Donald Trump, Boris Johnson and the route to trade mayhem

Both men believe that tiresome details can be left for underlings to sort out

Gideon Rachman

The disastrous G7 summit in Canada was a classic display of Donald Trump’s style of “negotiation” — one which combines self-pity, threats, and grandiose and impractical proposals. But just as most of America’s allies recoil in horror at the US president’s trade diplomacy, Mr Trump has found an admirer in Boris Johnson.

At a private dinner last week, Britain’s foreign secretary mused: “Imagine Trump doing Brexit . . . He’d go in bloody hard . . . There’d be all sorts of breakdowns, all sorts of chaos. Everyone would think he’d gone mad. But actually you might get somewhere. It’s a very, very good thought.”

It is a very good thought, but not for the reasons that Mr Johnson thinks. There are close parallels between the Trump style of trade negotiation and that favoured by hardline Brexiters such as the foreign secretary. These similarities explain why both men are likely to damage their own causes, creating “all sorts of chaos” without any compensating gains.

There are three key shared characteristics to the Trump-Johnson style. The first is the belief that big ideas matter much more than detailed knowledge. The second is an over-estimation of your own strength that sets you up for failure. Finally, there is the tendency to turn friends into enemies.

Mr Trump’s supporters are chortling that the president’s sudden advocacy of total free trade at the G7 summit has exposed the other leaders as hypocrites. But their bafflement stems from the fact that, unlike the US president, the other G7 leaders have some understanding of the complexities involved in international trade.
 For example, Mr Trump’s suggestion that all subsidies should be abolished is something that the EU has been pursuing internally for decades. In practice, it requires bureaucrats and politicians to agree on what constitutes a subsidy, and then to draw up rules and submit themselves to binding judgments by international institutions. This is just the kind of international governance that Mr Trump despises.

Mr Johnson also thinks it is the big picture that matters, and that the tiresome details can be sorted out by underlings. So he refuses to believe that keeping the Irish border open after Britain leaves the EU is a real problem, rather than a trivial objection thrown up by officials.

The foreign secretary airily dismisses the idea that there will be chaos at ports and borders in the event of a “no deal Brexit”. After all, great men like him do not bother with tedious technicalities such as supply chain management.

As far as Mr Johnson is concerned, the problem with the Brexit negotiations is that the British have not been tough enough. They should be more like Mr Trump and threaten not just to walk away from the table, but to turn it over.

What Mr Johnson ignores is that Britain has already tried this. The negotiations began with brave British cries of “no deal is better than a bad deal”. You do not hear so much of this now because it has become evident that this is clearly not true.

“No deal” would be disastrous for Britain, with crucial areas of commerce, such as pharmaceuticals, finance and aviation, stuck in legal limbo.

The mistake made by Mr Johnson was to assume that because the EU enjoys a trade surplus with the UK, it would never dare disrupt its trading relationship with Britain. But the European market is far more important to Britain, in percentage terms, than the British market is to the EU. The EU has also concluded that there are important principles at stake, and that conceding to Britain might unravel the entire EU internal market. So Brussels has been unyielding and the Brexiters’ bluff has been called.

Mr Trump belongs to the same school of non-thought as Mr Johnson and is making a very similar error — assuming that because the EU enjoys a trade surplus with the US, it will inevitably buckle. At first sight, it seems reasonable to assume that the US is much better placed to push around its trading partners than Britain is. There are some countries such as Canada, which sends 70 per cent of its exports to the US, that are particularly vulnerable. And in some areas, the US does have a massive power advantage. In particular, military might and the role of the dollar in world finance.

But trade is much more of a level playing field. The EU can retaliate against the Trump tariffs quite easily — by targeting American industries, such as farming. Meanwhile, Mr Trump’s tariffs on steel will cause pain inside the US by raising the cost of inputs for industry. The fact that Mr Trump has chosen to take on so many countries simultaneously means that US businesses may struggle to find alternative suppliers.

Both Mr Trump and Mr Johnson lack the empathy to realise that, if you kick old friends in the teeth, they are unlikely to respond in a cheerful and friendly manner. Many of Britain’s EU partners felt angry and betrayed after the referendum in June 2016. And they were particularly furious with Mr Johnson who they saw as the face of Brexit.

As a result, they are still reluctant to make any deals that might look like “rewarding” Mr Johnson. Mr Trump may discover that his bullying tactics on trade backfire in the same way.

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Is the Russian Economy Defying Western Sanctions?

By Ekaterina Zolotova


In a recent interview, Russian President Vladimir Putin said the Russian economy had overcome some significant challenges over the past several years, namely Western sanctions imposed after Russia’s annexation of Crimea and the global slump in oil prices. According to Putin, inflation is the lowest it has been in modern Russian history, gold and foreign reserves are growing, economic growth is slowly rising and foreign direct investment is increasing. The effects of Western sanctions appear to be easing. In 2015, Russian gross domestic product declined by 1 to 1.5 percent due to sanctions. In 2017, this number declined to 0.5-1 percent.

If the Russian economy really is recovering, it would give Russia a better negotiating position when it comes to the conflict in eastern Ukraine and would diminish some of the leverage the West gained through sanctions. We previously forecast that Russia couldn’t afford to be isolated from the global economy any longer and would therefore be forced to make concessions on Ukraine to gain some relief from sanctions. But these new indicators have made us take a second look at that forecast.

The Russian economy has indeed displayed some surprisingly positive results in 2018. The State Duma reviewed the federal budget on June 7, and for the first time since 2011, Russia is expecting a budget surplus – totaling 0.5 percent of GDP, or roughly 481.8 billion rubles ($7.7 billion), this year. According to the review, state revenue so far in 2018 was 17 trillion rubles – 2 trillion rubles more than was expected in the budget released in December. And according to the minister of economic development, Russia’s GDP in 2018 may exceed 100 trillion rubles – an increase from 92 trillion rubles in 2017. The World Bank has confirmed that the Russian economy is improving and forecasts that the growth rate will reach 1.5 percent in 2018 and 1.8 percent in 2019-20. In addition, the Russian government expects that non-oil and gas revenue will continue to grow by more than 1.8 trillion rubles in 2018. The government has also said about 60 percent of Russia’s income is not related to oil and gas.

But Russia’s moderate recovery was largely due to the increase in oil prices since early 2018, leading to an increase in revenue by 1.76 trillion rubles. And despite the government’s efforts, the economy is still heavily dependent on the energy sector. In the first quarter of this year, oil accounted for 27.4 percent of Russian exports, and fuel and energy products accounted for 42.5 percent, largely unchanged from 2017.

In addition, Russia’s National Wealth Fund has increased due to higher oil prices, but only marginally. In May, the fund grew by 5 percent if calculated in rubles, but in dollars, it actually declined by 3 percent, or almost $2 billion, due to the weak Russian currency. For now, Russia has chosen not to spend this money but rather to save it in case it ends the year in a deficit.

Even if the economy has improved on the macro level, it seems that Russians remain skeptical. Polls by the Russian Public Opinion Research Center show that the private sector still believes that the economy is struggling. In fact, 69 percent of companies said they believe the government’s economic policies will be ineffective, a 5 percent increase from last year. Business leaders cited economic uncertainty, rising taxes and declining domestic demand among the most important causes of the negative business environment in the country.

In the first quarter of 2018, consumer debt reached 4 trillion rubles, increasing by 5 percent compared to the same period in 2017. Almost half of this amount consists of overdue loans. A recent poll commissioned by the central bank showed that inflation expectations in Russia increased to 8.6 percent in May from 7.8 percent in April, partly due to the rise in gasoline prices by 5.6 percent from May to April and by 11.3 percent in annual terms, sparking fears of rising food costs. Eighty-three percent of Russians expect their financial situation will deteriorate due to rising gasoline prices.
Indeed, Russia has seen some growth but little development. In May, following March elections, Putin outlined the economic goals of the new government. In the next six years, he said, the country will be among the five largest economies in the world and will have a growing population, increased life expectancy to 78 years, sustainable income growth and reduced poverty. According to Putin, the country would need an additional 8 trillion rubles to achieve these goals. Yet, it hasn’t made any serious reforms that will increase government revenue to this level or transition the economy away from resource dependence.

The government has admitted that it currently doesn’t have the money to fund Putin’s plans, and so it has to either raise more money somehow or cut spending. But if oil prices don’t continue to rise, the government still has few options to raise revenue. The share of the population that’s economically active is declining and incomes have been falling for years. Raising taxes would only increase the burden on this already overburdened group. (The government is actually looking at cutting excise taxes on diesel, a move that would slash regional budgets.) The government therefore has been considering raising the retirement age and implementing pension reforms to cut public expenditures. But these are highly unpopular measures.

The more difficult economic conditions in the country become, the more Russia will be willing to make compromises in places like Ukraine. This is why it’s important for Russian officials to tout the country’s economic successes, however small and temporary they may be. A strong economy can show the world that Russia is able to withstand the West’s efforts to rein in its foreign policy – which it’s not prepared to do just yet.