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15th of October 2018

Economy



Behind tariff chaos, a world rethinking trade ties

The world order looks out of sorts these days. But in a sense, the new global disorder is exactly what Donald Trump promised when he campaigned for president. He pledged to reset the terms of trade with China, with NAFTA partners, and others. The problem is it’s not a quick or smooth process. The United States has cut some deals (with South Korea and Mexico) and may reach some more. Meanwhile the uncertainty is pushing other nations to seek bilateral deals with one another. “Bilateral is basically the only game in town,” says Fredrik Erixon, a trade expert in Brussels. But one big wild card is whether President Trump tries to follow through on threatened automobile tariffs in his bid to bring more factories to the US. An even bigger risk is that escalating tariffs turn into a longer-term trade war between the US and China. Trade expert Edward Alden says, “The longer this goes on with no serious negotiations, the less likely it is that a negotiation will be possible.”

Washington and Toronto

If it’s not a trade war yet, it sure is trade chaos.

Thanks to US tariffs, Walmart and other retailers are warning of price hikes this holiday season. Beijing is accusing the US of using a trade war to slow China’s rise as a world power. And America’s president just said, “We don’t like [Canada’s trade] representative very much.”

Behind the chaos, though, is a rethinking of global trade rules and relationships. In the face of President Trump’s aggressive push to reset US trade relations with all its major partners, those partners are recalibrating their own relationships. It’s a two-track strategy.

Nations are responding to Trump’s demands by engaging in direct talks with the US, but also by resetting ties with one another. And they’re using his approach of elevated bilateralism – casting doubt both on the relevance of the World Trade Organization and on the potential for larger-scale deals that can bolster the concept of a rules-based global trading system.

“Whatever one thinks of what the president is doing, he has succeeded in doing what he promised he would do, which is forcing new bilateral negotiations with almost all of the major US trading partners,” says Edward Alden, a senior fellow at the Council on Foreign Relations in Washington.

“Bilateral is basically the only game in town,” says Fredrik Erixon, director of the European Center for International Political Economy (ECIPE) in Brussels. “I think the general feeling [in Europe] is that with Trump in power, there's not going to be any multilateral trade reform that can happen.”

Such moves suggest more tension ahead between the United States and its major trading partners.

China cuts tariffs, except for US

In New York this week, Mr. Trump used a United Nations speech to showcase his “America First” worldview, and in some ways that’s being mirrored around the world in an every-nation-for-itself scramble in the realm of trade. As the US pushes its trade partners for a better deal for things it exports and imports, those nations are often pushing back – or seeking closer commercial ties with one another.

For example: When Trump fulfilled a campaign pledge by abandoning American involvement in a proposed Trans-Pacific Partnership (pleasing US critics of the deal, including organized labor), the other remaining Pacific nations concluded the accord on their own.

On Monday, China cut import duties on 1,585 types of products, a move interpreted by some as an effort to forge closer trade bonds with non-US partners. The tactic could help China at a time when its tariff battle with the US – started by Trump and expanded by Beijing’s retaliation – looks likely to put a significant dent in Chinese exports.

Europe is trying alongside like-minded countries like Japan and Canada to “take down the level of confrontation,” says Mr. Erixon in Brussels. Meanwhile, the tariff threats from Washington have been an impetus for nations including Mexico and Japan to step up efforts for bilateral trade deals with the European Union (EU), he adds.

“I think generally speaking that Europe as well as many other parts of the world are revisiting the core planks of the trade strategies, and without America they will need to find other ways to to deal with trade interests,” Erixon says.

Mr. Alden in New York sees the same trend.

“The Canadians now have a minister of trade diversification and the clear aim of that is: ‘Let’s find other markets,’ ” he says. “China’s got its own set of negotiations through RCEP,” the Regional Comprehensive Economic Partnership, a proposed arrangement spanning from India to Japan and Australia.

Too big to ignore

Still, none of this translates into an ignore-Trump strategy. America First won’t make America last in the world of trade.

“The US is the largest economy on earth,” Matthew Kroenig, an expert on security strategy at the nonprofit Atlantic Council in Washington, said in a conference call with reporters Thursday. Its heft as a market for exports gives the US leverage in bilateral talks with just about anyone, which may help explain Trump’s preference for that style of bargaining.

But with China’s growing economic weight, and with no nation responding well to a badger-thy-neighbor tone, the situation now has huge uncertainties.

“Who has more leverage here? Who is more vulnerable?” Mr. Kroenig asked. “I've heard credible arguments on both sides.”

China’s stock market has been struggling more than America’s amid the turmoil. But as tariffs have escalated, Chinese President Xi Jinping has shown little rush to make concessions. Some in China say the US seeks no less than containment of China’s economic rise.

“We haven't clearly articulated where we're going,” Kroenig says of Trump officials. “Is the goal ... cold-war style containment,” he asks, or more to “get China to play by the rules?”

Tension on the rise

The risk of a full-blown trade war is amplified, Alden says, by Trump’s gamesmanship. The US “betting seems to be that increasing the tariff pressure is going to leave the Chinese in a still weaker position and then at some point the US will be prepared to engage” more in negotiations.

“I think that’s probably a miscalculation,” he says. “The longer this goes on with no serious negotiations, the less likely it is that a negotiation will be possible.”

If the US-China relationship is the most consequential wild card in global trade right now, it’s not the only one.

The US is bargaining also on trade terms with the EU, and for now a key element of cross-Atlantic talks involves automobiles. Trump has threatened car-import tariffs as a high as 25 percent to bring more manufacturing back to the US.

The auto issue is also central in three-way talks aimed at a makeover of the North American Free Trade Agreement. Plenty of cars and auto parts flow across America’s northern and southern borders. Trump’s team cut a deal first with Mexico and now aims to bring Canada in.

The US says time is running out before it sends just a two-way deal (US-Mexico) to Congress. And Canada faces the reality of economic dependence: Seventy-five percent of its exports head to the US.

Yet the talks have stalled. Mark Warner, a Canadian and American trade lawyer who has worked on trade negotiations for three decades, says Canada appears to be banking on the “chaos scenario.”

That, he says, would mean refusing to make concessions, and trusting that the US Congress will thwart both a bilateral (US-Mexico) deal and the threatened auto tariffs.

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So the trade chaos lives on, for now at least. And as Canada joins other nations in seeking to diversify its global trade, Mr. Warner sounds a cautionary note: “This stuff takes time.”

Staff writer Laurent Belsie contributed to this article from Boston.

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