Donald Trump’s four rules for conducting a trade war
New tariffs on Chinese imports went into effect only on July 6, so it is too early to say how the trade war is going and which country, if any, will win it. Even the most die-hard free trader should admit that in theory it is possible that the threat of tariffs can induce other countries to make concessions that leave us (and possibly them) better off. Lose-lose scenarios are, however, also all too possible.
What we can say with certainty is that we are learning four rules for conducting a trade war, Donald Trump-style.
First: Assume that you will win it effortlessly.
In March, Trump trade adviser Peter Navarro predicted that no country would retaliate against our tariffs. His reasoning: We’re the biggest market in the world, so other countries have too much to lose. Refusing to co-operate with this theory, Canada, China, the EU and Mexico have all imposed retaliatory tariffs.
Trump himself has made the closely related argument that our trade deficit guarantees our success, because "when you’re already $500bon down, you can’t lose!". It’s true that in theory we can cut off more imports from the rest of the world to us than the world can cut off in exports from us.
But lost exports are not the only form of pain that a trade conflict can cause, and raising barriers to exports is not the only way that countries can act to harm our economic interests. China is reportedly considering "holding up licences for US firms, delaying approval of mergers and acquisitions involving US companies and ramping up inspections of US products at borders".
The administration’s strategy will pay off if Navarro and Trump understand the interests of our trading partners better than those trading partners themselves do.
Second: Make sure your tariffs are designed to inflict maximum damage on your own country’s companies.
The administration’s tariffs on imported steel and aluminium harm companies that use those inputs to make their own products, and these companies employ more Americans than the steel and aluminium industries themselves.
The tariffs on China, too, will reduce the competitiveness of many US companies. Analysts at the Peterson Institute for International Economics have calculated that 95% of those tariffs are falling on capital goods and intermediate goods. China has taken a different approach in choosing its retaliatory tariffs, of which 38% target agricultural and food products and 35% intermediate and capital goods.
Third: Take on as many countries simultaneously as you can.
The Trump administration has many concerns when it comes to trade. It objects to bilateral trade deficits, to other countries’ trade barriers against our exporters, to currency manipulation, to intellectual property theft and forced technology transfer.
One way to address these concerns would be to pick the worst abuses, or the worst abusers, and tackle them first. One might, for example, attempt to build a coalition with other countries that share an interest in combating Chinese mercantilism even if we want some of those countries to change their trade policies, too.
US policy makers have rejected this thinking. Instead we have in quick succession moved against China’s practices and nearly all of the world’s steel and aluminium producers. An earlier round of trade action targeted imported solar panels and washing machines. We have shrugged off signs that our policies are moving other countries closer to China. At the same time we are pushing for the North American Free Trade Agreement to be changed.
Trump is betting that he can succeed without building a coalition or setting priorities.
Fourth: Don’t feel that you have to make your negotiating demands clear.
As Martin Wolf points out, our goals with respect to China are "obscure". We may want China to reduce its trade surplus with us, or to end its Made in China 2025 programme, or to lower its trade barriers against us or some inscrutable combination of the above.
Trump administration officials do not seem eager to clear up any confusion. Kevin Brady, the Republican chairman of the House Ways and Means Committee, recently commented, with a hint of exasperation, that "today there are no serious trade discussions occurring between the US and China, no plans for trade negotiations anytime soon, and seemingly little action toward a solution". Nor can anyone say with confidence which Trump aides reflect the administration’s position.
So Trump’s team either won’t clarify what it wants or genuinely does not know. Having an objective is often considered helpful in achieving it.
But this is an administration bent on breaking the rules, disrupting old templates and trying new tacks. Its conduct on trade is definitely in keeping with that spirit.