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The US will be the loser from Trump’s focus on trade deficits

Robert B. Zoellick

(Financial Times) – People around the world are bewildered by President Donald Trump’s manoeuvres on trade. Their confusion is understandable, because Mr Trump rejects 70 years of US policy.

This week’s tumult with China is symptomatic. Mr Trump told China to slash the  bilateral trade deficit by $200bn. The Chinese are offering to buy more energy, farm products and aeroplanes, diverting trade without making fundamental changes. Beijing can also cut auto tariffs, although Japan and the EU would be the prime beneficiaries.

Because Mr Trump’s  negotiators fell to bickering, the president will now delightedly direct the dealmaking himself. But he does not have the knowledge nor patience to dig into the most serious challenge, which is whether China will pursue its “Made in China 2025” innovation agenda in an open or indigenous fashion. Instead, the US will block a host of Chinese investments and demand managed trade, sector by sector.

How should others make sense of Mr Trump’s approach? First, he declares that he is a protectionist. Believe him. He is more interested in closing markets than opening them. American farm exporters are recognising the peril of this shift, forcing Mr Trump to conciliate. Because 60 per cent of US imports are for intermediate goods and other inputs, many other American businesses are anxious, too.

Mr Trump views bilateral trade deficits the way businesspeople look at negative net income: as losing. For a man whose policy views are “fluid”, his loathing of bilateral deficits has been strikingly consistent. Almost all economists disagree with him, but Mr Trump is in charge. Therefore, China, Japan, Mexico, South Korea, and Germany are all on his target list.

Trade is fundamental to Mr Trump’s connection to his political base. As a candidate, he discovered that trade, the wall with Mexico, and immigration offer an emotional tie to voters with grievances and resentments. Mr Trump’s authenticity depends on continuing to emphasise these topics.

His trade symbolism focuses on traditional manufacturing — especially steel, aluminium and cars. People can see and touch these products, unlike the outputs of the much larger service sector.

Mr Trump also needs to break with his predecessors, whom he continually blames. Note the similar logic with Iran (kill Obama’s deal) and North Korea (meet Kim Jong Un face-to-face).

US trade representative Bob Lighthizer believes that a combination of protectionism and managed trade will enable the administration to win Democratic votes in Congress. I suspect that the congressional Democrats are playing the administration to push protectionism; if a deal comes to a vote, they will relish accusing Mr Trump of skimping on protection.

Finally, Mr Trump senses that brinkmanship and even breakdowns play to his advantage. He assumes he can use leverage, surprise and threats to compel his opponents to concede. This gambit becomes riskier with complex subjects involving multiple connections and actors. For example, Mr Trump’s flip-flops on trade sanctions for China’s ZTE reveal his confusion on security, supply chains and longer-term technology advantage.

Consider how his approach has played out. His one renegotiated deal with South Korea highlighted the appearance of gains for autos and a steel quota; another action limits South Korea’s exports of appliances. These changes did not even necessitate Congress’s approval. The economic effects will simply boost costs in America.

Meanwhile, debates over the North American Free Trade Agreement recall the days of Soviet central planning. Negotiators have sunk a vast amount of time into dictating the sources of inputs and wage rates across diverse activities along auto supply chains. Even if Mexico and Canada eventually feel compelled to capitulate, the three countries will face fundamental and testy disputes.

The EU could probably buy Mr Trump off with steel quotas, purchases of liquid natural gas and a cut in auto tariffs. Alternatively, it could pick up the banner America has dropped by leading in setting new standards and rules for the 21st-century economy. EU agreements with other economies might cover evolving service businesses, data protection and geographical indicators for high value farm goods.

Almost 20 years ago, the US assumed the initiative to set future rules through bilateral and regional free trade agreements that could prod China and the World Trade Organization to modernise. But Mr Trump has abandoned that strategy. He — and America — will be the losers

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