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    “America First “– “America Only “ – “America Lonely “ – And how dramatically the world does change

    June 2018

    There are decades which pass and nothing happens; and all of a sudden there are weeks and months where decades happen.

    For Europe, the first move was easy. Officials swiftly announced plans to strike back with retaliatory measures against President Trump’s tariffs on steel and aluminum while vowing a legal challenge. The White House announced this week that some of its closest allies, the EU, Canada and Mexico, would no longer be exempt from its tariffs on imports of steel and aluminum. In economic terms, this action is objectionable: the damage that will be done to domestic US users of steel and aluminum will undoubtedly far exceed any benefits to US consumers. For this reason, the protection is likely to spread upstream and so worldwide.

    For Europe the next move is more complicated and uncertain. Through European leaders project unified resolve in confronting what they portray as American bullying that breaches the rules of global trade, they have not proved adept at setting aside national differences in the pursuit of common aims.

    And Europe at the moment appears especially divided and internally conflicted.

    Britain is headed for the exit. The debate over the UK’s future relations with the EU is currently dominated by two fringes. These extreme factions are pushing either a “no deal” Brexit of quasi EU membership with no power. Neither holds much appeal to British business nor voters. A potentially destabilizing, populist government just assumed power in Italy. The formation of an anti-European, anti-immigrant government. To make it more clear – the xenophobic League and the out –with– the-old–order Five Star Movement – bring together bigotry and incompetence to an unusual degree. In my opinion they are a miserable bunch borne aloft on the global anti-liberal tide. Still they won.

    Spain unexpectedly changed leaders as well, while Hungary and Poland are testing the values of the European Union with policies anathema to democracy. In addition, European economic growth appears to be slowing, with factory orders down in Germany.

    In European corridors of power, anger at the Trump administration is intense – not just because of the tariffs, but also because of the American decision to resolve support for the Iran denuclearization deal. Yet given the difficulties Europe confronts in orchestrating any policy and given competing economic interest across the 28-nation bloc, Europe is in a compromised position as it squares off with a bellicose American president as “fool me once shame on you – fool me twice shame on me”.

    Many trade experts assume Europe will be forced to cede ground, further opening its markets to American exports to gain relief from Mr. Trump’s tariffs. We have to consider that the U.S. is more powerful than the E.U., and the E.U. is facing many challenges – will the E.U. be strong enough to rally against the U.S. – in my opinion they are not willing to pay the price.

    France is especially inclined to punish the United States, viewing Mr. Trump’s justification of the tariffs on national security grounds as on affront to the concept of rules – based international trade, as overseen by the World Trade Organization.

    Germany – the bloc’s largest economic power – is reluctant to escalate the conflict, lest tit – for – tat – tariffs jeopardize its lucrative exports of automobiles and other industrial goods to American shores.

    In fashioning its response, Europe must navigate skepticism that Mr. Trump is executing a cohesive trade strategy, rather than lurching from position to position in the thrall of the supposed powers of unpredictability.

    Mr. Trump’s approach has produced some results. In March, when Mr. Trump unleashed the prospect of steel and aluminum tariffs, his administration signaled that this was an opening move in a negotiation. Soon, the U.S. exempted South Korea, a major steel exporter, in exchange for opening its market to American – made automobiles.

    The Trump administration has hoped to use that agreement as a template in extracting similar concessions from the European Union. It suggested the bloc could gain an exemption from the American tariffs so long as it reduced its own duties on American autos while limiting its exports of steel. But European leaders balked at that approach, enraged at what they viewed as demeaning treatment from a long-standing ally. “We will talk about anything in principle with a country that respects W.T.O. rules,” the French president, Emmanuel Macron, told reporters in Brussels in March, shortly after the Trump administration announced its metals tariffs. “We will not talk about anything when it is with a gun to our head” Macron said.

    But to understand W.T.O rules we first have to understand the history of free trade.

    In the wake of the disastrous protectionist policies of the early 1930s in the United States, the secretary of state appointed by president Franklin Delano Roosevelt, a man named Cordell Hull, made promoting free trade a core principle of US international affairs, both because he felt it was economically good for the country and because he felt it promoted stronger ties with our trading partners worldwide.

    In the wake of the Second World War, the international community embraced the ideals of free trade when it signed the general agreement on tariffs and trade (Gatt) in Genera, Switzerland in October 1947. That was 71years ago. Since then, despite the inevitable ups and downs associated with trade negotiations, the core direction of US trade policy and of the international system we sought to influence was towards more trade liberalization.

    This movement manifested itself in the creation of the World Trade Organization (W.T.O), which will turn 25 next year, and the creation of the North American Free Trade Agreement (Nafta).

    From the establishment of the European Union to the trans – Pacific – trade agreement, the overarching principle was that more open trade meant greater opportunity and growth for all.

    It was far from a perfect system – but it has worked and the world economy has enjoyed unprecedented growth. And for every moment since the Gatt accord was signed and became US policy, the US has been the richest and most powerful nation on earth.

    But all that success and tradition apparently has not been enough to persuade Donald Trump. Mr. Trump and his team have taken it upon themselves to reverse more than eight decades of US trade policy.

    -People who are interested in making the best possible decisions rarely are confident that they have the best possible answers –

    They began with pulling the US out of the Trans – Pacific – Partnership. They then went on to demand the renegotiation of the NAFTA accord and to threaten to pull the US out of the agreement.

    They followed with a serious of attacks ratcheting up pressure on America’s number one trading partner, China. Now, in the past week, they have levied a series of steel and aluminum tariffs that have sent the US hurtling towards a trade war with many of the US’s closest allies in Europe and North America. It seems to me that Trump and his administration never heard of “critical thinking” which is disciplined thinking that is clear, rational, open-minded, and informed by evidence. Canadian Prime Minister Justine Trudeau, acknowledging how close the two countries have been for 150years, said: “This is not about the American people. We have to believe at some point their common sense will prevail. But we see no sign of that in this action today by the US administration.

    The biggest mistake in my opinion most US people make is to not see themselves and their president objectively. If you can talk brilliantly to your people about a problem like Mr. Trump, it can create the consoling illusion that the problem has been mastered – but the reality is that the problem and the caused damages by Mr. Trump and his administration erase worldwide on a daily basis.

    The Chinese government chided the US more indirectly, saying: “All countries, especially the major economies should resolutely oppose all forms of trade and investment protection.”

    As a summary we can confirm that there is a big problem: the US has gone to war with the good guys, not the bad. By slapping tariffs on America’s allies, Trump has put the US in my opinion in the worst of all positions: he has alienated the very countries that could help the US fight strategically important trade battles with China.

    These are not so much about steel and aluminum as who will set the standards for the digital economy and take the lead in areas such as 5G telecoms standards, the internet of things and artificial intelligence. This is in my opinion where the vast majority of global growth is going to be over the next decades. Trade in old line goods and services has been flat for years, while digital trade flows increased 45-fold from 2005 to 2014, according to the McKinsey Global Institute.

    The new world economy is based not on metal basking, but on computing power and data. There is tremendous opportunity for productivity growth here, which the world desperately needs.

    According to another MGI report, we must roughly double productivity growth over the next decades to preserve today’s global living standards.

    But to reap those gains and ensure that they are widely shared, we also need a new set of rules for everything from tax to intellectual property protection to trade. All of this calls for a coherent internal economic strategy, which of course the US administration does not have.

    Mr. Trump has yet to appoint someone to head the Office of Science and Technology Policy, the agency best positioned to connect all those dots. On trade, rather than duking it out with allies over motorcycles, peanut butter and whisky, we should be looking at issues like 3D printing and its effect on origin rules, which determine the nationality of products. Those regulations have been a sticking point in the renegotiation of the North American Free Trade Agreement. But will they be relevant in an era in which you can simply email product blueprints around the world and print them locally?

    The US and Europe should be sitting down to discuss shared standards for 5G, and a fair split of the profit-sharing pie in the coming era of connected machines. This will require negotiations between America’s big technology companies, EU telecoms as well as automakers and small and mid-sized companies in both regions

    China is already thinking about all of this. Over the past few years, it has quietly boosted its influence at the International Telecommunications Union and other standards bodies that will drive the adoption of 5G and artificial intelligence technologies. China is playing the long game, even as the US goes it alone.

    It is particularly alarming that the Trump administration has picked a fight with its European allies at a time when the EU is moving closer to China. The Middle Kingdom recently overtook the US as Germany’s largest non-European trading partner.

    Overall, the US is still the EU’s top trading partner, accounting for almost 17% of the bloc’s total external trade in goods last year. But China is not for behind, at 15%, and the EU’s trade relationship with China will probably grow even faster, as China’s Belt and Road Initiative shifts the trade and security balance in Asia.

    Europe will increasingly be able to conduct physical trade with China via land routes, rather than relying on the US Navy to police shipping-based supply chains in the Pacific.

    The world is changing and yet the US remains fixated on the same old fights. The Trump administration’s myopic focus on trade deficits as the most important metric of economic success is perhaps the best example of this.

    The last time there was a big protectionist push in the US – against Japan in the 1980s – a large deficit was likewise seen as an indicator of unfair trading practices. The US slapped tariffs on Japan. While the market penetration of Japanese cars into the US market did indeed decline slightly, the protectionist measures raised prices of automobiles, which increased the overall trade deficit. The entire episode cast American consumers an extra 5billion US Dollar annually, according to the Heritage Institute.

    Let us summarize once more history to be able to predict a possible future:

    For most of history, China and India were the world’s two largest economies, but because of the industrial revolution they were displaced by Europe and America for 200 years.

    As I have previously argued, the return of Asia is one of the two great power shifts of this century – the other being the information revolution that started in Silicon Valley in the 1960s and has in the meanwhile evolved to the 4th Industrial Revolution.

    The recovery of Asia did not begin with China or India, it was Japan. Not only did Japan use western industrial tools to defeat Russia in 1905 in the recovery process, Japan still remains the world’s third largest national economy by using current exchange rates. When we argue that the “emerging seven” economies have outstripped the G7 in contributing to global growth, Japan is treated as part of the west, not Asia.

    At the beginning of the 20th century, the US had about a fifth of the world gross domestic product, but in the aftermath of the Second World War, which strengthened the US economy while devastating others the US had nearly half of the world GDP. As other countries recovered and grew, partly as a result of US policy, the American share returned back to about 25%. US President Richard Nixon and his national security adviser Henry Kissinger interpreted this rebalancing as a decline and the belief paved the way for the Nixon doctrine and opening to China in 1971.

    In the 1990’s, President Bill Clinton helped China to enter in the World Trade Organization. This policy is now regarded as controversial – but no western figure had had the courage to state the defining truth of our times – .

    The US was not a global hegemon before 1991. In a bipolar world, US military power was balance by Soviet power. When the USSR collapsed, the unipolar temptation proved too strong and the way was clear for foolish interventions as in Iraq. Now, the current US President Donald Trump is clearly ignorant about the world.

    Therefore we can rightly conclude that it is not inevitable that China will lead the world or that the past 200years of western domination will be replaced by two centuries of Asian domination if western nations don’t act fast. One thing is already clear to me, that the west needs to learn to share with “the rest”.

    But for now, in fact, there is only one country that seems to be an immediate winner from the current policy reversals: Russia Moscow has long sought to weaken the US Atlantic Alliance and undercut American global leadership.

    For Mr. Putin and Russia, this is a dream come true. Indeed, given the burden potential trade wars place on American workers, consumers, allies and alliances, the person most likely to cheer statements like Mr. Trump’s recent comment that “trade wars are good” is Vladimir Putin.

    In fact, while few investors expected or could have planned for these stunning developments, Mr. Putin, by some estimates the world’s richest man, showed yet again what a savvy investor he was – as the effort his government made to help Mr. Trump with the 2016 election has proven yet again to be, at least for him, if not for all the rest of us, one of the canniest investments any world leader has made in recent years. From this perspective he has all of my respect and such a move can be called “The Art of the Deal”.

    For Mr. Trump there is still the existence to write American history as “you never get a second chance to make a first impression”. There is a realistic chance that Mr. Trump will be the first US President who has to pardon himself to avoid any kind of prosecution for his first impression. Such a self-granted pardon will isolate him, his administration and the US even more from the rest of the world.

    Such a pardon would probably lead to an immediate impeachment where the American population might finally come to conclusion “Dump the Trump”.