A desire for the deal is overriding Trump’s tantrum tendencies

Welcome to Trade Secrets. I’m struggling hard not to say “told you so”, meaning of course that I’m relishing the opportunity. We had some Friday fun with Donald Trump, with his extra 10 per cent tariff on Canada for the crime of accurately quoting what Ronald Reagan said about tariffs. But more importantly (especially as imports from Canada will presumably be protected by the USMCA US-Mexico-Canada trade deal) were the three deals he announced with Asian countries ahead of his tour of the region. (Good analysis here.) Add to that the strong signs of rapprochement with China ahead of the planned Trump-Xi Jinping meeting later this week, and my prediction last week that we’d end in a US-China trade truce looks pretty good right now. Most likely we’ll see a mutual standing down of weaponry without actual decommissioning. Amid Friday’s tantrum, Trump started a “Section 301” (unfair trade practices) investigation into China’s adherence to the “phase 1” deal he struck with Beijing in his first term, which I reckon is a show of strength to balance China’s rare earths gambit and soyabeans boycott. But, after all, nobody knows anything. Today’s newsletter is about the EU’s efforts at strategic industrial policy and Trump’s support for Javier Milei. Charted Waters, where we look at the data behind world trade, is on stock prices.

EV come, EV go

I wrote my column last week about the wider implications of the Amazon Web Services outage earlier in the week. It’s going to get very nasty if Trump, who regards the tech sector (and much else) as an extension of his administration, decides to try to weaponise the US dominance in cloud services against the EU or anyone else who annoys him.

The EU response to this, about which it’s been worrying for several years, is an absolute archetype of its industrial policy, for national security reasons or not. It goes like this. The European Commission hankers after a big new pan-EU approach, putting itself in the vanguard. Member states jealously guard their independence. France, while appearing close to the commission’s position, suggests an intervention that involves either EU-wide spending for which it can aggressively bid or relaxing state aid rules at national level. Other member states monitor France’s actions with the suspicion cowboys hold for coyotes circling their campfire at dinnertime.

In the end some kind of quasi-voluntary approach emerges. It’s strong enough to move some way towards the commission’s precious “strategic autonomy” without actually turning the EU into a geopolitical power.

Now, extend the definition of “strategic” beyond network utilities such as cloud services towards sectors like, say, cars. The policy justification (particularly regarding World Trade Organization legality) becomes harder, because it’s much more difficult to claim it’s about national security, but the political imperatives might actually be stronger. The transition to electric vehicles has become a lot more alarming to Germany recently, even though its carmakers are predictably leading the charge into the sector among European producers, because of the effect on regions dependent on the supply chains for internal combustion engine vehicles.

Assuming that using widescale intervention to build the car industry is a desirable goal (I have doubts), is a pan-EU industrial policy for EVs possible? Well, here’s one intriguing plan, from Sander Tordoir, Nils Redeker and Lucas Guttenberg, published by the Jacques Delors Centre think-tank.

The plan here is essentially to universalise across the EU the French model of tying consumer EV subsidies to the manufacturing carbon footprint of the car being bought (not its own emissions profile while being driven), which would have the effect of excluding Chinese cars. There would also be reciprocal deals with trading partners similarly worried about Chinese competition.

Optimistically, the authors claim this buy-European plan is WTO-proof. I think there would have to be some pretty high bars to be cleared to prove that the carbon criteria being used were actually clearly targeted at climate change rather than simply favouring domestic production.

But still, if nothing else it’s an indicator of the current respectability of conversations about quite dramatic proposals for pan-EU industrial policy. I suspect inertia and member state autonomy — plus the threat of retaliation from China — will win out and a programme like this won’t get done. But the more that industrial sectors start getting labelled strategic, the more this kind of idea will get airtime.

A great day for Milei

Yesterday’s legislative elections went very well indeed for “Chainsaw Javier” Milei: he decisively beat the Peronists and hugely outperformed the opinion polls.

It’s also a big win for Donald Trump, not just because his great pal won, but because the total of $40bn in potential financial support for Argentina, plus promises to buy Argentine beef, were pretty clearly conditioned on the elections going well. Trump has bought an election victory, perhaps not for the last time.

What now? For one, given the election result I don’t see much evidence that domestic opposition will force Trump to rescind the financing and trade package in the short term. The aggrieved parties are beef and soyabean farmers who are competing with Argentine exports in the US and China markets respectively, plus those who took his small-government rhetoric seriously, bless them. It would have been a different story had Milei lost: I can imagine Trump pulling support without blinking. (To be honest, I can still just about see him doing it anyway, since he doesn’t exactly do loyalty, but it’s not a high-probability outcome.)

Trump has already shown a willingness to annoy US farmers without losing their votes, and I suspect the soyabean growers are about to get their access to the Chinese market restored after the US president meets Xi this week — see above. Or he can just bail them out, as he did before.

What happens now depends on how Milei does. Trump didn’t condition the aid on any particular decisions, so as far as I’m concerned it rests on whether Milei decides to effect a massive peso devaluation and then tighten fiscal policy enough to control inflation and stop the real exchange rate rising again. It won’t be pretty and it won’t be popular, but he has got two years until the next presidential election and he’s the most likely president actually to have a go for decades. (Then again, we also said that about his predecessor-but-one Mauricio Macri, and look what happened to him.)

Structurally, the Argentine economy is an over-regulated (or at least badly-regulated) mess, but as I’ve said before its biggest problems are macroeconomic. If Milei doesn’t go for the big currency adjustment, I’m afraid to say the US is just going to wade deeper into the quagmire of lending to Argentina to try to hold up the peso that so many governments and investors have sunk into down the decades. Under those circumstances, particularly if Trump has found a new buddy in Brazil’s Luiz Inácio Lula da Silva, I can imagine the US cutting Argentina loose without a backward look.

Charted waters

One counter-argument to my confidence about Trump prioritising trade peace is that stock prices are looking very healthy, suggesting perhaps that he has the freedom to escalate the trade war without causing another market meltdown.

Trade links

The US and Qatar have told the EU that its imports of liquefied natural gas will be endangered if it continues with its directive on corporate sustainability due diligence.

Volvo and VW have warned of car production disruptions over the row between China and the Netherlands over the chipmaker Nexperia.

The FT reports that China’s overseas lending in renminbi is soaring as the authorities there continue their campaign to de-dollarise.

Academic Richard Baldwin in one of his highly recommended regular analyses looks at why US exports as well as imports fell after Trump put on tariffs.

Jun Du, professor of economics at Aston University in the UK, argues well that Trump does not understand global supply chains.

Trade Secrets is edited by Jonathan Moules