The global economy has a lot to lose from an escalating dispute over tariffs
Trump’s tariff thundering on trade offers little threat of actual rain
Once again, Donald Trump is not playing by the "international rules". The latest incident is the US president’s spat with Europe and other US trading partners, with his plans to impose a 25 per cent tariff on steel and aluminium imports, on the grounds of “national security” concerns.
The threat of tariffs has opened a can of worms, prompting threats of counter measures that risk further souring of key international relations, not least with China.
Signing the order last week, president Trump exempted Canada and Mexico from the tariffs, and gave other countries the opportunity to argue why they should be exempted.
Such exemptions provided comfort to markets initially, seeming to indicate that the tough talking president is not engaged on a maniacal spiral towards global trade wars. But markets have been more jittery in recent days; the exemptions for Canada and Mexico “are not open-ended”, the president said; with rumours in recent days of further protectionist measures to come.
The European Union has already set out retaliatory plans to impose import duties on US products including Levi's jeans, peanut butter, cranberries, orange juice, steel and industrial products. Other countries are also considering similar measures.
Critics argue the tariffs would fail to protect American jobs and would ultimately raise prices for consumers. International Monetary Fund chief Christine Lagarde warned "nobody wins" in a trade war, saying it would harm global economic growth. This in turn would harm Arabian Gulf oil producers who are hoping to see continued demand for their oil exports.
The real target for such measures is and remains China, and on that front the White House has quietly escalated its threats to include potential movement on intellectual property rights, by far the biggest bilateral issue between the two countries, dwarfing anything on steel or aluminium in significance.
Both the United States and China are keenly aware of the potential backlash and danger of increasing pressure on Beijing. Some say that Mr Trump creates this type of environment from ill-thought out presidential campaign promises like the decision to move the US embassy to Jerusalem. The political imperative of delivering on campaign promises on trade, in light of the threat of Republican losses in the November midterm elections, should not be underestimated.
But the US president is not having it all his way within the White House. The resignation last week of his top economic adviser Gary Cohn was triggered by very real policy differences within the White House that suggests ongoing tensions and uncertainty over multiple policy fronts, not just the final form of the current trade policy stance.
Whatever the intent, the president and certainly no Republican wants a trade war that would threaten the US economy or trigger a market collapse. The president’s aim is to correct what are perceived to be unfair trade practices working against US competitiveness, a political need that is especially pressing ahead of this year’s midterms.
Similarly, markets are grossly overestimating the willingness, or the ability, of congressional Republicans to block any movement on tariffs. In spite of all prior warnings, and their efforts to distance themselves from the White House, Republican “free traders” have been careful to phrase their opposition in terms of moderating, not blocking, Mr Trump's political trade agenda.
Understanding the need to give the president some victory on trade, there is one thing all of Congress, even Democrats, can agree on; China is indeed a “bad actor” on trade that somehow needs to be punished, hopefully without too much fallout.
How China responds next is crucial, not just to the US economy but for other countries around the world, including in the Gulf. China has threatened an "appropriate and necessary response" in any trade war with the US, while Chinese Foreign Minister Wang Yi has said the two countries should strive to be partners rather than rivals.
China’s powerful incoming Vice Premier, Liu He, has just concluded his trip to Washington DC, coming at a particularly bad moment for the country to present its goals to a hostile American audience. Those goals were to introduce and share views on macroeconomic policies, especially trade policies, and to ensure any economic and trade disputes are settled through negotiations.
With the US determined to implement the tariffs, the Chinese would be left with no alternative but to respond in kind, starting with, but not limited to retaliation on imports of agricultural products from the US. Meanwhile, China shrugs off the ultimate impact of threatened tariffs on steel, aluminium and washing machines on its economy; tariffs they maintain will hurt American allies more than theirs.
It is the unbalanced trade deficit between the two countries that has incurred Mr Trump’s wrath. But Beijing contends that the enormous US trade deficit with China will remain at current, record high levels, for at least another five years, unless Washington finally concedes to Beijing’s long-sought efforts to lift restrictions on high-tech exports to Asian country, particularly in the chip sector.
Even if China were to double its imports of agricultural products from America, the largest export market for the US in the world, the deficit would remain unsolved.
On the carrot side, China has hinted at the potential for preferential treatment of American financial institutions in its markets, even while stressing the roadmap and timetable for the opening of China’s financial sector has already been formulated and announced, a plan that will not be changed overnight.
Beijing also refuses to cut subsidies to its state-owned enterprises, as demanded by the “fair-traders” in Washington, just as the US cannot or will not eliminate subsidies to American farmers.
In a further enticement to the Americans, Beijing will also hold out energy co-operation between the two, specifically on imports of oil and gas from the US.
The ultimate bet in China is that some new, behind the scenes, concessions will still need to be delivered to ensure that as the Chinese saying goes, while Trump’s trade “thunder is loud, the rain is small”. It is a big bet indeed.
Dr Mohamed Ramady is an energy economist and geopolitical expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia