The recently announced trade deal with the EU pushed stocks higher late in the day, as it averts the risk of a trade war. Before explaining why this is a big loss for economic nationalists such as Peter Navarro and Steve Bannon, it’s worth considering a few facts.
Economic nationalists (aka mercantilists or protectionists) believe that countries with trade surpluses are stealing jobs from deficit nations. Today, it is continental Europe that dominates the world in current account surpluses, with European nations (excluding the UK and Turkey) running a surplus of roughly $650 billion with the rest of the world. Japan is next, with a surplus a bit below $200 billion, and there are some other smaller surpluses in East Asia. But Europe is the “Great Enemy” for people with a mercantilist/nationalist/protectionist worldview. The deal being discussed is likely to lock in place the current reality, with some minor tweaks.
My hunch is that Trump really does have protectionist instincts. So why did he agree to this deal? The good news is that Trump’s main objective seems to be doing deals and getting “wins”, not adhering to any fixed ideology. The stock rally today may have reflected relief that Trump will not push the trade war too far.
From the beginning, I’ve felt that big trade wars are not practical in the modern global economy, at least over any prolonged period of time (say a year.) I still wouldn’t rule out a trade war with China, but even that is likely to get resolved before doing too much damage.
Navarro, Bannon and other mercantilists have gone to war against global neoliberalism, and so far they are losing. Look for America to continue running very large (and growing) current account deficits.
Bonus prediction: Brexiteers will be unhappy with the final outcome of Brexit.
PS. Kudos to Larry Kudlow for quietly pushing globalization from within the Trump administration. And I think Gary Cohn would be pleased with this deal.
READER COMMENTS
Michael Sandifer
Jul 25 2018 at 9:13pm
This seems for news on the surface, but I see no reason to believe Trump will honor a trade deal. I suspect that as the trade deficit widens, Trump will accuse the EU of manipulating it’s currency and will go back to tariffs.
Ron
Jul 28 2018 at 7:56pm
Perhaps, like with North Korea, he will declare victory and move on to creating yet another crisis which “only I can solve”.
EB
Jul 25 2018 at 9:42pm
Big win for Trump. By calling Europeans’ bluff, he was able to get some immediate benefits and to start negotiations for additional benefits for the U.S.
See https://www.bloomberg.com/news/articles/2018-07-25/trump-juncker-reach-deal-to-ease-trade-tensions-dow-jones-says-jk1jtfs8
Who cares about Navarro&Co.?
Ron
Jul 28 2018 at 7:51pm
No. Trump got the appearance of that to people who don’t know any better. A few more soybeans and some LNG in the future if it is cheap enough. Face-saving tidbits at best. Basically we are back to the Obama status quo. Now Trump has to actually negotiate.
TMC
Aug 2 2018 at 10:10am
No, the big news is that they are working to make tariffs 0%. This is a big change from The Obama era where the average EU tariff was 3.5% vs our 2.5%
Scott Sumner
Jul 26 2018 at 1:25am
EB, Was Nafta a big win for Clinton? We got far more concessions from Nafta than Trump got in this deal. What does Trump think of Nafta?
EB
Jul 26 2018 at 6:54am
At the moment NAFTA was signed, it was a big win for Clinton. Now, 20 years later, it will be a big win for Trump if he gets some net benefits for the U.S from Mexico and Canada. In 2050, the U.S. president may get some additional benefits, or be a big loser if she is Ocasia-Cortez and thinks she has to compensate Mexico for the loss of California. Agreements should be judged first by the circumstances at the time they are signed and second by how they are implemented and enforced.
FYI, I read an interview with economist Jesús Seade (an old colleague) who will be the chief negotiator for Mexico’s new government and he was optimistic about a new agreement.
Ron
Jul 28 2018 at 7:59pm
Perhaps he is optimistic that the new agreement will be essentially the same as the current one, with a few little beads and trinkets for Trump to show off to his helpless adherents.
Benjamin Cole
Jul 26 2018 at 2:13am
Tyler Cowan’s latest post is that the Chinese regard Trump as some sort of genius.
Patrick Buchanan’s latest column is that the Washington foreign-policy- military establishment loathes Trump as he is proving how irrelevant they are.
Trump is a many-splendored thing, no?
Is Trump a carnival-barker outside Carnegie Hall? Beware of rash judgment.
Ron
Jul 28 2018 at 8:04pm
Of course the way to play Trump is to hint that you think he is a genius when you know full well he is a fool.
That he is a fool is why the foreign-policy- military establishment loathes him.
Alan Goldhammer
Jul 26 2018 at 7:41am
More interesting to me than a quasi-agreement on tariffs is that corporate tax revenues just hit a 75 year low as a percentage of the economy. Thanks to the tax cuts, this also means that the deficit will rise even more than predicted. I guess tax cuts don’t pay for themselves. The New York Times has an interesting commentary on this and notes that “The current spending bill that Mr. Trump signed earlier this year expires at the end of September, the end of the current fiscal year. Congress is unlikely to pass another comprehensive spending bill before then. Instead, Republican leaders will have to press for a stopgap spending bill if they want to prevent a government shutdown a month before the midterm elections.”
This doesn’t even address the proposed bailout of American farmers!!
OH Anarcho-Capitalist
Jul 28 2018 at 9:14am
Tax cuts need never be “paid for”; only spending does.
If a tax cut results in more debt, it’s because spending needs to be cut until a surplus emerges…
Ron
Jul 28 2018 at 8:11pm
But a tax cut that doesn’t pay for itself increases the national debt, so nothing is gained except a short term stimulus at best, followed by a hangover. Simple arithmetic.
David S
Jul 29 2018 at 11:10pm
I disagree. It seems that no matter how much tax is collected, Congress will spend more than is collected. By collecting less, you are applying small, ineffective brakes on spending. But that still beats not applying any brakes on spending.
EB
Jul 26 2018 at 8:22am
Scott, read the FT article by Mark Leonard with the title “The Chinese are wary of Donald Trump’s creative destruction”. This is the article that Tyler refers as highly speculative in his recent post about Mark’s article (referred by B. Cole in his comment).
I don’t know Mark but he claims to have spent a week in China talking with “experts” and to have learned how wary the Chinese are about Trump’s skills. I bet, however, that some of my old Chinese friends are wary but optimistic because they appreciate Trump’s destructive creation. I’m not playing with words: Mao left a legacy of destruction, but survivors of his regime know the West’s power of creation (they are worried about it, but they know how good it has been for them in the past 40 years).
Hazel Meade
Jul 27 2018 at 2:40pm
I like to leave the creative destruction to the market and individuals, not one person.
EB
Jul 29 2018 at 8:35am
Yes. That’s exactly what I said in my comment.
XVO
Jul 26 2018 at 8:39am
I don’t think Trump’s really a protectionist. He’s playing one because that’s what people think they want and it puts him in a good negotiating position. He’s said some things along those lines. I don’t think the average person that supports protectionism really wants protectionism either. What they want is “fair” trade, which is what free traders want too. So Trump’s using protectionism as a tool to get people what they really want, more free trade.
Meets
Jul 26 2018 at 11:24am
Trump is a classical liberal.
However, many of the old institutions is the liberal order (NATO, wto, etc) are outdated and are helping antiliberal countries like China and Russia more than the USA.
So Trump looks bad when he attacks them, but he’s trying to remake them for a new world where Europe is increasingly irrelevant.
Mark Bahner
Jul 26 2018 at 2:32pm
Classical wisdom in presentations: always start with a good joke.
Scott Sumner
Jul 26 2018 at 4:50pm
Ben and EB, Trump’s been in office 18 months and done an amazingly bad job of negotiating. For instance, he desperately needed McCain’s vote to repeal Obamacare, and instead mocked the fact that he was captured by the North Vietnamese (where he was tortured.) Is that how smart people win people over to their side? He gave N. Korea the recognition it wanted and got nothing in return. He tore up the Iran agreement, and failed to negotiate anything better. The EU president ran circles around him in yesterday’s agreement. Putin made a fool of him. Where is the evidence that he’s a good negotiator?
XVO, Everything in your comment is wrong. Trump’s been a protectionist his whole life, so this is not a pose to please voters. The fair trade idea is complete myth—there is nothing “unfair” about trading relationships between the US and other developed countries. Trump’s claims otherwise are based on fake facts. The trade barriers we face in Europe and Canada are roughly equal to those they face in the US.
If the world eliminated all trade barriers tomorrow, the US would still run a massive trade deficit, as large or larger than the current deficit.
EB
Jul 29 2018 at 8:48am
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EB
Aug 1 2018 at 8:32am
McCain? The same guy that on September 2008 left the race because he didn’t know what to say and what to do about the financial crisis. And remember that day he was well ahead in the polls. Thanks to him, Obama was president for 8 years.
Tell me, since McCain has been diagnosed with brain cancer, why doesn’t he resign? I bet it’s because he hates Trump –yes, to the point that for him Trump is the “mentally unfit” that won the Presidency.
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