With a trade war on the horizon, Roger Williams explores Trump;s tactics to confuse the enemy.
Since Donald Trump came into office, on what was labelled a wave of popularism, he has, in the view of the press, fulfilled key election pledges. Also according to the press, he has a short attention span, reads very little and eats hamburgers. He is a man of the people then, isn’t he?
I had a chemicals business for 17 years, based in Indianapolis. We only had plants only in mid- western states where all our employees were white Anglo-Saxon Christians, as far as I could tell, and my best guess is that they shared the president’s short attention span, read little and ate hamburgers. I will bet you that most of our employees would have voted for Trump and today would be pretty happy that they have got what they voted for.
This is not the picture you get sitting here in the UK. No single TV chat show can seem to have an American guest without an apology for Trump and no British actor can seem to reside in the US without poking fun at this president.
I make no apology for him. Not because I didn’t vote for him but rather because I think I can see the aim of what he does. That’s not to say I often follow what he says, but I can follow what he does and that is how best to measure his actions. Forget the rhetoric; forget the tweets; note the threats but watch carefully the action he takes.
I wish we had him to negotiate our Brexit deal. “You want 70 billion as the exit bill? Forget it! You’re willing to accept 39 billion? Ok, but we won’t pay you a penny until you come up with a free trade agreement; no border checks; the full Galileo source code on a disc sent to my office and I want 10,000 doctors and 80,000 nurses shipped across on Brexit and you are paying their salaries.”
That’s how I see Trump. He would use the money the bureaucrats need to pay their salaries and expenses to fund their grand plans. In his actions to date, he is just using the weapons he has to achieve an advantage for his country. His weapons in this case are economic: the dollar, dollar interest rates, and ability to be self-reliant in most products.
Trump has supposedly started a trade war and, according to accepted economic theory, it will damage the US economy more than that of the exporters to the US. However, I think this is too simplistic, especially when you consider the key players in this and look at what the relationship
of these countries is to the US: The biggest exporter in the world is China ($2,263 billion1), followed by the US ($1,547 bn1) and next is Germany ($1,448 bn1). We are way down at 10th place ($445 bn1).
How important are these exports to each of the countries? Exports constitute 44 per cent of Germany’s economy, 20 per cent of China’s, but only 8.6 per cent of the USA’s. The huge, rich US market is mostly serviced by US producers. Exports matter less to the US than they do to China and far less than they do to Germany.
The most valuable US import product is cars, followed by crude oil, mobile phones, computers, auto parts then medication. As you know, the US is now a net exporter of oil and gas and can hold its own in world markets. In mobile phones there are imports principally from East Asia, but a significant number are made for Apple (US resident) as its worldwide sales close in on $1 trillion.
What is Trump aiming at? I think the moves he has made so far are aimed at imbalances: technology and cars. He started his strategy with China to try and get a fairer playing field and
protect the US from further thefts of technology. He has followed with steel and aluminium tariffs. Trade gurus know that much of what is imported from China, the US can do without, particularly in consumer products. Historically, China’s exports to the US have been more important to China than US’s exports to China have been to the US. This situation is still true, so if things need to change, now is the time to begin the war.
And how do you get allies? Let them be the recipients of China’s over production. Who are these countries and how do you target them? Use the dollar: nearly 50 per cent of the borrowings of emerging economies are in dollars. Reduce US quantitative easing and raise US rates. Fast growing countries like Turkey are put under pressure and funding imports becomes more expensive just when external funding is required.
Even China feels the fiscal heat. Where does the steel go instead of the emerging economies? Some of it will go to Europe perhaps. What will they do? Increase tariffs, raise barriers and complain. Perhaps they will have to respond with tariffs against the US – the EU has. This has shown the world that the EU’s protectionist structure, one already with higher tariffs against US products (such as cars) than the US has against EU. Politically, it garners support at home and helps justify US moves internationally.
What has the EU done? Announced responsive tariffs hitting, among other things, motorcycles. Trump wanted a response, as his final aim is not really on steel or aluminium. It is, I believe, on automobiles.
Trump made promises to steel workers. He has shown them that he is good for his word even if steel production doesn’t increase in the US. Trump also made promises to car workers and, I think, it is here, that he will have tangible success.
Let’s take Germany for example. Cars are Germany’s most important export. Mercedes Benz and VW have substantial US production.
Forcing these companies to shift production to the US will take time, but if they are going to lose substantial market share, I suspect they will do it. Other US car plants will certainly benefit and all of this can result in more jobs for US car makers, potentially both in the medium term and the long term.
Economic theory on trade barriers simplifies, assuming that domestic and foreign producers are separate. They are not. They are worldwide concerns. The inefficiencies that are believed to arise under protectionist policies do not seem a logical result to me. The political and economic gains from starting this trade war with China and Europe seem clear. Trump’s change in corporate taxes gave light to this aim, giving every incentive to bring both capital and production back to the US.
Trump’s policy is to hit where it hurts. Cars are Germany’s biggest export, and the US is its biggest export market2. Germany has failed to pay its share of its defence; the US has demanded a two per cent share of the country’s economy be spent on defence and Germany is nowhere near.
Trump is exerting pressure. Germany is under pressure in the EU and Eurozone as southern states fail and members rebel against migration and policies of austerity required for financial bail-outs.
Interestingly, Trump’s moves will also add some focus on how important the UK is as a market for Germany’s cars. Perhaps, if still in place, US tariffs will be lifted on Brexit?
As a boy, I used to play a board game called ‘Risk’. You had a board with a big map of the world and started with a set amount of armies. The aim was to wage war on competing players and conquer the world. No one ever won without first conquering North America and using that as a base to conquer the world. I reckon Trump used to play too.