Australia and the World Past and Present

Donald Trump likes to win.

When it comes to how he views another country, there is one metric that looms large in his mind – the balance of trade with the US.

Do they run trade surpluses with the US or trade deficits?

Trump’s view on this matter is pretty black and white.

For him, US trade surpluses are good thing. It means that the US is not being taken advantage of. Conversely, a trade deficit is bad and signals that the US has been duped.

Here are the largest trade deficits for the US- (according to http://www.tradingeconomics.com – 2022 figures)

China

The country with which the US runs the biggest trade deficit – by far – is China.

China felt the brunt of Trump’s tariff policy during his first administration.

Tariffs increased substantially under Trump sparking off economic retaliation from China and leading to a trade war.

Trump believes that the rise of the Chinese economy has been largely at the expense of American jobs and manufacturing. Never mind the role of company and industry leaders in the past deciding to shut down factories in the US and relocate production across the Pacific. In part, this was encouraged by comparatively cheap labour in China. China and the US have vastly different histories, cultures and interests.

The US runs a large trade deficit with Mexico. Trade with this Central American nation is massive. This is unsurprising given that the two countries are neighbours. For decades, US companies have taken advantage of relatively cheap labour to the south. The North America Free Trade Agreement (NAFTA) has loomed large over the economies of the US, Mexico and Canada since it was brought in 1994. NAFTA reduced and eliminated many of the tariffs between the signatory nations. Trump sought to replace NAFTA with a new agreement during his first term. His United States-Mexico-Canada Agreement (USMCA) replaced NAFTA in 2020. Key issues Trump sought to address was:

• The US-Mexico trade deficit
• Restricting the ability of Mexico and Canada to appeal if the US raised duties on imports into the US

As a contingency or perhaps as pressure tactic, in 2018 Trump started negotiating bilaterally with Mexico. Trump wanted measures hindering the production of generic drugs within Mexico.

The US relationship with Mexico is not simply economic. It is tied up with all sorts of issues. The big one is immigration – particularly illegal immigration. Trump sees large numbers of people crossing the border illegally and asks what is being done on the other side to stop it. This plays into a perception that Mexicans are taking advantage of the US economically on the Mexican side of the border but also taking job opportunities on the north side of the border. If the two countries could sort out their issues they would have much to be positive about. Mexico is not going anywhere. The two countries are neighbours. They have much shared history and many person-to-person connections – especially in southwestern states like California.

The US has a high trade deficit with Vietnam. On the other side of the world, the US and Vietnam once shared a war but perhaps little else. The US-Vietnam relationship is largely an economic one. Vietnam is not as strategically or politically important to the US as many other countries. Trump is likely to receive little blowback if he decides to unilaterally increase tariffs on imports from Vietnam.

Canada is the little brother to the north. Like Mexico, Canada is not going anywhere. The US and Canada should be natural allies. But the personal relationship between Trump and Prime Minister Trudeau is fractured. In 2019 Trump called Trudeau “two-faced”. Trump suggested that Canada should pay more for its own defense – 2% of GDP. Some of the issues that the US has with Mexico are not present in the Canadian relationship. Illegal immigration is not a large problem. Canada poses no significant security concerns for the US. Trump will probably feel that he can drive a hard deal with Canada and there will be little downside for him.

The US had a large trade deficit with Germany. Germany is a NATO ally. It is a manufacturing powerhouse with a highly-educated workforce and focuses of high-end manufacturing.

A strange pattern has emerged with Trump. Trump often rattles the cage of traditional allies as much as he goes after traditional enemies. Instead of buttressing the NATO alliance during his first term, NATO leaders felt somewhat threatened by his insistence that member states pay more for their own defense. Trump was in a form of low-level conflict with military allies while Russia was flexing its muscles. His relationship with Angela Merkel was also strained. What will be the consequences if Trump raises tariffs on German products in order to address the trade imbalance? Will this weaken Germany and embolden Russia?

Japan is another military ally with which the US runs a large deficit. After the Second World war Japan adopted its ‘peace constitution’. Japan was never again to develop a military for aggressive war. The US would provide the security umbrella and Japan turned its attention towards trade.

Throughout the rest of the twentieth century, it focused on increasing economic output, better productivity, quality control circles, research and development and searched the globe looking to acquire commercial intellectual property.

Car manufacturing boomed. Japan imported raw materials and exported value-added products. Electronics was a key industry.

Japan is an ally of the US and a crucial one at that. Given the rise of China, Japan is absolutely critical to American security in the northern Pacific. Another reason why it is important to US security is its proximity to North Korea.

US trade deficits with Japan are nothing new. They were a concern for America in the 1980s and 1990s for example.

Japan is already grappling with an aging society and the economic challenges that it brings with it.

What will happen if Trump decides to raise tariffs on Japanese products? It will weaken a security ally. Japan could look to develop other markets but it would be difficult to fill such a void. Would Japan and China look to trade more with each other? One of the problem with Trump’s approach is that it may strengthen the relationships between American allies and non-allies.

Countries with which the US has large trade surpluses:

These countries include the Netherlands, Hong Kong (China), Brazil, Singapore, Australia and the United Kingdom.

Australia should be well placed to seek an exemption if Trump raises tariffs across the board.

From Trumps point of view, the US is already ‘winning’ this economic relationship.

Australia has a track record of gaining exemptions from Trump’s tariffs.

Former ambassador to the US, Joe Hockey, was instrumental in securing a tariff exemption for Australian steel and aluminum.

It seems that Hockey had a very good relationship with Trump and good access, sometimes playing golf with the American president. It seems that this ‘golf diplomacy’ is not a bad way to go.

It is almost a certainty that Trump will significantly raise tariffs. He is often willing to put pressure even on traditional allies. But Trump’s policies are often implemented unevenly. He will provide exceptions if he wants to. Australia is well-placed to avoid Trump’s tariffs but things are far from settled.