Trump’s ‘Cold War’: ‘Keep Your Seat Belts Fastened’, Trade Tensions Will Persist ‘Indefinitely’

That is the worst thing that could happen for an economy as globally connected as the American economy.

That’s from World Trade Organization Director General Roberto Azevedo, who spoke to Bloomberg on Friday after Donald Trump renewed his criticism of the organization and doubled down on his long-standing threat pull the U.S. out if the institution doesn’t “shape up”.

At best, Trump’s criticism of the WTO exaggerates the problem. At worst, Trump is lying. In other words, this is just another example of the President tilting at windmills in an effort to perpetuate the “us” versus “them” message that resonates with the Roseanne base.

As noted on Thursday evening, Trump’s populist platform is built in part on an express disdain for globalization and multilateralism and the WTO is an easy target in that regard. In fact, the WTO is in many ways the perfect target for Trump, as it represents a collective that presides over a global trade regime that he variously blames for gutting flyover America and destroying U.S. industries. He knows most Americans don’t have the first clue about what the WTO does and he harnesses that ignorance to garner popular support for a push to exit the institution.

A history of U.S. trade, from Goldman


As ever, it’s important to remember that Trump doesn’t care about the consequences of his actions. The idea that he is fully apprised of what it would mean for the country if the U.S. exited the WTO is laughable in the extreme. He’s just tossing live hand grenades into a national conversation in order to perpetuate and reinvigorate the nationalist, anti-globalist sentiment that got him elected, because if that populist fire dies, well then what does he have left? A tax cut for millionaires, a late-cycle economy that’s bound to decelerate once the sugar high from stimulus wears off and an ever-expanding special counsel probe that now threatens to ensnare virtually everyone and everything he’s ever touched.

That said, Trump has a long history of this kind of rhetoric so it’s not as if the misguided view on trade is solely a product of dementia, paranoia and the convenient co-opting of populism. Have a look at the box below.

Goldman documents a history of Trump on trade, from a note dated February 6, 2017


All of those quotes betray a rudimentary understanding of how international trade works. Unfortunately, Trump’s elementary grasp of global trade and commerce fits well with his overall message to voters, and so here we are.

As far as the WTO is concerned, the President has already done enough to undermine the institution without pulling America out. Earlier this year, Jennifer Hillman, a former member of the WTO’s Appellate Body who also served as a commissioner at the United States International Trade Commission and as general counsel at the Office of the United States Trade Representative, sat down with Goldman’s Allison Nathan for an interesting interview on the subject.

Asked how Trump’s actions have violated WTO norms, Hillman said this back in March when the metals tariffs were in the news:

It’s pretty straightforward. You cannot impose tariffs on any product above bound rates, i.e., the levels that you’ve agreed to with all of your international trading partners. For the vast majority of steel products, the US bound tariff is zero, so anything higher is a violation of that commitment. Aluminum is similarly bound at low levels, all of them well below the President’s 10% number. There are probably numerous other violations given that these tariffs will apply to some aluminum and steel that was already in transit at the time of the announcement; you can’t just turn the boat around or reject the shipment. So there will undoubtedly be complaints about due process. There will also likely be arguments made about the use of the Section 232 and Section 301 provisions. But again, I think it’s already pretty clear that these actions violate WTO and international trade obligations.

Asked if it’s strange that any nation (and especially the U.S.) would act in a unilateral fashion, Hillman said “it’s very unusual because there are multiple remedies to respond to increases in imports or concerns about domestic industry within the existing trade framework.”

Still, she did concede that Trump is at least partially correct to suggest that the WTO, as it exists today, is inadequate to address unfair trade practices in China. Asked specifically if the WTO is sufficient in that regard, Tillman said this:

No. I may disagree with an awful lot of the President’s tactics, but on this point, he is correct. In part, I think nobody anticipated the pace, depth, and breadth of China’s growth and, more importantly, its market structure.

That said, Trump’s contention that the U.S. “always gets f*&%ked” by the WTO is patently false. According to the “Economic Report of the President” (which Trump obviously signed), this is the reality:

The efficacy of WTO dispute settlement mechanism remains an area of active debate. Davis (2012) finds that the United States gets better outcomes via formal WTO adjudication than negotiation, increasing the probability that the complaint will be resolved and decreasing the time it takes to remove the barrier in question. Mayeda (2017) finds that the United States has won 85.7 percent of the cases it has initiated before the WTO since 1995, compared with a global average of 84.4 percent.In contrast, China’s success rate is just 66.7 percent. Most U.S. WTO cases target China (21) and the European Communities (19). When the United States is the respondent, it still wins 25 percent of the time, a rate that is better than the global average rate of 16.6 percent (Mayeda 2017). In comparison, the EU and Japan have won 0 percent of the cases brought against them, while China has won only 5.3 percent of the time (Mayeda 2017). Nonetheless, because countries may initiate or decline to initiate cases based on their perceived probability of obtaining a favorable outcome in the WTO dispute process, comparisons of WTO dispute statements between countries should be taken with at least some skepticism.

But again, Trump doesn’t care about reality. In fact, keeping voters in a state of suspended disbelief is key to staying in power.

Read more on populism and the suspension of disbelief

Dream States: Why No Resolution To Current Political Conflicts Is Possible

The nostalgia of greatness and the deconstruction of a déjà vu  (NotesFromDisgraceland)

Last Monday, the U.S. struck a tentative bilateral deal with Mexico that was supposed to pave the way for Canada to rejoin trade talks on the way to striking a trilateral agreement by the end of the week. That didn’t pan out for a number of reasons, not the least of which was the Toronto Star’s publication of off the record comments that found Trump telling Bloomberg about Chevy Impalas. And yes, that’s just as absurd as it sounds, in case you haven’t read the story yet.

It’s against this backdrop that BofAML’s Ethan Harris is out with the latest installment of the bank’s “global letter” and in it, he tries to draw some lessons from the “deals” the Trump administration has struck over the past 18 months.

At the outset, it’s important to note that none of the “deals” Harris mentions represent much more than a handshake. And even in the case of the NAFTA talks (which are far more advanced than, say, talks with Europe or the ongoing efforts to pry Pyongyang’s nukes from Kim Jong-Un’s hands), BofAML writes that what’s on the table appears to “respect the three ‘red lines’ from Canada and Mexico [with] small changes in investor protection rules, a heavily watered-down sunset provision and small changes in the content rules required for ‘North American’ autos.”

“Trade rhetoric has been very hot at times, but the actual deals have involved very small concessions that will not have a noticeable impact on trade flows, manufacturing employment or growth”, BofAML’s Harris writes, adding the following color on the Juncker agreement and Trump’s various efforts on the Korean peninsula:

The US-EU auto ceasefire had no meaningful concessions from either side. The EU agreed to continue to do what it is already doing—importing more LNG and soybeans—and the US agreed to continue its investigation of the national security threat from imported autos. The US-South Korea trade deal involved only one real concession: quotas on steel exports to the US. The nuclear deal with North Korea involved only vague promises, with no deadlines or signposts and no end to sanctions.

There is a big difference between a handshake deal and a final deal. None of the agreements so far have been finalized. North Korea has taken no concrete steps towards denuclearization. The Trump-Juncker deal is only a ceasefire and has not stopped further steps toward imposing auto tariffs. The progress on South Korea and NAFTA has been more substantive. However, South Korea has yet to ratify the trade deal it made with the US and there is a risk that it will withdraw from the agreement if the US imposes auto tariffs. And any NAFTA deal will require first a 90-day notice period for the US Congress and then approval from all three countries.

The bank goes on to say that things are progressing as you’d expect in terms of the U.S. seemingly zeroing in on China. Specifically, BofAML expects just two more major escalations on the trade front this year, the first being the imposition of tariffs on an additional $200 billion in Chinese goods and the promised retaliation from Beijing in the form of differentiated duties on $60 billion in U.S. products.

But the real kicker from BofAML’s note comes when Harris explains why none of this makes any difference and why, as noted last weekend in the “dream states” post linked above, the tensions are likely persist, not only because Trump needs to be perpetually at odds with someone, but also because U.S. fiscal policy is working at cross purposes with the trade war (a manifestation of the “dollar insanity loop“). Here’s BofAML:

We continue to view this as a ‘cold war’ that includes periodic flash points, but continues indefinitely. The US Trade Representative has a huge laundry list of trade complaints. We also expect deals to be reassessed in light of progress on reducing trade imbalances, or the lack thereof. Keep in mind that the kinds of deals we have seen thus far are unlikely to stop the natural increase in the trade deficit (Chart 2).


Strong, fiscally-fueled growth means strong imports, and US macro policy is encouraging a stronger dollar. Moreover, the trade balance is merely the flip side of a more fundamental imbalance of high US spending relative to income. Hence, like squeezing on a balloon, attempts to contain the deficit in one area can cause it to increase in other areas. Our advice to clients: “keep your seatbelts fastened in case of trade turbulence.

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