The global trading environment has clearly changed since Donald Trump became President.

    Trump's recent claim that he has achieved “more than almost any other administration in history” caused tittering from the world leaders gathered at the United Nations general assembly. While that statement is debatable, one thing he has done is to create turmoil with his America First trade war.

    Trump’s reasoning to protect America’s interests has been steadfast since his election campaign. He started as soon as he took office, abandoning the Trans-Pacific Partnership, a proposed trade deal, early in 2017.

    Since then the US has announced tariffs on imported solar panels and washing machines, steel and aluminium, and threatened tariffs on car imports. Trump has also ended the North American Free Trade Agreement, reinstated economic sanctions against Iran and of course started a tit-for-tat trade war with China.

    The impact on the US economy of the China trade war is less than 1 per cent, even as its largest trading partner in goods. Yet the ripple effect on non-US global trade is likely to be more significant. For example, car manufacturers are sensitive to changes to cross-border sanctions, but that applies equally to smartphones, tablets and other tech.

    The need for non-US businesses to maintain trade and work around (not necessarily against) the US is also starting to become more evident.

    The European Union (EU) has announced it's creating a cross-border payment mechanism special purpose vehicle (SPV) to allow countries both within the EU and elsewhere to transact with Iran and avoid US sanctions. 

    Federica Mogherini, the EU’s high representative for foreign affairs, told the UN general assembly that “no sovereign country or organisation can accept that somebody else decides with whom you are allowed to do trade with.”

    China in the crosshairs

    The EU SPV is highly unlikely to work, since the US is the dominant economy in the global financial system and it can simply adjust its sanctions to include the SPV itself or any business that uses it.

    But in some ways this is irrelevant. The creation of the SPV is a blatant and public demonstration of international frustration that Trump directs his sanctions and tariffs indiscriminately towards allies and adversaries.

    A further example of this frustration came from China’s vice minister of commerce, who stated that Beijing and Moscow could combine their efforts to counter the impact of Washington’s protectionist trade policies.

    Which leads onto the real target lined up in Trump’s trade tariff crosshairs: China.

    The challenge for China is the trade war is escalating at a time when its growth is already in slowdown. This is in part due to planned reforms of China's financial sector in order to manage debt and create more sustainable expansion.

    An increase on tariffs on US goods in direct retaliation to Trump’s administration is underway. However, some analysts are concerned about other actions China can take to make life more difficult for US companies operating there.

    In previous trade disputes with the US, as an analyst at fund manager Neuberger Berman points out, consumers in Japan and South Korea boycotted US goods through a sense of national pride. Something similar could well happen in China, where national pride is strong.

    For China, their emergence as a new superpower is simply re-establishing its position in the world. Taking on the US in a trade war taps into that deep sense of national pride. As such, President Xi Jinping cannot lose face in this trade war for more reasons than the economy.

    So, China has unveiled plans to cut tariffs for non-US imported machinery, electrical equipment and textile goods. This effectively cuts the prices on over 1,500 industrial products by an estimated 60 billion yuan (US$8bn, £6.1bn) this year alone. 

    The reduction in general tariffs from 9.8 per cent to 7.5 per cent makes non-US products cheaper in China – is this a tactic to create a longer-term drop-off in demand for US products?

    Perhaps, but the behaviour of China has principally been to retaliate against Trump's actions. So what is his next move?

    As we have said in the past, Trump delights in the art of the deal. His tactics come in three phases: threaten and make a lot of noise, act unpredictably and then come back to the negotiating table. This appeared to work with the EU - Trump’s smiling handshake with European Commission president Jean-Claude Juncker on the lawn of the White House staved off that trade war.

    It also worked with Japan and South Korea, both of which the Trump administration reached bilateral free trade agreements with.

    The difference between the EU, Japan, South Korea on one side and negotiating with China on the other is the former are allies of US, even if the US dominates the alliances. China and the US are adversaries, which explains why the Chinese cancelled trade talks.

    Where we go from here is unclear. Much depends on the results of the US mid-term elections in November.

    The Republicans are predicted to do badly and lose their majority in the House of Representatives, the ‘lower house’ of the two chamber US Congress.

    Therefore for the time being, Trump is unconcerned with the actions of other economic regions and the domestic contagion of some of his sanctions. Instead, he needs to promote his America First agenda and keep saying he’s winning to gain Republican votes. There will be no change in rhetoric or in actions in the short term.

    Either way, win or lose in the mid-terms, these are the tactics he has adopted to create an administration better than "almost any other." He has indicated he wants to run for a second term in office, and it's likely he will want to create a political legacy defined around his deal making.

    With just one tactic and China in no mood to cut a deal, the trade war is not likely to end any time soon.

    Start the discussion

    Add a comment