The global economy faces a roller-coaster ride every time Mr. Trump is in the White House. Last time, a focus on controlling China’s growing economic power meant that the rest of the world narrowly escaped the wrath of the United States executive, with some tariffs on some sectors. This time around, things are quite starkly different: it is difficult to even know who constitutes a friend or a foe. All trading partners are now threatened with high horizontal tariffs in the name of “reciprocity”. Adding to this list of unknowns is the uncertainty around non-tariff policies, the uncertain implementation of non-binding deals, and the nature of an elusive collective response.

First, tariff and non-tariff policies.

Trump appears focused on tariffs, using import tariff threats to secure various trade concessions and other commitments. Unsurprisingly, the prevailing vexation of the rest of the world is regarding the higher tariffs on their exports to the US. There will certainly be losers both in the US and its trading partners, due to the shocks of tariff hikes. The hope is for a predictable and stable trading environment to be restored soon. However, while we worry about tariff hikes and policy uncertainty, we should not be blindsided by other issues raised by US actions. The subversion of the rule of law and a severe blow to trade multilateralism are two obvious ones. However, finding meaning amidst the chaos is crucial to understanding the long-term implications of this abject abuse of power by the US.

In essence, the Trump Administration is using tariffs as leverage to manage trade across the board through negotiated “deals”. If these deals fail, tariff letters will be issued. These agreements aim to secure the long-term goal of making American manufacturing—nay, economy—great again, through coercive and mercantilist methods, using both tariffs and non-tariff policies. So far, deals have been signed with the UK, Vietnam (?), Japan, Indonesia, the Philippines (?), the EU, and Korea. Tariffs or the threat of tariffs, therefore, only appear to be the means to much bigger ends, i.e., managed trade, liberalising market access (even at the potential of undermining regulatory risks), increasing investment, reshaping global supply chains, influencing negotiating positions of trading partners, etc.

Tariff and quota arrangements on steel, aluminium, and vehicles, all under the pressure of higher horizontal tariffs, signal a shift towards some form of poorly managed trade practices. Minimum purchase commitments of US energy and agricultural products to boost US exports provide another example. The deals have negotiated the liberalisation of market access in highly regulated agricultural sectors such as beef in the UK and rice in Japan. Beyond domestic protection and boosting US export opportunities, some deals (such as with the EU and Japan) also contain investment commitments that would strengthen critical sectors in the United States. In addition, they also attempt to reorient global supply chains on the basis of economic security-based alliances to control the engagement of trading partners with China, backed up by stringent rules of origin to minimise the risks of circumvention and transhipment. Furthermore, the deals may also pave the way for securing guarantees to undertake commitments under multilateral trade rules and processes, as evidenced by the text published with respect to Indonesia. The irony is quite striking.

In sum, raising tariffs is only one part of this long game. Tariffs hold the limelight now because numbers have a certain way with humans. They are visible, tangible, calculable, modellable. They also make for compelling headlines. However the mere threat of tariffs can also raise the alarm about definite economic impacts. For example, consequent job losses, higher costs of living (for US consumers) and potential trade diversion can be estimated with some accuracy. At the same time, these deals have non-tariff elements too. Outside the numerical tariff effects, measuring the effects of these deals is tricky. Yet, it is imperative that the true cost (and indeed, worth) of these deals, considering the potentially significant effects far beyond tariffs. Admittedly, such details are fuzzy for now. But that is where the long game lies, revealing the true tactics used by the United States to both preserve power and create power.

Second, uncertain implementation of non-binding deals.

But does Trump mean any of it, especially the non-tariff elements of the deals? One might think so, judging by the relentless trade-related announcements of the past few months. But the choice of instruments (non-binding deals) is peculiar. Is this choice strategic? The debate on the legal and political implications of using hard law versus soft law is evergreen, so I will leave that for a later piece. For now, it suffices to say that this trend of non-binding trade deals is growing and cannot be generally ignored, suggesting their likely strategic role in this era of power-based trade policy.

Treaties, or binding agreements, provide stability and predictability by creating enforceable commitments. Typically, the domestic processes involved in the negotiation and finalisation of such binding international instruments provide some engagement with the legislative wing of the government. This is important in a participatory democracy. However, in the United States, these non-binding deals are negotiated by the executive branch without congressional oversight. The governments of trading partners are also coerced to finalise deals quickly, potentially leaving no time for comprehensive internal consultations. In any case, non-binding deals may still be put into effect by passing Executive Orders to that effect, as was done in the case of the UK deal. But until there is such implementation, we are left with nothing more than a page marked by spilt ink. This is not to say that binding rules will automatically ensure implementation. Instead, the binding quality of rules may have lost some meaning in recent times, with the frontal attack on WTO rules as well as FTA commitments.

Moreover, can all elements of all deals even be “implemented” measurably? If so, what are the benchmarks? Implementing tariff hikes in the United States or introducing tariff-rate quotas and relaxing regulations in trading partners are relatively easy. However, how will a commitment to invest $550 billion “at the direction of the United States”, with 90% profit retention, materialise (e.g., the Japan deal)? Does this amount include private capital or public funds? What level of control over the investment would the trading partner have? What must trade partners watch out for in contracts that implement such commitments? Moreover, what happens if targets are not met? Do all commitments in a deal have to be met, or does failing to meet even one lead to Trump tariffication?

Thus, much uncertainty prevails around what is to come, which leads me to my third and final point in this blog.

The prevailing uncertainty leads US trading partners to capitulate to Trump.

It might even be strategic to do so for now, as trading partners are choosing to put out the immediate fire before acting on a collective response. Why?

First, the tariff threats need urgent management. By throwing the stick first and then offering the carrot (bringing down threatened tariffs from the range of ~25-40% to ~10-15%), the US managed to place trading partners in tight negotiating spots.

Second, Trump’s deals contain several non-tariff elements too, but their non-binding nature provides a layer of safety net. This allows trading partners to appear cooperative while attempting to escape from the path of a tornado. This is applicable specifically to longer-term elements of the deals, such as minimum purchase commitments, investment commitments, and economic security cooperation. It is unclear what happens if such commitments remain unmet, but including them in the deals buys time.

Third, a collective response is the principled, correct, and economically sound answer. Such a response could take different forms – whether collectively ignoring the US abuse of power and capitulating to its demands (by renegotiating tariff concessions multilaterally, for example), or collectively retaliating (with perhaps a tariff on US imports). But designing a collective response is challenging, and the rest of the world needs to first settle on common ground amongst themselves. These countries also need to find an incentive that resonates with all (for e.g., upholding multilateralism and securing its continued benefits would be a fine reason).

To encourage cooperation, it’s essential to overcome any other perverse motivations that arise from discriminatory tariff-related trade diversion and resist any centrifugal forces of discriminatory practices against one another. Thus, the complexity and challenges associated with coordination are understandable. Yet, a coordinated response must emerge at the end of the tunnel—one that goes beyond tariffs and takes a hard look at the processes and structures of international regimes that leave space for economic statecraft to dominate the global economy.

 

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