So it seems that Donald Trump’s campaign rhetoric on trade is likely to be quickly put to the test. How countries respond to this antagonism remains to be seen, but the omens are not good. So far at least, Wall Street still seems to want to rally, preferring to focus on Trump’s promise of fiscal stimulus, rather than his threat to the international trade order as we know it.
Indeed, we now know how Trump intended to “pay for that Wall” if the Mexican Government refused to simply hand over the cash. According to a thought bubble from his hapless media spokesman, America would simply impose a 20% tax on Mexican imports.
Sound simple, but there are a few problems. First, that would effectively imply Americans pay for the Wall – through higher import costs. It would not be long before media commentators make this obvious point, which would undermine one of Trump’s key promises.
Second, attacking Mexico in this way would directly flout World Trade Organisation principles against discriminatory treatment against one country in particular. More generally, the threat of punitive tariffs appears to be why Trump now wants to negotiate trade deals on a one-for-one basis with other countries. Do what we want or else!
Of course, Trump may not care – he could even threaten to leave the WTO altogether. But the risks of a tit-for-tat trade retaliation is clearly increasing. Europe and China I suspect will not be as easily pushed around. Were the US to leave the WTO, other countries would be free to raises tariffs on America as they saw fit.
What about Congress? Or the Courts?
Unfortunately, it appears there’s very little either can do to stop a determined protectionist President tearing up previously-agreed trade pacts and/or unilaterally imposing tariffs on one or all countries. Under various pieces of legislation, Trump could cite either a “national emergency” or “times of war” or “adverse impact on national security” to justify tariffs hikes. Of course, were he to act in this way it could be subject to either Congressional or court challenge – but that could take years, and it would be just the sort of fight with “the establishment” that Trump would relish.
So Trump has the power to wreak havoc should he so wish. It all then comes down to how other countries would react. To my mind, this is where Trump’s plans may come unstuck – or at least send seriously knock international business and investor confidence.
While Trump may think he has the economic clout to trample over trading partners, countries are not like businesses. National pride matters as much as dollars and cents.
While it would seem in the immediate economic interest of a country not to antagonise America – give its important trading status – it could be politically quite popular to stand-up to such bullying. We may be getting an early taste of this defiance following the apparent decision of the Mexican President to cancel a scheduled meeting with Trump in the White House.
All this drama, moreover, is coming before Trump has even started to consider what he’ll do about China’s position in the South China Sea. Don’t get me wrong: I’m uncomfortable with China carving out slabs of international trade waters, but it is effectively inviting countries to call its bluff. What can we do about it? We could send ships through these waters, but even if China didn’t sink them (which, we might hope, is unlikely!), it won’t necessarily stop them further developing their man-made islands. They might just wave to us from shore.
So all up, there’s a very real risk that Trump’s bluster might not end up having the intended effects on its trading partners or military rivals. He has probably dreamed about how easy it would be to enact such tough measures for decades. Indeed, Trump has been complaining about American trade policies since at least the mid-1980s. But reality might deal him a harsh lesson.
How he reacts when cornered on these issues remains to be seen. Sadly, history suggests megalomaniac authoritarian leaders don’t back down easily – and he may prefer to seen his country torn apart than back track.
It’s a risk which to my mind is not yet sufficiently prices into equity prices. Trump is offering fiscal stimulus to be sure, but he’s also offering a lot of challenges and risk for the global economy at the same time.