Trump's new trade order is fragile

Mint

4 days ago

President Donald Trump has achieved the remarkable: raising tariffs by more than the notorious Smoot-Hawley Tariff Act of 1930, while—it appears—avoiding the destructive trade war that followed.
Including the deal struck over the weekend with the European Union, the U.S. will impose an effective tariff rate of about 15% on its trading partners, by far the highest since the 1930s, according to JPMorgan Chase. Japan and the EU have together committed to investing $1.15 trillion in the U.S. Europe also agreed to energy and military purchases.
And what did the U.S. give up in return? Nothing.
So Trump has hit his goals, for now. But these deals don't yet represent a new trade order. They are sort of a way station, more fragile and with less legitimacy than the system they have supplanted.
The formula for this achievement was distinctively Trumpian. The president calculated that others had more to lose from a trade war than the U.S. He picked off each trading partner in turn with the prospect that failure to strike a deal on his terms would result in worse treatment later.
Among American allies, only the EU has the heft to inflict enough pain on American companies to change Trump's calculus. But despite drawing up plans for retaliation, it never pulled the trigger. Along with the economic pain of a trade war, Europe feared Trump would abandon Ukraine and perhaps NATO altogether. A one-sided deal was the price of keeping, for now, Trump committed to the trans-Atlantic security alliance.
Of the major trading partners yet to strike deals, South Korea, Mexico and Canada can likely expect, like the U.K., Japan and the EU, to give up plenty and get nothing in return. China, the only country to have broadly retaliated, might fare differently.
Trump has avoided a trade war, but it remains to be seen if the trade peace will last.
Since the 1980s, Trump has believed that other countries have ripped off the U.S., producing deep trade deficits. His solution: charge for access to the U.S. market and the protection of its military.
Others have now accepted his terms for access to the market, while NATO partners have agreed to boost defense spending to 5% of GDP. This seems to have softened Trump's prior antipathy toward the alliance and Ukraine. On Monday, he shortened the deadline for Russia to agree to a cease-fire with Ukraine or face sanctions.
It might be too soon to announce 'mission accomplished," but it certainly looks like Trump has begun rebalancing the relationship between the U.S. and its allies.
'The two concerns Trump had about Europe is that they were free riding on the U.S. security umbrella and their trade was unbalanced, with their market a fortress," said Mujtaba Rahman, managing director for Europe at Eurasia Group, a consultancy. 'On both, Trump has implemented a shakedown."
The 15% baseline tariff and 5% military commitment represent Trump wins that put the trans-Atlantic alliance on a 'slightly more solid" basis than in February, he said.
Whether tariffs achieve Trump's economic goals remains to be seen. In a recent speech, Trump's trade ambassador, Jamieson Greer, set three benchmarks: first, reduce the goods trade deficit; second, raise after-inflation incomes; and third, boost manufacturing's share of gross domestic product.
The incentives in these deals to reshore production and purchase American goods should help meet these relatively low bars. As for how much of the tariffs consumers will ultimately bear, the jury is still out.
From 1947 through 2012, the U.S. presided over a steady fall in trade barriers and growing economic integration. It came through painstakingly negotiated pacts. Everyone gained something and gave something up and were thus invested in the pacts' success.
Such pacts 'require Congress to approve them, are deep and substantive, take a long time to negotiate, and last a long time," said Doug Irwin, a trade historian at Dartmouth College. 'They are a binding commitment on the U.S."
By contrast, Irwin said, these latest agreements are 'handshake deals" with a president who isn't legally bound to adhere to the terms.
Trump is at liberty to threaten higher tariffs again for any reason, from wresting Greenland from Denmark to protecting U.S. tech companies from European taxes or censorship. Europe, having foresworn retaliation, has few chips with which to bargain tariffs down, under this or a future president.
Trump acted entirely without Congress. Indeed, one court has already ruled his use of a sanctions law to impose across-the-board tariffs was illegal. Should an appeals court uphold that finding, the legality of those deals would come into doubt. (Trump could turn to a different law that limits tariffs to 15%, for 150 days.)
The one-sided nature of these deals also makes them more fragile. Other countries will be less willing to comply with something they don't think is in their economic interest, especially with so many details unsettled. Already, Japan has cast doubt on Trump's interpretation of its $550 billion investment commitment, and the Europeans' $600 billion pledge seems similarly vague.
Deals made under duress are politically unpopular and thus less durable. Especially noteworthy was the negative reaction of far-right populist leaders who are already hostile to the EU and trade deals.
Marine Le Pen, a leader of France's populist right-wing National Rally, which is slightly favored to win the presidential election in 2027, called the EU deal a 'political, economic and moral fiasco." Alice Weidel, leader of Germany's far-right Alternative for Germany, wrote on X, 'The EU has let itself be brutally ripped off."
Trump got his deals because of the leverage other countries' deep economic and security ties gave to the U.S. In coming years, that leverage will wane as those countries cultivate markets elsewhere and build up their own militaries. The resulting international system will be less dependent on the U.S.—and less stable.
Write to Greg Ip at [e-mail]