On tariffs, Trump is the opposite of unpredictable

Globe and Mail

4 days ago

So much for TACO.
The notion that 'Trump always chickens out' had informed much of the thinking, and negotiating tactics, of U.S. trade partners leading up to the Aug. 1 deadline imposed by President Donald Trump for reaching deals to avoid massive tariffs on their exports. But the idea that Mr. Trump ultimately backs down no longer holds much water.
Contrary to suggestions that the President is fickle and unpredictable, there has been a remarkable consistency to his approach that is becoming clearer as deals are struck with major U.S. trading partners that lock in hefty tariffs on their exports that would have been considered unthinkable not long ago. Instead, the 15-per-cent baseline tariffs agreed to by Japan and the European Union have been greeted by financial markets with sighs of relief, if not indifference.
That Mr. Trump has been able to so completely transform – or undermine – the rules of the global trading system in barely six months does suggest that there is more to his method than empty taunts and bravado. Rather, his determination to extract concessions from U.S. trade partners is based on the view that his country has disproportionately borne the costs of upholding the global trading system.
Whether or not you agree with that view – and most credentialed economists have not – acceptance of it now appears to be everywhere taking hold.
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European Commission President Ursula von der Leyen clearly demonstrated that on Sunday when she trekked to Mr. Trump's Scottish golf course for a handshake trade deal that implements 15-per-cent baseline tariffs on EU exports to the United States, and includes EU commitments to invest US$600-billion in the U.S. economy and buy US$750-billion in American energy over three years.
Asked what the United States is giving up in return for those EU concessions, Ms. von der Leyen replied: 'So, the starting point was a [trade] surplus on our side and a deficit on the U.S. side. And we wanted to rebalance the trade relation, and we wanted to do it in a way that trade goes on between the two of us across the Atlantic.'
In other words, the U.S. conceded nothing, and the EU was willing to accept 15-per-cent tariffs on most of its exports that, while half the level that Mr. Trump had threatened to impose without a deal by Aug. 1, will nevertheless significantly raise the prices of European wine, cheese, pharmaceuticals and other key exports in the U.S. market.
Ms. von der Leyen appears to have implicitly accepted Mr. Trump's notion of reciprocity – that is, U.S. trading partners must pay a price to access the U.S. market, while opening fully their markets to U.S. goods, to offset the costs the U.S. bears for upholding the global trade system and providing the postwar security umbrella that has kept Europe safe.
Keeping Mr. Trump on board with NATO and maintaining U.S. support for Ukraine were as important to the EU as avoiding a trade war and securing access to the U.S. market.
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In the Trump era, no longer are trade and security negotiations kept separate from one another. Defence spending is part of the calculus that determines the level at which U.S. allies get tariffed. No wonder most have undertaken to massively boost their military budgets.
Mr. Trump still sees steel as a special case whose domestic production is critical to U.S. national security. But his 50-per-cent tariffs on foreign steel and aluminum are not sustainable and will eventually begin to undermine his goal of boosting U.S. manufacturing. U.S. self-sufficiency in steel and aluminum is a pipe dream and U.S. industries that rely on imported steel and aluminum, including the auto sector, cannot bear these tariffs for long.
For now, however, Mr. Trump's tariffs have not stoked inflation and the U.S. stock and bond markets – after tanking on the President's 'Liberation Day' tariffs announced in April – have bounced back. Investors no longer fear tariffs the way they did. Nor does the prospect of even bigger U.S. budget deficits appear to faze them.
That could all change, of course, if tariffs-induced inflation is ignited and the one-sided deals that Mr. Trump negotiates with U.S. trading partners create a political backlash in the countries that agree to higher U.S. tariffs. Wine and cheese producers remain powerful political constituencies in France, and they are very upset with Ms. von der Leyen. French Prime Minister François Bayrou's description of the EU-US deal as 'submission' heralds a potentially rough ride for her as she attempts to win EU-wide approval for the deal.
A global trade war may have been postponed, but it is far from clear that one has been averted.