Trump’s Tariffs, Once Seen as Leverage, May Be Here to Stay

WASHINGTON — President Trump’s tariffs were initially seen as a cudgel to force other countries to drop their trade barriers. But they increasingly look like a more permanent tool to shelter American industry, block imports and banish an undesirable trade deficit.

More than two years into the Trump administration, the United States has emerged as a nation with the highest tariff rate among developed countries, outranking Canada, Germany and France, as well as China, Russia and Turkey. And with further trade confrontations brewing, the rate may only increase from here.

On Tuesday, the president continued to praise his trade war with China, saying that the 25 percent tariffs he imposed on $250 billion worth of Chinese goods would benefit the United States, and that he was looking “very strongly” at imposing additional levies on nearly every Chinese import.

I think it’s going to turn out extremely well. We’re in a very strong position,” Mr. Trump said in remarks from the White House lawn. “Our economy is fantastic; theirs is not so good. We’ve gone up trillions and trillions of dollars since the election; they’ve gone way down since my election.”

He called the trade dispute “a little squabble” and suggested he was in no rush to end his fight, though he held out the possibility an agreement could be reached, saying: “They want to make a deal. It could absolutely happen.” Stock markets rebounded on Tuesday, after plunging on Monday as China and the United States resumed their tariff war.

Additional tariffs could be on the way. Mr. Trump faces a Friday deadline to determine whether the United States will proceed with his threat to impose global auto tariffs, a move that has been criticized by car companies and foreign policymakers. And despite complaints by Republican lawmakers and American companies, Mr. Trump’s global metal tariffs remain in place on Canada, Mexico, Europe and other allies.

The trade barriers are putting the United States, previously a steadfast advocate of global free trade, in an unfamiliar position. The country now has the highest overall trade-weighted tariff rate at 4.2 percent, higher than any of the Group of 7 industrialized nations, according to Torsten Slok, the chief economist of Deutsche Bank Securities. That is now more than twice as high as the rate for Canada, Britain, Italy, Germany and France, and higher than most emerging markets, including Russia, Turkey and even China, Mr. Slok said.

[A trade war with China could be long and painful.]

The shift is having consequences for an American economy that is dependent on global trade, including multinational companies like Boeing, General Motors, Apple, Caterpillar and other businesses that source components from abroad and want access to growing markets overseas.

While trade accounts for a smaller percentage of the American economy than in most other countries — just 27 percent in 2017, compared with 38 percent for China and 87 percent for Germany, according to World Bank data — it is still a critical driver of jobs and economic growth.

Mr. Trump and his economic advisers say the administration’s trade policy is aiding the American economy, companies and consumers. And despite the tough approach, the administration continues to insist its goal is to strike trade agreements that give American businesses better trade terms overseas.

At a briefing last week, Steven Mnuchin, the Treasury secretary, praised the president’s trade policies for helping economic growth thus far and said the administration supports “free and fair reciprocal trade.”

But if the goal really is freer trade, the administration has never been further from achieving that goal than it is today, said Chad Bown, a senior fellow at the Peterson Institute for International Economics.

“They’re heading in the opposite direction,” Mr. Bown said.

Beyond an update to the United States agreement with South Korea, no other free trade deals have been finalized. Mr. Trump’s revisions to the North American Free Trade Agreement with Canada and Mexico still await passage in Congress, while trade talks with the European Union and Japan have been troubled from the start, with governments squabbling over the scope of the agreement.

Mr. Trump came into office fiercely critical of the failure of past administrations and global bodies like the World Trade Organization for failing to police China’s unfair trade practices. He withdrew the United States from multilateral efforts like the Trans-Pacific Partnership, a multicountry trade deal negotiated by President Barack Obama, and the Paris climate accord.

That shift has created an opening for other countries to step forward as global leaders, including Europe, Japan and China, despite its position as one of the world’s most controversial economic actors. On Tuesday, China submitted its proposals for overhauling the World Trade Organization, including broadening the privileges of developing countries, a status that China claims for itself.

Advocates of free trade fear that governments in India, China, South Africa and elsewhere might find Mr. Trump’s model of protectionism appealing and erect even higher barriers to foreign companies.

While the United States and China could still strike a trade deal that would roll back many of their tariffs, that likelihood has appeared to diminish in recent weeks.

Progress toward a deal came to a sudden halt this month when China backtracked on certain commitments and Mr. Trump threatened to move ahead with higher tariffs.

“We had a deal that was very close, and then they broke it,” he said on Tuesday.

The two sides continue to disagree over whether the deal’s provisions must be enshrined in China’s laws. But they are also arguing over Mr. Trump’s tariffs, which were intended to prod the Chinese to agree to more favorable trade terms for the United States. China insists those tariffs must come off once a deal is reached, but the Trump administration wants some to remain in place, to ensure China abides by its commitments.

In an interview on Tuesday on CNBC, Senator Marco Rubio, Republican of Florida, supported the administration’s tactics.

“Ideally, you wouldn’t have tariffs,” he said. But the United States already faces “all kinds of impediments” to gaining access to the Chinese marketplace, including tariffs, subsidization of industries and theft of intellectual property.

“We already have a series of hundreds of billions of dollars of Chinese penalties against the United States which are threatening our long-term viability,” Mr. Rubio said.

Canada and Mexico have repeatedly pressed the administration to lift its tariffs on steel and aluminum now that negotiations over the Nafta revision are done. The three countries signed the United States-Mexico-Canada Agreement in November, but the pact awaits passage in all three legislatures.

The Trump administration still views the tariffs as a source of leverage in case it needs to demand final changes to the deal from Canada and Mexico. But Canadian and Mexican officials — as well as many in Congress — say the levies are actually an impediment because all three legislatures will refuse to finalize the deal while they are in place.

A similar standoff could soon unfold with the European Union, which Mr. Trump has accused of being a “brutal trading partner” and being “tougher than China.”

The president, who wants Europe to open its markets to American farmers and companies, has already imposed tariffs on European metals and is threatening to levy a 25 percent tax on imports of European cars and car parts if the bloc does not give the United States better trade terms.

Europe has absorbed Mr. Trump’s steel and aluminum tariffs without too much damage. But car tariffs would strike the most important industry in Germany, which has the Continent’s biggest economy. European officials would regard car tariffs as a breach of a truce they worked out last year with Mr. Trump, and they have said they would refuse to negotiate as long as car tariffs were in place.

Cecilia Malmstrom, the European commissioner for trade, repeated on Monday that the European Union had prepared a list of American products worth $22.5 billion — including ketchup, suitcases and tractors — that would face immediate retaliatory tariffs.

“We’re prepared for the worst,” Ms. Malmstrom said in an interview with the Süddeutsche Zeitung newspaper in Germany.

European officials still hold out hope that Mr. Trump will see them as allies and not geopolitical rivals like the Chinese. And he could ultimately delay the decision and extend the Friday deadline for countries that are in trade talks with the United States.

But the president shows no signs of backing away from his stance that tariffs have helped the United States.

On Tuesday morning, Mr. Trump posted on Twitter that tariffs had rebuilt America’s steel industry and were encouraging companies to leave China, making it “more competitive” for buyers in the United States.

“China buys MUCH less from us than we buy from them, by almost 500 Billion Dollars, so we are in a fantastic position,” Mr. Trump tweeted. “Make your product at home in the USA and there is no Tariff.”

The Biggest Emerging Market Debt Problem Is in America

A decade after the subprime bubble burst, a new one seems to be taking its place in the market for corporate collateralized loan obligations. A world economy geared toward increasing the supply of financial assets has hooked market participants and policymakers alike into a global game of Whac-A-Mole.

.. Historically, there has been a tight positive relationship between high-yield US corporate debt instruments and high-yield EM sovereigns. In effect, high-yield US corporate debt is the emerging market that exists within the US economy (let’s call it USEM debt). In the course of this year, however, their paths have diverged (see Figure 1). Notably, US corporate yields have failed to rise in tandem with their EM counterparts.
.. In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the Securities Industry and Financial Markets Association, new issues of “conventional” high-yield corporate bonds peaked in 2017 and are off significantly this year (about 35% through November). New issuance activity has shifted to the CLO market, where the amounts outstanding have soared, hitting new peaks almost daily.
.. These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences.
.. Furthermore, not only are the newer issues coming from a lower-quality borrower, the covenants on these instruments – provisions designed to ensure compliance with their terms and thus minimize default risk – have also become lax. Covenant-lite issues are on the rise and now account for about 80% of the outstanding volume.
.. As was the case during the heyday of mortgage-backed securities, there is great investor demand for this debt, reminiscent of the “capital inflow problem” or the “bonanza” phase of the capital flow cycle. A recurring pattern across time and place is that the seeds of financial crises are sown during good times (when bad loans are made). These are good times, as the US economy is at or near full employment.
.. The record shows that capital-inflow surges often end badly. Any number of factors can shift the cycle from boom to bust. In the case of corporates, the odds of default rise with
  1. mounting debt levels,
  2. erosion in the value of collateral (for example, oil prices in the case of the US shale industry), and
  3. falling equity prices.

All three sources of default risk are now salient, and, lacking credible guarantees, the CLO market (like many others) is vulnerable to runs, because the main players are lightly regulated shadow banking institutions.

.. A decade after the subprime bubble burst, a new one seems to be taking its place – a phenomenon aptly characterized by Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas as “Financial ‘Whac-a-Mole.’

.. Like the synchronous boom in residential housing prior to 2007 across several advanced markets, CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has predictably led to a surge in issuance(up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of buyers. The networks for financial contagion, should things turn ugly, are already in place.

 

Don’t Believe the Hype About Trump’s Trade Deal with the European Union

maybe intending it as a compliment—craftily packaged together a number of small concessions and previously agreed upon initiatives which allowed Trump and his allies to hail the agreement as an American win. “This is a real vindication of the President’s trade policy,” Wilbur Ross, the Secretary of Commerce, told reporters as he travelled to the Midwest with Trump on Thursday.

In reality, the Europeans gave up little except their prior refusal to negotiate under threat.

.. Juncker’s pledge that the E.U. would import more U.S.-grown soybeans, for instance, formalized something that was likely to happen anyway. After Trump imposed hefty tariffs on Chinese steel and aluminum products, earlier this year, China responded by imposing equally hefty levies on U.S. agricultural exports, including soybeans. That made American soybeans prohibitively expensive for Chinese buyers

.. Brazil, traditionally the E.U.’s largest supplier, is now shipping more of its produce to China, encouraging the Europeans to shop elsewhere. “While China concentrates its purchases on Brazil, the rest of the world turns to the U.S.,

.. Looking years ahead, Norway’s reserves have plateaued, and the Europeans will eventually need alternative suppliers. U.S. producers could well be among them. But, again, such a result may well have occurred without Wednesday’s agreement.

.. hopefully nobody tells Trump that these concessions were largely illusory.

.. Both sides provide subsidies or tax breaks to politically powerful groups, such as farmers, and to industries they deem strategically important, such as commercial-aircraft manufacturers in the E.U. and military contractors in the U.S. These policies proved sticking points when the Obama Administration and the E.U. engaged in unsuccessful negotiations about a transatlantic free-trade treaty, and they will almost certainly prove to be sticking points again.

.. One way to think of the outcome of Wednesday’s meeting is that Trump is happy to declare a victory whenever he can get away with it. However, a more optimistic reading of this week’s developments is that Trump has finally realized that he needs the E.U.’s support in his campaign against China’s much more overtly mercantilist trade practices, and that, in this area at least, the United States and Europe have common interests.

.. E.U. officials wanted to persuade the Trump Administration to pursue grievances against China through the World Trade Organization (W.T.O.), the global ruling body for trade disputes, rather than by dishing out tariffs unilaterally. The article also noted that Robert Lighthizer, the U.S. Trade Representative, a key player in the Trump orbit, is not necessarily averse to this idea.

.. “Comfortingly, there is mounting evidence that Mr Lighthizer is not out to torpedo the WTO,”

.. If Lighthizer could persuade Trump to go down this route, and his negotiating team could construct a common front with the E.U., there is a possibility that, sometime in the future, China might be persuaded to make some real concessions in areas like opening its markets and respecting intellectual-property rights. If that did occur, the Trump Administration could claim a genuine victory.

 

The Murder-Suicide of the West

Trump forcefully caps off years of deterioration in European-American ties.

.. This trans-Atlantic partnership was a vast historical accomplishment, a stumbling and imperfect effort to extend democracy, extend rights, extend freedom and build a world ordered by justice and not force. Since 1945 it is the thing we have all taken for granted.

Over the weekend, Trump ripped the partnership to threads. He said the European Union is our “foe.” On Monday, Trump essentially sided with Vladimir Putin, who has become the biggest moral and political enemy of the Euro-American relationship. Trump essentially dropped a project that has oriented American culture and policy for centuries. He pointed us to a world in which the central ethos is that might makes right.

.. Progressives fell into the poisonous trap of racialism. They looked at the glories of Aristotle, Shakespeare and Mozart, and the most interesting thing they had to say about them was that they were dead white males. Future historians will marvel at how sophisticated people willfully made themselves so simple-minded. Eurocentrism became a code word for colonialism, oppression and privilege, taking a piece of European history for the whole of it.

Europeans didn’t help. In the wake of the Cold War, they have dedicated themselves to a post-nationalist project that is too top-down and technocratic and is now crumbling.

.. Trump could have gone to last week’s NATO summit and taken credit only for increased European military spending. Instead, he moved the goal posts, humiliated the Europeans, reasserted his trade war talk and made it impossible for European leaders to do anything that might seem to support him. These are the actions of a man who wants the alliance to fail.

His embrace of Putin Monday was a victory dance on the Euro-American tomb.

“This is not just another family quarrel,” Kagan writes. “The democratic alliance that has been the bedrock of the American-led liberal world order is unraveling. At some point, and probably sooner than we expect, the global peace that that alliance and that order undergirded will unravel, too. Despite our human desire to hope for the best, things will not be okay.