Tariff man is weaker than he thinks

As the United States raises trade barriers and reduces global cooperation, the rest of the world could start trading elsewhere.

Trump’s latest protectionist outburst is to raise tariffs on all steel and aluminium products to 25%.

On top of his threats to Canada and Mexico, plus the extra levies slapped on Chinese imports, this will only further force other countries to look elsewhere for new markets.

Such a shift would only be gradual, long-term and incremental — and Trump is apt to change his mind. Wishful thinking among those who dislike the current US administration is a dangerous thing.

But the latest moves may leave several countries and blocs with little option but to seek new destinations or to produce more for home use.

Fewer countries depend on the US than you might think, despite it accounting for a quarter of the global economy and obviously being the global economic powerhouse.

As Martin Sandbu points out in the Financial Times, among the world’s 20 biggest economies Mexico is the most exposed, with 27% of its GDP coming from exports to the US. For Canada the proportion is 21%. Tariffs would hit Mexico and Canada hard.

The country next most reliant on exports to the US is South Korea, at only 6%. Japan, Germany, Italy and China’s economies only rely on exports to the US for 3% of their annual economic output.

The US only buys about 16% of the world’s goods, a bit higher than each of the EU and China, but less than, say, the UK and EU combined (“the UK and EU combined” is a long shot, but you get what I mean).

Asia doesn’t rely on the US as much as it used to. Trade within Asia is increasing partly because growth in global supply chains has meant that goods often move back and forth across borders several before a final product is shipped.

Three-fifths of Asian exports now go to other Asian countries. The region accounts for nearly two-fifths of world trade — much more than the US. Services and digital trade are rising faster than physical commerce — and services aren’t subject to tariffs.

Asia attracts 40% of world direct foreign investment, up from a third a decade ago. New agreements like the Regional Comprehensive Economic Partnership are breaking down trade and investment barriers within the region.

Calculations suggest that whilst a move away from US dependence would be painful, most big exporters could replace the US as an export destination within a few years.

In other words even if the US completely shut off its markets to outsiders, it wouldn’t be catastrophic, other than for Canada and Mexico.

As China ramps up its response, several of its measures look potentially serious for the US. It isn’t so much the $14bn worth of tariffs it directed against the US on 9 February, nor the antitrust investigation into the US biotech company Illumina and into Google, whose search engine China blocks, nor the blacklisting of the holding company of US clothing brands Calvin Klein and Tommy Hilfiger.

Possibly the more serious impact for the US may be the restrictions on exports to the US of five critical metals used in defence, solar panels, electric vehicle batteries and other green energy goods. China produces about 60% of the world’s rare earths and accounts for 90% of processing in the industry.

Depriving the US war machine and tech companies of rare earths could send the US back to the negotiating table pretty quickly.

And as I said here, US self-exclusion from world trade may leave little option but for other countries to cooperate more among themselves in a range of areas, not only in trade.

China has spent the last decade deepening its links with the rest of the world and consolidating soft and hard power. While the US spent a trillion dollars in a failed war in Afghanistan over a decade, over the same time period China spent the same amount almost literally building bridges. It’s made several new friends.

It has an obvious interest in promoting the BRICS+ group. The latest round of US protectionism may lend BRICS+ new impetus. Last month Indonesia became the 11th member to join.

Canada’s trade minister visited Brussels in early February with the aim of building trade ties with the EU. All countries and blocs threatened with tariffs have an incentive to build cooperation.

Ultimately getting hung up on national borders doesn’t make too much sense. The world economy is inherently global. And tariff man’s transactionalism is designed to make him look strong at home and to assert dominance over international partners.

But for a character who prides himself on his supposed negotiating prowess, his position may be weaker than he thinks.