Trump's trade war — firing all cannons or closing the portholes?

Trump's trade war — firing all cannons or closing the portholes?

President TrumpDonald John TrumpProsecutors investigating Trump inaugural fund, pro-Trump super PAC for possible illegal foreign donations: NY Times George Conway: Why take Trump's word over prosecutors' if he 'lies about virtually everything' Federal judge says lawsuit over Trump travel ban waivers will proceed MORE has raised the stakes in the trade war with Beijing by announcing tariffs on an additional $200 billion worth of U.S. imports from China starting on Monday.

At the same time, Trump seems to be trying to remove part of the trans-Atlantic chill and smooth some of Tokyo's ruffled trade feathers. A possible motive could be that he wants to build a united front against China. For if there is one thing that the West (including Japan) tends to agree on it is that China poses the largest threat to global trade; it is the world's dominant manipulator.

No backing down

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There are three scenarios for a trade war at present, with the first one being a further escalation of the trade war. Trump has never made a secret of his nationalist-protectionist opinions. Not in the campaign and not after he took up residence in the White House. And he already had those thoughts almost two decades ago. In his book The America We Deserve (2000) Trump states:

“What I would do if elected president would be to appoint myself U.S. trade representative…I would take personal charge of negotiations with the Japanese, the French, the Germans. Our trading partners would have to sit across the table from Donald Trump and I guarantee you the rip-off of the United States would end.”

He has  stood by this line of thinking and is unlikely to change his mind any time soon. All the more so as many voters in states that are important to him have the idea that globalization did/does not work for them.

Moreover, the geopolitical urge to remain friends — whatever the cost — with like minded democratic countries has weakened since the Cold War. At the same time, as competing blocks advanced, the U.S. became less powerful so it is now more inclined to view its relations with other countries through a zero-sum game lens.

Also, free trade often comes off worst against nationalism while many politicians have lost their appetite for promoting the former. The Republicans championed open markets and free trade until not so long ago while large sections of the Democratic Party acted as globalisation cheerleaders, led by the Clinton dynasty.

Whereas the GOP changed tack under Trump, as the protectionist stance gained traction, Hillary ClintonHillary Diane Rodham ClintonSanders, Warren meet ahead of potential 2020 bids Hillicon Valley — Presented by AT&T — New momentum for privacy legislation | YouTube purges spam videos | Apple plans B Austin campus | Iranian hackers targeted Treasury officials | FEC to let lawmakers use campaign funds for cyber Comey’s remarks about Trump dossier are not credible, says former FBI official MORE also started to sing from a different hymn sheet. Headed by politicians such as Bernie SandersBernard (Bernie) SandersJoaquin Castro says brother Julián is running for president in 2020 Sanders, Warren meet ahead of potential 2020 bids Senate votes to end US support for Saudi war, bucking Trump MORE and Elizabeth WarrenElizabeth Ann WarrenJoaquin Castro says brother Julián is running for president in 2020 Sanders, Warren meet ahead of potential 2020 bids Senate Dems urge Trump to continue nuclear arms control negotiations after treaty suspension MORE, Democrats appear to have closed the door to a widely supported free trade platform in their party.

On the other side of the world, the Chinese economy faces a raft of problems, which may cause Trump to think he will have the edge in case of conflict.

To sum, not just Trump's protectionist ideas, which have been around for decades, point to a persistently hard-line course but also the broader political and social climate, the changes in international relations, and the increased fragility of the Chinese economy.

The show must go on for a little bit longer

In the second scenario, Trump continues to kick and scream until the midterms in November before watering his wine eventually. This scenario fits in with his behavior over the past 18 months or so. Teddy Roosevelt (U.S. president from 1901 to 1909) summarized his own modus operandi as follows: “Speak softly and carry a big stick.”

Whereas Trump's preferred method could be described as: “Shout loudly and carry a white flag.” Trump has declared war (in a manner of speaking) in various areas in the past period, only to sign a truce soon afterwards and claim the credits for both actions. He may do the same following the midterms in order to profit a while longer from his reputation as a bruiser who is not bang afraid to break taboos and bash the 'established order'.

Imminent armistice

In the third and last scenario, Trump deescalates the trade war in the coming weeks or months. An argument in favour of this scenario is that the lobby against Trump's trade adventures is getting stronger whereas the president seems to be getting concerned over the outcome of the midterms, which he dismissed as unimportant at first.

For instance, as he gave an address in May of this year he started off by reading from the teleprompter, “Your vote in 2018 is every bit as important as your vote in 2016,” before deviating from the script and saying jokingly, “Although I’m not sure I really believe that. I don’t know who the hell wrote that line.”

Now Trump seems to be having a change of heart; also as there is a much higher likelihood of the Democrats making big gains. Not to mention the impeachment that continues to hang over the market. Trump may also be wary of the risk that his protectionist war language will dent the optimist economic sentiment and cause the financial markets to switch to risk-off before the midterms.

That there is still enormous support among Americans for trade may confirm him in the conviction that he needs to adjust his course. Eight-two percent of Americans believe that trade benefits the U.S. economy.

Somersaulting into a truce?

So which scenario is the most likely? There is an interesting paragraph in a recent article about Francis Fukuyama:

“History is somersaults all the way to the end. That’s why it’s so hard to write, and so hard to predict. Unless you’re lucky.”

This certainly applies to the foretelling of what the impulsive and reckless Trump will do next. The most likely scenario seems to be that he will dilute his protectionism somewhat, to prevent a mood change in the markets before the Americans go to the polls to vote. After all, the election is increasingly important to the president.

At the same time, the underlying forces that point to more restrictions on free trade will not suddenly disappear. Nor is the president likely to change his disposition, which has been protectionist for a very long time. So don’t expect everything to be hunky-dory between Washington and the other trade blocks anytime soon.

Andy Langenkamp is a senior political analyst at ECR Research and political commentator, who specializes in assessing the repercussions for the financial markets of economic and geopolitical events.