by Daniel Moss
William Clayton, a businessman who served alongside successive U.S. presidents and became one of the main architects of the Marshall Plan, was not a fan of tariffs. He characterized the barriers that arose during the Great Depression as one of the great crimes of the century. It's hard to imagine that Clayton, who believed that free trade was just as important to prosperity as U.S. financial aid and security guarantees, would approve even in the slightest of Donald Trump's efforts to reshape the trade situation.
The disruption engineered by the White House, pushing tariffs to levels not seen since the Smoot-Hawley Act of 1930, will be costly — even if full pricing isn't immediately clear yet. The global economy has not suffered some of the worst consequences feared in April. Demand for U.S. assets is sustained, despite the superficial allure of the "sell America" narrative. The International Monetary Fund doubts that growth will suddenly collapse and inflation has not taken off. Have we avoided the bullet or is it the shock that delays the pain?
It is noteworthy that countries do not exactly seem to be preparing to return fire. With the exception of China, which initially escalated and retreated to follow the White House's pace, there has been little retaliation. "It's not a war when only one side is fighting," JPMorgan Chase economists said in a recent note. "The main blow from the trade war will come from increased tariffs imposed by the US, but we also expected broad reactions from US trading partners." The counterattack "did not take place. In fact, barriers to U.S. exports have decreased," they wrote.
In no case does JPMorgan predict zero damage. Business confidence has declined, but it is not collapsing. Capital expenditure will be reduced. And although the chances of a recession are still high, a better outcome remains very likely.
This kind of restrained optimism – or limited pessimism – constitutes a break from the gloomy warnings. Christine Lagarde, the head of the European Central Bank, told leaders to prepare for the worst-case scenario, in which U.S. competition would drag the world into a catastrophic economic conflict. The prime minister of Singapore, a city-state that flourished at the height of free trade, could not hide his disappointment: Tariffs are not acts of friends, Lawrence Wong noted. His Canadian counterpart, Mark Carney, said relations with the U.S. would change forever. Chinese President Xi Jinping thoughtfully "equalized" the U.S. moves, but at the same time moderated his rhetoric and actions when deemed appropriate. Washington and Beijing this week extended the pause of increased tariffs for 90 days, the latest in a series of pauses.
India, which has been the subject of some fairly optimistic forecasts as China's economy has slowed, is one of the few major economies that has not reached a deal with Trump. But Prime Minister Narendra Modi has not responded measure by measure nor has he shown a desire to "patch" American moves. Yes, there was insult and heavy emotions. The governor of India's Central Bank rejected Trump's claim that trade in the region was dead. He praised India's contribution to global growth – by about 18 percent compared to 11 percent in the U.S. — and insisted that the local economy is doing well. Something quite accurate, based on IMF forecasts. Nor does it include the fact that in net size America's economy is much larger than India's.
Brazil, an up-and-coming player struggling to reach its full potential, also refuses to succumb. President Luiz Inacio Lula da Silva detests dependence on the United States and wants to be treated on equal terms. But Trump doesn't like the lawsuit against Lula's predecessor, who allegedly planned a coup. Brazil is trying to develop an alternative to the dollar and attaches great importance to its trade ties with the BRICS group of emerging economies. Many of these nations, as well as aspiring members of the group, have entered into agreements with Trump or are likely to do so. Brazil will reach an agreement.
So, did Trump get away with it? His advisers thought that access to the U.S. market was too lucrative to ignore, and they might have been right. It would also be naïve to conclude that there will be no cost. The global economy has slowed down but has not collapsed, foreigners are still buying US bonds, and it is certain that the dollar will be at the heart of the financial system for years.
But the nations that were humiliated will not forget this experience. Asia's economies will get bigger and bigger, and the siren calling for greater integration with China will get louder. Trump's attempts to dismantle the existing order may turn out to be an own goal. Just not this year.
Clayton, who became the top economic official at the State Department, believed that strong trade between the devastated nations of Western Europe was just as important as their physical reconstruction. The economic disorganization brought about by the whirlwind of war had been underestimated. Capitalism could revitalize the continent and prevent the political collapse of key countries. According to Ben Steele's book "The Marshall Plan: Dawn of the Cold War," Clayton insisted that the U.S. "should run this show."
Trump's team boasts of restructuring the system that emerged from the ideals of the postwar period. An arrogance that may ultimately prove to be misplaced.
