Lion or lamb . . . what lessons can be learnt from Trump’s G7 visit?

Lion or lamb . . . what lessons can be learnt from Trump’s G7 visit?

Donald Trump arrived in Biarritz for the G7 summit on Saturday morning like an angry lion, having just slapped higher tariffs on Chinese imports, attacked the Federal Reserve and said he was ready to use emergency powers to compel US companies to stop doing business with Beijing.

But the Basque air seemed to have soothed the US president and he sounded more like a lamb as he flew back to Washington on Monday, suggesting that a deal to end the trade war with China might still be in the offing. In between, Mr Trump sealed informal agreements to ease commercial tensions with both France and Japan. So what trade lessons can we draw from the gathering of world leaders?

1) US president remains mercurial on China

Mr Trump seems to have become more volatile and unpredictable on Beijing in recent months, particularly when it comes to trade issues. One day, Chinese president Xi Jinping was America’s enemy, the next he was a dear friend.

The epitome of Trumpian confusion came after the US president first suggested he was having second thoughts about the escalation of the trade war, only to have the White House clarify a few hours later that he was regretting not having been tougher with Beijing. Mr Trump said his seesawing positions were a negotiating tactic, but a year-and-a-half since the start of commercial hostilities with China, there is still no deal in sight.

2) Japan deal is almost fully cooked

The US and Japan have been promising a “mini deal” to ease their tensions on trade for months, and finally it is here, with Mr Trump and Shinzo Abe, the Japanese prime minister, striking a preliminary accord. Details will be filled in by next month. The Japanese will open up some of their agricultural sector to US competition, while Washington will cut tariffs on some industrial goods for the benefit of Tokyo. Both sides will agree to new terms for digital trade.

If talks fall apart, it may be because it is still unclear how secure Japan’s immunity from auto tariffs will be. Mr Trump said they were off the table for now, but they could come back later.

3) Europe is still hoping to avoid a transatlantic meltdown

Emmanuel Macron showed he was highly effective at managing Mr Trump and ensured he did not totally spoil the summit. But the French president achieved something more — a possible deal out of the White House to avoid US retaliation against France’s digital tax.

The US has been considering a tariff on French wine, a doubling of taxes on French companies and individuals doing business in America, and a challenge at the World Trade Organization, in response to French levies on US technology companies. But a tit-for-tat on trade between Mr Macron and Mr Trump seems unlikely to happen for now, or at least until the US president changes his mind again.

The assumption has been that the EU and the US are heading for a big trade crash later this year, but there is still a chance one can be averted.

US figures cast shadow over industrial revival hopes

Mr Trump’s economic advisers have, at least in public, dismissed any notion that the US may be heading for a major economic slowdown, or even a recession. But some of the latest manufacturing data have made for grim reading in the White House, suggesting that the president’s rough-and-tumble trade policies may not end up delivering the industrial revival the administration was hoping for.

IHS Markit’s manufacturing PMI index for August, released last week, fell to a level of 49.9, in contractionary territory and the lowest since 2009 in the depths of the great recession.

It said American industrial companies were seeing a decrease in new orders and export sales, as they trimmed inventories in the face of concerns about weaker global economic conditions. The July ISM index, a separate manufacturing survey, also showed a decline, though it remained in expansionary territory.

Employment in manufacturing businesses has continued to increase this year, but at a slower rate compared with 2017 and 2018. Even US Steel, a company that was supposed to benefit from the metals tariffs imposed by Mr Trump, was forced to announce up to 200 lay-offs in Michigan this month, as steel prices have fallen over the past year.

Mr Trump and his team had been betting that the main political fallout from their trade wars would be American farmers hit by retaliatory tariffs and closed export markets. But the president is doling out billions of dollars in aid to compensate farmers for their losses, so the damage could be contained — many farm states will vote for his re-election anyway next year.

However, it is clear that a broad swath of the US manufacturing economy is now taking a hit.

In reply

Nice summary of a busy weekend. As usual the other big trading powers are evidently having an impossible time working out what Donald Trump will do next and how to engage, writes Free Trade co-author Alan Beattie.

Mr Macron’s manoeuvrings are typically impressive at first sight, but then he has attempted to charm Mr Trump before (the Bastille Day visit in 2017 aimed at keeping the US in the Paris climate change agreement) and it didn’t last long.

In the EU, the central expectation appears to be that Mr Trump will hold off on car tariffs for a while — at least if he listens to US trade representative Robert Lighthizer, whom the Europeans perceive as being against imposing them when the deadline comes up in the autumn.

But Brussels also reckons the US will go ahead with sanctions arising from the latest iteration of the Airbus-Boeing case.

The number: 30 per cent

The rate of tariffs Mr Trump has vowed to apply on $250bn of Chinese imports starting on October 1, up from 25 per cent at present.

Chart choice

The guns of August: the chart here shows how Chinese tariffs on US goods are mounting, and increasingly putting US companies at a disadvantage (Chad Bown, Peterson Institute for International Economics).

Further reading

● The month a shadow fell over Trump’s economy (Washington Post)

● Central bankers rethink it all at Jackson Hole (FT)

● Business grows more concerned as trade war spirals (New York Times)

● Trump changes his tone on China but an agreement is still elusive (Bloomberg)

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