The political economy of Trump’s trade war

by Anis Chowdhury | Updated at 11:55pm on March 05, 2018


PRESIDENT Trump’s latest bombshell of a 25 per cent tariff on steel and 10 per cent on aluminium imports has raised the spectre of a tit-for-tat global trade war. The vice-president of the European Commission, Jyrki Katainen, who is also the former prime minister of Finland, has cautioned that Trump’s new tariffs could trigger a global trade war. Similarly, the Australian Trade Minister, Steven Ciobo, apprehends that such actions could see retaliatory measures by other major economies, which are in no one’s interest.
In a very unusual manner, the International Monetary Fund has sent a warning message against its biggest shareholder, the US. Its spoke-person, Gerry Rice worries that these measures could prompt other countries to use the national-security rationale to justify broad-based import restrictions.
Predictably, Trump’s ‘tariff shot’ has drawn immediate reactions from both America’s ‘friends’ and ‘foes’.
The European commission president, Jean-Claude Juncker declared that this cannot be a unilateral transatlantic action by the Americans. He warned, if America imposes tariffs then the EU must treat American products the same way.
The Canadian PM, Justin Trudeau, said that Trump’s move was ‘absolutely unacceptable’. Foreign Minister Chrystia Freeland threatened to take responsive measures to defend Canada’s trade interests and workers.
Understandably, China’s response is more diplomatic, knowing that it is the main target. ‘China does not want to fight a trade war with the United States, but we absolutely will not sit by and watch as China’s interests are damaged,’ said Vice Foreign Minister Zhang Yesui. Earlier the Foreign Ministry criticised Trump’s tariff threat as ‘unreasonable and excessive’, and said Beijing ‘will take necessary measures to safeguard its legitimate rights and interests.’ And the Ministry of Commerce expressed ‘grave concern.’
Economists, both at home and abroad, are quick in showing how such a retaliatory trade war will be harmful not only for the global economy, but also for the US economy itself. They are quick to point out that such measures did not work in the past. President George W. Bush’s imposition of similar duties on imported steel in 2002, also responding to political concerns, ultimately destroyed about 200,000 jobs in industries that relied on the now costlier steel.
The usually friendly Wall Street Journal called, ‘Trump’s tariff folly’ as the ‘biggest policy blunder of his Presidency’. ClearView Energy Partners, an energy consultancy, believes, in addition to undermining the export chances for American oil and natural gas, limits on imported steel ‘could impose new costs on oil and gas production.’ Christopher Smart, a former Obama administration economic adviser, now at the Carnegie Endowment for International Peace, said, ‘Steel is one of those things where it doesn’t matter what the economic textbooks tell you. The math doesn’t add up for the economy, and we’re going to anger half our allies.’
Why did then Trump fire this tariff salvo, especially when the Chair of his Economic Council of Advisers, Gary Cohn, argued against tariffs? What gives Trump the confidence when he tweeted, ‘Trade wars are good, and easy to win’?
Answers to these questions can be found in both economics and politics, i.e., in the political economy of trade – both international and domestic.
Internationally, trade negotiations, despite an aura of so-called free trade agreements, are ‘gives’ and ‘takes’, influenced by powerful lobby groups. Thus, there are many exemptions. Trump’s real aim is China, as his predecessor, Barack Obama. Recall Obama’s comments hailing the Trans Pacific Partnership deal: ‘With TPP, China doesn’t set the rules in that region, we do.’
So, in the details, one is likely to see allies like the EU, Canada, Australia and Japan, exempted. Even, Mexico, which Trump does not seem to like, at least openly, most likely be included in the list of exempted countries. In fact, when the allies reacted, they did not say much explicitly that they are opposed to any such protectionist measures. All they hope that their countries will not be on Trump’s list.
So, this is just a brinkmanship in the international political economy arena. At the end, the US allies, happy with exemptions, are likely to join the US slamming their own tariffs against China in their attempt to resist China’s growing global influence. Trade measures as Trump’s are merely a bargaining chip for the US-led coalition to counter China’s assertive bold ‘One Belt and One Road Initiative.’
With such a united front, Trump is hoping an ‘easy win’ over China now that he scrapped Obama’s TPP weapon.
Domestically, too, trade is good politics — an effective winning weapon. Before Trump, Barack Obama and Bill Clinton, and other successful presidents, campaigned on the perils of free trade only to drop the rhetoric once in the White House. Trump got into the White House calling Mexicans ‘rapists’ on the campaign trail. And China? ‘There are people who wish I wouldn’t refer to China as our enemy. But that’s exactly what they are,’ Trump said.
William Dudley, President of the Federal Reserve of New York, opposes Trump’s tariff because in the longer term it would almost certainly be destructive. But he agrees that protectionism can have a ‘siren-like’ appeal because of its potential to provide short-term benefits to particular segments of the economy.
This is the mid-term election year in the US, and Trump has already appointment Brad Parscale as the Campaign Manager for his re-election committee as the advanced planning for the 2020 race begins. He wants to go to the poll — the mid-term included — with his vote bank in-tact. But his approval rating among white voters, including blue-collar whites who make up much of his base, has declined significantly, as revealed in the latest published polls.
So, Trump needs to respond quickly, and he hopes anti-Chinese trade ‘dog-whistling’ will win them back to his base. He needs to show that he cares for them as much as he cares for the rich who are going to benefit from his tax cuts.
Trump also desperately needs a distraction, especially when his approval rating with middle-aged, blue collar, white women is dropping more rapidly, amid numerous allegations of sexual misconduct against him surfacing again.
Finally, the urgency for a distraction is now the greatest as the Mueller investigation is tightening its noose around him.
Let us not forget; Trump is a master politician.

Anis Chowdhury, adjunct professor, Western Sydney University and University of New South Wales (Australia); held senior UN positions in New York and Bangkok during 2008-2016.