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Could Trump, G7 Strike a Grand Bargain on Trade?

Could Trump, G7 Strike a Grand Bargain on Trade?

Despite months of high-level outreach from America’s closest allies, the Iran nuclear deal recently became the latest casualty of President Trump’s aversion to multilateralism.

At next month’s G7 summit in Charlevoix, Quebec, Trump will be surrounded by the counterparts he has continually spurned. The other leaders at the table—representing Canada, France, Germany, Italy, Japan, the United Kingdom, and the European Union—may find themselves questioning whether they will ever be able to bring Trump into the multilateral fold. As difficult as that may be, they must keep trying, given that Trump’s next target for demolition is the global trading system.

In the days ahead, President Trump will make a series of far-reaching decisions on trade policy. The NAFTA talks continue to drag on, and Trump could choose by June 1 to impose steel and aluminum tariffs on Canada and Mexico, further complicating the path to a revised agreement. Similar tariffs could also be levied against the European Union, which has already announced plans to respond. Looming large are U.S. tariffs on approximately $50 billion worth of Chinese imports expected to take effect in June—quite possibly setting off a ruinous trade war between the world’s two largest economies.

The situation is perilous, but also presents an opportunity for a grand bargain: if Trump can hold the “friendly fire” that would hit U.S. allies, the allies could unite behind Trump in a coalition pressuring China to accelerate needed economic reforms.

In practice, what would this grand bargain entail? Trump would grant Canada and the Europeans a long-term reprieve from steel and aluminum tariffs and commit to enter negotiations with the European Union on a modest trade package. A similar framework could be offered to Japan, where U.S. steel and aluminum tariffs are already in force. Trump would also walk back his threat of withdrawing from NAFTA and allow those negotiations to continue in good faith.

In return, the other G7 leaders would agree to launch a new initiative for economic engagement with China. In a joint statement, the G7 nations would call on China to do a better job of upholding the international economic norms that helped to facilitate its rapid ascent, and outline the measures they are prepared to adopt, individually and collectively, to hold China to account.

These measures would be aimed at pushing China to address shared concerns about trade barriers and other market distortions that have had major reverberations throughout the global economy. A new, U.S.-led task force could be established to monitor progress and coordinate on policy and messaging.

Would Trump possibly consider such an offer?

Granted, Trump may view this proposal no more favorably than the multilateral deals he has already torn up. He may also not want to back down from his threats against NAFTA or the EU, for fear of looking weak.

On the other hand, the G7 summit on June 8-9 may represent the last chance for the Trump Administration to find a face-saving off-ramp that averts global trade chaos. Perhaps the President can be convinced that negotiations with China should be his top priority, and that the administration needs more leverage in order to make real progress with Beijing.

China’s economy is now large enough that Beijing can match U.S. tariffs and investment restrictions tit for tat. It can pour billions into subsidizing the development of high-tech sectors targeted by proposed U.S. policy measures. And as long as the United States continues to act unilaterally, Beijing will certainly be glad to capitalize on divisions between the U.S. and its allies.

China’s latest offer—to purchase an additional $200 billion of American merchandise—would not address structural issues in the Chinese economy or ensure more reciprocal treatment of U.S. firms doing business in China. Moreover, Trump’s recent decision to use an enforcement action against Chinese phone manufacturer ZTE as a bargaining chip in trade negotiationssuggests the U.S.-China talks are at risk of veering far off course.

A unified G7 would send a powerful message to the Chinese that the United States still has the capacity to galvanize action across a large share of the global economy. This message—rather than unilateral threats—could be more effective in securing a commitment from China to deep and lasting economic reform.

When Trump briefly flirted with rejoining the Trans-Pacific Partnership in April, it was perhaps a fleeting acknowledgement of the shortcomings of the go-it-alone approach he has taken thus far. While a G7 accord would not be as impactful as a comprehensive trade agreement like the TPP, the other G7 leaders could at least explore if the Trump Administration is now ready to take its first foray into multilateral deal-making.

Trump’s trade concerns may have some merit, but his tactics are potentially very damaging. So the leaders of America’s closest allies must try, once again, to forge a cooperative path forward with their wayward U.S. counterpart. This time, Trump would do well to go along.

Published in https://www.diplomaticourier.com/2018/05/18/could-trump-g7-strike-a-grand-bargain-on-trade/

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