Will a Real US Trade War with the EU, Canada, and Mexico Break Out?

_ Alexander Losev, General Director of JSC “Sputnik-Capital Management”. Moscow. 18 June 2018.

Trump’s escalating trade war with China and US allies is causing major political disputes in Western countries. The world looks on as the agenda shifts from economics to politics. This stood out particularly during the G7 summit, where the closest US allies criticized import tariffs on steel and aluminum, as well as the US withdrawal from the Iranian nuclear deal and Paris Agreement.

The European Union, Canada and Mexico are the latest victims of tougher US import tariffs. A 25% tariff will be slapped on steel imports, while aluminum imports will be hit with a 10% tariff. The United States is considering the possibility of a global increase in duties on cars and auto parts. Do these developments spell a rift between the United States and its key allies, and how might economic tensions affect political relations? What kind of retaliatory measures can the EU, Canada and Mexico take with respect to US-made goods? Will they present a real threat, or will they be no more painful than a mosquito bite for America? Do these developments represent a final blow to international institutions such as the WTO, with protectionism finally becoming the basis of economic relations? What should Russia do in this new reality?

Trump’s escalating trade war with China and US allies is causing major political disputes in Western countries. The world looks on as the agenda shifts from economics to politics. This stood out particularly during the G7 summit, where the closest US allies criticized import tariffs on steel and aluminum, as well as the US withdrawal from the Iranian nuclear deal and Paris Agreement.

The Trump administration is currently focused on its priorities of accelerating the US economy. Household income growth due to tax cuts and rising employment as well as an increase in corporate working capital has led to a sharp increase in imports, and President Trump started a trade war primarily because imports slow down economic growth and undermine measures designed to stimulate economic growth through fiscal reflation, which come at a high cost to the budget. In 2017, the United States imported goods and services worth $2.895 trillion compared to $2.329 trillion in exports, for a total US trade deficit of $566 billion.

The high share of imports in the structure of domestic consumption and the growing trade deficit annually create threats to the sustainable growth of the US domestic economy. Consumer goods and cars are the key drivers of the trade deficit. After China, the EU is the most troublesome partner for the United States in terms of trade balance. The US trade deficit with the EU reached $112.9 billion last year (the deficit amounted to $65 billion with Germany alone with total trade standing at $171 billion) followed by Mexico with a deficit of $71 billion and Japan with $69 billion compared to $204 billion in total trade.

However, this is only the tip of the iceberg. Ultimately, in order to reduce the negative trade balance, it is not necessary to introduce import tariffs and restrict trade. It is enough to reach an agreement with allies about expanding opportunities for US exporters, which will also reduce the US trade deficit. In addition, the US imports about $5.5 billion worth of EU steel per year and aluminum to the tune of only $500 million. Multiplying the first number by 25% and the other by 10% we get a result of only $1.3 billion. This is infinitesimal compared to the $112.9 billion trade deficit with the EU.

So, what is really going on? And why are European leaders so worried? The fact is that all this is unfolding against the backdrop of a steadily declining US share of global GDP year after year due to the rise of others, which threatens to weaken the political influence of America. That is, the issue here is the “rapport de forces,” i.e., the balance of forces at the moment when a conflict begins between a dominant power and rich countries capable of building up their power independently.

Something similar was happening in the world exactly 50 years ago. By 1968, Western Europe and Japan had reached economic parity with the United States. America lost its economic advantage over its trade partners, satellites and NATO allies, which lead to changes in the global financial system and policies. The United States made it clear to its allies that they must follow Washington’s foreign policy course in international affairs. It was back then that the G7 was created (which now in 2018 is going through something of a crisis). The Cold War and nuclear deterrence of the Soviet Union rallied the US allies in NATO. Most importantly, the ideology of neo-liberalism and globalization was used to build a system of economic and political relations and a system for managing resource allocation and production factor mechanisms, which allowed the United States to regain political, economic, financial and media control.

When US Secretary of Commerce Wilbur Ross says that “economic security is military security,” he is, in fact, correct. Trump’s rhetoric, the Iranian deal and the threat of introducing import tariffs are just visible manifestations of the beginning of deep political changes. It is no accident that the doctrinal National Security Strategy 2017 designates strengthening US influence in the world and maintaining peace through the use of force as the key national interests. Now, in order to preserve US hegemony, Donald Trump is using the threat of a trade war with the EU and turning secondary sanctions into new economic weapons against European companies.

Europe is faced with a dilemma: either give up its fundamental right to sovereignty altogether, or face severe economic consequences.

In fact, this is a false dichotomy, because there are other possibilities, namely, a return to international law and WTO agreements in order to block US protectionism, as well as cooperation with China and Russia. In this respect, Russia appearing on the G7 summit agenda was not an accident. Earlier, French Finance Minister Bruno Le Maire said in an interview with the WSJ that the French authorities view China and Russia as a counterbalance to increasingly dubious trade relations with the United States and Great Britain.

But Trump seized the initiative, saying that Russia should participate in the G7 summit. “I think it would be good for the world, Russia, the United States, and all G7 countries … We are looking for peace across the world, not playing games,” he said.

Indeed, the games are over. Europe will not accomplish anything by imposing retaliatory tariffs and blocking regulations. The risks of a large-scale trade war are not great, either.

This is the start of a major geopolitical event into which all global powers will be drawn without exception. It is possible that the United States will continue to provoke trade and military-political conflicts, weakening its allies, who are now becoming rivals. Europe has little chance of winning, and, most likely, the EU will bend to the political will of the United States.

In this situation, Russia needs to strengthen its role as a global security guarantor, support the restoration of international law and seek cooperation with individual EU countries and China. Russia’s economic weight is not great, but its political weight and military sovereignty will allow it to pursue its own independent foreign policy for a time, until the words of Karl von Clausewitz regarding the United States become relevant: “The situation of the assailant is often such at the end of his first start, that even a battle gained may force him to retreat, because he has neither enough impulsive power left to complete and make use of a victory, nor is he in a condition to replace the forces he has lost.”

Source: http://valdaiclub.com/

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