Trade Talks

Trump goes domestic while world traders go global – and ignores history

By J Brooks Spector 30 July 2018

A child holds Chinese and USA national flags before the welcome ceremony for US President Donald J. Trump and Chinese President Xi Jinping at the Great Hall of the People in Beijing, China, 09 November 2017. EPA-EFE/ROMAN PILIPEY

It is time to get serious about what works and what doesn’t in international economic relations – and to understand what works, and what does not. Consider China, Russia and the US.

It has become easy to invoke the term “trade war” as an all-encompassing explanatory mantra for what is going on with American economic policy – and thus significantly with world economic relations. This is true, but insufficient.

Instead, what actually also seems to be happening is the use of international trade policies and trade rules (such as tariffs) as a way of exercising – or attempting to exercise – American power in inter-state relations well beyond the usual limits of regulating trade. And naturally, too, America is not alone in this; it just happens to be in the spotlight right now, courtesy of the outsized and outrageous personality of its current president.

It is easy – perhaps too easy – to talk about trade as if it was something like a sports match carried out by countries, between countries, when, in fact, at its core it is the sum of relations between individual buyers and sellers. Big commercial farmers who raise crops for export or traders who carry out the sales – whether they are in the US, Argentina, Brazil, Australia or South Africa – all follow the international prices of their crops, and especially price futures, with nearly obsessive interest.

Why? It is because they want to – even need to – know when to sell the rights to their crops, or if they will be forced to have yet further rounds of unpleasant conversations with their bankers instead. Similarly, companies that make almost anything must constantly monitor the frequently fluctuating costs of nearly every part of their increasingly internationalised supply chains in order to be able to predict profit and loss, and to adjust their products’ prices.

But of course the buyers and sellers don’t have it all their own way. Governments enter into this arena too. Consider how China and Russia carry out their own international economic relationships.

Does anyone really believe the new Russian-German natural gas pipeline through the Baltic Sea was entirely predicated on simple economic terms of trade? Of course not. Yes, the Russian gas sector will benefit from this massive sale, just as German consumers will benefit from improved, cost-competitive fuel. But the real winner may just be the possibility that Russia will have the potential for increased leverage over German policies internationally, or perhaps a vote or two at the UN, or in some obscure but crucial committee in the depths of the World Bank, the IMF, the WTO, or some other international body. First prize, at this point, would be a shift in German feelings about those financial sanctions imposed by the West after the forcible seizure of Crimea in 2014.

Of course, such things can also cut the other way. Russia’s exports are largely limited to primary products like petroleum and natural gas (except for military sales to places like Syria, or a nuclear reactor or 12 to some place else). There are other competing sellers of this generic product and it isn’t much good for a bottom line when it stays deep in the ground, or sitting in a storage tank waiting for an order. (The same goes for gold or platinum, just by the way, in case the case hadn’t been sufficiently clear to readers.)

Given the nature of Russian external economic relations, the not particularly hidden hand of Vladimir Putin’s government has been clearly visible in this project. This was true even as German Chancellor Angela Merkel turned to Donald Trump at the Nato summit to remind him this gas pipeline deal was a private project, not a government one, after Trump pontificated that Germany was a virtual satrapy of Russia.

And then there is China. Yes, of course China is a non-imperial power with the interests of its BRICS partners firmly in place. In case such true believers have not been paying attention, though, the potent mix of loans, investments, trade agreements, and low-cost infrastructure assistance that constitutes China’s “Belt and Road Initiative’ is clearly designed to enhance China’s national influence, its markets, its connections, and its national prestige – as well as to provide some of the benefits actually being touted for these efforts.

The term “sharp power”, in comparison to the more frequently cited soft or hard power, was brought out almost precisely to describe this combination of inducements and blandishments. They draw the combined impact and power of government to negotiate agreements, together with China’s increasingly powerful private business universe, as well as a whole passel of quasi-governmental financial institutions in creating a new (or revised) model for international economic relations. In short, then, this is China’s sharp power. In that Belt and Road Initiative, this has even led to China’s virtual ownership of ports within its ambit such as the one in Sri Lanka, or their reach into South Africa’s infrastructure with some massive loans to state-owned enterprises such as Eskom – effectively holding the financial future of those institutions in their hands.

While China is significantly fudging things on proper protection of foreign intellectual property and in designing rules that force foreign investors to hand over big chunks of equity to local well-connected types as the price of making the investment, the Chinese are generally placing their big government leveraged bets on new tech, rather than in propping up old smokestack industries in the fashion of Trump-style protectionism.

Time for a short history lesson. An earlier, less economically weighty version of this policy – the original template – came out of the combined, interwoven power of Japan’s business empires; those vertically and horizontally integrated corporate families, married with major financial services houses; joined together with the Japanese government and its military in Manchuria and parts of China back in the 1930s.

That project, in turn, became a model – minus the now-forbidden military component – for Japan’s new developmental state after World War II. And that, in turn, comprised the impetus for the developmental designs of the “four little dragons of Asia” – and then the others such as Malaysia, Thailand, Vietnam, and Indonesia. Coming full circle, major elements of that model then served as the template for China’s own developmental project, once Deng Xiaoping took power in Beijing with the slogan, “To be rich is wonderful”.

The EU’s economic policies – as expressed through the European Central Bank and the EU members’ vast economic heft more generally, combined with the power of the German economy, along with that of the rest of the members – would probably have similar impact, but only if the respective countries’ political power were welded tightly together as well. At least for now, they are not.

And what of the United States? Now? It has already become a truism that Donald Trump is a transformational figure, aiming to recreate the Republican Party, the government, and the nation as a whole. Of course he is usually seen as a particularly unruly transformational figure, whose whipsawing political and foreign policy decisions veer alarmingly – dangerously – from one side of the road to the other, without much in the way of a plan or strategy. And then there is that dreadful tin ear for any sort of nationally elevating language, and an evident lack of public morality at work as well.

But perhaps surprisingly, in economic policy, there actually are reasons to perceive a kind of larger design at work. And it is one that also attempts to draw business and government much more closely together. In reality it, too, owes much to the idea of a developmental state, as well as protectionist impulses with deep roots in American history. But it is anything but that old-style, conservative GOP orthodoxy of low tariffs and isolationism. Instead, realising it or not, Donald Trump is significantly channelling a stew of ideas from the Asian developmental state and Alexander Hamilton’s early vision in his Report on Manufactures at the beginning of the republic, along with Henry Clay’s “American System” from the early 19th century. (Some would even find influences of still-earlier mercantilist thinking mixed in there as well.)

The main elements of this Trumpian thinking are a direct engagement by government in setting an industry by industry, sector by sector agenda, using the bully pulpit to urge support for this, the use of a kind of industrial policy in support of heavy manufacturing, and the bludgeoning of international rivals (or most of them) via tariffs or the threat of tariffs. In Hamilton’s day, it would have been tariffs to protect American infant industries, and in Hamilton’s and Clay’s visions both, it was a plan to underwrite the infrastructure improvements – harbours, canals, roads, and bridges – of their times.

The problem for Trumpian policies, and industrial policy more generally, is that picking winning sectors to support almost inevitably means missing the boat on new, disruptive technologies, or picking individual companies over others. (The Japanese government would not advance scarce foreign exchange to the Honda company years ago, arguing there were already sufficient carmakers, and that they should stay with motorcycles. The company founder borrowed every cent he could from friends and family and went ahead anyway.)

The result often ends up with politically determined subsidies and additional market distorting mechanisms, rather than the urging on of the increasingly innovative and the competitive. Or, in Trump’s case, now, by generating countervailing Chinese tariffs against American soybeans, his administration is now forced to offer subsidies to farmers whose Chinese markets are now lost to them. This in turn will almost inevitably generate further calls for other subsidies to yet other sectors whose markets or supply chains are similarly disrupted by the ongoing tariff battles.

A critique by investment analyst Zachary Karabell in Sunday’s Washington Post makes this point in a different way. As he wrote:

Trump’s goal appears to be restoring a domestic manufacturing base that has long since been globalised. If a few tariffs are the only tools, that will fail. But a radical reinvention of our economy is possible if — big if — Trump and Republicans in Congress decide to do what China does. In recent weeks, President Trump has threatened tariffs on $500-billion of Chinese imports, on $200-billion of car imports from various countries and on any nation he perceives as ripping off the United States. ‘We are being taken advantage of,’ he said, adding, ‘and I don’t like it.’

As it stands, alone, the level of tariffs being levied can’t come close to compelling that change. Unless they’re matched by massive public and private spending on domestic infrastructure, physical plants and training, those tariffs will amount to a de facto tax on American consumers. If Trump wants these tariffs to have their desired effect, he’ll need somehow to erect high barriers on a wide range of goods and then galvanize Congress to undertake a domestic spending programme unparalleled since the New Deal and the retooling of domestic industry during World War II. And that spending will need to be channeled and focused on building a manufacturing and transportation infrastructure on a scale that only one country in the world has done in the past 50 years: China….”

But that would likely be the death knell for free markets, Karabell explains. He notes Trump trade policy “is incoherent because it suggests simplicity and ease — Trump hallmarks — focusing on dramatic gestures aimed at transforming everything without making tough choices about where to prioritise resources. If only. The problem with the president’s tariffs isn’t that they can’t be defended, but that they’re detached from all that would be required to make them good policy. If Trump really went big, it would open a vital and needed debate about the future. Instead, we’re left with the illusion of bold policy, full of bombast and void of substance.”

An actual commercial farmer, Kalena Bruce, also writing in Sunday’s Washington Post, added real world perspective from the agricultural sector on the effect of current measures, noting:

Farmers use a lot of steel, which Trump subjected to a 25% tariff in March. Combines, grain bins, fencing and cattle gating, which we are constantly upgrading and replacing, have become significantly more expensive as steel prices have jumped because of the tariffs. This has taken a painful bite out of our already-slim profit margins. Yet the most significant consequence of tariffs for farmers has been the inevitable tariff blowback from trading partners, which reduces our export opportunities. For instance, China has targeted soybeans and hogs with steep retaliatory tariffs. These farm products are popular in China and fixtures on Midwest farms.

More than one-third of U.S. soybeans, the second-biggest crop in the nation, goes to China — about $12.4-billion worth. Since May, soybean prices have dipped about $2 per bushel to about $8.50 as export markets have dried up. For every dollar lower a bushel, farmers lose about 10 percent of their revenue.”

It is the same with US pork prices and exports already, Bruce explains.

The challenge for the Trump administration in trying to figure out what he wants and how to get there, it would seem to be, is not simply finding ways to punish foreign competitor nations for their trade slings and arrows, real and imagined. Instead, it must lie with designing policies that do not just defend old industries, even as they avoid the dangers and distortions of governmentally administered pricing and the government’s picking of winners within sectors and between sectors. Simultaneously, such policies cannot be positioned so that they generate a fierce blowback against the very industries where the US holds comparative advantage, like large-scale commercial agriculture – just as they are doing now.

It is already past time to add carefully abridged versions of Adam Smith’s and David Ricardo’s classic works on absolute and comparative advantage to the president’s summer reading pile, along with a study of Asia’s little dragons by someone like Ezra Vogel, and, perhaps most important of all, an economic history of the Great Depression so he can learn a bit about those punishing 1930s Smoot-Hawley tariffs – and how they contributed to the harshness of the economic collapse. DM

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