- President Donald Trump is opening up a two-front trade negotiations over newly proposed tariffs that could have major consequences for the US economy.
- Talks with the European Union and China could reshape the global economic landscape.
- The negotiations could also break down, lead to a trade war, and seriously damage the US economy.
President Donald Trump’s increasingly antagonistic trade policy is setting the US on a collision course with two major economic powers. The fights could have major implications for the global economy.
Trump’s contentious battles with China and the European Union over proposed tariffs will at the very least reshape the US’s trade relationship with two of its major trade partners. At worst, they could plunge the US into a damaging, multiple-front trade war.
The China conundrum
Perhaps the most pressing front is with China.
The back-and-forth tariff announcements from Trump and the Chinese government represent the signature example of a burgeoning trade fight that could soon include various investment restrictions and trade penalties.
A delegation of seven major US officials spent Thursday and Friday in Beijing, and the talks did not appear to make any substantial progress towards resolving the increasing tension between the two nations.
US demands suggested the Trump administration was taking an extreme stance in the talk, demanding a 60% reduction in the US-China trade deficit over the next year and a half. In addition, the Trump officials requested changes that would fundamentally reshape China’s economy and government policy.
While the US delegation emphasised the “frank discussions” that took place, Chinese officials reportedly found the US demands to be “unfair.” Chinese state media said there were “big differences” between the countries.
Haibin Zhu, chief China economist at JPMorgan, said in a note to clients Friday that the US demands and China’s reaction don’t paint an encouraging picture for the trade relationship in the short-term.
“The gap between US’s demand list and China’s offer list is very large, hence the upcoming negotiation will be bumpy and the situation may get worse before getting better,” Zhu wrote.
The continued tensions are already starting to hurt US businesses. For instance, China has appeared to halt all orders of US soybeans, a major export crop for American farmers. And manufacturers are reporting softening activity in part due to the trade moves.
There is still time for Trump to back off pending tariffs on another $US50 billion worth of Chinese goods – public comment on those tariffs runs through the end of May – but given the current chasm between the American and Chinese positions a reversal does not appear likely.
The EU game of chicken
Beyond China, Trump also set up the US for a confrontation with the European Union over the new steel and aluminium tariffs.
Trump decided to extend a temporary exemption for the EU and five other US allies until the end of May, but also insisted that the allies must impose a new quota system to avoid the tariffs. In contrast to tariffs, which tax a good as it enters the US, quotas restrict the total amount of a good that a country can send to the US in a given year.
“The guiding principle of this administration, from the president right down to his team, is that any country or entity like the European Union – which is exempt from the tariffs ‘ will have a quota and other restrictions which are necessary to defend the aluminium and steel industries from imports in defence of our national security,” top White House trade adviser Peter Navarro said Tuesday.
Economists and trade experts say the quotas may actually be a worse option compared to the tariffs. Quotas not only have the economic downsides of tariffs but also open the door to corruption, do not generate tax revenue for the US, and violate World Trade Organisation rules, experts say.
For those reasons, EU leaders have already rejected the Trump administration’s suggestion of a quota. The European Commission, the executive branch for the EU, released a statement on Monday insisting that Trump’s “take it or leave it” negotiation will not be accepted.
“The EU has also consistently indicated its willingness to discuss current market access issues of interest to both sides, but has also made clear that, as a longstanding partner and friend of the US, we will not negotiate under threat,” the statement said.
A lot is at stake
In each of these instances, Trump risks triggering a trade war – in which countries exchange tit-for-tat trade restrictions with the other party.
While economists expect the trade skirmishes so far to have concentrated consequences for some industries, the global economic downsides to the current trade restrictions are limited. But if Trump follows through on some of the more extreme trade threats, that could change.
Even just the fight with China could grow from a minor macroeconomic concern to a major drag on growth, said Oren Klachkin and Gregory Daco, analysts at Oxford Economics.
“Looking ahead, protectionism is likely to continue posing a mild drag on activity and risks on the trade front are likely to remain heavily tilted to the downside,” the economists said in a note to clients. “While we don’t think an all-out trade war is likely, a scenario we recently ran indicates the US and China would suffer a significant slowdown in real GDP growth under a trade war scenario.”
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