Trade war as never seen before (6 April)

🔸The tariffs slapped by Donald Trump on the world represent a milestone in economic history. What is claimed to be Liberation Day (April 2) brought outrage and disruption, but also retaliatory measures from a number of America’s trade partners (especially China). According to Paul Krugman, this is the biggest trade shock in history. The good news is that US is concerned about its debts and deficits, but the bad news is that they chose this appalling way of adjustment. There is certainly no science behind these acts, which on the other hand does not mean that there would not be a certain calculation in play. Trump’s coalition of stakeholders want to achieve: 1./ preservation of dollar dominance in the world, 2./ depreciation of the USD to restore cost competitiveness, 3./ increased export of goods (with job creation effects), and 4./ some re-industrialisation in battleground states. This combination of objectives and prospective measures is called the Mar-a-Lago Accord. This name rhymes with the 1985 Plaza Accord, hosted by then Treasury Secretary James Baker, where France, Japan, West Germany and the UK accepted to jointly weaken the USD in order to help addressing the US twin deficit (created by Reagan’s “trickle down” tax cuts and reckless defence spending).

🔸Trump himself and his observers have referred to historic precursors, i.e. periods of active tariff policy: 1./ under President William McKinley (1897-1901) and 2./ the Smoot-Hawley Tariff Act of 1930. In both cases, aggressive trade policy was economically counterproductive and eventually paved the way to real wars. A tariff war can come alongside with nationalistic and chauvinistic sentiment, and for Trump himself the prioritisation of tariffs is packaged in a narrative about revenge against countries (or blocks like the EU) that have been taking advantage of the US (a kind of Cinderella of the world system).

🔸It should not be forgotten that the previous administration led by Joe Biden did not ignore the problem of imbalances but addressed those in a different way. Bidenomics, primarily through the Inflation Reduction Act (IRA) represented the royal road. The IRA created jobs, boosted infrastructure investment and shifted production towards green technologies, but exactly the inflation reduction effects did not come fast enough for the Democrats to turn the results into votes at the November 2024 elections.

🔸Whether the current disruptive governance method pays off for Trump or not electorally remains to be seen. Because of the self-harm and bizarrness of the situation, the presentation of “Liberation Day” is compared to the Liz Truss episode of UK history (2022 September), when the suicidal measures were brought about by Kwasi Kwarteng as Chancellor of the Exchequer, who was co-author of a book titled “Britannia Unchained”. Economic policy incompetence paved the way for the Tories to electoral disaster. Trump’s measures hurt first of all stock exchange investors, and they will also hurt consumers who will have to pay more for imported products in the supermarket. However, it is too early to judge the overall political fallout, especially at the level of states and districts, because it is unclear how events will unfold. A certain segment of the electorate keeps supporting politicians who might visibly fail but at least “tried to do something” about the problems.

🔸While Trump was busy in Washington to liberate America, Secretary of State Marco Rubio appeared in Brussels (April 3) to liberate Europe by demanding that NATO members increase their defense spending to 5% of their GDP. While this is completely unjustified and outlandish, if the just manage to extract an additional 1 or 2 % of the GDP for the purchase of US weapons, they already made the deal of the century. Less hysteria in Europe can help resisting Trump’s blackmail.

🔸How Europeans should respond is a crucial quesiton. The EU is a more open economy than the US and, contrary to the US, we have a surplus and not a deficit. 1./ The EU response must be firm and clear but it also needs to come with moderation. 2./ If there are reciprocal measures, ideally those concentrate on goods that can be either produced in Europe or sourced from countries other than the US, or substituted without a pain. 3./ The EU must undertake the Quixotic struggle to uphold the multilateral trading system and find partners for it. 4./ The EU has a potential to boost internal demand (within the Single Market) and this headroom must be used now. (See comments by Anna Kolesnichenko here: linkedin.com/feed/updat… .) 5./ Because of the enhanced volatility of the outside world, the EU should boost instruments of internal stabilisation, e.g. an investment stabilisation tool designed at the time of Juncker—Oettinger, the Globalisation Adjustment Fund (EGF), and a reinsurance of unemployment benefit schemes too. 6./ This is also the time for a giant leap to boost the international role of the euro and cooperate with the dedollarisation efforts of other major players in the world economy. 7./ Eventually the alternative to Mar-a-Lago is a “new Bretton Woods” which would be a participatory and multilateral effort to rebalance the world economy and adapt to multipolarity, and the EU must start preparing for that too.

🔸30 years ago Hungary slapped an 8 percent surcharge on imports (save energy). The Socialist-Liberal government inherited a massive twin deficit one year before, and the Mexican financial crisis triggered speculative attacks on other weak players of the world economy. The analysis suggested that HU had liberalised trade too fast with the EU which resulted in a yawning trade deficit. Consequently, the government revenue base collapsed and the bond markets started to lose confidence in the Hungarian securities. The 8 percent import surcharge came on the top of a 9 percent devaluation of the forint (HU had at that time fixed but adjustable exchange rate, but as part of the stabilisation effort the central bank introduced a crawling peg). The government, or at least the Socialists in it, were not comfortable with the inescapable austerity agenda, which also comprised an increase of the personal income tax and proposals for welfare cuts (later annulled by the Constitutional Court). Because the import surcharge was not an orthodox measure, and the income tax was raised, the IMF did not support the package as a whole. But one year later they saw that program was working and they agreed to sign a stand-by agreement (when it was not needed any more). The inflation spike produced by the programme turned out to be short and a decade of high growth rates followed. Often we say, what is allowed for Jupiter is not allowed for the bull. In this case, the logic should be reserved: such interventions should be allowed for the bull (the weaker members of the world economy) but not for the very big ones. By the way, the proverb, which has an ancient origin, refers to the bull that abducted Europa (a Phoenician princess).