Trump Trade War will Benefit Only China

U.S. President Donald J. Trump (R-New York) might start a trade war that has the potential to reshape the world’s geopolitical order.

The fear is that tariffs on products like steel might drive historic U.S. allies like the European Union, Japan, the United Kingdom, Canada, and Mexico, closer to Russia. The real winner from the trade war will be China which will have a closer relationship with America than ever before.

The biggest beneficiary from the imposition of 25% US tariffs on imported steel and 10% tariffs on aluminum imports would be Russia in the short term. Russian metal producers like Novolipetsk Steel (NLMK) are among the largest in the world.

The fear is that countries like France will enter into exclusive trading relationships with the Russian Federation. That might shut Indian steelmakers like ArcelorMittal SA (NYSE: MT) out of many markets. French President Emmanuel Macron has announced plans to renew his country’s relationship with Russia.

Franco-Russia Strategic Project

Macron is promoting a “Franco-Russia strategic project” that includes closer economic ties, Fox News reported. Such a project has deep historical roots, France’s ties to Russia go back to Peter the Great. It is also worrisome because a similar Franco-Russian alliance helped trigger the First World War in 1914.

A major fear is that countries like Germany and France will try to play Russia off against the United States. The biggest winner from such games would be China, which does not need to import steel and does not rely on steel exports.

Most of China’s exports to the United States consist of consumer goods. Trump has failed to place tariffs on Chinese goods because of fear of a political backlash from working-class American voters that benefit from low prices on consumer goods like electronics.

Caught in the middle are Canada and Mexico which rely heavily on exports to the United States. Canadian Prime Minister Justin Trudeau retaliated against Trump’s claims by placing surtaxes on American steel and aluminium.

Tariffs are a mixed bag for Canada’s steel industry. The tariffs will have a positive impact by raising the price of steel, Marion Britton the Chief Financial Officer of Canada’s only publicly traded steel distributor Russel Metals Inc. told Bloomberg. Other Canadian steel executives were confused and angered by the Tariffs the Washington Post reported.

European leaders are clearly irritated by Trump’s trade policies, EU trade commissioner Cecilia Malmstrom has labelled the policies a “dangerous game,” the BBC reported. The EU retaliated against the metals tariffs with a page list of duties on American projects ranging from Harley Davidson motorcycles to Kentucky bourbon.

Is it a Trade War or Just Politics?

Trump’s tough talk on trade might be an attempt to win votes in steel-producing regions of the United States – like Pennsylvania and Ohio.

Trump’s Republican Party lost a special election for the U.S. House of Representatives in Pennsylvania’s 18th District in steel country by just 627 votes in March, The New York Times reported. Trump carried the 18th District by 20% in the 2016 presidential election.

Trump’s trade actions, which are designed to appeal to working-class voters in the Midwest, might really be intended to help Republicans keep control of the Representatives, the lower house of Congress. Observers think that the Democrats have a strong chance of winning control of the House in the November election. Democratic control of the Representatives would be problematic for Trump because House Democrats would be under political pressure to impeach or remove the President from office.

The trade actions are coming just at the beginning of the 2018 election season in the United States. The election is scheduled for 6 November and campaigning will begin in earnest in August. There is a strong possibility that Trump might end the “trade war” after the election.

The Damage has been done

Even if the trade war turns out to be just a hollow political ploy; a vast amount of damage has been done to both the international trading order and the United States’ historic alliances.

Trump seems to care more about getting a better trade deal from China than US alliances, Eurasia Future noted. That might set the stage for a future US China alliance that will run roughshod over weaker powers. Trump is only restrained from making more open moves towards Beijing by racist elements in the Republican Party.

Future presidents might have no such restraints; which raises the possibility of a bipolar world order in which Washington and Beijing carve up the globe. The obvious losers from that order would be India, Russia, and Europe. Smaller powers; like the UK, Canada, Australia, Brazil and Japan, are likely to be caught in the middle or forced to make alliances with weaker powers like Russian and India.

A new trading order that will shut many companies and countries out of specific markets is likely to emerge. Such trade wars have the potential to harm insurers because governments might start retaliating against insurance companies for their nations’ trade policies.

One thing is clear the old global trading order is dead and a new one that is more chaotic is emerging. The risks from that order are great because its composition is unknown.