Trade as a weapon or as a boomerang?

The new international buzz concept is the weaponisation of trade. And this is the stuff nightmares are made of for business executives and political leaders. Of course, countries have been using trade as a weapon or as a negotiating tool to twist arms in the past but this was on an ad-hoc basis. The big difference now is that the Trump administration has elevated the systematic use of trade tariffs and sanctions as an instrument of coercion to a doctrine governing the way America deals with adversaries  or friends and allies — although, in fact, the very notion of friend or allied country is completely alien to Donald Trump’s view of the world and of the way the US fits and acts in that world.  

There is no underestimating the damage that this weaponisation of trade by the number one economic power in the world is creating to an international trading system already under assault, to the global economy and to international stability and security. In that respect one can only be amazed by the hubris, arrogance ... and blindness of an administration so assured of its economic dominance that it does not realise that it is using a boomerang that will hit the US back in the face at some stage.

When Washington threatens to raise tariffs on imports from Mexico to force the government there to deal with the migrants issue — in complete disregard to the existing NAFTA agreement between the US, Mexico and Canada which is supposed to be replaced by the just agreed US, Mexico Canada agreement  (USMCA) — this is not just a blatant violation of an agreement ratified by the US, and of the norms of the WTO. It is a signal to all countries dealing with the US that the Trump administration does not feel constrained by legal commitments undertaken by the US and that it just operates according to the law of the jungle. 

In that respect, one needs to also look at the EU countries — especially Germany — and Japan facing the threat of US tariffs on their automotive exports which was reiterated this week in Washington, under the spurious pretext that these exports represent a threat to America’s national security. And then there has been the revelation that the US has recently transparently implied that the EU could face economic and trade  sanctions if it proceeds with its plans to expand the cooperation among its members on military procurement and spending.

So, today, every single trade and economic relationship with the US needs to be considered as a vulnerable one, subject to the whims of a president who has once called himself “tariff man” and who considers that trade wars are “easy to win”.  Washington has now become the rogue elephant in the china shop.

The damage done by this weaponisation of trade to the multilateral, rules-based trade system can now be measured every day as the uncertainties about the way this system will be able to continue to function — and the impact of the US-China confrontation — are  having an increasing impact on the global economic outlook. While Mr Trump relishes  launching trade wars investors hate them and keep decisions on hold or cancel investments until the situation is cleared. 

It is this growing concern about the extent of the synchronised economic slowdown that has pushed Mario Draghi, the president of the European Central Bank, to express his readiness to launch another round of stimulus monetary measures if the toxic combination of declining growth and political uncertainty were to continue. And it is the same concern that has prompted Jerome Powell, the President of the Federal Reserve, to suggest that rates could be brought down if the trade war with China and the trade confrontations with the EU, Mexico and whoever else, were to weaken the economy — as more and more indicators signal that this is beginning to happen.

However, the damage done by the Trump administration’s weaponisation of trade is definitely not limited to the trade and economic domains. It is potentially a major additional disruptor of an already very volatile geopolitical environment. As Washington shows no qualm using trade tariffs among the panoply of measures it is deploying in its containment policy towards China, Beijing has hinted that it could also respond by using its dominant position in the domain of rare earths. The EU is also ready for tit for tat measures against any move by Washington on auto imports tariffs. Countries which feel vulnerable to American trade blackmail will definitely push ingenuity to the extremes to find some  ways to hit back in another domain or another time. Acrimony is building up that can only complicate or even ruin efforts to address some crucial international issues in a constructive way. 

In a context where technology, trade, finance, economy, geopolitics are more and more intertwined, Donald Trump and the people around him implementing this strategy of trade weaponisation are fooling themselves if they consider that the “wins” that they could achieve through it will be lasting ones. The boomerang will hit back in other areas. While the US is still THE super-power, it is not anymore the “hyperpower” that the former French Foreign Minister Hubert Vedrine saw in it in 1999. And Donald Trump might have a painful realisation of this new state of affairs as the US economy  slows down and American businesses and consumers start asking him where he got this notion that “trade wars are easy to win”.  But the damage to the international systems will have been done. And it will take a long time to repair it; the same long time it will take the US to restore a reputation of reliability and of a genuine stakeholder in a rules-based international system. 

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The writer is President of Smadja & Smadja, a Strategic Advisory Firm  @ClaudeSmadja