Where Trump went wrong on China trade
President Trump missed the opportunity to build a broad-based coalition between countries and corporations who all share the same concerns vis-a-vis China’s trade and investment practices and who all want to see their intellectual property protected.
Worse than that, he failed to appreciate that the Trans-Pacific Partnership — a trade pact designed to comprise 12 Pacific Rim countries under the leadership of the US with the notable absence of China — was intended by the Obama administration to box in China’s pre-eminent position in the Asia Pacific. Trump tore up TPP on his first day in office. Canadian Prime Minister Justin Trudeau and Japanese Prime Minister Shinzo Abe understand the issue only too well and created the comprehensive Progressive TPP among the remaining 11 TPP countries — without the US. It was signed on March 8 in Chile.
All of the above were missed opportunities. It comes, therefore, as little surprise that the protectionist measures that Trump announced were ill thought through. When he announced tariffs on steel and aluminum they might have been intended to hit Chinese overcapacity, but Chinese steel imports to the US comprise less than 1 percent. So the measure hit the Canadians, the Brazilians, the Mexicans and the European allies of the US.
When Trump then made further announcements to slap a 25 percent tariff on 106 categories of Chinese imports, he again failed to think things through carefully enough. Many of these goods are part of the supply chain of US manufacturers, hence making their goods more expensive and less competitive in the international markets. Stock markets across the globe reacted swiftly and went into negative territory. They recovered some since, but are still jittery.
President Xi Jinping, on the other hand, is playing the long game. He did retaliate where it hurts Trump’s and Republican voters in key constituencies, in states such as Wisconsin (pomegranates) and Kentucky (bourbon) and farmers in the Midwest (soy beans). This must be unsettling so close to the mid-term Congressional elections.
President Xi also won the PR war internally as well as externally. In China he is in control of the media and is portrayed as the defender of free trade and Chinese prosperity. Externally he also portrays himself as the advocate of global free trade, which in reality he is not. Nonetheless he had made the case at the World Economic Forum in Davos in January 2017. The world’s elites and media gobbled his message up.
So far this has been a war of words and tariffs still need to be imposed. We may see the issue resolved before long, because both US industry and the Chinese economy have a lot at stake. The balance in terms of numbers still is in the US’ favor. In 2017 it imported $506 billion worth of Chinese goods, whereas the Middle Kingdom imported a mere $130 billion worth of US goods over the same period.
Donald Trump may have a point about unfair trade practices by China, especially its investment practices. If he went about things in a less haphazard way, he could have gathered a lot of support on the subject of intellectual property rights in China.
Trump’s willingness to undermine the fragile global trading system is nonetheless dangerous. Since World War II trade has lifted billions of people out of poverty. Since then the US has been the underlying guarantor of the free trade system. The World Trade Organization (WTO) is unimaginable without strong US support. The failure to conclude the Doha round has chipped away at the WTO’s credibility, which does not mean that the organization does not have a vital role to play devising and executing fair trade rules at the supra national level — which is, by the way, the relevant level. A global trading system has to be multilateral. It will become unstuck if we revert to bilateralism.
Why is this trade controversy relevant for the GCC? The reform programs of the council are dependent on bringing manufacturing, tourism and services to the region. These industries will depend on trade for their supply chains as well as for bringing the finished goods to the global markets. The KSA joined the WTO as early as 2005, precisely because the country wanted to have access to global markets. The GCC economies are also still reliant on exporting oil and petrochemicals. Oil is the prime fuel of transport. Global trading volumes have a direct correlation to global oil demand. More trade means therefore more demand for Saudi, Kuwaiti and Emirati crude.
- Cornelia Meyer is a business consultant, macroeconomist and energy expert. Twitter: @MeyerResources