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Trump’s trade stance: A cause for mayhem

The US hardball trade strategy is a double whammy for the EU, writes Manal Lotfy in London

Manal Lotfy , Friday 5 Oct 2018
Donald Trump
File Photo: President Donald Trump signing executive orders in the Oval Office of the White House in Washington DC (AFP)
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With a beaming smile, US President Donald Trump declared his biggest triumph yet in wake of a last-minute trade agreement with Canada that will keep alive the free trade area between US, Canada and Mexico.

In Trump’s eye, his triumph is one of substance and style. His unconventional and personal style in deal making; hardball strategy.

His strategy forced Mexico to make concessions. And now it did the same with Canada.

So, after nearly a quarter of a century, the North American Free Trade Agreement (NAFTA) is officially dead and is replaced by the United States-Mexico-Canada Agreement (USMCA) to the delight of Trump who repeatedly called NAFTA “the worst deal ever”.

“These measures will support many – hundreds of thousands – American jobs,” Trump said Monday at the White House, describing the trade deal as “the most important” the United States had ever made.

“It means far more American jobs, and these are high-quality jobs,” he said.

With the approaching midterm elections of the US Congress, you can only imagine the enthusiasm of the working class and popular bases of the Republican Party in the most rundown cities in the US.

Mr Trump did not fail to mention another two successes in his push to negotiate new one-on-one deals with big trade partners.

He hard pressed South Korea to agree to revise its accord with Washington under the threat of punitive tariffs. Then Japan gave in to pressure to start bilateral talks on a new deal.

Investors worldwide breathed a sigh of relief that the key players of NAFTA had survived President Trump’s hardball strategy to remake the world’s trading system.

However, Trump’s aggressive trade strategy is causing mayhem and chaos.

In his self-congratulatory statement at the White House, he warned other trading partners, mainly EU and China, they were in his sights.

No wonder markets are nervous.

The midnight deal with Canada serves as a testimony to President Trump’s world trade strategy, which can be summed up as: America First; do not blink; and divide and conquer, as the US has sought to pick off trading partners across the world one by one, demanding concessions.

South Korea was one of the first countries to buckle under the pressure. Seoul agreed to adjust its trade deal with the US to limit steel exports and import more cars; in return it was granted exemptions from US tariffs on steel and aluminium imports. Then Japan followed, agreeing to adjust its trade terms.

The same tactics were used with Mexico and Canada, where US pressure pushed Mexico to break a promise to Canada that it would maintain a common front with Ottawa in the renegotiation.

After successfully rewriting the NAFTA agreement with Mexico and Canada, Trump has threatened to slap punitive tariffs on European Union car exports.

“If we can’t make a deal with the European Union, we will respectfully put tariffs on cars,” he said.

The US has already levied tariffs on imports of EU steel and aluminium while Brussels has retaliated with tariffs on $3.2 billion worth of US goods.

Both the EU and US agreed in July not to step up their dispute, but Trump’s statement is a sign that Washington is ready to resume a trade war with the EU if talks do not materialise a concrete compromise that will satisfy Trump as he again raised the spectre of a 25 per cent levy on imports of European cars.

Trump also dismissed critics of his tariff policies as “babies”, emphasising that tariff threats had brought trading partners to the negotiating table.

His shock tariff threat increased recession fears in the EU.

A new report commissioned by the German government shows that the country – and the rest of the EU – would be plunged into severe recession if there was an escalation of trade disputes with Washington, as well as the impact of Brexit.

It warned that the European automotive sector will suffer if President Trump followed through on previous threats to impose sanctions on EU car exports.

The report also warned that US tariffs would lead to immediate job losses. “Any escalation of the trade conflict, leading to considerable tariff increases by the US on a broad front, is likely to trigger a severe recession in Germany and Europe,” it said.

Although the report did not give a predicted timeframe for the EU doomsday scenario, it cut the 2018 GDP growth forecast from 2.2 per cent to 1.7 per cent.

However, the researchers from the German Institute for Economic Research, the Ifo Institute for Economic Research, the RWI Leibniz-Institute for Economic Research, the Kiel Institute for the World Economy and the Halle Institute for Economic Research, said retaliatory measures from the EU would soften the impact and could even “trigger a severe recession in the US”.

It is double whammy for the EU as the trade war between the US and China will also affect the EU economy. Let us not forget that China is the second largest trading partner of Europe.

So far, Trump’s administration has slapped record duties of $250 billion on Chinese imports to the US.

The EU and the US had shared similar concerns over China’s trade and economic practices, such as restricting the access of foreign companies to China’s market, while giving subsidies and preferential treatment to state-owned enterprises.

However, all signs show that the Euro Zone will be the big loser in a US trade war with China, due to the lack of structural reform in countries such as Italy, Greece and France.

Last month’s agreement between Washington and Brussels to suspend new tariffs was a worrying sign for China amid its trade war with Washington.

The EU, however, is not yet ready to join forces with the United States against China.

Last month, China and the EU said they were “strongly” committed to resisting protectionism.

Chinese Foreign Minister Wang Yi warned Europe not to “stab China in the back” because Beijing was at the forefront of efforts to protect the global trade regime.

But with Trump’s hard-pressing and divide and conquer strategy, Brussels finds itself in a delicate position.

In an apocalyptic note, WTO Director General Roberto Azevedo said, “warning lights are flashing” and the world must act immediately.

The European Union faces 1.7 per cent wiped from its GDP growth if the US were to act against the EU, he said. That equals £255 billion ($335 billion) of the EU’s £15 trillion ($19.7 trillion) GDP.

In the short term, working with Trump against China could be beneficial, but the long-term consequences are damaging for everyone, including the US, because signs of a probable recession are present for everyone to see.

*A version of this article appears in print in the 4 October, 2018 edition of Al-Ahram Weekly under the headline: Trump’s trade stance causes mayhem

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