Trade War Casualties

They say the first casualty of war is truth. In the context of a shooting war where nations are conducting armed struggle against each other, that is certainly correct. There are seldom identical explanations for the origins of any war. Like small children found fighting and separated by their parents, cries of "He started it. No, he started it" ring out from political leaders on both sides. As the war continues, both governments need to keep up the morale of their armed forces and civilian populations and that sometimes requires less than candid reports on how events are unfolding.

Trump’s trade war killed off truth right from the outset with his ridiculous assertion that "trade wars are good, and easy to win". But there have also been two other early deaths: rationality and predictability. Trump has a transactional approach to every issue, so he is always on the lookout for winners and losers to make sure he is a winner. In his simplistic world, there are no situations where both sides could emerge victorious. But in the adult world, not only do we find win-win situations, we actively seek to create them because we have learned from decades of experience that only when an arrangement is mutually beneficial is it sustainable.

This is particularly true in the context of trade between nations. The rampant protectionism of the 1930s impoverished all sides. That is why after the second world war the international community, led by the United States, developed a rules-based trading system which evolved into the World Trade Organisation. Trump is attacking the WTO, doing everything possible to undermine its operations, because he thinks it stops him from "winning" even though the US has in fact been successful in most of the complaint cases it has brought to the organisation for adjudication. But the process is too slow for the short-fused orange-haired reality TV star. He only wants dramatic, immediate "wins" for which he can take personal credit.

Trump’s focus has therefore been on bilateral rather than multilateral trade because he thinks he can use the economic might of the world’s largest economy to get a series of "better deals" with individual trade partners. Any relationship in which the USA incurs a deficit is unacceptable because it represents a "loss". The idea of earning surpluses with some nations offset by deficits with others is too complicated for him to grasp.

Let me bring it down to an individual level to explain. I run a deficit with my barber. I will always have a deficit with my barber, in Trump’s terms I will always "lose". That is because he cuts my hair regularly and I pay him money, but he never buys any services from me. A similar situation prevails with the supermarket where I do the weekly shopping, and the fresh market where we get our fruit, vegetables and fresh meat. Deficit, deficit, deficit, "loss" "loss" "loss". Fortunately for me, other people do require the services I provide and I get paid without buying anything from them in return. So I have surpluses in some areas and deficits in others.

Life in the twenty first century is like that for nearly everyone except perhaps subsistence farmers who consume what they produce, buy nothing from outside and have no surplus to sell. Our economic selves dwell in a sophisticated society where individuals buy and sell a wide range of products and services to each other using portable wealth – money. The days of direct barter ended for most societies several centuries ago. A moment’s thought – a brief period of rationality – leads inexorably to the conclusion that modern life can only work in this way. Anything else would be impossible and simply fail.

As it is at the individual level, so it is with nations. Some countries are endowed with abundant mineral resources and can sell them either "raw" or after processing. Others are blessed with fertile soil and can produce agricultural surpluses relatively easily. Still others compensate for lack of these things with ingenuity and application, by developing advanced technology or by creating business friendly environments. Think Singapore and our very own Hong Kong.

Rationality has been a casualty, and so too has predictability. There are two forces at work here: one is the fact that there are always unforeseen consequences in life; the other is Trump’s very short attention span which causes him to flit from project to project if there is no sign of immediate movement.

Who could have forecast that the American agriculture sector would need a $12 billion bailout shortly after the trade war began as other countries responded to the US imposition of tariffs on spurious national security grounds? Who could have foreseen that a Republican Party dedicated to free trade would remain supine as its leader jettisoned all past policy and principle? One moment there were going to be high tariffs on imported cars to punish Europe for alleged unfair trade practices, the next minute Trump and the EU’s Jean-Claude Juncker are cuddling on the White House lawn and promising to work towards a zero tariff future. One minute ZTE is about to go bust because it has been cut off from the supply of advanced micro processors it needs to survive, the next it has paid a penalty and been allowed to soldier on. One minute Qualcomm’s acquisition of NXP was proceeding smoothly to completion, the next it has failed to secure routine regulatory approvals.

In such a volatile setting, the only thing we can confidently forecast is that there will be other events which nobody predicted. It is vital that leaders on all sides remain calm, and behave in a statesmanlike manner. It is no exaggeration to say that the prosperity of the whole world is at stake.