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WARNING: By the time you read this text, it might already be out of date - thanks to the latest tweet from the American President. That is how trade policy works these days...

By Holger Paul

To understand how much the world (of trade policy) has changed over the last two years, we need look no further than the Business section of the "Frankfurter Allgemeine Zeitung" from August 11. The lead story is the dramatic fall in the value of the Turkish Lira - a result of a tweet from US President Donald Trump, threatening to double punitive tariffs on Turkish steel and aluminum. His counterpart, Recep Erdogan, responds with talk of a trade war. On the next page, we can read how Russia is denouncing a trade war with the USA after the White House announced new sanctions against the regime in Moscow. Also on this page, a report on slight growth in the Japanese economy - albeit overshadowed by Trump’s threat to slap high tariffs on Japanese cars.

And this is just a fraction of the havoc and destruction that the American President has wreaked since taking office in January 2017. The list of the American economy’s new "foes" is alarmingly long: Trump has managed to antagonize America’s close allies Canada and the EU, as well as Japan, Mexico and various South American countries, with punitive tariffs and threats thereof. In Iran, he plans to instigate a regime change, no less - both by pulling out of the nuclear deal and with economic sanctions intended to impact not only on the country itself, but also on anyone who wants to trade with Iran. Last but not least, the probably largest and most dangerous confrontation: The US President sees China as a threat and seems almost unable to refrain from threatening one round of punitive tariffs after another on Chinese products - with Beijing reacting with equal force every time. This verbal arms race has already worked its way up to a goods value of 500 billion US dollars.

Trump’s tough manner and verbal clumsiness should not come as a surprise. After all, in that sense his presidency is the same as his time as a New York property mogul, TV presenter and campaigner. What is surprising is how unconcerned Trump seems about the reputation of his country - and his office - around the world when he rules by Twitter and executive orders, and the collateral damage he is prepared to accept abroad in pursuit of his agenda. On the other hand, all we really needed to do to predict his actions is take the announcements he made during the election campaign seriously and multiply them. It was no secret that he hated the Iran deal, for example. From the very beginning he railed against multilateral free trade agreements like NAFTA (where the USA is at least still at the negotiating table) and the World Trade Organization and polemicized against all countries that have a trade surplus with the United States.

Behavior like "Jekill and Hyde"

Now the US President is attempting to fulfill his promise to improve America's trade relationships "for the benefit of American workers" unilaterally by constantly flexing his muscles. He would get a better deal for America in bilateral trade agreements than through multilateral deals in future, he boasted during the election campaign. He would bring millions of jobs back to the USA and roll back the foreign trade deficit - by executive order, through punitive tariffs, and by threatening extra-territorial authority, for example when European companies still want to do business with Iran. A seemingly scrutable strategy, but it has various snags.

Firstly, neither tariffs nor fighting talk will enable Trump to create millions of new (industrial) jobs in the USA if they are not profitable. Other countries offer lower production costs and greater expertise in key technologies: something that no wall can change. Secondly, Trump appears to be completely ignoring the fact that his "punishment" leads to countermeasures that will hurt both American industry and ultimately American citizens. Tariffs make urgently needed imports more expensive - no wonder that the American corporation Alcoa, for example, has already requested a tariff exemption for almost 40,000 tons of aluminum from Canada. World trade is and has never been a zero sum game, with winners on one side and losers on the other.

But ultimately, it is Trump’s own unpredictability that is causing his mission to fail. In a kind of "Jekill and Hyde" performance, he praises other leaders as "wonderful partners" one minute, only to present them as devious crooks the next. Who would want a long-term alliance with someone like that?

The American Paul Krugman, winner of the Nobel Prize for Economic Sciences, puts it this way: "While Trump rants about other countries’ unfair trade practices - a complaint that has some validity for China, although virtually none for Canada or the European Union - he hasn’t made any coherent demands. That is, he has given no indication what any of the countries hit by his tariffs could do to satisfy him, leaving them with no option except retaliation. So he isn't acting like someone threatening a trade war to win concessions; he's acting like someone who just wants a trade war." According to this interpretation, Trump is not initiating trade wars because he has a plan to give American industrial workers their jobs back, but because he has no other ideas about how to help them.

The neighborhood bully

So how should we deal with someone who is driven simply by a love of aggression and the desire to be revered by everyone as the greatest US President of all time? The rest of the world is still struggling to come up with an answer. Backing down and accepting the punitive tariffs and other sanctions with little or no complaint is not a solution, at least for other industrial countries and regions. After all, once you have been a willing victim once, the neighborhood bully will torment you forever more. On the other hand, throwing down the gauntlet and fighting back carries the danger of a trade dispute developing into a full-blown trade war - with unknown consequences for world trade. Unfortunately, this scenario can no longer be ruled out.

That makes it all the more important - especially for the EU - to present a united front against Donald Trump without turning away from the USA as a partner. However focused the US Congress might appear on infighting, it is still a potential source of useful allies. Isolated pinpricks in the form of increased tariffs on products that would particularly hurt Trump supporters could be a useful tactic - as long as the EU is also willing to negotiate with the USA on extensive tariff reduction on both sides of the Atlantic in line with WTO rules.

The EU still seems unsure about this approach and cannot afford to position itself against the USA. However, showing its own strength, fighting loudly for free trade, creating stronger alliances with other states such as Canada and South Korea, and putting pressure on China to truly open its markets, is the only sensible response to Donald Trump. Not all of the American President's suggestions are automatically bad - a general reduction in trade tariffs between the USA, the EU and China would actually be a good move, while the WTO is in urgent need of reform.

However, the trick will be to teach Donald Trump that he cannot make the rules for tomorrow's trade alone. The first step would be to stop treating every tweet as a government declaration. After all, their half-life is rarely more than a night...

(VDMA has always advocated free trade, the reduction of trade barriers and global growth. To do this, the Association has now launched the "Thank you, free trade" campaign. Anyone interested can join the discussion at facebook.com/dankefreihandel. More information can be found at: www.dankefreihandel.com)

Further Information

VDMA Foreign Trade   |   vdma.org: Campaign "Danke Freihandel"   |  VDMAimpulse 02-2018: "Trade policy reaches a crossroads"

Holger Paul, VDMA Communications.