It’s true that U.S. President Donald Trump is a loud, rude and really unpleasant man. But perhaps these are the qualities demanded of a person who positions himself as a slaughterer of sacred cows at a dizzying pace – see: Iran, North Korea, NATO and China.
The North Atlantic Treaty Organization was founded in 1949 to counter the threat posed by the Soviet Union. Nowadays the threats are somewhat different. They are coming from Iran, North Korea, Islamic terror – but also from Russia. The problem is that Europe’s wealthy nations would rather not fund NATO. They pay very little compared to the United States, which bears most of the burden. For example, Germany, which has the largest economy in Europe, spends only 1.2 percent of its gross domestic product on defense. The United States spends 4 percent. Israel, by comparison, spends 6 percent.
Many American presidents have demanded that Europe increase its defense outlays and share of NATO funding, but its leaders smiled politely and did nothing. They would prefer to spend more on welfare, health and infrastructure. As far as they were concerned, the Americans could pay and even sacrifice its sons to defend the Western world.
But Trump isn’t prepared to have this situation continue and told the leaders as much to their faces. During the NATO conference in Brussels last week, he announced that he wouldn’t renew America's commitment to the defense alliance if they didn’t significantly increase their defense spending. They said they would do so – but it’s all talk.
Another sacred cow is relations with China. During his election campaign, Trump said he would not allow China to continue to levy customs fees on imports from the United States. He also objects to the Chinese government subsidizing Chinese exports. This is a policy that undermines American industry, which cannot compete under such unfair conditions.
These tariffs lead to the closure of efficient and successful U.S. factories that could be exporting cars to China, for example, if it weren’t for these levies. The export subsidies also undermine American factories that manufacture goods for the domestic market.
The Chinese government also maintains an artificially low exchange rate for the yuan to facilitate the penetration of Chinese products into the U.S. market. China is thus undermining the natural equilibrium of the market, distorting the way U.S. manufacturers must allocate resources in order to function. As a result, thousands of American factories closed and millions of workers were laid off in Middle America – the so-called Rust Belt, where most of Trump’s supporters are concentrated.
Obviously, a world without customs levies would be better. Obviously, we would prefer a world of free trade that would allow every country to produce the goods and services they excel at, while importing the goods and services they are less proficient at producing. That would be the optimal situation, in which every country’s standard of living would rise. That’s why many economists oppose Trump’s recent move to raise customs duties on Chinese goods.
The economists’ fear is that China will retaliate by imposing new and even higher tariffs on imports from the United States, resulting in a trade war between the two giants that will wreak huge damage upon their economies and the global economy.
But there is also the possibility that Trump is going to the brink so as to pressure China to return to negotiations and agree to reduce overall tariffs and cut export subsidies. China is already showing signs of flexibility. It has said it doesn’t want a trade war. It knows it is much more dependent on exports than the United States. China’s stock markets have meanwhile plummeted and the yuan has weakened against the dollar.
But nothing has been decided yet. It is not clear how the conflict in NATO will end and how the trade war with China will be resolved. The results will indicate whether Trump is just talking big, or whether he will actually slaughter some sacred cows.
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