Opinion |

How Israel Could Become a Casualty in Trump's Trade War

Trump could win a trade war with China, but with nearly a third of Israel's economy derived from exports, it is particularly exposed to the U.S. president’s antics

David Rosenberg
David Rosenberg
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U.S. President Donald Trump and Israeli Prime Minister Benjamin Netanyahu shake hands after Trump's address at the Israel Museum in Jerusalem May 23, 2017.
Trump, left, and NetanyahuCredit: Ronen Zvulun / Reuters
David Rosenberg
David Rosenberg

The list of half-erroneous statistics, exaggerations and distortions that Trump has used in relation to international trade is a long one. They include remarks like “Our country is in serious trouble. We don't win anymore. We don't beat China in trade. We don't beat Japan.” (in his June 2015 candidacy announcement). Or “The world is taking advantage of the United States and it's driving us into literally being a third world nation.” Or “We do have a Trade Deficit with Canada.”

The first remark assumes that countries “beat” each other in international trade, as if it’s a zero-sum game where everyone’s trade surplus wins them a point and every deficit loses them one. The second one is typical of the kind of hyperbole Trump routinely engages in where people and things he disapproves of are “losers” or the “worst ever.” If the U.S. is becoming a third-world country it’s probably more due to its poor health statistics or high rates of poverty, not because trade is pauperizing the country. And, even though Trump has repeatedly said otherwise, the U.S. has run a trade surplus with Canada for the last three years.

Trump has also famously tweeted, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win."

Trump

Now that China has retaliated for the Trump tariffs with a plan to impose duties on a quarter of all U.S. exports to the country, he’ll have his chance to prove it. I think he will be rudely surprised.

In a simple binary world of the United States versus China, the U.S. may have a slight edge. Exports account for a far larger share of the Chinese economy (19.6%) than they do the American one (11.9%).

Moreover, China’s leaders are highly sensitive to any setbacks to the country’s breakneck growth. They need it to ensure the rising standards of living that Chinese people are supposed to get in exchange for granting the Communist Party and Xi Jinping in particular the right to unchallenged rule. If Trump stumbles and his trade policies push America into a recession, he’ll be out of the White House in 2021; if China’s leaders don’t deliver, the absence of any democratic outlets for venting the public’s anger could well lead to political upheaval.

Therefore, there’s good reason to think that after putting up a symbolic fight, Beijing will back down. There’s not only the huge cost to China of a trade war; its leaders are too thoroughly invested in the system of global trade that has served their country so well. They have a deep interest in preserving it. The U.S. has at least as much of an interest. The problem is that Trump and apparently his leading advisers don’t think so, which gives them a strong hand vis-à-vis China.

That means that even if Beijing does act as the responsible adult, it may run up against the White House’s bloody-mindedness. In that case, the world may end up paying a heavy price for Trump’s mindlessness.

With friends like these

Even if the U.S. has some advantages over China in a bilateral trade war, there’s no way for America the fight will “be easy to win.” Prices for goods in the U.S. will rise and American exports will become less competitive as a result. Perhaps some jobs that were outsourced to China will come back, but America’s capacity to fill them is limited because unemployment is already low. Anyhow, that will take time, while the deleterious impact of higher tariffs on Chinese imports will have their effect immediately.

Nor is a trade war something that the U.S. and China can keep to themselves. If other countries find themselves deluged with Chinese products now effectively barred from the U.S. market, they’ll erect their own barriers. Bloomberg estimates that a worldwide trade war could cost the global economy $470 billion by 2020, assuming countries impose tariffs of 10% on average.

Israel is particularly vulnerable. With more than 30% of our GDP coming from exports, our small economy is far more reliant on trade than America or China. Moreover, we run a big trade surplus in goods and services, which reached $5.7 billion last year. Israel's high-tech sector in particular is entirely a global industry: not only does it export almost everything it makes, it relies on big influxes of foreign capital.

The export sector is already struggling with a strong shekel that has made a lot of our industries, even high-tech, less price competitive than they once were, and Israel’s trade surplus has been in decline. There’s no big domestic market for us to turn to, like America and China have, if world trade begins to shrink.

Those in Israel who still employ the simplistic formula that Trump likes Israel therefore he’s good for Israel now have another reason to think again. He’s given us a U.S. embassy in Jerusalem, cut off aid to UNRWA, dissed the Palestinians and threatened Iran, all of which has cheered the Israeli right.

But he has also left us to face Iranian irredentism in Syria alone and now he is undertaking an assault on the global system of trade that is so important to Israel. And those aren’t feel-good acts, but blows to Israeli interests.

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