A gap in credibility imperils the trust which is the emotional foundation of any relationship, private or public, in business and in government
With the tariff wars declared by the Trump administration, the psychological factors in play stand out as well they should
Our previous notes discussed the ‘pride’ and the ‘prejudice’ driving Mr. Trump into ever more outlandish provocations
This is not to suggest that some of the vociferous condemnations of foreign importers are not warranted because they probably are…from discriminatory price strategies to intellectual property theft
However, the hard question remains – is straightforward focus on US trade deficits fit for purpose or even simply relevant in the broader setting of systemic challenge of American preeminence
A systemic trifecta
The recently published note - “Hunkering behind trade barriers” - strongly suggests that such fit-for-television adversarial posture and extravagant accusations of trade abuse do not address the central issues exposing America to risky decline
A sense of US decline is of course as hard to perceive as is the dire fate of the frog slow-cooked in a boiler
The systemic trifecta of economic power, collective security and geopolitical dominance, which characterizes true superpower, complicates our understanding of the challenge confronting the US administration
- The three engines of superpower control are interconnected and rely on each other – economic strength and guarantees of security and governance are interdependent, and diplomatic strength buttresses both
- Exposed to competing entities, these engines may be disputed and weakened to various degrees and over different timeframes, making actual challenges hard to anticipate
Arguably, these complications could be overcome by determined leadership, and this is precisely what the Trump administration seemingly hopes to achieve by strongarming its trade partners into concessions benefitting the US unilaterally
Trapped
Unfortunately, the administration seems to be caught up in the very ‘trade-deficit’ trap set for its partners
The lack of serious justification of supposed trade barriers (tariffs and non-tariffs) makes negotiations pointless and leaves US importers to their tribulations
Presumably, this has the reasoning in Beijing, when faced with an 'intermediate' 104% tariff
Omair Sharif of Inflation Insights LLC, quoted by John Auther's Bloomberg, offers this back-of-the-envelope calculation, adding an extra two-thirds of a percentage point to the inflation forecast
- The old 54% tariff rate on China boosted total CPI by 0.35 percentage points. The newish 104% rate would lead to a rise in total CPI [inflation] of 0.67 percentage points
- Obviously, the new-new tariff of 145% sends the impact on prices into the stratosphere, assuming the imported goods will even be available
The 20% tariff imposed on EU exporters, when American products were actually taxed at an average external rate of 5% upon delivery in the European zone (2023 data), is just another case in point…
In fact, if global trade imbalance is a critical issue, and the growing disequilibrium between large trading blocs undoubtedly is, the drivers are in all likelihood structural, beyond the command of any government
In a show of weakness and not of strength, structural characteristics of international trade could be reversed by burning down the barn – an assertion of 'superpower' in the hope that rebuilding something better will be agreeable to all the parties involved – a wild guess indeed
Industrial policies
Economic analysis of international trade is well documented and on solid ground since David Ricardo’s theory of comparative advantage,
Industrial policies of trading countries on the other hand are obviously not aligned in an international framework
The shares of national GDP set apart countries of consumers from the countries of investors and highlight huge disparities
As for household consumption as a share of GDP - sourced in Our World in Data (2019) - the Chinese had to contend with just half the share enjoyed by the Americans (39% of China GDP vs 70% for the US consumers)
Consumers in South Korea (44% of GDP) - Germany and France (54% each) and Japan (53%) are in middling positions...
As for investment as a share of GDP - sourced from World Bank 'Prosperity' data (2023) - the picture is exactly reversed
China – 42.5% (vs world median 23.7%) – commits twice the share of GDP compared to the US – 21.33% (below the world median)
South Korea – 32% – and Japan – 26% of GDP – are again middling...
What stands out unfailingly in these allocations is that the build-up out world-beating industries takes a long time, engagement of an entire nation and vast amounts of capital
This is still true of China after more than two decades as it has been true of the 'Asian Tigers', Japan and South-Korea
What U.S. economic planning ? - a credibility gap
It would be naïve to take the disparate industrial strategies as ‘proof’ of dark intentions
The high household savings rate in China is the mirror image of its very strong investment push, in infrastructure and in business – but if the Chinese people have chosen to save rather than to consume, their causes are profound, cultural and mostly sensible, and here to stay
China’s vast population, in majority, is still poor, insecure for lack of a trustworthy social network and, significantly, under the cloud of past tragedies, the Great Leap Forward (engineering a famine taking between 15 and 55 million lives) and the Cultural Revolution (estimates ranging from 1 to 2 million deaths)
The same factors were probably in play in 1945 for the Axis countries who rebuild their economies on the ruins of WWII – Japan and Germany – with a dedication boosted by faith-based engagement
Lip service has been paid by numerous luminaries to the benefits of a manufacturing renaissance in America
Because of the damage wrought on American society by unbridled globalization, ransacking entire industries, and deepening the sense of desperation of the poorest, this sense of purpose is indeed commendable
However, the responsibilities, shared by past Administrations and Congress, to set the 'losers' in international trade on a different course are blithely ignored
Improbably, general tariff barriers under the Trump Administration are supposed to resolve decades of neglect in the rust belts of America, industrial commitments are taken for granted and the corporate capital investment magically - and massively - allocated to US job creations
In fact, in the absence of actual planning focused on key sectors, the link between tariffs and domestic industrial expansion will be tenuous at best
So obviously misplaced, Mr. Trump’s tariffs have been losing traction on a Chinese Great Wall as exposure to inflationary pressures on the American consumer are becoming clearer
With nothing significant to negotiate in the previous low-tariff environment, the European Commission will undoubtedly draw on Mr. Trump’s discomfiture when the Union’s counter-measures are announced ..
The stock markets may soon recognize that the tariff wars are just an opening gambit and the real issue raised by Mr. Trump, growing trade imbalances, is stuck
It is early days, and in our follow-up note on the financial aspects of international trade, U.S. credibility might be battle-hardened
Is it “All for naught”?