Countries ponder signing non-binding deals with a trustless US president

Hello and welcome to Trade Secrets. Future generations of game theorists are going to find rich pickings in governments’ manoeuvrings around Donald Trump’s wrongly named “reciprocal tariffs”, which were imposed on April 2 and a week later suspended supposedly for 90 days pending negotiations. The UK and China have so far made deals that might generously be described as preliminary sketches, improbably assuming they do indeed ever turn into finished works of legally binding art.

Below I look at how other governments are reacting now, and readers’ responses to my question from last week of whether the UK and China did the right thing. Charted Waters, where we look at the data behind world trade, is on the EU trade surplus with Ukraine. Incidentally, if you want a discussion of the issues below in audio form, here I am on last week’s Unhedged podcast with the great Katie Martin, of which the transcript is here.

The tricky tactics of tackling Trump

On the face of it, Trump unleashed a bombshell with his assertion last week that he would impose “reciprocal tariffs” on a bunch of countries in the next few weeks without negotiation or consultation. In reality, it didn’t gain much attention from the trade community or financial markets. Why? No one is really sure whether Trump is serious about anything these days, nor indeed whether he even understands what he’s saying.

If you think about it, it’s kind of incredible that the president of the United States of America threatens potentially massive tariffs on dozens of trading partners and the general reaction is “whatever”. In the meantime, he contented himself with wandering around the Middle East, making obviously bogus announcements about signing deals worth a grillionty bazillion dollars and being given a plane to take home, like a party bag at an over-catered child’s birthday celebration.

So what can we conclude so far about governments’ dealings with Trump? For one, we can now rule out there being a concerted effort to deal with him collectively, whether because of different interests and positions or a prisoner’s-dilemma lack of trust. Nor are governments rushing to build alternative networks or strengthening those already there. Ministers from the Asia-Pacific countries in the CPTPP agreement last week vaguely talked about “working towards dialogues” with the Association of Southeast Asian Nations (Asean) and the EU, just about the most milk-and-water promise you could imagine.

Nor, certainly in the case of the UK, is there strict adherence to multilateral rules. The UK accepted a deal that violated the “most-favoured nation” principle, and has vaguely agreed to gang up on China if called upon to do so. The big trading powers have taken a dim view of these acts of self-preservation. EU ministers were cross about the thinness of the UK deal, which they have sworn not to replicate, and Beijing warned London not to take sides in a US-China trade war.

In practice, it’s entirely possible the US will neither be focused nor determined enough to undermine the MFN principle systematically with big trading partners, nor force the UK to stick up trade barriers against China and ban Chinese investment. After all, the first Trump administration did introduce a poison pill in the US-Mexico-Canada (USMCA) trade agreement by constraining signatories from making deals with non-market economies (that is, China). But that hasn’t noticeably affected Mexico and Canada’s calculations since.

The EU and UK are having a summit today, where apparently the usual last-minute deal has managed to reach some sort of agreement on a bunch of contentious issues that the UK has mishandled in its usual clodhopping way (youth mobility) and the EU has been typically short-sighted and petty about (fisheries). But Britain’s deal with China isn’t hanging like a forbidding black cloud over the meeting or disrupting the sides’ ability to make a politically feasible agreement.

As for the EU’s dealings with the US, Brussels has made a pretty good fist of refusing to be rushed to the negotiating table and insisting it won’t accept the 10 per cent baseline “reciprocal tariff” without retaliation — though that latter principle might well bend under pressure. The FT reported last week that Brussels and Washington had begun the early stages of talks. But it seems unlikely the EU will be sprinting to sign a fast deal. Mind you, I said that about China as well.

In other negotiations news, Australia said it’s keen to get a deal with the US, but not at the cost of joining an anti-China posse (which, given the massive skew of its exports towards China, is not surprising). Japan is less eager to signal it wants a quick agreement, partly for domestic political reasons.

Where do we go from here? Many sages (I think correctly) reckon financial markets have underpriced the costs of the tariffs, especially those that remain in place between the US and China, perhaps because they think we’re on an inevitable path back towards normality. But that looks pretty complacent if normality is defined as a 10 per cent baseline tariff on all other countries; sectoral duties on steel, cars, pharmaceuticals and so on; and — critically — an eccentric policymaking regime under which tariffs could shoot up again at any time. If Trump really does start announcing a whole array of fresh unilateral duties, I can see investors taking fright again pretty quickly.

What readers thought about tackling Trump

While we’re on the subject, I asked you what you thought about the UK and China deals with the US and whether London and Beijing were right to sign them. I wondered if I’d been a bit too negative about the UK deal in particular. But in fact, if anything, you were more sceptical than me.

There was not one expression of enthusiasm as such. Responses ranged from a straight “No” to a more detailed explanation that the UK should have aligned itself with the EU, while China had much better cards than the US and could have extracted more. Indeed, several of you said the US was as or more fortunate than China in getting the deal it did. 

I had no idea my readers were so hawkish. Maybe I should up the aggression quotient in future newsletters.

Charted waters

The EU is running an increasing trade surplus with Ukraine but nonetheless (see links below) wants to restrict imports from the country further to help its farmers.

Trade links

Trump wrote on Saturday that the giant retailer Walmart, instead of raising prices, should “eat the tariffs” that he previously said Chinese exporters would eat. The smart money remains on consumers eating them, or rather eating less because of them.

The EU is dismaying Kyiv by preparing to raise tariffs sharply on imports of agricultural products from Ukraine within weeks, following a campaign led by Poland on behalf of its farmers.

Last week, the US Court of International Trade heard oral arguments against Trump’s use of the International Emergency Economic Powers Act (IEEPA). Here is an account by Ilya Somin, an academic who helped bring the case. If you have nearly two hours to spare and much more patience than me, you can listen to proceedings here. I previously wrote about how most scholars think courts are unlikely to stop Trump.

The FT examines how Chinese restrictions on rare earth sales could hit global supply chains. (I will come back to this at some point.)

The National Public Radio podcast Planet Money looks at how US farmers suffered from Chinese retaliation against Trump’s tariffs before. The transcript is here.

The FT looks in depth at how governments around the world are dealing with Trump. 

Trade Secrets is edited by Harvey Nriapia