Doing business with Trump

This past week, with a deadline looming for cripplingly high tariffs on US imports, Japan, Indonesia, and the Philippines walked away signing trade deals with US President Donald Trump.

The details of the deals were not by themselves particularly cheerful for the Asians. All three of them will continue to face decidedly higher tariffs than they did before Trump came to power: Japan will cop a 15 per cent tariff on its exports to the US, and Indonesia and the Philippines each settled for a 19 per cent tax.

Additionally, the Asians also made heavy concessions to US exporters. Indonesia and the Philippines agreed to eliminate tariffs on a wide slate of US imports and reduce non-tariff barriers on some of the key sectors. Japan agreed to open itself up to American cars and rice exports and pledged to invest $550 billion in the US.

As one-sided as all this might sound, the circumstances meant that the deals were still worth the pain for the three Asian partners.

In the face of continued threats from Chinese naval vessels in the South China Sea, the Philippines was keen to avoid jeopardising its military cooperation with the US. For months, Chinese coast guard ships and Filipino fishing vessels have come close to blows over those contested waters. The US is a treaty ally of the Philippines and is legally obligated to come to its aid in the event of a war, but Trump’s unpredictability has rendered that commitment tenuous for years.

Meanwhile, for Japan, higher US tariffs would have been an economic death knell. About 20 per cent of Japan’s total exports are shipped to the US, making it Japan’s largest export market. In the course of the negotiations, Trump threatened to impose tariff rates as high as 25 per cent. In return for a more stable framework, Japan agreed on 15 per cent.

The deals revealed the core philosophy behind Trump’s negotiation tactics. Investors and businesses actively seek stability and predictability. The actual tariff rate matters less than the promise that they remain stable and predictable. By threatening chaos, Trump managed to force all three Asian partners to cave.

To be sure, this approach also has its limits. At the time of writing, deals appear to be more elusive with larger economies such as the European Union, Canada, and China, all of whom have greater leverage and stronger geopolitical incentives not to give in.

China and Canada are in the top three suppliers of US imports, and prolonged tariffs on those countries have the potential not only to cause inflation but also to cripple domestic US industries that rely on them for inputs. Meanwhile, even as the EU continues trade talks with the US, it has actively sought to diversify to other markets, particularly in Southeast Asia. This year, European leaders have travelled to Vietnam, Singapore, and elsewhere, looking to hedge their bets. A deal with these countries is unlikely to be as one-sided as the ones Trump secured with the Asians.

As negotiations continue at a frenetic pace, these evolving experiences hold critical lessons. If you depend heavily on the US and have a limited trade footprint, be prepared to make heavy concessions. The US is often the largest export market for many emerging economies, but in turn, those countries individually tend to make up a tiny percentage of total US imports, which means that Trump can impose steep tariffs on them at limited cost.

To counteract this leverage, emerging economies would need to either find new export markets and reduce their dependence on the US or build coalitions with other countries to improve their bargaining power. If you go to Washington alone these days, you are unlikely to get your way.