Trump’s Trade Levers Test Long-Term U.S. Alliances

President’s threats against Mexico and others can work in the short run, but global rules could be strained

President Trump’s threat to hit Mexico with tariffs over immigration is the latest and most dramatic step in the weaponization of international economic levers.

In the short run, these moves may serve the U.S. interest. But in the long run, they could do the opposite, by emboldening everyone to ignore international conventions and rules that reserved tariffs and sanctions for specific purposes. The U.S. may also find its “soft power,” the ability to get other countries to cooperate out of shared mutual interest rather than threat, diminished.

Mr. Trump is not the first president to use trade levers to achieve unrelated goals. Congress has granted the president authority to do so in successive statutes, starting with the Trading with the Enemy Act of 1917. These laws enabled Presidents Roosevelt to declare a bank holiday in 1933, Nixon to impose a 10% tariff on foreign imports and Reagan to sanction Nicaragua.

But Mr. Trump’s trade maneuvers have been different in several ways. First, the extent is unprecedented: Last year, he used national-security justifications to impose tariffs on steel and aluminum imports, even from allies, and is threatening the same with autos. He then doubled tariffs on Turkish steel to force that country to release an American pastor. He has imposed new sanctions that would severely penalize any foreign or U.S. company that does business with Iran. A new order barring U.S. companies from doing business with China’s Huawei Technologies Co. because it could be a conduit for spying is ensnaring foreign companies as well.

“There’s nobody like this in the last century,” said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics.

Second, the president has used these powers to achieve narrow goals with little connection to the economic imbalances or national-security threats for which they were intended. In 1985, Mr. Reagan imposed sanctions on Nicaragua using the International Emergency Economic Powers Act of 1977, the same authority Mr. Trump invoked for his tariffs on Mexico. But the U.S. regarded Nicaragua as a hostile client-state of the Soviet Union. Similarly, Mr. Reagan imposed sanctions on construction of a natural-gas pipeline from the Soviet Union to Western Europe for fear it would make American allies vulnerable to Soviet economic blackmail.

Mr. Trump’s actions don’t flow from an overarching geostrategic vision: His tariffs on imports of steel, aluminum and, potentially, autos are designed primarily to shore up favored domestic industries. His threat toward Mexico came because he says it hasn’t done enough to stem the flow of Central American asylum seekers traveling north to the U.S. border. And while his tariffs on China and his sanctions on Huawei superficially resemble Mr. Reagan’s efforts to contain the Soviet Union, Mr. Trump’s calculus is more transactional. He has suggested, for example, that the case against Huawei, which U.S. officials say is motivated by national security, might be dropped as part of a trade deal.

In the near term, these tactics can work. His assumption that other countries will prioritize retaining access to the U.S. market has generally proved correct. Mexico has so far been restrained in responding to his tariff threat. Though U.S. allies haven’t joined its sanctions on Iran—designed to halt all its nuclear activity and support for Syria’s government and groups the U.S. considers terrorists—the threat of American penalties has dissuaded their companies from resuming business there. As a result, Iran’s economy is cratering. Similarly, several Western European companies have suspended business with Huawei even as their governments don’t view it as the threat the U.S. does.

Yet in the long term, these actions, with other trends, likely will weaken ties between the U.S. and its allies and the security and leverage all derive from acting together.

The Pew Research Center has found a growing share of Republican voters, like Mr. Trump, are skeptical that openness to the world or deference to allies serve U.S. interests. And many countries are moving in a similar direction. Nationalists now govern India, Israel, Brazil, the Philippines, Poland, Hungary and Italy, and Chinese President Xi Jinping espouses a more bellicose, China-first agenda than his predecessors. Because they define national interest in the same transactional terms as Mr. Trump, they are more likely to defy the U.S. if it suits their immediate needs. The Philippines, for example, has courted Chinese investment, and Italy has welcomed Huawei. Despite Mr. Trump’s personal fondness for Indian Prime Minister Narendra Modi, India has sought to circumvent the U.S. crackdown on trade with Iran, while the U.S., unhappy with Indian protectionism, has withdrawn tariff preferences from India.

Even countries still ideologically allied with the U.S. will question the value of doing deals if, as with Mexico, they fail to prevent unilateral punishment for nontrade matters.

“As Trump shreds international trust in the U.S., friendly countries have to start preparing Plan Bs: alternatives to relying on America,” said Robert Zoellick, the U.S. trade representative under George W. Bush and later World Bank president. “This shift won’t occur overnight, but the erosion is increasing rapidly, and the negative dynamic weakens U.S. influence.”

The Iran sanctions are an early sign of this diminished leverage. Other countries, tired of how the U.S. uses the dollar’s role in global payments to enforce unilateral sanctions, are devising workarounds. The U.K., Germany and France are building an alternative payments system for dealing with Iran, which has meanwhile begun expanding its stockpile of enriched uranium.

The political trends weakening U.S. leverage with the world are compounded by economic trends. Since 1985, the U.S. share of global gross domestic product has shrunk to 24% from 35%, while China’s has grown to 16% from 3%. This means other countries have less to gain by cooperating with the U.S. and more to lose from antagonizing China.

If U.S. tariffs, real and threatened, shrink trade and investment flows, that would further diminish economic incentives to cooperate, while also weakening the constituencies in other countries favoring openness and integration with the U.S.

But that argument can’t be applied to other countries targeted by Mr. Trump. Aaron Tornell, a Mexican-born economist at the University of California, Los Angeles, noted that since the 1980s, Mexico has turned away from left-wing isolationism toward liberalized markets and closer cooperation with the U.S. on trade and security issues such as narcotics. Advocates in Mexico of this integration argued American presidents and big business would prevent the U.S. from using its enhanced leverage to punish Mexico.

Mr. Trump’s policies could “destroy the political foundations of a country that has been following liberal economic policies for the last 30 years and give more power to those who want to be like Venezuela,” Mr. Tornell said.

From Greg Ip: In Davos, Nobody Knows Anything, and That’s the Problem

The raison d’être of Davos is intelligence gathering. Hedge funds go to chat up CEOs, CEOs go to chat up politicians, politicians go to chat up donors, and journalists go to chat up everyone.

This year, all that chatting is yielding distressingly little intelligence, and that helps to explain why the mood here, and indeed over the world economy, seems so dark.

Here are the questions people here most want answered: How will Brexit be resolved? No one knows, certainly not British parliamentarians or cabinet ministers. When will the federal government shutdown ends? Nobody knows. Will the U.S. and China reach a deal to avoid all-out trade war by March 2? Nobody knows. This isn’t because no one from the Trump administration is here; if they were, they wouldn’t know, either (or so the people here who have dealt with Trump have concluded).

In the economy uncertainty is, of course, a constant. Businesses, markets and investors are used to working with probabilities rather than certainties, whether it’s the outlook for profits or interest rates. But with today’s problems you can’t even assign probabilities. Since Mr. Trump himself does not seem to know what he wants out of the China trade talks, how can you judge the odds and provisions of a deal?

How do you assign a probability to Mr. Trump or Democrats breaking a promise to their bases, as would be necessary to end the partial federal shutdown? Shutdowns used to treated as localized natural disasters, Harvard economist Ken Rogoff noted on a panel moderated by Journal editor Matt Murray: painful for those involved but without national repercussions. This shutdown, he said, is like one local disaster after another, each worse than the one before. In such a situation, “We don’t know what happens.”

As for Brexit, French finance minister Bruno Le Maire, asked about reopening the European Union’s deal with Britain, shrugged: “It’s up to the British people and British politicians to decide what they want.”

“Nobody knows anything,” screenwriter William Goldman once said of making hit movies. Too bad he died last year; he could have taught Davos a thing or two.

A Hedge-Fund Titan Puts Away the Punch Bowl

Ray Dalio of Bridgewater sees Americans’ debt as a coming drag on growth and markets

.. While he doesn’t see another crisis in the offing, he does see the same underlying stresses at work: Americans have accumulated far more debt than they have assets and income to support.

.. Not only will this drag on growth and markets, it will leave the economy acutely vulnerable to higher interest rates. The relevant parallel, he says, is not the early 1930s, when the economy imploded, but the late 1930s when the Federal Reserve tightened monetary policy and inadvertently extended the Great Depression. Today, the central bank must balance the short-term need for higher interest rates to contain inflation against the long-term need for low rates to work off the debt overhang and sustain high asset prices.

.. “It may not be a problem in the next year or two, but the risk of not getting it right increases with time.”

.. “We ‘finance people’ see the world very differently from the way economists do,”

.. The views of finance people tend to be shaped more by trading experience than by formal economics. They assign much more weight to financial factors such as debt, asset prices and cash flow than do economists who emphasize “real economy” factors such as employment and investment

.. Finance people are wary of how macroeconomic data obscures crucial details of individual companies and households. Some economists do think like finance people, such as former Fed Chairman Alan Greenspan, but they are in the minority.

.. since the 1970s, inflation-adjusted interest rates have steadily declined while investors have accepted ever lower compensation for risks such as bankruptcy, recession and volatility (i.e. the “risk premium” has declined). This directly raises asset values and indirectly lifts growth by spurring borrowing.

.. His team estimates this has contributed three percentage points a year to stock returns since the 1970s while boosting private and government debt to 325% of gross domestic product.

.. In 2007, Mr. Dalio’s team concluded that the cost of servicing Americans’ debts was growing faster than their cash flows, creating the conditions for a crisis.

.. By slashing short-term interest rates to zero and buying bonds to push down long-term rates, it engineered the right combination of economic growth, debt write-offs and low interest rates necessary to start the painful process of “deleveraging,” or working off all that debt.

.. it can’t raise them much either, or debt servicing​would swamp cash flow and asset prices would sink. Thus Mr. Dalio foresees years of low interest rates, and while he thinks stocks are appropriately valued, he thinks returns to a typical stock-bond portfolio over the next decade will be around zero after inflation and taxes.

.. his biggest worry is that lower corporate taxes and higher stock prices do nothing for the bottom 60% of households who own almost no assets and whose stagnant wages are the mirror image of expanding profit margins, feeding resentment and political polarization. Says Mr. Dalio: “If we do have an economic downturn, I worry we will be at each other’s throats.”

We Are Not the World

From Brexit to Trump to the rise of nationalist parties across Europe, the old division between left and right is giving way to a battle between self-styled patriots and confounded globalists

 Supporters of these disparate movements are protesting not just globalization—the process whereby goods, capital and people move ever more freely across borders—but globalism, the mind-set that globalization is natural and good, that global governance should expand as national sovereignty contracts.

The new nationalist surge has startled establishment parties in part because they don’t see globalism as an ideology. How could it be, when it is shared across the traditional left-right spectrum by the likes of Hillary Clinton, Tony Blair, George W. Bush and David Cameron ?

.. In the 1930s, nationalists were also expansionists who coveted other countries’ territory. Today, Mr. Trump and his ideological allies mostly want to reassert control over their own countries. Their targets are such global structures as the EU, the World Trade Organization, NATO, the U.N. and the North American Free Trade Agreement.

.. Little unites the new nationalists other than their shared antipathy toward globalism. Mr. Trump’s economic program is as far to the right as Ms. Le Pen’s is to the left. Nor do they have credible plans for replacing the institutions of globalization that they want to tear dow

.. In 1957, six European countries signed the Treaty of Rome, creating what would become the EU, hoping that economic and political integration would make war unthinkable.

.. Between 1987 and 2008, total U.S. wages adjusted for inflation rose by 53%, while the profits that U.S. companies earned abroad soared by 347%.

.. President Bill Clinton signed Nafta in 1993 in part to embed a pro-American government in Mexico

.. The late political scientist Samuel Huntington applied the caustic label “Davos man” to those who see “national boundaries as obstacles that thankfully are vanishing.” For globalists, this was a badge of honor, symbolizing not just an outlook but a lifestyle of first-class departure lounges, smartphones and stock options.

.. In 2000, Mr. Clinton blessed China’s entry into the WTO. Echoing Truman, he predicted China’s membership was “likely to have a profound impact on human rights and political liberty.”

It didn’t. China adhered to the letter of its WTO obligations while systematically violating their spirit with discrimination against foreign investors and products and an artificially cheap currency.

.. Economists warned that Italy, Spain and Greece couldn’t compete with Germany without the safety valve of letting national currencies periodically devalue to offset their faster-rising costs. Sure enough, their trade deficits ballooned, but low-cost euro loans at first made them easy to finance. The loans proved unsustainable, and the resulting crisis has still not run its course.

.. Chinese and German trade surpluses could wreak havoc thanks to expanding cross-border finance. To globalists, its growth was as inexorable as that of trade. In early 2008, President George W. Bush’s treasury secretary, Henry Paulson, put out a report arguing that globalization had made much of U.S. financial regulation obsolete. The priority was to maintain “American preeminence in the global capital markets.

.. Globalists were blind to the nationalist backlash in part because their world—entrepreneurial, university-educated, ethnically diverse, urban and coastal—has thrived as whiter, less-educated hinterlands have stagnated.

.. Many globalists now assume that the discontent is largely driven by stagnant wages and inequality. If people are upset about immigration, they reason, it is largely because they fear competition with low-wage workers.

In fact, much of the backlash against immigration (and globalism) is not economic but cultural

.. in the 1980s, economic issues such as taxes and welfare became less important than noneconomic issues such as immigration, terrorism, abortion and gay rights.

..  voters were bothered less by competition from immigrants than by their perceived effect on the country’s linguistic, religious and cultural norms.

.. Europeans’ opposition to immigration was driven less by pocketbook concerns than by worries about how changes to “the composition of the local population” would affect “their neighborhoods, schools and workplaces.”

.. Yet the new nationalism often thrives on xenophobia. Mr. Trump has been criticizing free trade since the 1980s, but his candidacy took off when he started attacking Mexican immigrants and Muslims. American Jewish groups heard unsettling echoes of anti-Semitic conspiracy theories when Mr. Trump accused Mrs. Clinton of meeting “in secret with international banks to plot the destruction of U.S. sovereignty.”

.. In short, there is ample reason for skepticism about whether the new nationalists can prove themselves a genuinely secular, democratic alternative to globalism.

.. That globalization’s winners can compensate its losers makes impeccable economic logic, but it rings hollow among those too old to retrain or move.

.. globalists should not equate concern for cultural norms and national borders with xenophobia. Large majorities of Americans, for example, welcome immigrants so long as they

  • adopt American values,
  • learn English,
  • bring useful skills and
  • wait their turn.

 

Electric Cars Are the Future? Not So Fast

Though they’re no longer ugly, impossibly expensive and impractical, electric vehicles need to out-innovate fossil fuels if they are ever to displace the internal combustion engine

at the current battery cost of $270 per kwh, oil would have to cost more than $300 a barrel​ (in 2020 dollars) to make electric and gasoline equally attractive. If battery costs fall to $100, as Tesla Founder Elon Musk has targeted, oil would have to average $90.

..  an optimistic scenario, where battery costs fall 10% a year starting now and gasoline begins at $5 a gallon, electric vehicles will be competitive in five years. If battery costs fall just 5% a year and gasoline starts at $2.25, it will take more than 20.
.. Electric vehicles are meant to be recharged at night. Economists Joshua Graff  Zivin, Matthew Kotchen  and Erin Mansur note in a 2014 article in the Journal of Economic Behavior and Organization that night is when electricity is most likely to come from burning coal. They estimate electric vehicles account for more carbon dioxide per mile than existing cars in the upper Midwest, where coal-fired plants are more prevalent, and more than comparable hybrids in most of the country.
.. Yet they may not be the most efficient way to combat carbon emissions. A carbon tax, for example, would incentivize conservation and alternative fuels regardless of oil prices.