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It's About Retaliation, Stupid!

Image credit: Donald Trump (Facebook: Creative Commons)

The United States believes that it has all the leverage in the world when it comes to negotiating international trade. Since it possesses the largest single export market and the biggest economy in the world, the latest imposition of steel tariffs of 10% and aluminium tariffs of 25% are within the scope of Donald Trump’s intention to put America first. Complementing this development has been the anticipated slap on Chinese imports valued at more than $30 billion dollars.

These protectionist trade measures, however, are not a panacea for America’s trade deficit, nor an effective remedy for high unemployment levels. Flummoxing liberal economists and Republicans, commentators have argued these measures will damage US fiscal interests and incite potential trade wars. The target – however – was not just rectifying a US trade deficit, it was a red flag for China. The United States is hitting back on an asymmetrical relationship.

Following the announcement of new tariffs, global scramble to negotiate concessions from the Trump administration ensued. Mexico, Canada and possibly Australia have so far managed to secure exemptions from the tariffs. This is unsurprising considering the US possesses a trade surplus in aluminium and steel exports to Mexico and Canada. Suggestions that the administration may enact harsher and higher tariff rates on these two metals were met with hostile reactions from Brazil, the European Union and China. Indeed, their responses have pre-empted fears of an impending trade war.

The European Commission has hit back with a list of US products, including Kentucky bourbon and Harley Davidson motorcycles that may be subject to higher tariffs or curtailed export rates if the collection of states is not awarded exemptions. EU Commissioner Cecilia Malmstrom issued a statement on 14 March warning: “if the EU is not to be excluded... there would have to be a firm and resolute, but proportionate, response.”

Yet these concession, and certain statements by Treasury Secretary Steven Mnuchin, suggest that this was not an ‘America First’ move against its global trade partners — in fact, it was a warning aimed at China. Trump’s move is an obvious red light at China, driven by the perception of a lack of reciprocity in international trade agreements. Mnuchin has framed the tariffs as an attempt to curtail the flood of production from China (which possesses 50 per cent of the world’s steel production) and urged other states to lean on Beijing. These measures might trigger a trade war. Economic critics reacted against Trump’s claim that “trade wars aren’t so bad” with damning evidence of the impact of the 20th-century Canada-US trade war between 1929-1933 with “little disagreement” that it “exacerbated and prolonged the Great Depression”. It appears that certain US states and consumers themselves will suffer from the new tariff levels, with a report by Brookings detailing the local consequences of these macro shocks. Indeed, retail groups including Apple and Walmart argued that tariffs would be ineffective against the trade deficit. If the risk outweighs the pay off – what is driving these tariffs?

The answer lies in reciprocity. Reciprocity and retaliation are at the heart of international cooperation when it comes to state interaction. However, new research has found that public reciprocity may play a large role in the American public’s opinion on targeting China. Using experimental surveys across China and America, the researchers found that reciprocity is a crucial determinant driving public opinion on regulating foreign direct investment flows. The survey evaluated the responses across individuals in China and the United States, finding that “respondents were consistently more likely to oppose foreign acquisitions when the firm’s home country did not provide reciprocal market access.” An investigation conducted by the Trump administration into China’s intellectual property practices found upwards of $30 billion in annual damages to US companies. Ultimately, these IP clauses have significantly disadvantaged foreign investment.

Critics have argued that Trump’s move will threaten America’s relationship with its global allies, do nothing to solve its trade deficit and ultimately trigger a trade war that will damage American consumers. Chinese Premier Li Keqiang was correct when he appealed to Trump that in a trade war “there are no winners”. But the logic behind retaliation and reciprocity suggest that this was never about winning.

The US would rather have no pie at all, than accept a smaller slice.

Hayley Pring is the International Trade and Economy Fellow for Young Australians in International Affairs.

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