Trump’s Trade War Is A High-Stakes Gamble

There are several extraordinary aspects to the US-China trade war, but perhaps the most unusual (and risky) is President Donald Trump’s reliance on “his own intuition and analysis and not the advice of aides,” as The Washington Post reports, for waging economic conflict.

Concerns about the president’s single-minded push to confront China is less about objectives and motivation vs. process. Most economists agree that the US needs to renegotiate its trade relationship with China. The debate is whether Trump’s public bull-in-a-china-shop approach is the best way to proceed to secure results that benefit America. This much is clear: almost everyone agrees that the blunt instrument of tariffs is a high-risk strategy, with minimal if any historical support for expecting a productive outcome.

White House aides are reportedly making that point to Trump. Late last month, CNBC reported: “With the 2020 election looming, ‘plenty of people’ inside the White House are telling Trump that trade wars are not “good and helpful,” according to a Politico report behind the site’s paywall.”

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Some of Trump’s strongest Republican supporters in Congress are also advising caution. “I’m concerned both with China and Mexico,” Sen. Rand Paul (R-Ky.), a Trump ally, said in June. “Worldwide tariffs are what led to the exacerbation of the Great Depression. … Tariffs are a bad idea. Interruption of trade is a bad idea.”

To be fair, countering China on trade deserves to be a high-priority for US strategic economic policy, which is a key reason for the creation of the Trans-Pacific Partnership free trade agreement. Thomas Friedman, a foreign affairs columnist for The New York Times, correctly notes:

Trump should have signed the Trans-Pacific Partnership free trade agreement, which would have aligned all the major Pacific economies — except China — around United States trade values, norms, interests and standards, and lowered thousands of tariffs on American products. Instead, Trump tore up the TPP.

Then Trump should have lined up all the European Union countries, which have the same trade problems with China as we do, on our side. Instead, Trump hit them with tariffs on steel and other goods, just as he did China.

The result is that US trade policy (and the economy) is increasingly beholden to a seat-of-the-pants, high-stakes brinkmanship run largely by the occupant of the Oval Office, often by way of tweets. Maybe this will all work out, but the idea that bluster and intimidation on the fly will bring the world’s second-largest economy to its knees and force it to accede to most if not all of Trump’s demands looks like a long shot.

Stratfor, a risk consultancy, noted a few days ago that “judging by the United States’ continued, albeit moderate, economic expansion, Trump is likely calculating that he still has enough economic room to push harder on Beijing in this negotiation by hiking tariffs.” True, but that’s a thin reed as the US economy slows.

What’s beyond debate is the growing uncertainty linked to Trump’s tactical preferences for renegotiating trade policy — uncertainty that’s taking a toll on the economy. For the moment, it’s a marginal headwind.  As reported by The Capital Spectator this week, the median estimate for a set of nowcasts sees third-quarter economic growth for the US holding near a modest 2% pace—roughly unchanged from Q2. That’s strong enough (assuming it’s correct) to keep the 10-year-old expansion alive. But the economy has clearly downshifted this year and a 2% (or slower) pace leaves the US vulnerable to future shocks – such as a risky trade-war policy that turns really ugly.

Global trade tensions have already soared, according to BlackRock’s estimate (see chart below). That’s a sign that the potential for economic trouble is elevated. The longer the current scenario endures and uncertainty reigns, the higher the potential for economic pain.

Adding to the potential headwinds on the global stage: the UK appears headed for a hard Brexit on Oct. 31, combined with a slowing Eurozone economy and a downshift in China’s macro trend. There’s never a good time to launch a trade war, but the global economy is especially vulnerable at the moment.               

“Certainly, escalating trade tensions through higher tariffs and restricted access to markets is hurting sentiment, increasing costs, damaging supply chains and weakening corporate profitability,” warns James Knightley, chief international economist at ING.

For now, growth still has the upper hand for the global economy, or so survey data suggests. The JP Morgan Global PMI Output Index edged up in July to a three-month high, signaling modest growth. But the latest print, at 51.7, is only mildly above the neutral 50 mark that separates growth from contraction. The global macro trend, in short, is susceptible to trade-related headwinds.

Not surprisingly, the International Energy Agency (IEA) trimmed its outlook for global oil demand growth, citing rising US-China trade tensions. “The prospects for a political agreement between China and the United States on trade have worsened. This could lead to reduced trade activity and less oil demand growth,” The Paris-based energy agency advised.

It’s only a slight exaggeration to say that the key factor for the near-term outlook for global economic activity is closely bound up with one man’s perceptions, informed or otherwise, on what constitutes prudent trade policy decisions on a day-to-day basis. Risky as that is, it’s right where Trump likes to be: running the show, with little (any?) input from experts in the field. Whether that’s good for US strategic interests is another matter.

In any case, at least we know where to look for the next iteration of the ever-evolving trade situation: Donald Trump’s Twitter feed.

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By James Picerno