Brexit’s Advance Opens a New Trade Era

The decisive Conservative victory in Britain leaves no doubt that in today’s global equation, national interests are supreme and globalization is suspect.

The notion that global economic integration amounts to human progress had a good run, dominating the thinking of the powers that be for more than seven decades. But a new era is underway in which national interests take primacy over collective concerns, with trading arrangements negotiated among individual countries.

Britain’s voters made that clear on Thursday in handing an emphatic majority to Prime Minister Boris Johnson and his Conservative Party, all but ensuring that the world’s fifth-largest economy — and a charter member of the international trading system — will proceed with its abandonment of the European Union.

preliminary deal hailed on Friday by the two largest economies, the United States and China, raised the prospect of easing their high-stakes trade animosities. But the nature of their engagement — country to country, not mediated by the World Trade Organization or some other international authority — underscored the principles of the new age.

Britain now faces another complex phase in its tangled European divorce proceedings — negotiations over the terms of its future economic relationship with the Continent. But in one form or another, “getting Brexit done,” the mantra that Mr. Johnson promised and can now deliver, marks a profound change in the world trading system.

In the aftermath of World War II, the victorious Allies built an international order on the understanding that when countries swap goods they become less inclined to trade artillery volleys.

Britain’s departure from the European Union is the clearest manifestation that this idea no longer holds decisive sway. It is not the only one.

The traditional arbiter of international trade disputes, the World Trade Organization, is listing toward irrelevance as countries bypass its channels to impose tariffs. Its appellate body, which adjudicates disputes, has been rendered inoperative by the Trump administration’s blocking of new judges. The panel needs at least three judges to render verdicts, but now has only one.

“The sense that policy moves in one direction, toward more liberalization and more integration, has been replaced by recognition that policy can go backward as well as forward,” said Brad Setser, a senior fellow at the Council on Foreign Relations in New York.

The United States and China together account for more than a third of the global economy, making their wave of escalating tariffs a cause for alarm about diminishing fortunes in nearly every country exposed to international trade — from Germany to South Korea to Mexico.

President Trump has put stock in the unrivaled scale of the American economy in seeking favorable trading arrangements. In his calculus, the United States boasts the advantage in any bilateral trade negotiations and can tilt the rules toward American interests.

This was the logic that prompted Mr. Trump to renounce American participation in the Trans-Pacific Partnership, a trade bloc spanning a dozen countries. It was a project pursued by his immediate predecessor, President Barack Obama, in part to press China to address longstanding complaints that it subsidized key industries, doled out credit to favored companies and manipulated the value of its currency to gain advantage in world markets.

In taking on China, the Obama administration employed the multilateralist mind-set that had guided American policy since the end of World War II. The Pacific trading bloc would set rules on investment, labor and environmental standards. Its members would profit through growing trade, and China would want in. To gain access, China would be forced to adopt the bloc’s rules.

But in Trumpian thinking, multilateralism is for suckers. Shortly after he was sworn in, declaring as his credo “America First,” Mr. Trump ditched the Pacific bloc and weaponized the American market: If China wanted access to the 327 million consumers in the richest country on earth, it would have to buy more American goods and play fair.

On Friday, Mr. Trump cited the preliminary agreement as evidence that his strategy was working. The United States would sharply reduce the tariffs it had affixed to Chinese goods, while China promised to buy more American farm products and respect intellectual property. Mr. Trump called it “an amazing deal for all.”

But economists said the announcement of new farm purchases reflected goods that China was already buying. Even as the scrapping of the next wave of tariffs weighed as positive for the global economy, few were proclaiming the advent of enduring peace. The United States and China have descended into such an adversarial state that they are likely to continue seeking alternatives to exchanging goods and investment. Companies that make goods in China will face pressure to explore other countries, posing disruption to the global supply chain.

China’s leaders have come to construe trade hostilities as part of an American bullying campaign engineered to suppress their national aspirations and deny the country its rightful place as a superpower. Nationalist sentiments and security concerns have become intertwined with trade policy, complicating the pursuit of a final deal.

Now Britain, in leaving the European bloc, embarks on a strategy aimed at securing bilateral trading arrangements with major economies, from the United States and China to Australia and India.

Trade deals are complex and difficult. They entail prying open new markets for exports in exchange for exposing domestic companies to new competitors. Powerful interest groups complain. Deals take years.

Arithmetic reveals that no combination of trade deals is likely to compensate Britain fully for what it stands to lose in walking away from the European single marketplace, a territory stretching from Greece to Ireland.

Britain sends nearly half of its exports to the European Union, a flow of goods imperiled by Brexit. Britain’s appeal as a headquarters for multinational companies will be undermined as it finds itself separated from the Continent by a revived border.

The fraying of international trading arrangements and the rise of nationalist imperatives have been driven by intensifying public anger in many countries over widening economic inequality, and the perception that trade has been bountiful for the executive class while leaving ordinary people behind.

In Britain, struggling communities used the June 2016 referendum that unleashed Brexit as a protest vote against the bankers in London who had engineered a catastrophic financial crisis, and who then forced regular people to absorb the costs through wrenching fiscal austerity.

In the United States, Mr. Trump’s political base has rallied to his trade war. In ItalyFrance and Germany, furious popular movements have fixed on trade as a threat to workers’ livelihoods, while embracing nationalist and nativist responses that promise to halt globalization.

“The era of freewheeling markets and liberalism is ending,” said Meredith Crowley, an international trade expert at the University of Cambridge in England. “People are dissatisfied with the complexity of policy and this feeling that those who have the levers of policy are somehow out of their reach.”

Economists see perils in this unfolding era, especially as governments champion national industries at the expense of competition. They point to history, notably the Great Depression, which was deepened by a wave of tit-for-tat trade protectionism kicked off by the United States through the Smoot-Hawley Tariff Act of 1930.

ImageProducts in transit at Felixstowe, a container port in southeast England. 
Credit…Ben Quinton for The New York Times

The law sharply raised tariffs on a vast range of agricultural and factory goods, prompting American trading partners to respond. As world trade disintegrated, nationalist rage spread, culminating in the brutalities of World War II.

The British election, and the splintering of the European trading bloc, amounts to the most consequential upsurge of economic nationalism in generations.

“Since Smoot-Hawley, I don’t think we have seen something as dramatic as this,” said Swati Dhingra, an economist at the London School of Economics.

One major variable has gained clarity: Congressional Democrats and the Trump administration this week hailed an accord that clears passage of the renegotiation of the North American Free Trade Agreement, the deal that has allowed some $1.2 trillion worth of goods a year to be exchanged freely across the United States, Canada and Mexico.

Yet on another front, Mr. Trump has threatened to impose tariffs on imported automobiles, a step that would be especially disruptive in Germany, Europe’s largest economy. Germany sells far more goods to the United States than it imports, drawing the ire of the American president.

Mr. Trump has openly warned that he could cite a national security threat as justification for auto tariffs. Trade experts have derided that strategy as an affront to the norms of the international trading system.

Last month, Mr. Trump allowed a self-imposed deadline to lapse without imposing auto tariffs. But he has left a major international industry guessing about what happens next.

Image
A cattle ranch near Lifford, Ireland. Economic integration has allowed goods to flow seamlessly from one end of Europe to another.
Credit…Andrew Testa for The New York Times

Since Britain shocked the world with its vote to abandon the European Union, its political institutions have tangled themselves in knots trying to decide what to do with their nebulous mandate to leave. Businesses have deferred hiring and investments, awaiting clarity on future trading terms.

The uncertainty has already exacted significant costs, and far beyond Europe, according to a new paper by Tarek Hassan, an economist at Boston University, and three European accounting experts, Stephan Hollander, Laurence van Lent and Ahmed Tahoun.

Every year since the referendum, the average company in Ireland — which trades heavily with Britain — has seen its growth in investment reduced by 4.2 percent, and hiring is 15 percent less than it otherwise would have been because of uncertainty, the paper concludes. Yet even across the Atlantic, the average American company has seen investment growth limited by 0.5 percent a year and hiring slowed by 1.7 percent.

“There is already a significant drop in employment as a result of the risks of Brexit,” Mr. Hassan said.

Some analysts suggested that the election enhanced the possibility that Mr. Johnson would pursue a softer form of Brexit, keeping Britain closer to the European market. His majority is so comfortable that he need not worry about alienating the hard-liners in his party who favor a clean break with Europe.

But some alteration now lies ahead. If Brexit uncertainty has been damaging, what replaces it is the near certainty of weaker economic growth and diminished living standards.

“It’s going to have massive implications,” Mr. Hassan said.

Trump, E.U. announce deal to avert escalation of trade tensions

  • The E.U. charges a 10 percent tariff on imports of U.S. automobiles, and the United States has a
  • 2.5 percent tariff on European cars.
  • The United States also charges a 25 percent tariff on light truck and SUV imports from other countries.

.. The disharmony within the White House is spilling into public view, something that appears to be bothering Trump. On Wednesday, White House budget director Mick Mulvaney said at a CNBC event that he and National Economic Council Director Larry Kudlow were at odds with others on how to proceed on trade but that Trump made the ultimate decisions on his own.

.. A tweet suggests Trump is irked by people questioning his approach.

“When you have people snipping at your heels during a negotiation, it will only take longer to make a deal, and the deal will never be as good as it could have been with unity,” he wrote Wednesday . “Negotiations are going really well, be cool. The end result will be worth it!”

European leaders are indignant and defiant over Trump’s G-7 statement. But they’re not surprised.

“By portraying him as the naughty boy in the room, he will stick even more to his behavior and it will get worse,” said Röttgen, who is a member of Merkel’s center-right Christian Democratic Union. “We have to ignore his behavior and concentrate on what is left of the substance of the transatlantic relationship.”

.. But Röttgen derived at least some hope from Trump’s proposal for entirely tariff-free trade among allies. Although Trump coupled the idea with a threat, and most experts see the notion as far-fetched, Röttgen said it is at least a basis for discussion.

.. Germany has the most to lose from a trade war with the United States. The United States had a $151 billion trade deficit in goods with the European Union last year. Germany alone, with its high-end automobile and appliance exports, accounted for $64 billion of that.

.. there were signs among otherwise frustrated allied leaders that they see Trump and his “America First” agenda as an aberration and not necessarily as expressive of a new reality.

Macron emphasized his belief that Trump’s vision of America was at odds with American values.

.. Trump allies allegedly told the Telegraph newspaper that the U.S. president had grown weary of May’s “schoolmistress tone.”

.. Trump had called for Russia to be readmitted into the G-7 group, much to the dismay of leaders of Germany, Britain and France.

.. Italian Prime Minister Giuseppe Conte

.. said on Twitter that Russia’s return to the group was “in the interests of everybody.”

.. “every move made by the premier has been conceived so as to break the European front and attempt to build an anti-EU axis with Trump.”

Trump’s Manchurian Trade Policy

Remember “The Manchurian Candidate”? The 1959 novel, made into a classic 1962 film (never mind the remake), involved a plot to install a Communist agent as president of the United States. One major irony was that the politician in question was modeled on Senator Joe McCarthy — that is, he posed as a superpatriot even while planning to betray America.

.. Both the international rules and domestic law — Article XXI and Section 232, respectively — let the U.S. government do pretty much whatever it wants in the name of national security.

.. If the U.S. or any other major player began promiscuously using dubious national security arguments to abrogate trade agreements, everyone else would follow suit, and the whole trading system would fall apart.

.. But Trump is different. He has already imposed tariffs on steel and aluminum in the name of national security, and he is now threatening to do the same for autos.

.. The idea that imported cars pose a national security threat is absurd. We’re not about to refight World War II, converting auto plants over to the production of Sherman tanks. And almost all the cars we import come from U.S. allies. Clearly, Trump’s invocation of national security is a pretext

.. the proposed auto tariffs would further undermine our allies’ rapidly eroding faith in U.S. trustworthiness.

.. Which is not to say that national security should never be a consideration in international trade. On the contrary, there’s a very clear-cut case right now: the Chinese company ZTE, which makes cheap phones and other electronic goods.

.. Yet Trump is pulling out all the stops in an effort to reverse actions against ZTE, in defiance of lawmakers from both parties.

.. China approved a huge loan to a Trump-related project in Indonesia just before rushing to ZTE’s defense; at the same time, China granted valuable trademarks to Ivanka Trump. And don’t say that it’s ridiculous to suggest that Trump can be bribed; everything we know about him says that yes, he can.

.. what we’re getting is Manchurian trade policy: a president using obviously fake national security arguments to hurt democratic allies, while ignoring very real national security concerns to help a hostile dictatorship.

Trump Tariffs May Threaten U.S. Auto Jobs, European Executives Warn

Raising duties on imported cars could prove trickier than on steel and aluminum imports

Volkswagen AG , BMW AG and Daimler AG, which makes Mercedes—have built factories in the U.S. and Mexico in recent years that are geared to export to Europe and China, not just to sell to Americans.

The German manufacturers employ around 36,500 Americans at their factories in South Carolina, Alabama and Tennessee. If U.S. exports face retaliatory tariffs and it becomes more difficult or uncompetitive to export cars from the U.S., European auto makers would likely have to shift those jobs to Mexico or bring them back to Europe.

.. Fears of a global trade war is leading Volvo Cars Corp., the Chinese-owned Swedish auto maker, to reconsider the scope of a new plant that it is building near Charleston, S.C

.. “If the factory in South Carolina could not export, it would be half the size. It would not employ 4,000 people anymore but just 2,000,”

.. Steven Armstrong, president of Ford’s European business, dismissed Mr. Trump’s claims that American auto makers were blocked from selling cars in Europe.

“He obviously hasn’t seen our booth this morning,” Mr. Armstrong said on the sidelines of the Geneva Motor Show. “If the product fits the market, consumers will buy it.”

Trump targets European car-makers with big plants in states he won

President Donald Trump, expressing his ire over trade imbalances this weekend, made a peculiar choice: He focused his criticism on two European brands, BMW and Mercedes-Benz, that have significant investments in two of the nation’s most Trump-friendly states.

“Open up the barriers and get rid of your tariffs,” Trump said of the European Union’s trade policies in a wide-ranging and rollicking address in Pennsylvania Saturday. “And if you don’t do that, we’re going to tax Mercedes-Benz, we’re going to tax BMW.”

.. BMW has an assembly plant employing more than 9,000 people in Spartanburg, South Carolina; about a third of the BMWs sold in the U.S. in 2017 were produced in the country, the company said. A Mercedes-Benz factory employs 3,500 people near Tuscaloosa, Alabama, according to data from the Alliance of Automobile Manufacturers.
.. Trump’s latest attacks, meant to stir up populist enthusiasm, could backfire politically if they instead spur fears that jobs in Trump country might be in jeopardy.
.. Trump likely hopes tariffs on European car imports would spur the German companies to make more vehicles in the U.S. But he said the unpredictability of Trump’s trade policies would more likely have the opposite effect.
.. “A countervailing factor would be a reluctance of the Germans to ‘reward’ this behavior, especially if it’s unclear where trade policy is going,” Ikenson told POLITICO. “His unorthodox and sometimes erratic behavior ultimately discourages investment in the United States.”
.. “Should we get tariff walls, it would have an impact on jobs in the United States,” BMW CEO Harald Krueger said last week
.. “China wins when we fight with Europe,” Graham said. “China wins when the American consumer has higher prices because of tariffs that don’t affect Chinese behavior.”