optics — about looking good and claiming a win in the “deal”.

After threatening adversaries, exploiting strengths, any master of deal-making aims to bring them back to the table to negotiate a better outcome.

That works for property deals, and even war, but can it apply to the complexities of trading between nations?

China’s imports from the US totalled $130bn last year, while US imports from China were more than $500bn.

Trump has more cards to play, but so does China which has bankrolled bonds underpinning the US economic recovery.

Meanwhile China has begun to make overtures to the estranged G7 members on countering US policies.

If Trump was shrewd, he would be able to convert the bargaining position with China into a long-term win, bringing US allies into a bigger play, thrashing out demands on currency, IP, trade and investment with China that the EU, UK and Japan could also adopt.

There are a few problems with that proposition, leading an administration that has lost trust and is renowned for incompetence.

Trump has burned all key bilateral relationships with a scorched-Earth foreign policy after taking office.

Tariffs aimed at several trading partners will provide a reverse of what he intended. In efforts to undo everything, he turned long-time allies into doubters and adversaries.

In a world that is already growing in complexity and unpredictability, this Administration has added another layer of uncertainty and risk — even as he delivers on the promise to Trump’s base to “blow it all up”.

As he and his team have demonstrated it doesn’t require a high degree of competence to do that.

The void the US leaves in terms of international rule-making cooperation — imperfect as it was — will be filled, so keep watching … if the Trump stuff hasn’t already worn you out.

• Steve Spencer is a Director of www.freshagenda.com.au