As G7 ends, President Trump opposes allies rather than concerting measures against China

Trade correspondent L.C. reports on the unraveling of the G7 summit.

When the annual Group of Seven Summit (G7) in Charlevoix (Quebec) on June 8th-9th ended, President Trump decided to oppose allies rather than concert with them measures against China. This raises questions about all aspects of US trade policy going forward:

• The escalating moves around the US Section 232 iron and aluminum tariffs;
• The trade confrontation with China as US tariff hikes loom;
• The initiative to work with allies to rein in Chinese transgressions;
• The effort to cooperate on WTO reform;
• The quest to find willing new bilateral FTA partners;
• The fate of NAFTA.

Today’s lead editorial in the Wall Street Journal, headlined “Disruption Isn’t Enough,” sounded a similar note:

Donald Trump has proved in 18 months that he can disrupt the global status quo, for better (Iran) and worse (trade). The question as he brawls with his G-7 allies after their annual summit and now meets with adversary Kim Jong Un is whether the President knows that disruption isn’t enough. Sooner or later he has to contribute to a better world order instead of merely blowing up the old one….

His withdrawal from the Pacific trade deal was strategic folly if his main priority is changing China’s behavior. His steel and aluminum tariffs punish friends who could forge an alliance against Chinese mercantilism. Blowing up NAFTA would cause widespread economic damage with no compensating benefits.

The G7 leaders could have built on what the US, Japanese, and EU trade ministers agreed to in their May 31st trilateral meeting in Paris. According to their joint statement:

The Ministers confirmed their shared objective to address non-market-oriented policies and practices that lead to severe overcapacity, create unfair competitive conditions…, hinder the development and use of innovative technologies, and undermine the proper functioning of international trade, including where existing rules are not effective.

The final G7 Charlevoix Communiqué, which the US didn’t sign despite it having been hammered out jointly in advance, suggests that the leaders were expected to discuss a common effort to deal with China. Point 5 of the communiqué states:

We will work together to enforce existing international rules and develop new rules where needed… addressing in particular non-market-oriented policies and practices, and inadequate protection of intellectual property rights such as forced technology transfer or cyber enabled theft. We call for the start of negotiations – this year – to develop stronger, international rules on market-distorting industrial subsidies and trade distorting actions by state-owned enterprises. We also call on all members of the Global Forum on Steel Excess Capacity to… implement its recommendations. We stress the urgent need to avoid excess capacity in other sectors such as aluminum and high technology. We call on the International Working Group on Export Credits to develop a new set of guidelines for government-supported export credits, as soon as possible in 2019.

Reportedly, Prime Minister Theresa May took the lead on this idea. But there are no indications that the commitment received any serious discussion in Quebec.

Perhaps this is not too surprising given reports late this week suggesting that the President is not interested in any cooperation with Europe. Sources told Axios that in the late April meeting between Trump and French President Emmanuel Macron, Macron offered, “Let’s work together, we both have a China problem,” to which the President responded that the EU is “worse than China” and proceeded to “rant” about German cars coming into the US.

Trump-Trudeau rift and NAFTA

This year’s summit left Trump-Trudeau relations in terrible shape. That could spur the President to give six-months’ notice of US intention to leave NAFTA. The anger the President directed at Ottawa was intense. He expressed outrage that Canada would retaliate against the US steel and aluminum tariffs which, he stated, were a response to Canada’s dairy tariffs. That claim, however, undermines the US assertion that the tariffs were imposed to protect US national security, as required for a 232 action. The President also suggested that Canada’s tariffs could be the basis for imposing tariffs on their vehicles – a threat also raised against German auto imports.

It is not yet clear where things stand in other policy arenas after this whiplash summit, where President Trump was alternately amiable – saying relations with Canada have never been better – and hostile. He appeared to share the goals of the group – at one point calling the summit “tremendously successful” – until after he had left and denounced it.

Because of this new threat to US relations with trading partners and new questions about how thought-out the President’s trade policies are, the post-summit uncertainty could give new life to the Corker bill to rein in the President’s unilateral trade powers, a bill that had lost momentum late this week.

The President’s surprise free trade proposal

One of the odd reports from the summit is that during the June 8th discussion of trade, in which President Trump decried US trade deficits, he suddenly suggested that the G7 should work to end all tariffs, non-tariff barriers, and subsidies. When reporters asked if he offered this proposal, he told them, “I did, oh I did…. No tariffs, no barriers, that’s the way it should be. And no subsidies, I even said.” Kudlow confirmed this, saying on June 10th, “President Trump made it clear time and again that he wants to reinstitute a process of free trade, no tariffs, no tariff barriers, no quotas and subsidies.”

But even assuming the President is serious about this proposal, it ignores some important realities. Four of the G7 countries, the EU members, can’t negotiate trade provisions on their own. Subsidies can only be dealt with in a global context (e.g., the WTO) because otherwise all countries not in the pact would benefit without having to give anything in return (the free-rider problem). And if the G7 were to end all tariffs without notification and acceptance by the WTO, the zero tariffs would have to apply on a Most Favored Nation basis to all other WTO members. So while the optics of the President’s suggestion were favorable, it wasn’t really serious.

But the President’s denunciations of the trade policies of the other G7 allies were serious, as he made clear in his remarks to the press. The US has always been cheated by its trading partners, he declared, the result of past US presidents being weak:

It’s going to change…. I mean it’s not a question of ‘I hope it changes.’ It’s gonna change — 100%. And tariffs are going to come way down because people cannot continue to do that. We’re like the piggy bank that everybody is robbing.

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