Last week both Emanuel Macron and Angela Merkel rushed to Washington to meet Donald Trump and discuss with him about the freezing of the tariffs on European aluminium and steel, imposed by the US administration and starting on May 1st, 2018. They claimed that tariffs lead to protectionism and slowly but truly to a real trade war which is very perilous for the global economy. Immediately after, the European Community threatened a coordinated retaliation on US goods. Finally, on the last second (April 30th, 2018) President Trump extended the deadline to the end of June 2018, leaving some room for an agreement. Are we at the beginning of a trade war? What are the real reasons for this escalation? Is protectionism and economic issue or a geopolitical affair?
To understand what is going on, first of all, let’s take a step back. The same “tariffs pattern” is happening in the U.S/China trade relationship; Trump’s administration imposed tariffs on Chinese goods (the new proposed list, as April 4th, counts 1300 goods, including electronics, aircraft parts, satellites, medicine, machinery and other high-tech items, for an estimated total value of around $50B ) and China promised to reciprocate for the same amount of U.S. imports. Discussions are in place between the two countries to find a common ground for an agreement, given the fact that China is the big exporter in the USA but, at the same time, is also the first foreign holder of US Government Bonds (9% of total US public debt of $14,173B, as September 2016 as stated by the US Treasury Department)
Needless to say, these trade tensions are creating increasing volatility in the financial markets as the investors are worried that this situation will eventually lead to a global full-blown recession. Apparently, this is only a strictly economic issue: the U.S. trade deficit is ballooning (-347$B with China, -151$B with EU as FY 2017) and Trump’s willingness to reduce it seems to be moved only by economic reasons. Nevertheless, the problem has been there for years and this sudden acceleration may hide many other political aspects, which makes the trade war argument more a geopolitical affair than an economic issue. This fact leads also to the conclusion that the solutions must be found also outside the economic field and may well include the political side.
Let’s try to analyze some of the geopolitical implications.
1. Mid-term U.S. election in November 2018 Trump’s political agenda has the motto: “America First” as the trademark. Therefore, after accomplishing the tax reform, as the election nears, the President has to show to his electorate base that he is very tough in defending American interests. The recent aggressive announcements on trade could be also explained by this reason and will likely be replaced by a more pragmatic approach in order to get real and balanced results before the election. Furthermore, the tariff arguments may divert the attention from the Russiagate, which represents a political risk for the President
2. Global confrontation with China The tariffs with China represent only the tip of the iceberg of the global confrontation with China which has become a political and economic superpower. Therefore, a compromise on trade can be found also through concessions on the political side. The recent positive events in Korea, which may bring to a peace treaty, have happened not only thanks to Trump’s tough stance but also for the strong political pressure of the Chinese. In this joint action of the two Super Powers, therefore, it is not difficult to see the seeds of a future compromise also on the trade imbalances.
3. The new Transatlantic relationship Trump election in 2016 has changed the US attitude towards NATO and Europe: the Americans don’t want to pay any more for the defense of Europe and are pressuring the European countries to spend much more in armaments. In addition, they are forcing the European Community to maintain economic sanctions against Russia, which is resulting very costly for many European exporters. Therefore, in this already complicated geopolitical scenario, the threat of tariffs put one more problem on the table. That’s why an agreement on the trade dispute can’t be found only on the economic side but has to include a comprehensive solution for a new relationship between Europe and US. From this short analysis, it seems clear that the trade confrontation of these days is not only an economic problem that can be solved through a simple mathematical approach. The interconnections with geopolitical issues are great and a failure in reaching compromises can lead to a big trouble for the economy and even for our daily lives. But it is not the case to be too pessimistic; many times fears of collapse work wonders and this time the stake is too big to fail. The recent message coming from the financial markets goes in this direction: the uncertainty caused more volatility but the most negative scenarios are not priced in and the bets of the investors still favor positive solutions.