Jun 9, 2018

Axios AM

By Mike Allen
Mike Allen

Good Saturday morning. With President Trump in Canada for an economic summit that started in chaos as he feuded with allies Canada and France ("In Trump, some fear the end of the world order," says the WashPost's lead headline), we wanted to hit "pause" and walk you through this new era of global trade wars.

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1 big thing: The new world order

Illustration: Sarah Grillo, Rebecca Zisser/Axios

No single shot in President Trump’s trade wars matters much. But the wild, simultaneous spraying of shots at a half dozen U.S. allies — unprecedented in modern America — is changing the balance of trade politics and power before our eyes, Axios CEO Jim VandeHei writes:

President Trump didn't start a single trade war — he started at least four, all by choice:

  • War 1: with China over our trade deficit and over China's trade practices.
  • War 2: with Mexico and Canada over NAFTA.
  • War 3: with our European allies and much of the rest of the world over steel and aluminum.
  • War 4: with the World Trade Organization over its rules for policing trade disputes.

Why it matters: Trump is challenging the global order, and well-established alliances, more than any U.S. president in living memory. George W. Bush alienated Europe with the Iraq war, but that was a single issue. Trump is shaking the foundations and structures of the post-World War II order.

  • The rupture also helps Vladimir Putin, who has long sought to split the West. "There is no evidence that Mr. Putin is dictating American policy," writes Susan Rice, President Obama's national security adviser. "But it’s hard to imagine how he could do much better, even if he were.”

The downside: China is charging into the vacuum left by Trump. Not only is Xi Jinping cutting deals with bruised U.S. allies, he’s benefiting from the fracture of the U.S.-Europe alliance that was created to keep China in check.

  • The upside: China has exploited the U.S. by stealing technology and radically tilting the playing field to companies with ties to the Beijing government. So the possibility of more favorable terms for the U.S. remains. 

Still, Trump's trade tirade has upended decades of trade norms:

  • Relations with American allies such as Germany, France, Canada and Mexico are bad — and getting worse — largely over trade. 
  • The N.Y. Times' Peter Baker writes on today's front page: "In the 24 hours before heading to Quebec, Mr. Trump attacked Canada on Twitter six times for 'unfair' trade practices and threw in a few jabs at France and the European Union for good measure."
  • Trump redefined a national security threat in a dangerous way by using that as the justification to impose tariffs on steel and aluminum and to threaten tariffs on imported cars. Republican lawmakers complain that he could alienate military allies and raise prices for U.S. consumers. It’s a precedent other nations could exploit. 
  • Germany, Japan and others who want to do business with America may find no other choice than to cozy up with the Chinese. 
  • This started with Trump bolting the Trans-Pacific Partnership, which promotes trade among the U.S. and 11 Pacific Rim nations (Asia and the Americas), and culminated this week with furious European leaders threatening more deals sans America. 

Be smart: It's possible that all of these wars get resolved. But with each passing day, Trump seems less likely to bend and allies seem more likely to bolt alliance with America for deals with each other and China. 

2. Why you should care

You should care about trade debates for two reasons:

  1. At a personal level, they directly affect how much you pay for cool or necessary things.
  2. At a global level, they directly affect our economic and national security power. 

All things being local, this is where it could hit you at the cash register: 

  • Cars and trucks could be as much as $400 more expensive, reports Fortune.
  • Beer and soda could be costlier as brewers deal with pricier aluminum cans.
  • The same goes for canned soup and beans.

And if the White House's massive list of proposed tariffs on 1,300 Chinese products goes into effect, it could raise prices — in some cases by hundreds of dollars — for ...

  • Flat-screen TVs, printers, copiers, dishwashers, plows, snow blowers, fire extinguishers, golf carts, medical devices and more.

Go deeperThe winners and losers (mostly losers) in a U.S.-China trade war.

3. Where our stuff comes from, where it goes
Expand chart
Data: Census Bureau; Chart: Andrew Witherspoon/Axios

To get a sense of the real-world battleground , check out the top three products that the U.S. imports and exports from these five key trade partners.

4. Why Trump lit the fire

White House trade adviser Peter Navarro on the Rose Garden colonnade on Thursday (Chip Somodevilla/Getty Images)

The biggest key to understanding Trump's dogmatism on trade is that even as he switched political parties and changed his views on issue after issue, his one consistent stance over 40 years is that other countries are "ripping off the United States" in trade deals, as he put it in 1987.

  • Jonathan Swan wrote in an Axios "Trump 101" that it's the one thing the president really believes, with his protectionist roots going back to the union-friendly environment where his father, Fred, courted Democratic pols. 
  • On the campaign trail, Trump's messages on trade resonated with millions of American workers who felt cheated by globalization and low-cost competitors like China. They hooked into Trump's promises to hit back against these countries.
  • Nobody can claim to be surprised about what Trump is now doing. It's everything he promised during the campaign.

Another key insight to Trump: Not only is he fixated on America's trade deficit — it's specifically the trade deficit in goods he cares about. He doesn't pay much attention to the services sector.

  • Trump has a vision of American workers pouring back into factories to make machinery and tangible goods. His dream: a new boom for America's automobile sector.

Inside the administration, the most full-throated champion of Trump's own long-held view is hardline trade adviser Peter Navarro, a China hawk and advocate for aggressive tariffs.

  • Navarro is famous in the building for his massive charts showing how just about every foreign country is screwing America. (For a deeper understanding of what he's telling Trump about each foreign competitor, see Navarro's Friday N.Y. Times Op-Ed.)
  • Trump's mainline economic advisers — some with a decades-long record as free traders ("globalists," the president calls them) — cringe when the boss says in Oval Office meetings: "What do you think, Peter?"

This week, Swan put that exact question to Navarro, who told us Trump's strategy "squarely addresses three separate but inter-related structural problems":

  1. America's more than $800 billion a year annual trade deficit — the gap between goods imported and exported. (Navarro didn't include services, where we have a surplus.)
  2. "China’s strategic moves on the crown jewels of American technology and intellectual property."
  3. The growing national security threat: "a flood of imports is posing to two of the most important industries needed for a safe and prosperous American future — aluminum and steel."

What Trump is doing:

  • Trump's ultimate goal is what he calls "reciprocity" — imposing matching tariffs or penalties against every country on every product. On Friday at the G7, he reportedly floated removing all tariffs and barriers, full stop.
  • So far, he's hit China with an investigation, followed by the imminent threat of tariffs and investment restrictions. (It's Trump's way of fighting Chinese theft of American IP and forced technology transfer from U.S. companies.)
  • And he's imposed tariffs on aluminum and steel imports — a move that has inflamed allies in Europe and Canada.

Swan asked Navarro to respond to arguments by economists and business leaders who argue the steel and aluminum tariffs were the wrong approach because they ignore — and ultimately harm — America's competitive advantages in other sectors.

  • Navarro replied: "We on Team Trump are astonished by the argument that America's future is in the services sector, and Americans don't want 'dirty' jobs in steel furnaces."
  • "So to the financiers on Wall Street who look down their noses at manufacturing jobs ... you should get out more often to the Heartland and see what Main Street and Trump country really look like."
5. How the globalists fought — and failed

Gary Cohn in the Cabinet Room in March (Michael Reynolds/Pool/Getty Images)

Trade has been the Trump administration's biggest internal policy fight. For more than a year, senior officials met weekly in the Roosevelt Room, and occasionally with Trump in the Situation Room and Oval Office, to hash out differences.

Gary Cohn, Trump's economic adviser until April and fellow "globalists" — a small group that included Treasury Secretary Steven Mnuchin and former Staff Secretary Rob Porter — were often forced into a defensive crouch, trying to beat back the hardliners' ideas in real time in front of the president.

  • Cohn fought hardest in these meetings, according to sources in the room, calling Navarro a liar and telling him he knew nothing about economics.

Swan spoke to Cohn this week about his role in challenging Navarro, Commerce Secretary Wilbur Ross, and ultimately the president over their dedication to tariffs as a tool in trade negotiations:

  • Sources say Cohn internally acquiesced to putting tariffs on washing machines and solar panels but fought tooth and nail, and ultimately resigned, over Trump's decision to impose massive tariffs on steel and aluminum.
  • Cohn said he's not opposed to tariffs in every situation, but views tariffs on inputs rather than finished goods as economically disastrous because they affect so many industries.

Cohn says flatly that trade deficits don't matter.

  • "China is producing goods, not services, that we want to buy and they're producing them cheaper than we can produce them ourselves. 
  • "The old smokestacks that we used to have in the United States in the 1950s ... have moved to China, because people didn't like working in those environments."

Cohn disagrees with the idea that America needs a domestic steel industry for its national defense:

  • He says it's unlikely America will go to war with allies like Canada from whom the U.S. imports steel. 
  • "We're not fighting a 1950s war anymore with tanks on the ground ... Look how effectively we're doing in North Korea with sanctions. Look at cyber. The computer is more powerful than any piece of steel."

Bottom line: Cohn worries that by putting tariffs on steel and aluminum, Trump will ultimately hurt American farmers and consumers, because China and other countries will retaliate by putting higher tariffs on U.S. agriculture.

6. Do trade deficits even matter?
Expand chart
Data: U.S. Census Bureau; Chart: Andrew Witherspoon/Axios

President Trump is obsessed with the trade deficit — it's often the only number he requests from aides during trade conversation, and the only number he mentions. But the vast majority of economists agree it's a misleading indicator of whether the United States is getting the better of any trade deal.

Three big reasons why:

  1. Trade balances are dictated by macroeconomic factors, not trade policy.
  2. China's economy is experiencing export-led growth, while the U.S. is consumer-driven.
  3. The U.S. is an attractive investment destination for countries all over the world, and that also piles onto trade deficits.

The other side ... Trump isn't alone. Jared Bernstein, who was chief economic adviser to Vice President Joe Biden, and Dean Baker, co-founder of the Center for Economic and Policy Research, wrote for The Atlantic just after Trump's election, in "Why Trade Deficits Matter":

  • "Trade deficits, even in times of strong growth, have negative, concentrated impacts on the quantity and quality of jobs in parts of the country where manufacturing employment diminishes."

Be smart: The Wall Street Journal's Greg Ip, reflecting mainstream economists and journalists, writes that trade deficits are an oversimplified and "deeply flawed gauge of trade behavior that could lead the U.S. to pick the wrong fights."

7. Trump's war with NAFTA: Who could lose

Illustration: Sarah Grillo, Rebecca Zisser/Axios

President Trump has threatened total withdrawal as his administration continues to renegotiate the North American Free Trade Agreement with Canada and Mexico, a Clinton crown jewel from 1994:

  • The N.Y. Times reports that "internal divisions and a thinly staffed bureaucracy often left big American companies with much at stake shut out of deliberations, leaving "many of the biggest American companies frustrated and bewildered."
  • Why it matters: 26% of U.S. imports come Canada and Mexico, the country's second and third largest trading partners, respectively (after China).
  • Here's a look at the industries that will be hit hardest if Trump withdraws:
Expand chart
Data: U.S. Census Bureau; Chart: Andrew Witherspoon/Axios

Go deeper.

8. Trump's war with Europe: Allies rebel

Illustration: Sarah Grillo, Rebecca Zisser/Axios

When Trump exited the Paris climate deal, Europe hemmed and hawed. When he pulled the U.S. from the Iran nuclear accord, he faced sternly worded rebukes. But with his recent decision on tariffs, Trump unleashed Europe's fury.

  • The backstory: After initially giving Europe, Mexico and Canada waivers on steel and aluminum tariffs, Trump slapped those tariffs on last week. European leaders are furious both about the decision — they called it "illegal" — and about the implication they are somehow a threat to America's national security. 
  • Where things stand: Europe immediately announced retaliatory measures. There are real economic consequences to the tit-for-tat. And the move further splinters transatlantic ties, and makes cooperation on key issues, like China, far more difficult.
  • French President Emmanuel Macron, confronted Trump by name ahead of this weekend's summit, with the implicit threat to turn elsewhere: "Among countries which are friends and allies, it is inappropriate to refer to national security in order to justify trade sanctions. ... The six other G7 countries combined form a larger market than the American market. This must not be forgotten."

Go deeper: Erik Brattberg of the Carnegie Endowment for International Peace dives into the conflict for Axios Expert Voices.

9. Trump's war with the trade cop

Illustration: Sarah Grillo, Rebecca Zisser/Axios

Worried that President Trump is embarking on a global trade war, U.S. allies and adversaries alike are turning to the World Trade Organization to mediate — and getting nowhere, Axios' Erica Pandey writes.

  • The WTO, based in Geneva, is designed to reduce trade barriers and resolve disputes among countries.
  • But Trump has repeatedly undermined the group, which used to have the U.S. as a top backer and leader.
  • CFR senior fellow Edward Alden wrote when Trump announced he would impose tariffs on imported steel and aluminum: "March 8, 2018: The day the World Trade Organization died. Twenty-three years and sixty-seven days after its launch on January 1 of 1995. RIP."

You'll often hear debate about Trump's use of "Section 232."

  • What that means: It's a section of the Trade Expansion Act passed in 1962, during the Cold War, that allows the president to take broad unilateral actions — including tariffs — to defend the U.S. against imports that are harming or threatening America's national security.
  • Trump applies it by arguing that imports of cheap steel and aluminum into the U.S. market are killing the American domestic industries. He believes that if you lose your steel industry you lose your country, and you need domestic steel production both as an economic necessity and to produce tanks and other military hardware in the case of war.
  • But Trump's use of a national security claim against close allies like Europe and Canada run again decades of norms and America's allies are saying he's set a dangerous precedent.

The big picture: The WTO has no track record of dealing effectively with intellectual property theft or state-run corporations — two of the biggest modern trade obstacles — and takes months to resolve disputes at a time when the trade landscape shifts on a daily basis, according to trade experts.

  • The WTO's rules were written for a physical world and it's best equipped to deal with the trade of physical goods.

Go deeper with Erica's full story, "The WTO is in over its head in Trump's trade war."

10. The big winner: China

Illustration: Sarah Grillo, Rebecca Zisser/Axios

While the U.S. is consumed by its own political chaos, China is filling the global power vacuum, Erica Pandey writes:

  • President Xi Jinping, calling himself the world's "rational leader," has made it a point to lobby for an open global economy in speeches and meetings with world leaders.

Check out the results:

  • In April, a top Chinese trade official, Fu Ziying, met with several European ambassadors, asking the European Union to remain neutral and stay open to business with China amid Trump's trade war.
  • Japan has reopened a high-level economic dialogue with China for the first time in eight years. China has also agreed to revisit a ban on certain Japanese agricultural imports.
  • French President Emmanuel Macron met with Xi in China in January, and the two leaders jointly "articulated a vision sharply at odds with Mr. Trump’s worldview," per the N.Y. Times.
  • German Chancellor Angela Merkel visited Xi in late May. In an official statement following their meeting, Beijing said China and Germany could be "promoters for new-type international relations and cooperation partners transcending ideological differences."

Be smart: With its trillion-dollar Belt and Road infrastructure initiative, China is buying friends in developing countries all over the world with the promise of free trade relationships and infrastructure — which the West isn't offering.

  • Go deeper: Erica's full article, "China emerges as master dealmaker."
Mike Allen

Thanks for reading. Track Trump abroad: We'll have all-day summit updates at Axios.com.