A truce in the “trade war”?

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J. Soedradjad Djiwandono

The Financial Times of July 26 came up with an encouraging headline, “US and EU declare ceasefire in their trade war”. However, its editorial referred to the agreement between European Commission President Jean-Claude Juncker and President Donald Trump in Washington DC last week an “elusive trade pact”.

So are we supposed to be happy or not here? I am afraid it all depends on how one perceives the issue: the saying is that “Beauty is in the eye of the beholder”. As a student of International Economics I of course welcome the avoidance of any sort of trade war, which is universally recognized as potentially causing problems for all parties concerned.  The spat itself and how those involved in initiating an attack or retaliating to it will certainly give rise to uncertainties, which will be costly for the economies involved and possibly even others as well.

Cautious optimism
The trade war between the US and EU looked to become real as reflected in the recent “war of statements” between the US Treasury Secretary Mnuchin and French Minister of Finance Le Maire in the Buenos Aires G20 meetings, as reported in the media.  Stating that the EU retaliation against the US import tariff increase on steel and aluminum had failed to inflict pain on the US economy, Secretary Mnuchin called on the EU to engage in negotiations for a transatlantic free-trade deal through reducing tariffs, non-tariff barriers and subsidies. This triggered an immediate response from French Finance Minister Bruno le Maire, stating that the EU would not negotiate with the US “with a gun to our head” while calling the US “to return to reason”.

As if this was not enough, the next day President Trump followed up through Twitter, his favorite medium of communications, with a message repeating the demand for fair trade, in anticipation of the visit of EU President Juncker, by mentioning three areas of importance: the reduction of tariffs, non-tariff barriers for US exports and a reduction of subsidies on EU exports. During his previous visit to Europe, President Trump even called Europe as a foe to the US and suggesting Russia to be readmitted to the rich countries club, the G7. However, to the pleasant surprise for many, the meeting between EU Commission’ President and the US President in Washington DC turned out to be conciliatory and resulted in a truce.

Of course, as always, and even more so with unpredictable President Trump, the devil is in its detail. According to the media reports the two sides were willing to negotiate on addressing the issues in those three areas as well as cooperating in working toward the improvements of the WTO.

Be that as it may, some already commented rightly that what mentioned by Secretary Mnuchin at the G20 meeting and President Trump in twitter and to Mr. Juncker are basically what were negotiated by Obama Administration in the Transatlantic Trade and Investment Partnership or TTIP that was thrown away by President Trump not long after his inauguration. Meanwhile the current threat for the US to raise tariffs of car and automotive parts would not be implemented during the process of negotiations. We may have to get used to this type of surprise in today’s US policy.

So, it could be said that tariff war between the US and EU is under control. In addition, the willingness to addressing the problems of the WTO operation instead of completely ignoring its rules and regulations, which for sure in need of changes to work effectively is a good sign. We still have to wait and watch over time. May be the best that we could say at this point is that a cautious optimism is in order.

Even though it is still even less clear than the above story, the latest development in the Brexit process could also be characterised as providing some better hope for avoiding a no deal or hard Brexit (see my “Hard Brexit looks inevitable” in this previous edition of this paper).  The recent negotiation between British new Brexit Minister Dominic Raab and EU Commissioner for Brexit Michel Barnier has been reported to achieve agreement on some future relations, like regarding the financial sector and movement of people, while no progress is reported on the sticky issue of how to deal with the border issue of Ireland.

But less encouraging in the other front
Unfortunately, the positive development in the transatlantic trade spat does not seem to be duplicated in the US-China trade war. The war of statements may be less heated.  However, the war on tariffs has become more serious. The initial salvo by the US of raising the import tariffs from China in washing machines and solar panels was implemented and after that the import tariff on steel and aluminium, followed by tariff on import items from China worth USD 35 billion that was immediately retaliated by similar action from China on imports from the US. This could be continued up to imports from China of USD 500 billion if tariff war continues.

There has not been any report available to the public as to what would be the total cost for both sides of the tariff war. However, we could see the change of policy or action taken by both China and the US governments that signal the seriousness of the impacts of the tariff war. With respect to China, People Bank of China (PBOC), the central bank recently decided to provide USD 74 billion of liquidity to the banking sector to provide bank loans for the economy to support growth.  This policy was decided together with tax cut and government expenditures on infrastructure projects. The IMF also estimating a slightly lower growth for China due to the trade issues and high leveraging.

However, true to the theoretical prediction China is not the only one encountering the adverse impact of trade war. It is true that the US reported a robust growth of GDP and lower unemployment in the second quarter of this year. However, the US also launches a policy that basically a fiscal stimulus, even if it is still to be implemented. Specifically, the US government pledges to provide subsidy to farmers suffering from the tariff war to the amount of USD 12 billion (Ironically the same amount of the value of US soybean export to China annually).  In value terms it may not be substantial, however some US companies have been suffering from the trade war, like the shrinking production of a nail factory in Polar Bluff, Missouri due to the increase prices of steel in the US , Harley Davidson will be moving some of its production out from the US to avoid import tariff in China or EU resulted from retaliation those countries.

No time for complacency

A mixture of cautious optimism in US-EU trade spat and continuing anxiety in US-China tariff war cannot be a cause for celebration. In fact, cautiousness even in interpreting the dynamic of what have been developing in the trade war; and its resolution or escalation must be upheld by other economies that are not directly involved in the war but still affected in globalised trade and finance that lately suffered from attacks by big economic powers.

Regarding where the trade spats would be heading or ending, from what we all just observed as I tried to review above it is hard to know whether President Trump decision to have a truce with EU is a game changer toward returning to believing in multilateralism and openness in trade or is it just a temporary pause as in using tariffs as means of negotiation? Of course, we hope that it is the former and that multilateralism based on an improved rule-based WTO would be restored.

In think provided President Trump still thinks that playing around with tariffs is the best means for his campaign to balance the US trade with the rest of the world instead of adhering to the rule- based WTO, all economies carrying a surplus in their trade with the US could become the target for the US attack.  Currently, when the US economic performance shows it strength in terms of growth, unemployment rate and other macro indicators it is even more dangerous. As President Trump prides himself as master in deal making, the strong position of the US economy will give him confidence to attack other countries, regardless of foes or allies.   As we could see even Indonesia is in danger being targeted due to the current trade surplus of USD 9 billion in our bilateral trade relation with the US as mentioned by Johannes Nugroho in “What Should Indonesia Do on US-China Trade War?” (Jakarta Globe, July 9, 2018).

Other advanced economies seem to take the right stand by letting the US stands alone if she wishes as what happened with the new TPP, which is called Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or in other multilateral or regional cooperation, like the climate change and denuclearisation of Iran, the Joint Comprehensive Plan of Action (JCPOA), i.e. let the US leave but the others remain stick together. Those resolutions are consistent with the logic and approach to globalization as shown by Professor Dani Rodrik of the Kennedy School of Government, Harvard University in his recent article “How to Avoid a Trade War” (Project Syndicate, July 10, 2018).

Thus, no economy has the luxury to be complacent in the trade war or spat that threatens global trade with already clear impact of slowing economic growth or the path of economic recovery for some as reflected in the downward correction of GDP growth in the IMF’s World Economic Outlook and others. For sure the trade spats that are still developing is creating additional uncertainty that cannot be ignored by any country.