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Your guide to what Trump’s second term means for Washington, business and the world
It turns out that the leader of a country where journalists get slung in jail for writing or broadcasting the wrong thing is also pretty good at manipulating the media beyond its borders. The photos of Xi Jinping at last week’s Shanghai Cooperation Organization convening the leaders of the big emerging world powers — including, importantly, India’s Narendra Modi — went around the world, kicking off another round of predictions of a new world order.
Those analyses aren’t necessarily wrong, certainly as far as defence and security matters go, as my colleague Gideon Rachman observes. And Modi’s anger at Donald Trump’s self-defeating imposition of tariffs of up to 50 per cent on Indian exports undoubtedly pushed India towards China’s political orbit.
But in trade and economics, blocs do not realign so easily. Neither do companies simply snap into a new geopolitical formation at the command of governments. A shared grievance against a common strategic enemy doesn’t mean big middle-income economies will throw in their lot with an economic order led by China.
First, as a general matter, trade does not move in lockstep with strategic alignment. Markets still matter. True, as research by the Bank for International Settlements has shown, trade and particularly investment are showing some fragmentation along geopolitical lines. But the study also notes the effect is strongly offset by the simple operation of supply and demand. Countries now trade more readily with friends than with foes, but they still sell eagerly where the demand is.
Second, Trump’s tariff regime is disruptive but not necessarily prohibitive of trade. Mitigating the rush of news about tariff walls is a steady stream of low-key but substantive announcements of holes being punched in them.
Trump astounded and dismayed Switzerland last month by announcing a huge 39 per cent tariff on its exports, but subsequent exemptions for gold and pharmaceuticals mean only 10 per cent of all Swiss exports will be affected. Indonesia, locked in talks with the US, recently said Trump had agreed to exempt palm oil, cocoa and rubber from duties.
India is furious over its 50 per cent tariffs, but its bid to steal iPhone export business from China is so far intact, thanks to the exception Trump carved out for electronics. V Anantha Nageswaran, Modi’s chief economic adviser, estimated recently that the tariffs currently imposed would probably take half a percentage point off Indian GDP growth this year; that’s not catastrophic for an economy likely to grow between 6 and 7 per cent.
Even if Trump (improbably) puts tariffs on iPhones as well, what is India going to do? Sell them to China, itself a massive net electronics exporter? Diversifying away from the US market towards other importers of consumer goods, such as Europe, is one thing, and the US in any case buys less than 20 per cent of global imports, even on a value-added basis. But a determined attempt to reorient towards a bloc led by a mercantilist competitor is quite another.
China’s shift back to export-led growth in recent years shows no signs of moderating, with car sales in particular continuing to rise sharply. Governments are keen to import green tech from China, but that’s a business proposition that doesn’t require geopolitical alignment.
One of Xi’s most important friends these days is Vladimir Putin, but Russia’s military and strategic salience far outweigh its economic heft. Russia’s economic importance is as a source of hydrocarbons and a middling consumer market, a tenth the size of the EU. India doesn’t buy Russian oil because of geopolitical positioning. It buys it because it’s cheap.
More generally, countries are right to be suspicious of China as an aspirant geoeconomic hegemon. Xi has sufficient leverage over the US, deriving from China’s strategic control over rare earths, that he might blackmail Trump into lifting tariffs — as he did with the “phase 1” deal in Trump’s first term — and pivot back to trade with the US. The two presidents are likely to meet in the next month or two, and Xi is very much not the junior interlocutor.
As ever, global economic heft is Trump’s to lose. The work on payment systems that China and other big emerging markets have been doing is not negligible but is certainly not a serious challenge to the dollar, unless Trump starts weaponising the dollar payments system on a large scale. Trump’s clodhopping attempt to bully the EU into putting tariffs on India and China underlines his unpredictability, but it hasn’t actually come to pass.
The biggest threat to the US’s global pre-eminence isn’t China. It is Trump. To a casual observer it might look like he’s deliberately trying to sideline the US from the global trading order and indeed the world economy itself. But he’s got quite some way to go before he achieves it.
