Trump’s Trade War Really Might Be Easy to Win

Trump knows when to hold ’em and knows when to fold ’em, knows when to walk away and knows when to run, as Kenny Rogers advised all poker players. He was holding a losing hand when it came to handling the children brought to America illegally by mothers crossing the border illegally, so he folded ’em. But when it comes to trade policy he knows he is holding a winning hand-and intends to force the other players in this high-stakes game to pay up.

First come tariffs on steel (25 percent) and aluminum (10 percent), mostly imported from America’s allies. Canada will be hardest hit. The Toronto-based Howe Institute estimates that the steel and aluminum tariffs will cost Canada 6,000 jobs and cut its annual GDP by $8 billion. Two-thirds of Canada’s trade is with the United States, 85 percent of its auto exports go to America, and a considerable number of the industry’s 130,000 workers will be out of work if Trump goes through with his threat to raise U.S. duties on imported autos from 2.5 percent to 20 percent.

Prime minister Justin Trudeau is between a rock (Trump) and a hard place (his farmer-constituents, protected by a 270 percent tariff on dairy products) as he tries to negotiate a NAFTA deal while also retaliating to Trump’s steel and aluminum tariffs. Laura Dawson, the Canadian who heads the Canada Institute in Washington says “Canada is going to have to make some concessions.” But Trudeau had little choice but to retaliate.

Nor did the European Union, which made the decision to retaliate despite Angela Merkel’s preference for suing for peace. Germany’s economy is heavily dependent on its auto industry, which employs 117,000 workers, and exports about 800,000 vehicles per year-323,000 of them to the United States. It is shielded from foreign competition by the E.U.’s 10 percent duty on auto imports. Daimler has already issued a profit warning because of the U.S. threat, and the Ifo Institute, a Munich-based think tank, estimates that U.S. tariffs on automobiles would lower German GDP by €5 billion, or 0.16 percent of GDP. “No other country would suffer higher absolute losses from such a tariff as Germany,” says Gabriel Felbermayr, director of the Ifo Center for International Economics. Merkel just doesn’t have enough chips to get into a serious game of raise and re-raise with America.

Which is why the German auto industry is proposing the elimination by the E.U. and the U.S. of all duties on most vehicles, an idea that never entered the heads of German automakers when their tariff was almost five times America’s. Now that Trump is threatening to see their 10 percent and raise it to 20 percent (to continue the poker analogy) VW, BMW, Mercedes, et al. are born-again free traders. Whether they speak for their E.U. partners-the E.U. alone has authority to negotiate for its members-is uncertain.

That was a warm-up, low-stakes game, preliminary to a high-stakes effort to upend a trading order that Trump says seriously disadvantages America. Across that table sits Xi Jinping’s communist China. Trump’s opening bid there is a 25 percent tariff on $50 billion of Chinese goods, covering 1,102 product categories that XI is promoting as part of his “Made in China 2025” plan to dominate industries of the future. China called Trump’s bet, retaliating by threatening duties on 659 goods valued at $50 billion, including cars, crude oil, and soy beans, and unloosing its controlled media: Trump is “capricious . . . squanders the country’s reputation . . . rude, unreasonable, selfish.” Not very different from the mainstream American press’s treatment of the president.

Serious poker players regard this opening round as penny-ante stuff. Fifty billion dollars is less than half of one percent of the GDPs of both countries. But the betting and the risks are getting interesting. Trump has put on the table chips representing a 10 percent levy on $200 billion of Chinese goods, doubled to $400 billion if China retaliates. Also coming soon will be bans on exports of U.S. high-tech products to China, unless the regime ends its theft of intellectual property.

Unless the parties agree to call off the game before the next cards are dealt, we will soon find out which player has the most chips. If Trump is a cool enough player to ignore whining by some American firms, he has the chips with which to win. Here’s why:
• China’s exports to the United States come to almost 4 percent of its GDP, while U.S. exports to China equal only 0.7 percent of U.S. GDP. As consultants the Lindsey Group point out, “A tit-for-tat trade war has an impact on China that is six times that on America.”
• The U.S. economy is in rude good health, while China is the throes of an effort to reduce the massive debt overhang that is beginning to stifle its growth. That creates “a strain on the top leadership as it tries to fend off a trade war with the U.S.,” Diana Cheyleva, chief economist with London-based Enodo Economics, told the New York Times.
• China is having difficulty finding U.S. stuff to penalize. It has exempted LNG from tariffs because it desperately needs imports from the United States to fuel its economy. If it cancels orders now with Boeing, it will have a five-year wait to get on the books of Airbus. Tariffs on U.S. agricultural products drive up food costs in China.

In short, America can win this game. Whether the president can draft a peace treaty that accomplishes his primary goal of ending China’s massive theft of U.S. intellectual property and subsidization of the industries it is positioning to dominate the future is another question. Getting China to promise something and getting China to do something are not quite the same thing. In response to pressure from Trump, Xi promised to liberalize access to its securities market. Then comes the fine print-to qualify a firm must have at about $16 billion in assets, a threshold only very few firms can cross.

Looking at his hand, Trump is convinced that, as songwriter Leonard Cohen puts it, he has drawn the card that is so high and wild he will never have to draw another to earn the acclaim he so badly needs. As Ronald Reagan put it when asked his strategy against our major adversary at the time, “We win, they lose.”

Americans would even forgive Trump the inevitable claim that he invented that phrase.