Opinion

The International Economic Consequences of Mr. Trump

What has fundamentally changed with the Trump administration is not that it behaves more selfishly than its predecessors, but that it seems unconvinced that the global system serves US strategic interests. For the rest of the world, the key question is whether the global system is resilient enough to survive its creator’s withdrawal.

By: Date: January 31, 2018 Topic: Global Economics & Governance

This blog was originally published by Project Syndicate (c) 2018

This year’s World Economic Forum in Davos proved to be yet another opportunity for US President Donald Trump’s administration to display its customary verbal incontinence and send shockwaves through the global economy. This time, there were two sources.

The first shock came from US Treasury Secretary Steven Mnuchin, who broke with more than two decades of strict discipline by suggesting that a weaker dollar would be in America’s interest. The second came from Commerce Secretary Wilbur Ross, who seemed to rejoice at the prospect of waging and winning a trade war.

For once, it was Trump himself who restored calm by denying that the US was pursuing a beggar-thy-neighbor strategy. But he did so only after his cabinet secretaries’ statements had attracted sharp responses from international partners.

If Trump’s first year in power provides an indication of what is to come, there is little reason to look forward to more stable US economic leadership. A year after his inauguration, Davos provided a powerful reminder that he is far from being normalized.

To be fair, the Trump administration is certainly not the first to put “America first.” Owing to its inward-looking political system and the persistence of strong isolationist undercurrents, the US has been consistently more reluctant than European countries to enter into or to abide by international commitments. The 1948 rejection of the Havana Charter (an early attempt to create a global trade organization), congressional hostility to the Bretton Woods institutions, or the refusal by President George W. Bush to ratify the Kyoto Protocol on climate change are just a few examples.

Likewise, taking ruthless measures to defend US interests did not start with Trump. President Richard Nixon’s unilateral decision in 1971 to abandon the gold standard was a major blow to the international monetary system. The US Federal Reserve’s monetarist experiment in the late 1970s precipitated the Latin American debt crisis. Arm-twisting with Japan in the 1980s circumvented established trade rules. And in the aftermath of the 2008 global financial crisis, the Fed implemented quantitative easing despite protests that it was allowing the US to export deflation.

Yet there is something different this time. From the moment it inherited global leadership from the United Kingdom – symbolically with the signing of the Atlantic Charter in the summer of 1941 – until Trump was elected 75 years later, few could doubt that the US was the ultimate owner of the international economic regime. Depending on timing and political conditions, it could fudge the rules or help enforce them; it could behave more selfishly or more generously; and it could pursue narrow, short-term interests or broad, long-term goals. But whatever the US did, it remained the dominant shareholder of the global system. And the rest of the world knew that perfectly well.

There were strong geopolitical reasons for this stance. Until the Cold War’s end, the system of rules and organizations that formed the institutional infrastructure of international trade, investment, and finance was considered by the US establishment to be vital to the prosperity of the “free world” and the containment of Soviet influence. After the Soviet Union collapsed, the system served as a strategic means for integrating former communist countries into the international capitalist economy.

Eventually, in the early 2000s, the global economic system came to be regarded as providing the best platform to accommodate China’s rise. China was invited to join the club, with the implicit promise that after it had learned to play by the rules, it could contribute to amending them. It would have a chance to participate in steering the international system, and gradually gain in power and influence. China’s accession to the World Trade Organization in 2001 was an important milestone here.

What has fundamentally changed with the Trump administration is not that it behaves more selfishly than its predecessors. It is that it seems unconvinced that buttressing the global system serves US strategic interests. Critically, it seems unconvinced that integrating China into this system and offering it a place at the top table is the best way to accommodate its rising economic might.

For the rest of the world, the key question now is whether the global system is resilient enough to outlive its creator’s withdrawal.

Superficially, the international economic consequences of Trump seem remarkably benign. Concerns over currency wars have waned. The global economy has not descended into a protectionist spiral. Even the US withdrawal from the fragile Paris climate agreement has not resulted in its collapse. On the contrary, all other leaders – starting with China’s President Xi Jinping – have confirmed their commitment to it, and 174 countries have formally ratified it. Concerns in the security field look more serious, owing to disputes over the Iran nuclear agreement and uncertainty over the handling of North Korean missile launches.

But the view that the economy, at least, is on firm ground is dangerously misguided, as it assumes that global economic rules and institutions have created the equivalent of an economic and financial constitution. Indeed, the system remains too incomplete to self-regulate, and its functioning requires constant guidance and frequent discretionary initiatives. This is why informal groupings like the G7 and the G20 remain essential: they provide the necessary political impetus. But they, too, depend crucially on US backing and leadership.

For example, it was not the rules of the system that offered a response to the 2008 crisis; it was a series of ad hoc initiatives – a standstill on trade protectionism, coordinated bank rescues, a global stimulus, and the provision of dollar liquidity through swap lines, to name only the main ones – that owed much to the US. Absent its leadership and the initiatives of key players like the UK and France, the crisis would have been much worse.

True, the other major players – Europe, China, India, and Japan – may eventually be able to exercise global leadership. But, for the time being, they lack the will, the capacity, and the cohesion this would require. So the world should be under no illusion. To keep the boat on course after the pilot has left the wheel is one thing; to steer it in a storm is another matter. Let’s hope the next storm does not gather too soon.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article
 

Opinion

Relaunching transatlantic cooperation with a carbon border adjustment mechanism

The best way for the EU and the US to jointly introduce carbon border adjustment would be to form a ‘climate club’.

By: Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, Global Economics & Governance Date: June 11, 2021
Read article More by this author
 

Podcast

Podcast

[LIVE] A transatlantic climate alliance

When Joe Biden visits Europe for the first time as US president, he should begin forging a transatlantic green deal.

By: The Sound of Economics Topic: Energy & Climate, Global Economics & Governance Date: June 11, 2021
Read about event More on this topic
 

Past Event

Past Event

Form a climate club: United States, European Union and China

Can the three biggest economies agree a carbon tax on imports to catalyse climate action globally?

Speakers: Simone Tagliapietra, Sheldon Whitehouse and Guntram B. Wolff Topic: Global Economics & Governance Date: May 3, 2021
Read article More on this topic
 

External Publication

Form a climate club: United States, European Union and China

If the three biggest economies agree a carbon tax on imports, it will catalyse climate action globally.

By: Guntram B. Wolff and Simone Tagliapietra Topic: Energy & Climate Date: March 23, 2021
Read about event More on this topic
 

Past Event

Past Event

Declining competition: a transatlantic challenge

Join us for a discussion of transatlantic competition with Kristalina Georgieva, Margrethe Vestager and Amy Klobuchar among others.

Speakers: Romain Duval, Kristalina Georgieva, Greg Ip, Amy Klobuchar, Nancy Rose, Tommaso Valletti, Margrethe Vestager, David Wessel and Guntram B. Wolff Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 15, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Low interest rates: a transatlantic phenomenon

Structural factors are putting downward pressure on rates: is it time for macroeconomic policy to play second fiddle in managing demand?

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 10, 2021
Read about event More on this topic
 

Past Event

Past Event

Prospects for the US climate policy under the Biden Administration

How US climate policy is likely to evolve, and which international impacts can be expected?

Speakers: Jason Bordoff, Kate Marvel, Michael Mehling, Robert N. Stavins, Leah Stokes and Simone Tagliapietra Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 17, 2021
Read article More on this topic
 

Blog Post

Carbon border adjustment in the United States: not easy, but not impossible either

President Biden has promised to implement a levy on carbon-intensive imports, albeit without a federal domestic carbon price. The measure faces a number of difficulties, but could feasibly be implemented. The route chosen by the US will have important implications for the EU's own plans.

By: Ben McWilliams and Simone Tagliapietra Topic: Energy & Climate Date: February 11, 2021
Read about event More on this topic
 

Past Event

Past Event

The geopolitics of the Green Deal

Join us to mark the launch of the eponymous paper co-written with the European Council on Foreign Relations.

Speakers: Stefano Grassi, Mark Leonard, Simone Tagliapietra, Jennifer Tollmann, Marc Vanheukelen and Guntram B. Wolff Topic: Energy & Climate Date: February 3, 2021
Read article More on this topic More by this author
 

Opinion

Strategic autonomy or strategic alliance?

It is hard to imagine how either the EU or the US can do better on the big issues if they pursue their interests separately.

By: Maria Demertzis Topic: Global Economics & Governance Date: February 2, 2021
Read article More on this topic More by this author
 

Opinion

The Biden promise

In the eyes of Europeans, Joe Biden’s US election win brings the promise of major change with global relevance. From climate to multilateralism, to trade and managing global public goods, here is a take on how to understand this promise.

By: Maria Demertzis Topic: Global Economics & Governance Date: December 23, 2020
Read article More on this topic More by this author
 

Opinion

Europe should promote a Climate Club after the US elections

Time has come for Europe, the US and possibly China to create a global “Climate Club”.

By: Guntram B. Wolff Topic: Energy & Climate Date: December 10, 2020
Load more posts