By Mark John
LONDON, Jan 29 (Reuters) – It will be many years before the United States’ allies can contemplate dispensing with the need for its military might or challenging the tech supremacy of its Silicon Valley giants.
But in an ironic twist, given U.S. President Donald Trump’s love of tariffs, they are discovering that the trade in goods is one area where they have more options than they may have thought and where they have the ability to adapt relatively quickly.
No one is seriously trying to decouple outright from a U.S. market which remains the most lucrative in the world despite a bipartisan protectionist drift seen well before Trump 2.0.
Instead, the re-drawing of the global trade map that has accelerated with a rash of bilateral pacts in recent weeks is aimed more modestly at “de-risking” ties with the U.S. – a term that until recently was mostly applied to China.
As with any insurance policy, this comes at a cost, be it reconfiguring supply chains or making unpalatable compromises with countries whose values are not fully shared. But the signs so far are that the economic costs at least are digestible.
“Trade is probably one of the areas where middle powers have some of the greatest agency in choices,” said Alexander George, senior director for geopolitics at the Tony Blair Institute for Global Change (TBI).
“Look at the European Union. Suddenly it (Trump’s trade threats) focused minds and they got things done,” he said of the signing this month of the long-delayed EU-Mercosur trade pact with Latin American countries and this week’s deal with India.
FOR NOW, ECONOMY TAKES CHANGING ORDER IN ITS STRIDE
To be sure, free trade deals are minefields of legal and political complexities. Whether the EU can fully ratify the Mercosur deal in good time will be a test of its ability to act.
Likewise, the rapprochements with China initiated by the leaders of Britain and Canada this month have a way to go after long periods of deteriorating ties – notwithstanding the recent warm words and some early deals clinched already.
But businesses are not waiting for a full map of the new trade order. The Irish Whiskey Association was quick to hail the recent EU-India deal as “critical” to its efforts to find new customers to mitigate the cost of the 15% tariff in the U.S., its largest market.
And despite EU wariness of China, investments by German firms there hit a four-year high last year, driven in part by a push to strengthen local supply chains in response to a more hostile U.S. trade policy, the IW German Economic Institute found.
Reuters’ quarterly poll of 220 economists released this week had one central takeaway: Global economic growth this year is still seen at 3% as forecast a year ago despite supply chain readjustments forced by Trump’s upending of trade ties.
Some even suggest there are long-term gains in redrawing three decades of globalisation dominated by the large trading blocs – echoing Canadian Prime Minister Mark Carney’s call for “middle powers” to forge a web of alliances between themselves.
“You kill two birds with one stone,” World Trade Organization Director-General Ngozi Okonjo-Iweala told Reuters on the sidelines of the World Economic Forum in Davos.
“You create jobs elsewhere by investing, you build global resilience because you don’t cluster too much production in one place,” she said, noting such deals were typically being pursued according to WTO terms for free and fair trade.
For most countries, diversification is a better bet than outright confrontation with the United States.
Modelling by the UK’s Aston University found that, had tensions escalated over Greenland, the threatened 25% U.S. tariff level would have cost European economies barely 0.26% income per capita if they chose not to retaliate – less than half the cost assuming a retaliatory 25% levy on U.S. goods.
Forging new alliances abroad may also prove easier than pushing ahead with domestic economic reforms that prove elusive to governments struggling with fragile majorities, said Mujtaba Rahman, managing director for Europe at the Eurasia Group consultancy.
“Diversification on the trade side is absolutely happening and continuing,” he said of Europe.
“Is Europe a more credible economic proposition in five years’ time? That’s not clear to me,” he added of a failure so far to make headway in game-changing areas such as unifying the disparate functioning of splintered national capital markets.
TRADE COULD BECOME A FAULTLINE
Ultimately, two factors may limit how fast and extensively countries and business will adapt to the Trump trade shock.
First is the reluctance of Chinese authorities to drive local consumer demand, which means China will not take up the slack from the U.S. market any time soon.
The Tony Blair Institute noted that while China’s exports have risen since the higher U.S. tariffs, its imports have remained flat, forcing other countries – including in Asia and Africa – to accept a growing trade deficit with it.
Second is the possibility that the U.S. bristles at the diversification and uses its weight to dissuade countries from going down a path that would take them out of its orbit.
“The question is to what extent this becomes a geopolitical faultline,” said TBI’s George.
(Graphic by Dan Burns in Washington; Editing by Hugh Lawson)
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