Trump Uses the U.S. Economy as a Weapon While Avoiding Hot Wars

(Bloomberg Businessweek) -- Donald Trump has become quite comfortable deploying the U.S. economy both as lure and as threat. In London on a state visit, he tweeted that the U.K. could expect a “big Trade Deal” with the U.S. once it “gets rid of the shackles” to the European Union. In the previous week, a short one in Washington because of the Memorial Day holiday, he still found time to escalate hostilities in America’s economic war with just about everyone.

The countries of the EU had already been in that firing line. On May 29 news broke that Trump was threatening them with sanctions on the grounds that they’re attempting—not very successfully—to trade with Iran, as they are entitled to do under international law. The next day, Trump warned Mexico that he would impose tariffs on all its exports to the U.S. and steadily ratchet them up until Mexico shuts down the northward flow of migrants. On June 1, he removed India from a list of developing countries that receive special trade privileges because it hasn’t done enough to open its markets to U.S. companies. The New York Times reported on June 2 that Trump had considered tariffs on Australian aluminum until the Pentagon objected.

The salvos were sideshows to what’s becoming the main event in the second half of Trump’s term: his campaign to rewrite the rules by which the U.S. trades with China. But all of Trump’s tariffs, sanctions, and trade policies show how the president has broadened his definition of national security to include the U.S. economy, which he’s turned into a weapon to use against allies as well as his main strategic rival.

Tariffs and sanctions aren’t the same thing, of course. One is a trade instrument, intended to calibrate the interests of producers and consumers, and imposed by most countries on friends as well as enemies. The other is openly punitive, a form of international criminal justice. But they work in similar ways for Trump, who’s using them in tandem on an unprecedented scale, because they both leverage the global desire to do business in the U.S., the world’s richest consumer market.

America has enjoyed that status for generations, a key element of its leadership. Until recently, access has mostly been dangled like an inviting carrot. Trump wields it like a cudgel. He thinks it was made available too easily in the past, and the U.S. has benefited less than others—becoming, as he tweeted on June 1, “the ‘Piggy Bank’ Nation that foreign countries have been robbing and deceiving for years.”

Tariffs make access to that market more expensive, though how the bill gets shared is an open question. Overseas manufacturers, import-export companies, domestic retailers, and consumers could all shoulder some of the cost, depending on the product and the market for it. In a May 20 open letter to the president, 173 shoemakers, including hugely profitable giants such as Nike Inc. and Adidas AG, protested the footwear tariffs, saying, “As an industry that faces a $3 billion duty bill every year, we can assure you that any increase in the cost of importing shoes has a direct impact on the American footwear consumer.”

Sanctions often mean you can’t get access to the U.S. market at all. Trump is ready to deploy both tariffs and sanctions even when his goals aren’t really economic. They’re becoming the essential tools of “America First,” applied from Mexico to Venezuela, from Turkey to Iran—as much about politics and diplomacy as trade and finance.

That’s a high-risk approach, says Jeffrey Sachs, professor of economics at Columbia University. “Open systems can become closed or divided systems,” he says. “It happened after the chaos of World War I and the Great Depression.” An open world economy is a vulnerable one, he says, and “if the U.S. abandons this system, others will too.”

Sometimes Trump’s economic moves are reminiscent of military tactics, according to Ben Emons, a managing director at research firm Medley Global Advisors in New York. The president is always looking for the element of surprise, with dawn raids via Twitter. He’ll try to compel enemies to behave the way he wants them to or paralyze their political leadership—methods known in military theory as “coercion” and “decapitation.” In the latest move against Mexico, the tariffs were a workaround. “He wants to shut down the border,” Emons says. “They wouldn’t let him. So he figured out a different way of doing it.”

Trump’s long-game strategy, Emons says, is based on the belief that “ultimately our demand for goods is so large that nobody can go around the U.S.” In the immediate future, that’s probably true, he says, and investors are betting that way. “Our stock market is outperforming the rest of the world. Markets feel the economic impact will be larger in the case of Europe or China than in the case of the U.S.”

But in the longer run, it may not be. Two or more can play at the president’s game. China has drawn up its own blacklist of U.S. companies in response to Trump’s ban on Huawei Technologies Co. It “could become more reliant on trade with other countries, not the U.S.,” Emons says, “and more dynamic at home.” Apart from tariffs and sanctions, the panoply of tools at the disposal of both countries—indeed all countries—is broad: investment restrictions, export controls, consumer boycotts, blacklists, antitrust actions, even criminal indictments. China, which successfully used the threat of suppressing tourism against South Korea, has hinted at using similar tactics against the U.S.

As disruptive as his economic onslaughts have been, Trump clearly prefers this kind of fight to the tanks-and-troops conflicts (sometimes called “kinetic”) that the U.S. has been engaged in for most of the last half century as it worked its way toward global hegemony and the role of world cop. Almost all his recent predecessors went to war. Even Barack Obama, winner of the Nobel Peace Prize, bombed Libya into regime change. Trump hasn’t entirely neglected that tradition, ordering two missile strikes on Syria. He’s plowing more money into the Pentagon, and he’ll cheerfully talk about raining fire and fury on other nations—even, in Iran’s case, putting an “end” to them. But he’s also been trying, with limited effect so far, to pull troops out of Syria and Afghanistan. He campaigned against foreign military adventures, and most of his overseas counterparts are still betting that he means it. In Europe, for example, leaders didn’t much enjoy a visit in May by Trump’s secretary of state. Mike Pompeo was trying to get them on board for the U.S.’s “maximum pressure” campaign against Iran. The backdrop was ominous, with headlines about U.S. aircraft carriers being dispatched to the Persian Gulf and echoes of the buildup to the invasion of Iraq in 2003. The Europeans, however, consoled themselves with the thought that the president, the decider, didn’t really want to start a war.

Trump says so, too. But he hasn’t shied away from exerting economic power over Europe in a way that isn’t consoling at all. The Europeans want to keep the 2015 nuclear agreement with Iran alive after the U.S. pulled out a year ago. They’ve been trying to set up aspecial vehicle that will enable trade to flow without any dollars involved—essentially barter—so that it won’t trigger sanctions. But the Trump administration has signaled anyone associated with it could be barred from the U.S. financial system anyway.

The threat of U.S. sanctions, enforced in a way that means they effectively have global jurisdiction, dwarfs any incentives Europe’s politicians can offer their own companies to engage with Iran. Brian Hook, U.S. special envoy for Iran, spelled it out on May 30: “If a corporation is given a choice between doing business in the U.S. and doing business in Iran, it’s going to choose the U.S. every single time.”

Also causing vexation in Europe are existing and potential curbs on trade with Russia, a much more important partner of the EU than Iran—and a competitor for American natural gas, recently rebranded as “molecules of U.S. freedom” by the Department of Energy. The biggest market Moscow and Washington are fighting over is Germany. The Trump administration has warned it’s ready to impose sanctions that could hobble a proposed $11 billion pipeline to carry gas there from Russia. But it dialed back the threat this year after Germany announced it will build two terminals that could receive U.S. tankers. The U.S. “strongly supports” the idea, Deputy Energy Secretary Dan Brouillette said during a visit to Berlin in February. As for sanctions, he said, “I cannot today tell you that the U.S. has specific plans.”

Maybe the best example of Trump’s dual use of sanctions and tariffs came when Turkey got whacked by both last summer. Its offense had nothing to do with trade. President Recep Tayyip Erdogan, when he was rounding up tens of thousands of alleged conspirators after a 2016 failed coup attempt against him, made the mistake of detaining an American pastor in his net. Trump and his evangelical allies were infuriated. On Aug. 1, 2018, the U.S. president slapped sanctions on two Turkish cabinet ministers. Nine days later, he unloaded the other barrel. “Our relations with Turkey are not good at this time,” Trump observed demurely, in a tweet that was at least somewhat self-fulfilling because it also doubled tariffs on Turkish exports of steel and aluminum, sending Istanbul’s financial markets into a once-in-a-generation nosedive. The pastor was released, and some of the penalties have been lifted. But others may soon be on the way, as NATO member Turkey prepares to buy a Russian missile defense system, a sanctionable offense in U.S. eyes.

What’s striking about all these broadsides is that, like military commands, they’re the work of a moment. There’s no need to cajole or threaten legislators to build a coalition. And the effect is instant, too, which is one reason the process has become disturbing for many investors, Emons says. “You get on your phone at 3 a.m., and there’s the announcement, and the consequences are very large,” he says. “It would be different if the market wasn’t listening to Trump or taking him seriously. But because he can actually do it, and he did do it, the markets are like: ‘We believe you!’ ”

The strategy is a stark contrast with the more than two years it took to negotiate the Iran deal under Obama—or the Nafta overhaul, which, as a frustrated Trump learned in the first half of his term, has turned into a marathon that’s not done yet.

In the longer term, the repeated use of such high-impact economic weaponry—and its scattershot targeting—may have different effects. The Trump administration says it’s focused on China, which is closing in on the U.S. as the world’s biggest economy, and by some measures has already surpassed it. Since China isn’t shy about flexing its own economic muscle, and many countries share Trump’s suspicion of its trade practices, there’s potential support for a firm approach—but it’s undermined when those could-be allies are under the same kind of pressure themselves, and have no idea what to expect next. Trump’s weaponization of the U.S. economy, and his creation of a rolling emergency that’s invoked to justify each move, is likely to “create real problems down the road,” says Sachs. “It’s a very bizarre way for a $20 trillion economy, and a supposed democracy, to operate.” —With Ladane Nasseri

To contact the editor responsible for this story: Howard Chua-Eoan at hchuaeoan@bloomberg.net

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