July 12, 2019

The Trump administration’s “America First” battle cry in trade negotiations may curry favor among its supporters in the United States, but weaponizing trade policy in this way undermines the fine-tuned supply chains that companies have meticulously constructed over recent decades.

Consumers across the globe — including Americans — ultimately pay the price in the form of more expensive goods and elevated uncertainty.

Multiple fronts

It seems that the administration is determined to open up a new front in this war every month. A recent example is President Trump’s threat at the end of May 2019 to impose an escalating series of tariffs on Mexico unless the country makes more of an effort to combat illegal immigration into the US. A week or so later, an agreement was apparently reached that enabled the Trump Team to lift the threat. However, the tariffs could still be activated if Mexico fails to deliver results over the coming months, so the uncertainty remains.

Ongoing disputes with China continue to rack up casualties. “US agriculture exporters should brace themselves for a prolonged trade war that will continue to erode their share of the all-important China market because China won’t budge on certain demands, and Trump’s self-image is inflated by being tough on China,” said the Journal of Commerce on June 17, 2019.

China and Mexico are not the only countries that are feeling the heat. India has announced a 70% tariff on various American products including apples and almonds in retaliation for increased duties on steel and aluminum imported from India. The US is unhappy with India’s trading relationship with Iran.

Companies are being caught in the crossfire too. For instance, AP reports that revenues for Chinese telecom giant Huawei will be $30 billion less than forecast over the next two years as a result of trade restrictions imposed by the US. Huawei is on America’s “Entity List,” which means that American companies are effectively barred from selling components to the Chinese company.

More hostile landscape

It can be argued, with justification, that such measures are long overdue given China’s checkered history as a trading partner, especially its propensity for co-opting foreign companies’ intellectual property. Indeed, in many respects, China began the process of weaponizing trade policy.

However, the Trump Administration’s escalation of the war is unprecedented in modern times, and the long-term consequences could be dire. Furthermore, the administration has not prepared the country for a protracted trade war, and thus may be forced to retract or lose the 2020 elections.

To respond, companies are being forced to reconfigure supply chains built over many years to deliver goods across the globe as efficiently as possible. As my colleagues at the MIT Center for Transportation (MIT CTL) describe in MIT CTL’s recent blog post, two examples are Walmart and Cisco. Walmart has apparently made it possible for suppliers to respond swiftly to tariff increases with requests for price rises. Cisco is reducing its reliance on China in anticipation of higher tariffs.

Such actions are the tip of the commercial iceberg. America’s heightened aggressiveness in trade circles raises many questions about how companies should operate going forward. “Companies that are the economic engines of countries need to think about changing their modus operandi from being optimized for a low-tariff policy environment to a completely different design suited to high tariffs and trade barriers,” says the MIT CTL post. Most importantly, companies should build flexibility into their supply chains so they can quickly respond to changing international circumstances. Such flexibility is expensive, and is part of the price companies and consumers pay for the uncertainty.

Also, the trade landscape is fast becoming more hostile for countries that lack the negotiating muscle of leading powers such as the US and China. Consider, for example, the United Kingdom’s prospects. If Brexit supporters get their way and the UK crashes out of the European Union, it will likely turn to the US for a trade deal. Realistically, the US is in no mood to grant concessions. The UK will probably be forced to accept a one-sided deal, tilted in the US favor, and to comply with conditions in areas such as environmental regulation that the Brits may find onerous.

The weakening of third-party trade adjudicators such as the World Trade Organization will make it easier for powerful nations to impose their will on smaller countries. Both America and China appear to be ever more willing to flout international trade norms and the supra-national organizations that enforce them.

Finally, wielding trade agreements as weapons may eventually erode US influence on the world stage — not enhance it. Other countries may develop workarounds that exclude the US. For instance, when President Trump pulled the US out of the Trans-Pacific Partnership trade agreement last year, 11 countries including Australia, Chile, Japan, and Singapore signed a similar agreement which covers a market of nearly 500 million people. America’s exclusion from the deal undoubtedly weakens the pact, said the BBC, but by exiting the agreement the US could lose an estimated 0.5% boost to its GDP and an additional $2 billion “because firms in member countries have an incentive to trade with each other instead of with American companies,” said the BBC.

Enduring changes

International trade connects the world’s economies as never before, and supply chains that deliver goods globally are the glue that binds countries together. Weakening or breaking those bonds will undermine the free flow of goods, and promote antagonism that could lead to even more destructive conflicts. Nations that trade goods are generally less likely to trade bombs.

This is not to say that Chinese trading practices are harmless. In fact, US calls for better protection of intellectual property, stopping forced technology transfers, the elimination of non-tariff barriers, etc., are seen as fair demands (outside of China). However, the lack of nuance in the US administration’s approach to trade policy in general and to trade with China in particular, may have permanently changed the way global commerce is conducted.

Importantly, many Democrats in the US Congress support President Trump’s aggressive trade policy. Consequently, even if a Democrat wins in 2020, the new president will surely pick up the trade weapon President Trump bequeaths him or her to pursue their political agenda. While Democratic trade policy may be executed with more refined speeches and less bravado, its populist roots are not dissimilar to the current policy. Consequently, regardless of who wins in November 2020, we’d better rethink the way countries do business internationally.