Leibowitz on Trade: Trump's Changing the 'World Order'

Prime Minister Trudeau, after declaring that the G7 communique was ready and would be joined by the United States, proceeded to declare the U.S. an outlier. The response was predictable—President Trump withdrew from the communique.

There is a definite pattern here.  President Trump is not ham-handedly offending our closest allies—he is doing it in a very calculated way.  The trade relationships and trade rules we have gotten used to since 1947 are, if President Trump has his way, going to change and change fundamentally. He is knocking our closest partners out of their comfort zone and he wants to do it. As long as our trading partners argue that the Trump proposals are unacceptable, he will double down on them. At the end of the day, there will either be a confrontation or a negotiation. We are clearly in the confrontation stage now. Neither Trump nor the other G7 members look likely to come together for a while. Eventually, the EU, Canada and Mexico will put their issues on the table and maybe then negotiations can take place. In the meantime, NAFTA negotiations appear to be on ice. The steel and aluminum tariffs will remain in place in their comprehensive form.

Make no mistake—President Trump wants to change fundamentally the international trade “world order.” He wants reciprocal tariff balance for particular products (e.g., autos). He wants to create a two-tiered trading system: one for the G7 countries and another for everyone else. That would destroy the “MFN” principle at the core of the WTO. He has made the dispute settlement system at the WTO nearly unworkable by blocking new appointments to the Appellate Body, the “Supreme Court” of the WTO. He wants bilateral trade deals as opposed to regional deals, because they maximize U.S. leverage. Bilateral deals are inconsistent with his proposal for completely open trade within the G7, but consistency is not what he is after. He is after improving the U.S. balance of trade in goods.

So far, the reaction of our allies has been hostile. Because I think there is a lot of benefit from the global trading system, I believe it is worth fixing rather than destroying. Perhaps our trading partners believe they can outwait President Trump. In 2021 he will be replaced, they hope, with someone that will deal with our closest friends in more traditional ways. This may be wishful (and unrealistic) thinking. I am not sure we can rebuild the postwar consensus with a new administration (assuming we have a new one in 2021). Populism and protectionism is on the rise elsewhere, too. 

Lewis Leibowitz

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