So far markets have liked Donald Trump’s promised reflation more than they have disliked his threatened protectionism. The impact of large tax cuts and a more relaxed approach to banking regulation is thought to be more dramatic than the slow slog of trying to impose tariffs and other barriers to trade with China and Mexico whilst staying within World Trade Organisation rules.
There will be substantial institutional resistance to reversing the progress to freer trade in recent years. Arguably this will be more effective than opposition to tax cuts and general reflation.
Trump’s attitude to trade and deals is more nuanced than his critics allow. He is not against doing trade deals. He sees the advantage of lower tariffs or no tariffs. His argument is that trade with China and Mexico in particular has been skewed unfairly against the USA. He also felt the same was true of the proposed Trans Pacific Partnership.
It is one of the features of modern trade relaxation that the advanced higher income countries have got much further in lowering their barriers than the emerging market economies. The rich countries have accepted a lack of symmetry as part of their contribution to advancing development worldwide. If the west opens its markets more generously to developing countries they have more chance to export and make a profit. Their reluctance or refusal to reciprocate fully has been accepted.
Trump is concerned that products such as steel are being dumped at unrealistic prices in the USA. He will find that the Obama administration has already used WTO flexibility to impose retaliatory tariffs on dumped goods. He is also concerned at the export of whole factories to Mexico, where he is now seeking case by case to intervene to keep the jobs in the USA. His big tax reforms, if they go through, will help persuade more to come and to stay to make things in America.
The rich countries have not been entirely generous in their tariff arrangements. Whilst the EU has a very low average tariff of just 2.3 per cent on imports of goods excluding agriculture, it has remained very protective of farm products. Many foods attract tariffs of over 20 per cent, with some being charged at a rate of 75 per cent.
Under WTO rules a country or trading bloc may apply restrictions to a large sector like agriculture without upsetting the rest of the low-tariff or no-tariff deal. Restricting agricultural imports is especially tough on many developing countries, which have large agriculture sectors with the capacity to export.
EU tariffs can also militate against adding value to farm output. In a case such as coffee where the EU is not a main producer, green coffee can be imported without tariff, but tariffs are imposed on roasted or processed coffee to try to ensure that added value work takes place within the EU and not in the coffee growing country.
I suspect markets have got their response right to recent noises over trade. Trump may sometimes use strong words to try to force a better trading deal. He does want China, now a successful middle-income country, to make faster progress in removing its numerous and high tariffs.
He may indulge in some brinkmanship over the China trade. He will also want to show he has stemmed some of the flow of jobs south to Mexico. He will not want to throw the world WTO system into reverse and cause trade interruptions to faster growth. He will have to balance his rhetoric against his actions. We will have to get used to understanding the difference between striking a pose to get a deal, and the deal itself. This president-elect wants to be a deal maker, not a deal breaker.
John Redwood is Charles Stanley’s Chief Global Strategist.