US economic policy is still, let’s say, lacking in strategic clarity. It continues to oscillate; where it will end up is hard to say. But events have yielded some new information: President Donald Trump is alert to “yippy” financial markets.
This makes it likely that Trump’s approach to trade will shift — perhaps not a little but a lot. Suspend disbelief for a moment. Imagine a reconstructed World Trade Organization, built to the president’s specifications and dedicated to “fair trade.” Could that happen? The odds are against it, but the answer is yes.
Trump has bowed before financial markets. He paused many of his planned tariffs. He now says tariffs on China will fall “substantially” and China is “going to do fine.” And he says he has no plans to fire Federal Reserve Chair Jerome Powell. (When he called Powell “a major loser” whose “termination cannot come soon enough,” the press had jumped to conclusions.) He flinched in each case because financial markets had protested forcefully. Investors might lack a veto over US policy as effective as the one that threw former UK prime minister Liz Truss out of office, but the White House is paying attention nonetheless.
This malleability will affect where the new world order is heading. Consider four main scenarios starting from here. In descending order of misery, the first is a shattering economic setback caused by Trump’s doubling down; the second is milder but persistent underperformance, with trade barriers lower than first advertised but still much higher than before; third, a return to trade as usual, as though Trump had never happened; and fourth, short-term chaos gives birth to long-term progress, with the theatrics of the past few months seen in due course (grudgingly by some, joyfully by others) as productive.
Trump’s surrender to financial-market pressure makes a difference when weighing these probabilities. It doesn’t matter why he backed down. Was he surprised that his plan to collapse the global trading system and dethrone the dollar alarmed investors? Did he expect a rout, planning to shrug it off? Or is everything going as intended? (Threats, panic, retreat — to be continued, in a cycle of disruption for its own sake.) Hard to say. The crucial discovery is simply that, for whatever reason, he gave way under pressure.
The worst-case scenario — markets crash, the global economy tanks, and Trump keeps going regardless — is therefore less likely. The chronic-underperformance scenario doubtless remains the most probable, because the damage already done won’t be easily reversed even if Trump chooses not to drive the economy over the brink. But have the chances of the best-case scenario — call it the creative-destruction scenario — really improved?
I’d say so. It isn’t just that the president cares more than we knew about what markets think. He’s also learned that markets detest his ideas on trade (and monetary policy) more than he’d imagined. And I take it as given that he cares more about coming out on top than about the substance of any policy or ideology. His intellectual commitments are minimal. So how does he get his big win on trade — a transformation that investors will applaud and nobody else could deliver? He becomes the toughest champion of fair (don’t say free) trade since Adam Smith.
In a previous column I recommended something along these lines, explaining how the president could turn his “trade strategy” into a trade strategy. Essentially, dump the Navarro Doctrine of balanced bilateral trade and negotiate deals that concentrate on lowering non-tariff barriers to US exports. This would be good, as substance goes, but he’d get bored after one or two minutely detailed bilateral agreements had been negotiated — moderate, sensible, underwhelming, and thus not to the president’s taste.
Now that Trump has been schooled by investors, and the big trade wins he envisaged are in doubt, he needs a suitably ambitious alternative. This is where a reimagined WTO comes in. True, the WTO has long been defunct. But this might not matter; on the contrary, it could be helpful. Correcting injustice by repairing a broken pillar of the global economy. That’s bold. Investors would be delighted. And which other president has even so much as thought of this?
Here’s how it might go: The existing WTO is dead and deserves to be. It failed because it let countries merely pretend to engage with the US in achieving a truly level playing field for trade. The US has low tariffs and imports vast quantities of goods from abroad. Its so-called trading partners kept higher tariffs and pervasive non-tariff barriers. Some, like China, stole US intellectual property and manipulated their market power to gain unfair advantages. Others, like the European Union, use regulatory powers to punish US firms.
This account is grossly one-sided and exaggerated — but not entirely groundless. And it accords with the administration’s existing rationale for punitive “reciprocal tariffs.” The problem is execution. Threatening punitive tariffs partner by partner, aiming to end up with much higher barriers than now, and entrenching a new disorder of constant threats, counter-threats and acute economic uncertainty is a formula for destroying wealth. That’s just the message investors are sending, and voters will join in too when prices start climbing and jobs are lost.
The alternative is a reinvented WTO, newly dedicated to fair trade, broadly defined. Negotiations on non-tariff barriers would take center stage. They’d be multilateral or at least plurilateral, not country by country, with the US taking the lead. Whether this project would succeed in lowering trade barriers is a separate question — but the president should see that as beside the point. The big win isn’t the longer-term outcome, good or bad as it might be in economic terms, but the act of creation. The White House would be taking charge of global trade policy, and in a way that financial markets would cheer. You can bet other governments would be delighted to go along: Some would welcome the opportunity to negotiate lower non-tariff-barriers, and all would be thrilled to see the US pivot away from the current trade-war chaos.
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