An era of globalization and free trade ending?
One of the most famous self-help books since the Second World War was “How to Win friends and Influence People”. That Donald Trump hasn’t read it seems rather obvious and indeed he seems to have adopted a policy of snarling and snapping at friends while engaging in an on-again/off-again flirtation with Russia. Ok, so the guy’s erratic….
So the election in November of 2016 delivered a mandate for getting tough with trade partners that were ripping the US off. All well and good…. the people had spoken. The trouble was that the most egregious example of trade imbalances, that of the US with China, has not been dealt with. In fact it seems like the Administration has retreated from its tough talk in that direction to instead go for a soft target (in Canada). Whether the new target will prove to be “soft” is yet to be proven, but Trump clearly thinks it’s easier to kick sand in the face of friends than foes in a classic bully manouevre. The problem he has here is that not even his “base” regards Canada as kick-worthy and it will beg the question over the long-term as to why he is not doing anything about China.
The China Syndrome
Much of the campaign period in 2016 was larded with attacks upon China and how it was stealing jobs (and technology) from the US and how its currency policies were manipulative and distortive and directed towards enhancing the shift of industries and trade in their direction. Frankly we had little to argue with the first thesis. Having been involved up close and personal with the Rare Earth industry this was a classic example of the Chinese modus operandi. Very little happens by chance even in areas that one might feel there is not much to gain. So the idea of taking punitive action, for instance against Chinese steel-dumping, has quite a lot of appeal and definitely Trump’s opponents were flailing around and on fragile ground when trying to arguing that China had NOT stolen US jobs. On the second thesis of China as a currency manipulator we suspect that Trump was looking at a rather out of date copy of Time in the dentist’s waiting room when he proposed that thesis. That view is so totally 2007 and outmoded. China has not been finding it easy to control its currency in recent times (welcome to the rest of the world) and if anything has been trying to stem capital flight.
In any case Trump’s election came as a shock to the Chinese and the sabres continued to be rattled during the interregnum leading up to the inauguration. Taiwan and South China Sea issues unsettled nerves and it looked like a serious tussle might evolve and that the new import duty regime and the tax credits linked to it (the Border Adjustment Tax) could put the US and China on a road to locking horns.
Then peace broke out. China was deemed useful for putting North Korea in its place (despite them being the main sustainers of the wayward regime for over 60 years now). Meals were partaken at Mar a Lago with the Chinese leader and all was well in the world, or at least in Sino-US relations.
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The problem with this outcome is that it sets up the scene for appeasement on the South China Sea and will not deliver back a single job to the US. It does not deliver for “the base” in the Rust Belt who thought that some, if not all, of the lost jobs would be brought home. It does not deliver for those of us who had hoped to see a removal or lessening of China’s rather sinister hidden hand in a lot of commodity pricing and trading. It does nothing for those who hope to see resource independence (read security) in the West from Chinese machinations. Essentially Trump wimped out.
“Erratic” is not a critique in the Trump Administration it’s virtually a mantra. If a policy decision is consistent with something said or done before then clearly someone “didn’t get the memo”. The wild swings and roundabouts have lead to daily embarrassments (not that anyone on this crew would blush at anything they have done or said). Strangely the worst events have usually involved close allies and long-term friends. The Australian Prime Minister was insulted (and hung up on), the German Chancellor was excoriated for not paying her share of NATO, the Mexicans have been accused of bringing Biblical style plagues of misfortune upon the US and now the Canadians have been given the first taste of Trump’s new get-tough trade policy.
As a result of this there appears to be no grand plan. That Canada has been the first victim of the “trade realignment” is probably because it is perceived as a soft target for a quick news opportunity in the absence of any action on the China issue. The perception, possibly mistaken, is that Canada won’t respond. Meanwhile little consideration seems to have gone into the opinions of the US housebuilding industry where on average timber worth $15,000 goes into each new dwelling constructed and that the new measures against Canadian timber imports might add $1,500 to the cost of each house. That must cut into margins or increase the cost (and affordability) of new houses, or both. It is also somewhat ironic that the beneficiaries of this action are in the timber states of the US of which the two largest are Oregon and Washington that both went with the Democrats. How does this deliver for Ohio or West Virginia?
A new tone has been set here. There could very well be a slew of random tariff actions take place from now on against a range of products and countries and there are sure to be countervailing actions by those countries affected to show that they will not take this lying down.
Trump quite likes being folksy so we might remind him of the old adage “What comes around, goes around”. Whatever the revenge that Canada exacts for the latest slap in the face it will probably be more subtle than anything the Donald might understand as “revenge”. If he has resolved on a course of trade actions against everyone EXCEPT China then the US will find itself exceedingly isolated for the rest of his term with foreign dignitaries staying at home and trade talks becoming a distant memory.
If Trump is right in one thing it is that China (and a few other nations) have gamed the WTO rules for a long while now with seeming impunity. The US has decided to join that exclusive grouping of rule-breakers. The response of those negatively impacted will be “see you in court” and the Trump approach is “bite me”. An era of globalization and free trade is ending. If the US thinks it can rule the globalized world while simultaneously dismantling it, it has a rude shock coming its way.
Christopher Ecclestone is the EU Editor for InvestorIntel and is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten ... <Read more about Christopher Ecclestone>