Is there method to Donald Trump’s supposed madness on trade?
4 Jun, 2018
By Jim Jatras
President Donald Trump, it is said, is unleashing a global trade war, which is already beginning with promised retaliatory measures from our closest trading partners. Trump justified his action by claiming that steel and aluminum are strategic materials essential for national defense. In all likelihood national defense had little to do with his action. Rather, it is a ploy to put a “national security” halo around a measure being taken for economic reasons.
That doesn’t mean it’s the wrong move, however. It’s important to put these measures into the context of long-term US trade policy. US trade policy since World War II could almost have been designed to undermine the economic interests of American workers and American producers. Starting with Germany and Japan, our defeated enemies, we offered them the proverbial deal they can’t refuse: they get virtually tariff-free, nonreciprocal access to our huge domestic market to assist with their economies’ recovery from wartime destruction; in return, we would take their sovereignty: control of their foreign and security policies, as well as their military and intelligence establishments, plus permanent bases on their territory.
In effect, Germany and Japan ceded geostrategic control of their own countries and were rewarded at the expense of domestic US economic interests. This may have seemed a good deal for both sides at the time, in light of the mounting Cold War with the Soviet Union. Germany and Japan were flat on their back, we were the only major world economy not devastated by the war – in fact, our economy was booming. We could afford to be generous, especially as the arrangement strengthened our geopolitical position vis-à-vis the USSR and Soviet bloc.
Unfortunately, not only was the Germany-Japan arrangement not ended when those nations recovered by the end of the 1950s, it became the standard for our trade relation with other countries in non-communist Europe, as well as some in the Far East, notably South Korea.
Though reduced politically to the status of satellites, these countries also benefited from having to spend only token amounts on their own militaries. (In fact, Japan accepted an arbitrarily low military spending cap of one percent of GDP, now beginning to erode.) This meant they could focus all of their resources on their economies, even while protecting them from outside competition, including from the US.
This is not to say no one in the US benefited economically. American corporations – or more accurately, companies that originated in the US but had gone global – jumped at the opportunity to dump their pricey American workers (along with bothersome labor and environmental regulations), move their manufacturing operations abroad, and then import their products back into the US virtually tariff-free.
While this didn’t benefit US workers, it has made life cushy for the corporate boardrooms and for shareholders (with corporate buybacks of stock, sometimes there is substantial overlap in these two categories).
So not surprisingly, for years the troubadours of the corporate class and their favored media and think tanks sing hosannas to the wonders of so-called Free Trade. With the predictability of Charlie Brown kicking the football, each new trade deal rushed through with “fast track authority” is touted as “opening new markets for American goods” and “creating millions of good-paying jobs” – and each with clockwork regularity leads to bigger deficits and lost jobs.
Before Trump’s election, Republicans (also deservedly known as the “Stupid Party”) barely paused for breath from their ritual denunciations of Barack Obama’s dictatorial abuse of his Executive Authority to steamrollblank-check autocratic presidential trade powers through Congress.
But while our political class exulted in America’s one-way commitment to Free Trade, our trading partner practice barely concealed mercantilism, both against each other and us. Consider, for example, the European Union’s Value Added Tax (VAT), which applies internally to domestic and imported goods but not to exports – in effect an export subsidy. But when the US considered leveling the playing field with a Border Adjustment Tax (BAT), the EU and other trading partners screamed bloody murder. As Alan Tonelson points out, “The BAT would have functioned like a value-added tax (a levy imposed by virtually every other country) — imposing a tax on imports heading for the U.S. market, and providing a subsidy for U.S. exports.” But for reasons that are not clear, the BAT was dropped.
To be sure, the American consumer benefitted in the US dollar’s status as the world’s reserve currency which has allowed purchases of imported items at artificially low prices, even as domestic producers are forced out of business and their workers laid off. Then, “rather than exporting goods, the United States exports financial assets in the form of U.S. Treasuries, which have been purchased by central banks around the world to bolster their foreign currency reserves and to keep the value of their respective currencies low relative to the dollar.” The irony is that even with foreign goods’ attractive low, low, low prices, there are fewer working class Americans with good-paying manufacturing jobs able to support a Middle Class lifestyle.
The plight of these Americans is what largely propelled Trump into the White House as an improbable historical accident. Let’s recall that in 2016 there were anti-establishment rebellions in both parties, directed against Republicans and Democrats alike in light of flat economic growth, a shrinking Middle Class, flat or falling income levels (reflecting in large part loss of high-paying manufacturing jobs), crippling debt levels (“nearly half of Americans would have trouble finding $400 to pay for an emergency”), a rising mortality rate (notably among the white working class, dubbed “the White Death” from suicide), substance abuse (with about five percent of the world’s population, the US consumes 80 percent of the world’s opioid prescriptions), and a diet of processed foods and GMOs (in apattern reminiscent of collapsing life expectancy of Russian males as the USSR imploded), and a record low labor participation rate.
A widespread sense of foreboding suggests that the future will be even worse, with most Americans’ expectation of a lower standard of living for their children and grandchildren. Somebody is making a lot of money out of the more than two decades’ quest for “benevolent global hegemony,” but it sure isn’t the ordinary folks in, what the elite of both parties concentrated on the coasts disdain as, “Flyover Country.”
Trump pledged to do something about this. Especially in the Rust Belt states of Pennsylvania, Ohio, Michigan, and Wisconsin, those who voted for him want something radically different from business as usual. They voted for Trump because they wanted a bull in a china shop, a wrecking ball, a human hand grenade, a big “FU” to the system.
So far, though, on many issues they have gotten instead something closer to a conventional Republican of the Mitt Romney or Jeb Bush variety. This is especially true on foreign policy, where Trump’s team and his actions seem to have been formulated by the same globalist, neoconservative-dominated establishment he denounced during the campaign. But with his tariffs Trump has boldly departed from recent Republican orthodoxy – and in fact, rejoined the nationalist tradition of the GOP from Lincoln to Eisenhower, when the US became and remained the industrial and economic envy of the world.
It remains to be seen whether anything like a trade war will materialize. Key to that will be what Europe will do, not just with respect to tariffs but to US sanctions against European companies doing business with Iran in the aftermath of American withdrawal from the Iran nuclear agreement. It is one thing for the Europeans to meet Trump for some serious horse-trading that begins to rectify the lopsided commercial disadvantage they have enjoyed for half a century. But it is another thing to succumb to political diktat in the form of Iran sanctions. One would hope the European leaders see the connection between the new Iran-related threats emanating from Washington and the decades-old cession of independence to which they have meekly submitted under a long-outdated American “security umbrella.”
In assessing the readiness of Europe (not just of the EU leadership but national governments) to resist threats from Washington, it’s always the smart bet to expect them to wimp out. This is perhaps partly a function of their institutional weakness (especially of the unelected nobodies in Brussels), but the main fault seems to be the low human quality of leadership in the likes of Theresa May, Emmanuel Macron, and Angela Merkel, who wouldn’t know a principled stand for national sovereignty if it walked up and bit them.
Exhibit A is the European establishments’ inability to cope with – indeed, active encouragement of – migratory invasion, currently the only real external threat to Europeans’ safety and security. Exhibit B is the way European governments rushed to accommodate the US on the abominable global financial regulation known as FATCA (the “Foreign Account Tax Compliance Act”), where these supposedly independent states abrogated their domestic personal privacy laws in the face of naked sanctions threats from Washington. (To be fair, Russia, which has even more reason to resist placing its financial sector under the authority of the US Treasury Department, has done no better.)
At this juncture, it matters less what the specific steps European governments decide to take but that they resolve to achieve their political independence from Washington, even though that must entail some short-term pain from loss of a privileged trade arrangement. That in turn will require them to make a sober assessment of their relationship with Russia and the so-called threat that is justification for continued – indeed, perpetual – American domination. That linkage was made recently by Austria’s populist Vice-Chancellor Heinz-Christian Strache, who called both for a reaction to US pressures and normalized EU-Russia ties in anticipation of President Vladimir Putin’s upcoming visit to Vienna.
Perhaps there’s something in the air when even the likes of European Commission President Jean-Claude Juncker can say that “Russia-bashing has to be brought to an end.” An even more hopeful sign may be the accession to power of the Five Star Movement – Lega parties in Italy, which has been called the “most radical challenge yet to the order that has dominated Europe since World War II.” To be sure, Trump is hardly the sole cause of what the Council on Foreign Relations laments as the impending death of the “liberal world order,” but he certainly has been a catalyst. One can’t help but wonder to what extent that is deliberate.