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20th of July 2018


A trade war risks all Donald Trump’s economic successes

Anthony Scaramucci

July 12, 2018 Print this page

During his first 16 months in office, President Donald Trump made all the right moves in leading the US economy and stock market to record heights: tax cuts, regulatory relief and pro-business rhetoric. Wages are inching upwards and people are returning to work. Yet, the potential for a full-blown trade war risks undoing much of that great work and punishing the very voters who elected him. The administration needs to change tactics now or risk jeopardising the midterms.

Mr Trump’s diagnosis of the economic big picture is correct: global trade imbalances have helped hollow out the middle class and create record income inequality. Dynamics left over from the years after the second world war are partly to blame, but the real catalyst for the decline of American industry was China joining the World Trade Organization in 2001.

Since then, the Chinese have consistently broken the rules by devaluing their currency, stealing intellectual property, failing to maintain adequate labour standards, illegally subsidising some industries and dumping products on the open market to drive out competition. Despite now being the world’s second-largest economy, China is still labelled a developing economy by the WTO, allowing it higher trade barriers than developed countries.

Mr Trump recognises the problem, but his current approach to solving it needs refining. The administration has antagonised our allies and threatened to abandon the global rules-based system rather than building a coalition to reform the WTO and hold China accountable. Because trade represents a prisoner’s dilemma (in which two rational parties acting in their own self-interest do not produce the optimal outcome), supranational institutions such as the WTO are necessary to prevent a global shift towards protectionism. The only way to achieve a tariff-free world is through more co-ordination, not less.

While the president made his career as a dealmaker, his bellicose rhetoric on trade has given global leaders little room to compromise. To save face, they have been forced to fight back with tariffs, hitting the US where it hurts most politically — in the heartland.

Chinese companies bought $12bn of soyabeans from the US last year but ceased purchases altogether in April after the administration announced $50bn in tariffs on Chinese goods. The largest US nail manufacturer, Mid Continent Nail in Missouri, is “on the brink of extinction” as a result of steel tariffs.

Harley-Davidson is now accelerating plans to move some production abroad due to a projected $100m drop in annual profits caused by reciprocal tariffs. The list goes on. Overall, the Chamber of Commerce says 2.6m US jobs could be at risk. In June, investors pulled $12.4bn out of global stocks, the fastest withdrawal since the 2008 financial crisis.

In its most recent monetary policy minutes, the Federal Reserve noted that companies are signalling their intent to freeze capital expenditures due to trade uncertainty. Mr Trump is an adaptive entrepreneur. A slight change in tactics here can help us accomplish our goals while giving allies political wriggle room to strike a deal.

The president has already made two great course corrections in the past month: ending the policy of child separation at the border and lowering the flags to half-mast in response to the Capital Gazette shooting.

He now has a chance to make another shift that could define his presidency. Get a deal done on Nafta , find common ground with the EU, revise the Trans-Pacific Partnership and work with allies to confront China’s abuses within the WTO. With those tactical adjustments, consumer confidence and business sentiment will continue to improve and the president will have a clear path to re-election. More importantly, the American people will have a clear path to sustainable prosperity.

The writer, a former White House communications director, is a managing partner at SkyBridge Capital

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