Markets May Start To Focus More On Trade

The Boston Tea Party is an early example of how a trade dispute can reshape an economy (Boston) and foment political change. It is iconic enough that the first presidency of Donald Trump was prefigured by the rise of the Tea Party as a disruptive force in Republican politics.

With the presidential election not far off now, tariffs form the spear-end of Donald Trump’s economic strategy, potentially because he can implement them unilaterally (without the approval of the Senate). In addition, many of his acolytes, from Robert Lighthizer to Peter Navarro, are ‘trade’ obsessed, and have recently published books like ‘No Trade is Free‘ to underline the ways in which they would re-order the international trade system.

In addition, other members of the Trump entourage such as Robert O’Brien, the National Security Adviser (2019-21) has in the July edition of Foreign Affairs Journal invoked the idea that American can bring peace to a disordered world through ‘strength’. In this vision, strength comes in the form of 60% tariffs on Chinese goods and export controls, a message that has repeatedly been emphasised by Trump himself.

In that context, a second Trump presidency could begin with a trade war, and a verbal assault on the currencies of ostensible allies that have weakened in recent years, such as the yen. American consumers and potentially the bond market might pay the price of tariffs (we wrote last week that Trump wanted to fund the development of a sovereign wealth fund with revenues from tariffs).

Trade wars are generally not successful, and while Trump may have in mind America’s trade spats with Japan (1987), the weight of past trade disputes going back to the Smooth Hawley Act suggest that there are better ways to guard American economic power. China could respond with measures that cripple supply chains for at least a couple of years. In this scenario, a trade confrontation between the US and China would decisively shatter the axis of globalisation as we know it, and finally render the WTO (World Trade Organisation) obsolete.

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A US-China trade war might have many other consequences.

One might be the rise of populous south Asian (and southeast Asian) from India to Bangladesh to Pakistan, Indonesia, Thailand and Vietnam, with Singapore as their organising locus. Many of these countries are urbanising and rolling out infrastructure, most of them need but distrust China, and in most cases aspire to closer commercial ties to the USA. Tariffs on China by the USA will accelerate supply chain de-risking by Western multinationals towards these countries, though this could well complicate their relationship with China.

A second consideration is Europe. The EU has been caught by surprise by the consequences of several Biden administration policies – the Inflation Reduction Act and the CHIPS Act – which illustrates that US international trade policy is usually made with a view to domestic politics. A second Trump presidency should be no surprise to Brussels, and there is a small but important team of officials working on a policy response to a potential trade war on Europe by Trump. Europe’s trump card may lie in its role as a partner with the US against China. It will be difficult for Washington to reshape trade relations with China, Europe and potentially Japan by taking each one on. Stymieing China is better done in collaboration with Japan and Europe, and Trump should really see the constraints of the policy situation that faces him.

A second Trump presidency will be different to the first in the sense that he has had time to prepare for it, and crucially, his supporters have had four years to concoct a policy strategy (‘2025’ seems to have dropped out of headlines). In the same way, a Harris presidency comes with deeper reserves of policy experts, and to a large sense on the international trade and economic outlook, the Harris case represents ‘more of the same’ in terms of the techn0-strategic economic policy that is currently pursued by the White House.

An idealised, and though I like the idea a lot, too lofty rendition of this policy is Walter Russell’s Mead’s September Foreign Affairs essay entitled ‘The Return of Hamiltonian Statecraft’ which argues for the notion of ‘enlightened patriotism’.

In this context, a Harris White House would use trade and investment policy to laser focus on America’s race with China for global supremacy. Driving Chinese economic and investment activity further inwards might be one goal, and ironically anything Washington can do to make Chinese public life more closed and repressive, the better (because it curbs innovation and wealth creation).

At the same time, the US and Europe, would both pursue parallel strategies of ‘strategic autonomy’ or what Trump refers to as ‘strategic national manufacturing’ focused on sectors like defence, new computing power (quantum, AI, data storage and management), batteries and new power sources and revolutionary medicine. Europe’s challenge is to find a way of reducing long-term energy costs.

Kamala Harris, who has trialled a few incoherent policies (taxes on unrealised capital gains, price controls) is likely to be more constrained in her fiscal policy – because her government is likely to instinctively focus more on tax and spending changes, for which she will need the help of the Senate (which in turn could tilt towards the Republicans). As such her fiscal policy will focus on not increasing the national debt, and like many other governments, encouraging the private sector to work with government to build out strategic technologies.

I am so far surprised that markets do not seem to price in uncertainty over trade policy, possibly because they are more focused on falling interest rates in the US, Europe and China. However, the next month will start to reveal how seriously financial markets take economic rhetoric of each of the presidential candidates.