Desire for agreement outweighs President Trump’s tendency to tantrums

Welcome to Trade Secrets. I struggle very hard not to say “I told you so,” which of course means I’m enjoying the opportunity. We had a great time Friday with President Donald Trump, who imposed a 10 percent tariff on Canada for accurately quoting President Ronald Reagan’s tariff statements. But more important (especially since Canadian imports are likely to be protected by the USMCA U.S.-Mexico-Canada trade agreement) were the three agreements he announced with Asian countries ahead of his trip to the region. (Here’s some great analysis.) Add to that strong signs of rapprochement with China ahead of the Trump-Xi meeting scheduled for later this week, and my prediction last week that the US-China trade truce would end seems pretty accurate at this point. Perhaps there will be mutual deactivation of weapons without actual decommissioning. Amid Friday’s tantrum, President Trump launched a Section 301 (unfair trade practices) investigation into China’s compliance with the “Phase 1” agreement signed with Beijing during his first term. I think this shows China’s strength in balancing its rare earth strategy with the soy boycott. But at the end of the day, no one knows anything. Today’s newsletter is about the EU’s strategic industrial policy efforts and President Trump’s support for Javier Millay. At Charted Waters, we look at the data behind world trade and we look at stock prices.

EVs are coming, EVs are going

I wrote a column last week about the broader impact of the Amazon Web Services outage that occurred earlier in the week. If Mr. Trump, who sees the tech sector (and many other sectors) as an extension of his administration, decided to use America’s dominance in cloud services as a weapon against the EU or anyone else who bothers him, things would get very messy.

The EU’s response to this, as we have been concerned about for several years, is the absolute prototype for EU industrial policy, whether for national security reasons or not. It will look like this. The European Commission is keen on a new pan-EU approach, and it will lead the way. Member states zealously protect their independence. France appears to be close to the European Commission’s position, but is proposing an intervention that would involve either actively bidding EU-wide spending or relaxing state aid rules at national level. Other member states are monitoring France’s actions with the suspicion cowboys have about coyotes circling the campfire at dinner.

Eventually, a kind of quasi-spontaneous approach emerges. This is powerful enough to somehow move the European Commission towards valuable “strategic autonomy” without actually turning the EU into a geopolitical power.

Now let’s expand the definition of “strategic” beyond network utilities such as cloud services to areas such as automotive. Policy legitimacy (particularly regarding the legitimacy of the World Trade Organization) is more difficult because it is much harder to claim that it is about national security, but political imperatives may actually be stronger. The transition to electric vehicles has recently become very worrying for Germany, even though the country’s automakers are predictably leading the way among European manufacturers in entering the field, due to the impact on regions dependent on internal combustion engine vehicle supply chains.

Assuming (I have my doubts) that making large-scale interventions to foster the car industry is the desired goal, is a pan-EU industrial policy towards EVs possible? Now, let me introduce you to an interesting plan by Sander Trudoir, Nils Redeker, and Lukas Guttenberg, published by the Jacques Delors Center think tank.

The plan here is essentially to make the French model of tying consumer EV subsidies to the manufactured carbon emissions of the cars they buy (rather than the emissions profile of the cars themselves on the road) universal across the EU, which would have the effect of excluding Chinese cars. Similarly, there will be reciprocal transactions with trading partners concerned about competition with China.

The authors optimistically argue that this European purchase plan does not conflict with the WTO. I think there are some pretty high hurdles that need to be cleared to prove that the carbon standards being used actually clearly target climate change, rather than simply favoring domestic production.

But still, at least this is an indicator that the conversation around very dramatic proposals for pan-EU industrial policy is now respectable. I believe that inertia, member state autonomy and the threat of retaliation from China will prevail and such a plan will not be implemented. However, as industrial sectors begin to be perceived as strategic, there will be more opportunities for these types of ideas to be aired.

A great day for Millay

Yesterday’s parliamentary elections certainly went very well for “Chainsaw Javier” Millay. He decisively defeated the Peronists and topped the polls by a wide margin.

This is also a big victory for Donald Trump. Not only because his great friend won, but because the potential for financial aid to Argentina totaling $40 billion and the promise to buy Argentine beef were quite clearly contingent on a successful election. Trump has won an election, though perhaps not for the last time.

What now? First, given the election results, there is little evidence that domestic opposition will force Mr. Trump to withdraw his loan and trade package in the short term. The affected parties are beef and soybean farmers who compete with Argentine exports in the US and Chinese markets, respectively, and those who took his small government’s statements to heart congratulate them. If Millay had lost, the story would have been different. I can imagine Trump gathering support without blinking. (To be honest, I can see him doing that anyway since he has no loyalty at all, but that’s not a high probability outcome.)

President Trump has already shown a willingness to embarrass American farmers without losing votes, and I suspect soybean producers will be looking to regain access to the Chinese market after the US president meets with Mr. Xi this week (see above). Or you can bail them out like before.

What happens next depends on Millay’s actions. President Trump did not make the aid conditional on any specific decision, so as far as I’m concerned, it all depends on whether Mr. Milay decides to carry out a significant devaluation of the peso and tighten fiscal policy enough to curb inflation and prevent the real exchange rate from appreciating again. It wouldn’t be pretty, and it wouldn’t be popular, but he has two years until the next presidential election, and he’s the president most likely to actually get through an election for decades. (Also, we said the same about his predecessor Mauricio Macri, but look what happened to him.)

Structurally, Argentina’s economy is a mess due to overregulation (or at least bad regulation), but as I’ve said before, the biggest problem is macroeconomic. If Mr. Milay does not agree to large-scale exchange rate adjustments, the worry is that the United States will simply dig deeper into the quagmire of loans to Argentina as many governments and investors try to preserve the peso, which has been sinking for decades. Under these circumstances, one can imagine that the United States would let Argentina go without looking back, especially if President Trump finds a new partner in Brazil’s Luiz Inacio Lula da Silva.

Sea area with nautical charts

One counterargument to my belief that Trump is prioritizing trade peace is that stock prices are looking very healthy, perhaps suggesting that Trump has the freedom to escalate the trade war without causing another market meltdown.

trade links

The United States and Qatar have told the EU that continuing the directive on corporate sustainability due diligence would put liquefied natural gas imports at risk.

Volvo and Volkswagen have warned of disruption to car production over a dispute between China and the Netherlands over chipmaker Nexperia.

The FT reported that China’s renminbi-denominated loans abroad are rapidly increasing as Chinese authorities continue their campaign to lower the dollar’s strength.

In a highly recommended periodic analysis, scholar Richard Baldwin examines why U.S. imports and exports fell after President Trump’s tariffs.

Jun Do, a professor of economics at Aston University in the UK, makes a good case that President Trump doesn’t understand global supply chains.

Trade Secrets is edited by Jonathan Moules