Ignorance is bliss (for the EU)
I am seeing a lot of confusion about the recent trade deal that Trump negotiated with the EU. There is talk of “concessions” being extracted from the EU. This is very misleading, in a number of different ways.
In earlier posts I pointed out that commodities were “fungible” and traded in highly competitive global markets. Thus if the EU agrees to buy more soybeans from the US, they simply buy less from Brazil. Then those exports go elsewhere, and displace American exports to those other markets. Unless the EU promises to consume more soybeans, the promise to buy more from the US means nothing. And even if they do consume a few more soybeans, it may be for reasons unrelated to the trade deal:
Trump appears to believe he got two important promises from Juncker. “European Union representatives told me,” he tweeted, “that they would start buying soybeans from our great farmers immediately. Also, they will be buying vast amounts of LNG!”
In fact, the EU, which barely produces any soybeans, is already buying them from the U.S. and will increase imports of the oilseed this year because of a low domestic rapeseed crop and smaller supplies of sunflower seed meal from Ukraine and Russia.
Natural gas is also a commodity, traded in highly competitive markets:
The EU cannot order member states to buy more from the U.S.: Unlike the market for pipeline gas, where costly fixed infrastructure dictates the sources, an LNG carrier can come to Europe from Peru, Trinidad or the U.S., and it makes little difference to the buyers as long as the price is right. Juncker’s “promise” to Trump means merely that demand for natural gas is growing in Europe and capacity exists to accept more imports if they’re competitive.
There is also a vague promise to work toward eliminating all tariffs on industrial goods, except cars. This is a big win for the EU, for several reasons. First, this “concession” on industrial goods shifts the trade agenda away from protectionism and toward freer trade, helping to defuse the threat of a trade war. Second, Trump had been railing against the 10% EU tariff on car imports (ours is 2.5%). Trump agreed to remove that specific demand from the deal. And this should be no surprise, as the US car market is now dominated by larger SUVs and pick-up trucks, where we have a huge 25% tariff protecting domestic producers. Trump would never even consider truly free trade in all industrial goods if it meant removing that 25% tariff.
This is not to say that even a free trade deal in non-car industrial goods is meaningless–if achieved it would be a significant achievement for Trump and would help both the US and global economy. But notice the irony here. Trump ran for President against free trade deals such as Nafta. It would be odd for his supporters to cite the possibility of even more free trade deals as a goal that is now within reach, due to pressure from Trump. Nor is it clear that pressure was needed. Free trade deals are happening all the time. The EU recently did a deal with Canada and is negotiating a deal with Japan. If Trump wanted to follow in the footsteps of free traders like the Bushes and Clinton and Obama, he didn’t need to use threats.
Some might argue that Trump will sign better deals. But the major criticism of deals like the TPP is that it has too much protection of intellectual property rights (a criticism I agree with.) That means the problem with the TPP is that it’s too slanted toward favoring big American corporations. But that’s not a problem in Trump’s eyes.
Donald Trump often seems to take pride in his refusal to read policy memos, or to reject the wisdom of 250 years of economic research on international trade. He believes that his instincts as a businessman are superior to those of eggheads like me. But businessmen see things from what economists call a “partial equilibrium view” missing all the interconnections in the economy.
European Commission President Jean-Claude Juncker proved on Wednesday that the EU isn’t the useless bunch of bureaucrats populists and nationalists make it out to be. He came to Washington with a bridge to sell, and in three hours of talks he sold it to Trump. . . . Juncker, often criticized by euroskeptics, deserves credit for his contribution to the meeting’s success for the EU. Where German Chancellor Angela Merkel failed with her cool directness and French President Emmanuel Macron with his slightly pompous verbosity, Juncker delivered with an easy bonhomie combined with an ability to run circles around Trump when it came to the subject matter.
Previously I’ve argued that Trump cares more about negotiating “wins” than achieving any sort of ideological goal, such as smaller trade deficits. But to “win” at highly complex negotiations you need to be on top of the issues. I see this as one of those rare cases where two types of error offset, creating a positive result:
1. Trump’s mercantilist instincts are misguided.
2. Trump lacks the knowledge to effectively negotiate trade agreements.
3. Trump ended up negotiating an agreement that did not further his mercantilist objectives.
And that’s good!
PS. Tyler Cowen cites a paper with a contrarian view. I’m skeptical, partly because Trump is already 18 months into his term. On current trends, if he serves one term he would leave office with no significant durable accomplishments in foreign affairs. Of course that may change, and he may serve two terms, but does Trump have the negotiating skills needed to achieve what his instincts tell him is the correct goal?