This is the week that Donald Trump’s America-first trade agenda runs headlong into Economics 101.
A long-feared global trade fight is poised to get much more real as a flurry of tit-for-tat tariffs kick in between the United States and many of its main trading partners, including Canada.
The U.S. President may think he’s winning this trade war, but the evidence is unconvincing. So far, countries are not bending to U.S. pressure, consumers are paying a steep price and companies aren’t behaving as Mr. Trump wants.
A case in point is Harley-Davidson, the iconic U.S. motor-bike maker, which is shifting some production offshore to avoid steep tariffs imposed by the European Union in retaliation for U.S. duties on steel and aluminum. The company said it has no choice because European duties will add roughly US$2,200 to every motor bike sold there.
Prices are spiking for products hit with import tariffs, including lumber, steel and aluminum. Conversely, prices for key U.S. exports facing retaliatory tariffs, such as soybeans, wheat and corn, have fallen sharply.
Meanwhile, fears of an escalating trade war are pushing the U.S. dollar higher against the currencies of most of its main trading partners, overwhelming the effect of import tariffs. If sustained, a stronger dollar will make foreign goods cheaper and widen the already large U.S. trade deficit. The greenback’s roughly 5-per-cent rise since March would add as much as US$200-billion to the country’s trade deficit.
It’s also not clear that Mr. Trump’s tough stand with China is playing out according to plan. China has already matched the United States’ US$50-billion in tariffs and has vowed to go toe-to-toe with anything else the United States does.
“In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek,” Chinese President Xi Jinping told a gathering of U.S. and European multinational chief executives in Beijing recently. “In our culture we punch back.”
China has plenty of tools – tariff and otherwise – to inflict pain on U.S. companies operating in the country, points out Drummond Brodeur, senior vice-president and global strategist at Signature Global Asset Management. But he said engineering a major devaluation of the yuan is not likely one of them.
“China has stated that they don’t want a trade war, but will respond in kind. So they’ve remained the adults in the room,” Mr. Brodeur said.
Instead of buckling to the pressure, China is actively pursuing trade diversification, cozying up to traditional U.S. allies, such as the European Union and Japan. Chinese officials were in France last week pledging to buy more European farm products and perhaps Airbus commercial aircraft – a clear warning shot at U.S.-based Boeing.
China is also working to jump-start a regional free-trade deal among 16 Asia-Pacific countries called the Regional Comprehensive Economic Partnership. The group, which includes neither the United States nor Canada, is China’s response to the United States’ withdrawal last year from the Trans Pacific Partnership.
And of course, China is continuing to invest in its so-called Belt and Road initiative, expanding its influence in the region by investing hundreds of billions of dollars in infrastructure projects throughout Asia.
China is stepping into the void created by the Trump administration’s isolationist behaviour. As the United States undermines multilateral organizations and agreements, such as the World Trade Organization and the TPP, China is sending the unambiguous message that it’s ready to step up.
Mr. Trump is not getting anything he wants. The tariffs aren’t putting a dent in the U.S. trade deficit, he isn’t getting the better trade deals he insists he wants and U.S. companies are showing they are just as likely to move jobs offshore as they are to repatriate them.
The longer-term consequences could prove even more damaging. With its Made-in-China 2025 initiative, the world’s No. 2 economy has set a clear goal of becoming a global leader in emerging technologies, such as artificial intelligence and robotics.
Under any other U.S. President, Washington would be working with its traditional allies to make sure China plays by the rules, and doesn’t achieve technological dominance through theft of intellectual property, infiltration of computer networks or other illicit means.
Instead, the United States is picking trade fights with its friends and opening the door for an ascendant China to become the world’s geopolitical, economic and technological superpower.
The real struggle of the coming years is not about trade deficits: It’s about dominance in technology.
And the United States is fleeing the battlefield.