Paper tigers: There will be no trade war

The hyperbole surrounding the global trading environment recently reached fever-pitch with the imposition of tit-for-tat sanctions between the United States and China. The world’s media predictably went into a collective meltdown, issuing increasingly hysterical headlines based on little or no analysis of the parties’ respective policy goals.

The press can be forgiven for succumbing to the temptation of a newspaper-selling headline, however, discerning patterns in global trade requires close observation of fact, especially repetitious actions which signal patterns.

One such pattern is the US approach to revising trade policy. In this article, I present my observations on the current administrations’ approach to trade, the ‘Trumpian Model’.

The game is afoot

For all the noise, it’s easy to overlook the fact that the threatened sanctions have not been imposed. Indeed, US and Chinese officials have been busily engaged in negotiating a way through the artificially precipitated crisis.

Given China and the US are each other’s largest two-way trading partners, sensible policy-makers in Beijing and Washington know that no-one ‘wins’ from a trade war, despite presidential exclamations to the contrary.

Analysis of threatened tariff impositions indicates a marginally, albeit negligible negative impact on the Chinese economy of about 0.3 per cent of GDP, revealing the true intent of the Trumpian tariffs: renegotiating the rules of the game.

Through a complex process of globalisation and development, the US reduced its heavy industry and manufacturing and outsourced it to cheaper, more efficient markets including China. The consequent Chinese trade surplus with the US, one of the President’s key gripes, can be seen as a result of the United States’ own policies, although distorting reality in the service of nationalist rhetoric is common to populists and autocrats the world over.

This bluster hides an emerging pattern of behaviour, a certain muscular mercantilism which is applicable to the majority of the current US administration’s economic engagement; think NAFTA for example (North American Free Trade Agreement).

Model behaviour

Modern communication has enabled massive efficiency gains in logistics and freight, while connecting people like never before. Tweetstorms emanating from the White House at 3am have become commonplace, causing the media to agonise over the interpretation of each new utterance while the President enjoys his covfefe. Sensible observers of this charade understand that tweets are not policy, they are a negotiating tactic, with the President employing a three-stage approach.

Norms of diplomatic engagement traditionally saw a majority of policy dealt with discreetly out of the public glare. Upending these centuries-old conventions, twitter-plomacy has become a weapon in forcing second parties to the negotiating table.

This new paradigm sees the US signal its dissatisfaction with a policy through public diktat, such as a tweet. This signal is then reinforced by a negative repercussion, forcing the subject to the negotiating table, wherein the two parties negotiate an outcome. We’ve recently seen the second stage negative inducement also employed to ratchet up pressure during the third stage negotiation, with the unfortunate ZTE telecoms company as the sacrificial lamb.

The current US-China spat exemplifies this approach, with the US signalling its dissatisfaction over ‘unfair trade practices’ which allowed ‘China to rape our country’. Even before assuming the presidency, Mr Trump signalled his approach, claiming during a campaign rally in Bluffton, South Carolina in July 2015 that ‘I win against China … just go back to the negotiating table’. Threats to label China a currency manipulator on entering office (which didn’t happen), and the imposition of tariffs on $150 billion of Chinese exports (not yet activated) can then be seen in the context of calibrated negative inducements to force China to the negotiating table.

While unconventional, the approach worked. US negotiators are reported to have requested that China reduce its trade surplus with the US by $200 billion by the end of 2020, of which half should come from the purchase of more US products. In addition, the US is reported to have requested the reduction of Chinese import tariffs to US levels in the same time period, alter its “Made in China 2025” strategy to cease any government subsidies, abolish its policy on technology transfer, open its domestic market to US goods and investment, particularly services and agriculture, and finally not to retaliate or request WTO involvement while the US imposes tariffs on China. Remarkably, and aligned with the model, the two sides issued a joint statement on 19th May saying that ‘there was consensus on taking effective measures to substantially reduce the United States’ trade deficit in goods with China’, with the latter pledging to ‘significantly’ increase purchase of US goods and services, including ‘meaningful increase’ of agriculture and energy exports, increase intellectual property protections, ‘stop levying additional tariffs and not engage in a trade war.’

Notwithstanding an interpretation of whether the US case for such requests is justified, and the mix of measures China might agree in response to US requests, the model withstands scrutiny. The US’ action against ZTE, nearly bankrupting the Chinese company, can thus be seen as a warning to the Chinese government that the US can play dirty should China choose not to play ball.

The applicability of this model to other engagements allows us to cast events in a new light. Rhetoric towards North Korea for example, and the various sizes of each presidents’ rocket, preceded the imposition of additional US sanctions, and was followed by the recent announcements of a potential historic first summit between the two leaders.

This brave new world of brinksmanship forces us to recognise that Trump is different and rethink how we engage with the US. The world has spent over a year in collective denial that Obama had left the building, hoping that Trump would somehow go away and the sanity and predictability of the global order would be reinstated. The reality is that the US is an increasingly transactional mercantilist actor, not the reliable internationalist ally it once was. The collective rules-based order that Australia has benefited from for decades is being upended in a world where unilateralism and economic might equals the last word. We must all now learn to deal with Trump on his terms.

Given the dizzying revolving-door of administration staffers in the West Wing, it would be easy to dismiss US policy as uncoordinated and reactionary. The clear pattern of US engagement reveals however that somewhere within the institutional architecture, a greater game is at play.

Sam Lawrence

Senior Manager, Global Trade and Customs