The Trump Effect: a Bull in a China Shop

In March 2018, the US President Donald Trump imposed a 25% import tariff on steel and 10% on aluminium, despite objections from many US industries that use these metals (construction businesses, car manufacturers, soft drink producers etc).

By imposing these tariffs, President Trump wanted to:

• help American  steel and aluminium producers (thus holding his election promise;
• punish China for stealing commercial secrets.

The first goal will be achieved at the expense of the rest of the society – some estimates show that the tariffs will destroy five times more jobs than create.  If the US trading partners impose retaliatory measures, American economy will lose 470 thousand jobs (which is about  0,3% of total employment but nevertheless can be substantial in some places).

The second goal probably cannot be achieved with trade measures – usually companies do not disclose the facts of industrial espionage. Moreover, in most cases Western companies “voluntarily” provide their technologies to China  as a “fee” for accessing the 1,3-billion market.

Nevertheless, China has already imposed retaliatory trade restrictions on American goods. Obviously, these restrictions will not benefit the American economy. European leaders, for now, issued strong statements warning of symmetrical measures.

Thus, at the moment economic losses from trade restrictions are not very high. But the political effect of these measures is much worse, as they have been imposed unilaterally. In this way the US president demonstrates his determination to start a full-scale trade war and forces foreign trading partners to “voluntarily” limit their exports to the US to avoid it. For example, North American Free Trade Agreement (NAFTA) is currently being revised; trade negotiations are ongoing with the EU, China, Korea and other countries.

At the moment economic losses from trade restrictions are not very high. But the political effect of these measures is much worse, as they have been imposed unilaterally. In this way the US president demonstrates his determination to start a full-scale trade war and forces foreign trading partners to “voluntarily” limit their exports to the US to avoid it.

Moreover, the tariffs on steel and aluminium are justified by the Article XXI of the GATT Agreement (security interests). Therefore, if the US trading partners file this case to the WTO, its tribunal will have to decide what threatens the national security of the USA, and what not.

That and other actions of Trump (for example, the withdrawal from the Iran nuclear deal or migration restrictions) suggest that one of the most important posts in the world is being held by a person that values his election promises much higher than international agreements of his country or well-being of the majority of his voters.

The world is guessing which of his twits the US President will implement next, and who will suffer as a result.

Obviously Trump is a much more serious crash-test for the international institutions established after the World War II than Putin. While the Russian attack on Ukraine made a stronger case for the UN reform, Trump trade policies threaten to dismantle the WTO, which has been barely developing since 2001 (the beginning of the Doha Round) and is being gradually undermined by multilateral and bilateral agreements. It is entirely possible that international justice institutions and defence alliances will be next.

While the Russian attack on Ukraine made a stronger case for the UN reform, Trump trade policies threaten to dismantle the WTO, which has been barely developing since 2001 (the beginning of the Doha Round) and is being gradually undermined by multilateral and bilateral agreements. It is entirely possible that international justice institutions and defence alliances will be next.

Many people think that international institutions are inflexible and unable to adequately respond to the new challenges. Indeed, many institutions are inert and bureaucratic. Nevertheless, the new EU trading rules with China shows that it is entirely possible to accommodate the changed terms of trade within the WTO regulations without much ado.

So, what can be done if the “World Policeman” himself is breaking the rules?

One can rely on the American institutions and American voters – the former somewhat limit the high-handedness of the President, and the latter may not elect him for the second term.

One may adopt the new-old rule “everyone for himself”: for “national security reasons” close the markets, give preferences to national producers, limit migration. Some of Ukrainian politicians are pushing for this scenario. Unfortunately, the first to suffer from such all-out war would be countries with small “safety cushions” and small internal markets, just like Ukraine.

Finally, the most favourable scenario would be to protect international cooperation and  simultaneously reform the underlying institutions. This will not be a cakewalk taking into account election results in many of the European countries and the recent scandals in the European structures. On the other hand, Trump’s actions may mobilise the Western world in the same way Russian aggression mobilised Ukrainians.

The most favourable scenario would be to protect international cooperation and  simultaneously reform the underlying institutions. This will not be a cakewalk taking into account election results in many of the European countries and the recent scandals in the European structures. 

Another analogy may be drawn between the situation in the world today and in Ukraine since its independence. Some country leaders may argue that “if the USA violates the international treaties then we will not follow them either”. Similarly, many Ukrainians argue that “if the President/ Prime minister/ MPs are corrupt than I have the moral right to disregard the rules as well.”

Such logic can lead to a vicious cycle of low mutual trust, limited cooperation and low growth* that may be very hard to escape. To avoid slipping into this bad equilibrium (speaking about the world) and to get out of it (in case of Ukraine), joint efforts to protect the “rules of the game” are needed. This implies following the rules and not cooperating with their violators. Certainly, “pro” coalitions are harder to form than “con” unions. But otherwise the repercussions will be grim and unforeseeable.