Where Will A Trade War Take Us?
Bloomberg Businessweek Middle East|1 August, 2018

The damage from Trump’s disruptive policies will take years to repair.

Peter Coy

Is President Trump a blip? A brief aberration who will have no lasting impact on international relations? A tempest in a samovar? Don’t count on it. In a matter of days the president has instigated a trade war, insulted the leaders of numerous allies, thrown NATO into shock, labelled the European Union a foe, and held a remarkable press conference with Russian President Vladimir Putin on July 16 in which he endorsed Putin’s suggestion that Russian intelligence agents could help the U.S. sort through allegations that Russians meddled in the election that brought Trump to power.

There are two reasons to expect that Trump’s impact on the world order will be lasting. One is that his actions are eroding trust among both allies and rivals. Once gone, trust is hard to reestablish, even if the next president turns out to be a devoted internationalist. The other is that he is pushing a boulder downhill—the boulder, of course, being nationalism. Like the politicians behind Britain’s “leave” campaign, he’s both harnessing and amplifying powerful emotions that tend to drive countries apart and keep them apart. “The populist sentiments for isolationism and protectionism in the U.S. are not created by Trump,” says Lawrence Lau, an economist at the Chinese University of Hong Kong. “He has merely exploited them very effectively.”

That makes Trump a big problem for Big Business. U.S. corporate leaders soft-pedaled their criticisms of his trade policies in the past because they hoped he’d come around to their point of view. And they were grateful for his strong support on two other key priorities: tax cuts and deregulation. Now they worry that waiting for the squall to pass may be a mistake because real damage could be done in the meantime.

You can sense the frustration in Joshua Bolten, a free-trade Republican who was President George W. Bush’s chief of staff and is president of the Business Roundtable, an organisation of large-company chief executive officers. He testified on July 12 against the tariffs Trump has unilaterally imposed on steel, aluminum, and other products. “I have heard people in the administration say, ‘You know, OK, but don’t worry, it’s going to get resolved, it’s going to take a little, everybody needs to absorb a little pain in the short run,’ ” Bolten told Trump critic Bob Corker of Tennessee, chairman of the Senate Foreign Relations Committee. Bolten rejected such reassurances: “When you disrupt supply chains, when you demonstrate that we are an unreliable trading partner, you lose those relationships permanently.”

U.S. financial markets have largely shrugged off fears of a trade war because the amount of goods covered by higher tariffs is small. The S&P 500 stock index is up 5 percent this year. Economists estimate that the tariffs imposed so far would knock no more than a tenth of a percentage point off the growth rate. “I think the market is right in thinking that the most likely outcome is that free trade survives but with tweaks,” says Mohamed El-Erian, a Bloomberg Opinion columnist and chief economic adviser at Allianz SE. Speaking to Bloomberg News on July 16, BlackRock Inc. CEO Larry Fink said, “Right now it’s all talk.” Still, the threats and counter threats create uncertainty that may induce businesses to hold back investment in new plants and equipment, known as capital spending, or capex. “Global business sentiment, linked to positive news on profits, has been an important driver of the recent global capex upturn,” JPMorgan Chase & Co. economists wrote on July 13.

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