Trump is on path to full-scale trade war: first China, then Europe

Much to the delight of Hollywood, Donald Trump wants to open a new front in his trade offensive by punishing China for theft of America’s intellectual property rights.

The US entertainment industry is not awfully keen on Trump, having strongly backed Hillary Clinton in the 2016 election, but is even less keen on its movies and TV shows being ripped off by the world’s most populous country.

The Motion Picture Association of America estimates that 90% of the viewings of its output in China are illegal, and that the Chinese are particularly partial to ripping off Game of Thrones, which for the past six years has been the most pirated TV show on the internet.

The MPAA is urging Washington to get tough with China over intellectual property and Trump – who sees trade not as a win–win exercise but more akin to the bloody dynastic struggles in Game of Thrones – appears ready to do so.

The signals coming out of the White House are pretty unambiguous. Having campaigned as a protectionist, Trump intends to govern as one. He thinks “trade wars are good and easy to win” and that the spoils go to those who negotiate hardest. Those who thought the president was all talk and would eventually be reined in by the “grown-ups” who favoured free trade have been proved wrong. The grown-ups have either departed or been sidelined, with Trump surrounding himself with people who are more sympathetic to his America First agenda.

The opening salvos in what soon [???]become a full-scale trade war were fired a few weeks ago when Trump announced tariffs on imported steel and aluminium. All things considered, the response from other leading trading nations was restrained. There was no knee-jerk retaliation from China or the EU: rather a willingness to let the World Trade Organisation in Geneva decide whether Trump’s action could be justified on his purported national security grounds.

But the White House has got the taste for protectionism and wants to go further. The next round of sanctions will specifically target China. After that it looks like being Europe’s turn.

Trump’s beef with China goes beyond piracy of Hollywood movies. The administration says Beijing has forced American companies to transfer their technology across the Pacific as the price of doing business. Technology transfer is one of the ways in which developing countries close the gap with the west, but rich countries tend to guard their patents jealously. Peter Navarro, the president’s director of trade and manufacturing – and an arch-protectionist – says the US is being abused by China. Trump agrees and has already said he is looking for big damages.

China has until now sought to portray itself as the champion of free trade, even to the point where Xi Jinping went to Davos last year and described protectionism (by which he meant Trump’s protectionism) as “locking oneself in a dark room”. But Beijing has said appeasement would not be an option were the US to announce more tariffs.

As for the EU, it ran a $92bn trade surplus with the US in 2016. Both the EU and the US impose tariffs on each others’ goods, but the EU’s are higher on average. Measured in dollars, Germany is running an even bigger trade surplus than China and has been criticised for it by the International Monetary Fund, the Organisation for Economic Cooperation and Development and even the European commission.

The European Central Bank is not helping matters. As Albert Edwards, of Société Générale, has pointed out, the ECB’s stimulus programme has involved printing euros through its quantitative easing programme. This has had the effect of weakening the value of the euro and so making exports cheaper, because both official and market interest rates are well below where they would otherwise be.

The US has been threatening action against China for manipulating its currency for years. Trump may well accuse the EU of the same offence in the belief that he can force the Europeans to make life easier for American exporters. He is not the only protectionist out there. Between them, the world’s 60 largest economies have imposed 7,000 new protectionist measures since the financial crisis of a decade ago, with Washington and Brussels each responsible for 1,000 of the new restrictions. The US president is at least honest about being a mercantilist; others tend to keep quiet about their protectionist proclivities.

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Trump sees trade negotiations as like one of his business deals: the aim is to get the other side to make concessions. He may be right in his assumption that other countries will blink first. America is, by global standards, a relatively self-contained economy: trade is 28% of GDP. That compares to 41% in China and 51% in Germany, leaving them in a much more exposed position.

Predictably enough, Trump’s hard line on trade has prompted calls for the US to act through multilateral organisations, such as the OECD and the WTO. But, having been instrumental in creating the WTO in the early 1990s, Washington has turned its back on the Geneva-based institution in favour of a go-it-alone approach.

This is very much in accord with the spirit of the times. Belief in globalisation has been shattered by the events of the past decade. Voters, not just in the US but across the developed world have been turning to politicians who say that the answer to flatlining living standards is for the nation state to take back powers from remote international bureaucracies.

Christine Lagarde, the IMF’s managing director is right when she says the lesson of the 1930s is that trade wars are unwinnable, but Trump is not listening. Winter is coming.