The list of countries with the largest trade surplus with the United States is led by China, which exports $375billion more than it imports. It is followed, very far away, by Mexico ($ 71 bn), Japan (69bn), Germany (65bn), Vietnam (38bn), Ireland (38bn) and Italy (31bn). If we do the exercise of putting aside the 2018 report of the USTR (Office of the US Trade Representative 2018 National Trade Estimate), the markets that have more protectionist measures against the United States are China, the European Union, Japan, Mexico and India. What a surprise.
These facts explain much more about the failure of the G7 summit than any Manichean analysis on Trump, Trudeau, Macron or any of the leaders gathered there.
During the last twenty years, the world has carried out a widespread practice in governments’ disastrous idea of “sustaining” GDP with demand-side policies. Build excess capacity, subsidize it, and hope to export that excess … to the United States.
Steel and aluminum, like the automobile industry, are clear examples of building unnecessary capacity and subsidizing it, country by country, hoping that it will be somebody else who closes its inefficient factories while, at the same time, hoping to export more.
Meanwhile, barriers against global trade increased between 2009 and 2016. The World Trade Organization warned, year after year, since 2010, about the increase in protectionism. The Obama administration, faced with the exponential increase in its trade deficit, was the one that introduced the highest number of protectionist measures between 2009 and 2016. The United States’ complaints in the World Trade Organization fell on deaf ears.
And then Trump arrived. The requirement of the Trump administration in the G7 to eliminate all tariffs and barriers, rejected by the rest, has shown that the hat trick of accusing the US of protectionism was simply a PR stunt. Every time the Trump administration has pressed its trading partners with tariffs, we learned of hidden barriers from the so-called “free trade leaders” in China and the European Union. In six months we have seen an important list of tariffs and barriers against the United States that many of us simply thought did not exist.
Trump’s strategy is obvious. He tries to dismantle the trick of imposing hidden barriers inside, with a smile, and at the same time try to export more to the United States.
The German car manufacturers themselves have asked the European Union to reduce tariffs on US cars, the Chinese have agreed to reduce barriers to the imports of US agricultural and industrial products, and so on. Even the European Union recognized that the “Made In China 2025” plan, which the United States denounced, was a conscious objective of limiting foreign trade.
It had to explode. If all countries subsidize their excess capacity and try to export to the United States while using peregrine excuses to limit imports from the world leader, it ends up breaking the deck.
And the “free-market-disguised protectionism” strategy of some of the G7 leaders collapsed when Trump said “they have taken advantage of the United States for decades” and called for the elimination of all tariffs and tariffs completely. Interestingly, those who presented themselves as defenders of free trade refused.
The game is over. But careful with the consequences.
The United States may win. On the one hand, it exports very little. Almost 12% of GDP. On the other hand, everyone wants to sell there because the conditions of market opening, competition and opportunities are greater. Additionally, without its huge trade surplus, the European Union and China cannot sustain their growth.
And the debt? I have explained it a thousand times. China has $ 1.3 trillion of United States debt. It does not reach 6.2% of the total. It is neither the largest holder of US debt nor a threat. As shown throughout 2018, the demand for US bonds is much higher than the supply on all issuances and the US debt funds would absorb these Chinese bonds in a few days. Also, China cannot sell them. For China, these bonds are reserves of foreign currency. If sold, the Yuan would suffer enormous volatility, especially when its currency is used in less than 4% of global transactions and its value is more than questioned by the imposition of capital control.
It has been very easy for the European Union and China to support their GDP growth thanks to an external sector and a surplus that hid huge barriers under different subterfuges. From brutal bureaucratic barriers, hidden taxes, lack of intellectual property protection, disproportionate subsidies to obsolete sectors to try to export their excesses, or invented environmental excuses, it is over. If they want to sell to the United States, all countries have to adopt measures that really increase free trade, not disguise our protectionism with a mask of openness.
However, careful what you wish for. Tariffs are the worst way to combat protectionism. They give governments the excuse to impose higher barriers to trade and blame the external enemy, not to lift the existing ones.
Beware of the more than optimistic expectations of global growth.
The G7 summit shows another yellow card to the complacency of the markets.
The failure of this summit should, at least, alert us to overly optimistic estimates of global growth. The United States has found an unexpected ace card in its “fist on the table” negotiation tactic. The evident slowdown in European growth. The data on industrial production, GDP, consumption and credit point to a much poorer growth than estimated. The European Union is exiting its monetary stimulus with a very important drop of all indicators of economic surprise.
Let’s be careful. Protectionism only protects governments. All of us lose. The United States is carrying out an aggressive negotiation tactic, but it can go wrong, because politicians often prefer things to get worse than lose control, and that is a relevant risk with China and Europe.
Trump knows that tariffs hurt inside as well. In 2001, Bush Jr. introduced tariffs on aluminum that destroyed thousands of jobs, and Obama’s constant protectionist measures led the country to the worst external sector growth data in decades. Putting the fist on the table and demanding that everyone remove their barriers can end up in everyone blaming their barriers to trade on the outside enemy. On the “evil” US, and vice versa. Those who will suffer the most will be the consumers all over the world.
Daniel Lacalle is Chief Economist at Tressis, SV a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP)