“I’m not saying there won’t be a little pain,” President Trump said in April about the tense trade negotiations and ensuing brinksmanship between the U.S. and China. That day the Dow closed down 700 points when China threatened $50 billion in retaliatory tariffs on U.S. goods. Subsequent events have done little to relieve the pain.
Failed trade talks between the U.S. and China in June have culminated in the world’s two largest economies making good on their threats—with both countries announcing tens of billions of dollars of tariffs on each other’s goods. And the president is not reserving his tariff-driven negotiating style for our country’s greatest commercial competitor.
He’s imposing steel and aluminum tariffs on our staunchest allies from Canada and Mexico to the European Union. On the 70th anniversary year of the General Agreement on Tariffs and Trade (GATT) that spawned the global trade architecture, global trade relations have never been more fraught.
During that same April radio interview, the president added “so we may take a hit, and you know what, ultimately we’re going to be much stronger for it, but it’s something we ought to do.”
That seemingly encapsulates his overarching vision when it comes to his trade agenda. The administration and its supporters would claim that creating a little instability now, even if it carries some risks, will likely result in greater market access and a more level playing field for American businesses and workers down the road. They present Trump’s trade agenda as an antibiotic. The side-effects may be unpleasant, but the infection will likely be eliminated.
How unpleasant have the side effects been? The first quarter of 2018 saw the VIX index, which measures volatility in the equity markets, increase by an astonishing 81 percent, where $2 trillion of U.S. market cap evaporated over the course of one ten-day period.
Markets have added and shed as much as 2 percent of aggregate market value in multiple trading days. Meanwhile, both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) warned that a brewing global trade war could weaken the synchronous global growth we are experiencing.
This proves what dealmakers have always known: that volatility and uncertainty are the enemies of capital formation, and a trade agenda that engenders such volatility and uncertainty will curtail or at the very least postpone investment.
Meanwhile, American farmers are already expressing anxiety while altering planting and investment decisions, in response to the increasing trade tensions—bear in mind that agriculture exports are responsible for 20 percent of U.S. farm income while supporting over 1 million American jobs.
Up to 70,000 net jobs in manufacturing are projected to be lost due to steel and aluminum tariffs. And by jeopardizing access to global markets, the ongoing brinksmanship will directly undercut American manufacturing by increasing the price of the foreign inputs, including steel inputs, that our factories rely on to create internationally competitive finished goods, while threatening our status as the world’s leading exporter of services and capital goods.
A central tenet of the administration’s agenda has been focused on freeing up capital to drive growth and investment—from the federal tax reform law to federal deregulation. Yet these benefits will be undermined by the very instability these trade policies engender.
At the same time, the forgotten Americans President Trump pledged to pay attention to—notably farmers and manufacturing workers—are precisely the people who will be hurt the most. Far from being an antibiotic, the president’s trade approach recalls the classic dictum: if the disease doesn’t kill you, the cure surely will.
All of this reflects the fundamental error in Trump’s trade strategy: at the same time he disregards the rules of global trade, he remains focused on reducing bilateral trade deficits, especially with China where he has called for the immediate reduction of our trade deficit by at least $100 billion, and by $200 billion within the next two years.
This ignores the fact that these trade deficits are not the direct result of trade policy, but of the dollar serving as the global currency of choice, the impact of countries’ savings and investment rates, and our reliance on foreign capital to make up the difference between what we save and what we spend.
In negotiating with governments as if they were businesses, this administration misunderstands that governments are not the “spenders” of national economies the way businesses are the spenders of their budgets. Governments cannot directly create outcomes or results the way businesses do. At best, governments can enact policies that support certain outcomes.
History has repeatedly shown that the best way that our country can maintain global competitiveness is through negotiating the rules of the road. This is precisely why the president should stop focusing on demanding outcomes he cannot control and start focusing on negotiating rules he can secure—rules that remove tariffs and non-tariff barriers, establish strong intellectual property protections, and clear means of dispute settlement.
As the nation best positioned by far to compete and win in the global marketplace, a rules-based approach can only help our businesses and workers. This approach, which relies on partnership-building and win-win outcomes, is frankly, slow. However, having negotiated trade agreements as well as innumerable transactions as a long-time investment banker, I can assure you that consistency, clear thinking and a dynamic of mutual respect are the best ingredients for success in deal-making— especially with China.
Discarding brinksmanship does not guarantee any immediate solutions, particularly to the dramatic challenges China brings to our bilateral commercial relationship and the global trading system. It does, however, offer the best hope of providing any solutions at all. At the very least, it will best ensure what good doctors know and should be followed as the Hippocratic rule of global commerce: First, do no harm.
Stefan M. Selig served as President Obama’s Under Secretary of Commerce for International Trade at the U.S. Department of Commerce from 2014-2016. In 2017, he founded financial and strategic advisory firm BridgePark Advisors LLC. Previously, Selig spent nearly 30 years in senior investment banking positions on Wall Street, including 15 years at Bank of America Merrill Lynch, most recently as executive vice chairman of global corporate & investment banking.
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