Questionable Tactics

 

    Eric Lee/The New York Times

Who amongst us believes that bullying our allies is shrewd statesmanship? In normal society, "punching down," the act of belittling someone who cannot fight back, is taboo. Does this standard apply to nations as well?  In a recent interview on Fox News with Larry Kudlow, Commerce Secretary Howard Lutnik referred to Canada as a "Communist regime," and stated that Canada has "been living off the U.S. for decades and decades." This condescending tone towards one of our largest trading partners naturally hasn't been well-received in Canada. Does the United States position as the world's most consumptive nation give it the leverage that the White House believes it does in these matters of trade? If so, is using this leverage in such a manner the best negotiating tactic?  The deal may get done, but will belittling Canada in this way damage relations between the two nations? 

For the record, Canada is not a Communist regime.  It is a constitutional monarchy and a parliamentary democracy.  Mark Carney, the current prime minister, is a member of the Liberal Party of Canada, which historically leans slightly left of center. All of this begs the question as to whether the Trump administration enjoys trolling more than dealmaking. Trump has a reputation, as he will remind us, as a master dealmaker.  He employs leverage without remorse.  This is fine in matters of private business, but rather more questionable in global affairs, where the stakes are infinitely higher than in negotiating the price of a building.  

Making things even more uncomfortable, President Trump continues to mention his interest in Canada becoming the U.S.' 51st state.  This of course has rankled Canadians, who have called his comments "deeply offensive." Canada is one of our most steadfast allies, so the administration's collective  antagonism doesn't strike me as a particularly effective negotiating tactic.  

Admittedly, Trump is using what we Americans view as a weakness–our gluttonous consumption–to his advantage.  As a nation we owe money to everyone, everywhere.  But as our economy goes, so goes the world.  In 2023, the latest year for which this statistic is available, the United States accounted for approximately 26.11% of the world's gross domestic product (GDP). GDP is defined as the value of all goods and services produced in the course of a year.  To use a popular analogy, we are the economy that is "too big to fail." Nations that lose access to the American consumer will suffer economic harm, and this is the negotiating leverage that the Trump administration is employing in its attempt to restructure world trade. 

I read a fascinating article recently entitled "Crashing the Car of Pax Americana."  Written by Ben Hunt, it offers a terrific insight into America's historical position in the world economic order and how the current adminstration is attempting to restructure that order. The article strikes a balance between the problems that the Trump administration has correctly identified and the questionable remedies it is attempting.

He describes Pax Americana as the agreements that came about at the end of World War II.  These agreements made the dollar the world's reserve currency. This accrued tremendous advantages to the United States.  In return, we agreed to provide security to the rest of the free world and to give other countries access to the prodigious wealth of the American consumer.

 "Pax Americana is the ability of the United States to set the rules for every coordination game in the world. The rules of trade, the rules of intellectual property, the rules of money, the rules of culture, the rules of war … all of those rules were made by us. Only by us! And in return we gave the rest of the world two things: global peace (pretty much) enforced by a blue-water navy with force projection capabilities anywhere in the world, and unfettered access (pretty much) to the buying power of the American consumer."

 Hunt opines that the agreement has been a "damn good deal for the United States AND the world" and cites these two developments as proof:

The United States has seen more than 300 million citizens lifted into the highest standard of living in the history of the world, as we have exchanged intangible things like services and the full faith and credit of the US government for tangible things like oil and semiconductors and food at an unimaginable scale.

• The world has seen more than a billion people lifted out of crushing poverty, mostly in China and India but everywhere else, too, as the capacity to make tangible things has shifted permanently (yes, permanently) from West to East.

For almost eighty years this arrangement has been a win-win.  In an arrangement akin to dealer financing, the rest of the world has lent us money which we have then used to buy the goods that the lender nations produce. Both sides get something from the agreement. Trump, however, has long been a protectionist.  In interviews dating back to the 1980s, he has espoused the belief that other countries have traded unfairly with us, implying that the agreements that allowed the United States to become the most prosperous nation in human history were actually a bad deal for us. I understand his interest in bringing manufacturing back to this country.  Doing so would reinflate the middle class and lessen our reliance on other nations for vitals goods and services. It's a noble idea.  Impossible, but still noble. 

The labor cost and regulatory issues that drove companies to move production offshore in the first place remain formidable–dare I say insurmountable–obstacles.  American workers command markedly higher wages than do their counterparts in developing nations.  They command more perks and protections. These add to production costs. It has been estimated that a domestically-produced iPhone would sell for something like $3500 vs. the current price of $1500 for the 1 terabyte iPhone 16 Pro.  Americans say they will buy American.  But will they, really? Consider this.  In a recent Forbes article entitled "Experiment: Will Americans Really Pay More For American-Made Goods?," a company named Afina conducted an experiment. 

"Afina, a company that produces premium shower heads, recently conducted a straightforward test. They created a landing page offering two identical products with just two differences. One was labeled "Made in Asia" and priced at $129, and the other "Made in the USA" priced at $239 - an 85% premium. The higher price is based a manufacturing cost three times as high in the U.S. as in China and Vietnam.

With over 25,000 visitors to this test page, the results were unequivocal. While a few dozen shoppers added the American-made version to their cart, the final tally of actual purchases was… exactly zero. Not a single consumer bought the American-made product at the higher price point.

The company tested multiple variables - different page layouts, copy variations, and traffic sources - but the results remained consistent. When faced with an actual purchasing decision rather than a hypothetical question, consumers voted with their wallets for the less expensive option." (emphasis mine)

It appears that, while the thought of goods manufactured by American workers in American factories is great in theory, when Americans are making purchasing decisions in private they will do what they always have done and assign more importance to cost than any other variable. 

Back to Canada.  In an awkward meeting on Tuesday in the White House, President Trump and Prime Minister Carney exchanged forced pleasantries while Trump continued to hammer the idea of Canada as a U.S. State. Eventually, Carney was compelled to state that Canada, "is not for sale, won't be for sale." On the trade front, recent data indicates that the U.S. may not have the leverage the White House thinks it does.  In a May 6 article entitled "Canada Makes It Plain", Bloomberg reported that while "Canadian exports to the U.S. plunged 6.6%, the biggest drop since the pandemic, Canada's exports to countries other than the U.S. jumped 24.8%, almost entirely offsetting the decline in shipments to the south (U.S.)." This is what is happening.  

In trying to remedy his belief that the U.S. is a trade victim, Trump is dismantling the protocols that have allowed the United States to flourish post WW II.  In demanding that other nations pay us for the defense we provide, that other nations grant us unobstructed access to their markets while at the same yanking from those same nations the manufacturing that has powered their own economies, this administration is seeking a unilateral win for America.  

A deal in which the United States wins and everyone else loses will either be accepted grudgingly or not at all. As Hunt writes, "I appreciate their frustration. I share a lot of it. But I am desperately opposed to crashing the Pax Americana car, Annie Hall style, because the America First system that this Administration wants to have as a replacement is not a stable system that is possible to have as a replacement. The end result of blowing up Pax Americana and its – yes – globalist system of rules and institutions and alliances that coordinates the flow of capital, labor, goods, services and culture without ‘winning’ any head-to-head relationship will be a system that is both worse for the United States AND the world."

I don't like the sound of that.