What Trump wants to solve is the U.S. trade deficit, but it is not a problem of trade, but a problem of the U.S. macroeconomy, said Lamy. The U.S. has a structural trade deficit because it consumes more than it produces, but because the U.S. dollar is the world’s largest reserve currency, the U.S. can easily finance the trade deficit.

Trump’s desire to solve the U.S. trade deficit with tariffs won’t work, it will only create inflation in the U.S. In addition, erecting a 25 percent tariff barrier around the U.S. will slow U.S. growth, Lamy said. “The bond market has realized that this is a big problem, so the U.S. Treasury market is down and Treasury yields are up.” According to Lamy, it was this reaction in the Treasury market that drove Trump’s decision to suspend high reciprocal tariffs for most countries, except China.

Lamy said that before Trump’s decision to suspend it for 90 days, the trade conflict was between the U.S. and more than 60 countries, which is now split into two parts, one between China and the U.S. and the other between the U.S. and the other countries that have had their high reciprocal tariffs suspended.

Considering that the 10% baseline reciprocal tariffs are still in effect, and that Trump has already imposed 25% tariffs on the steel, aluminum, and auto sectors, Lamy said we are still at a very dangerous stage, but the rest of the world is in a much less difficult position compared to the difficulties China is facing.

Lamy said that one of the open-ended questions that the world is now focusing on is when the leaders of China and the United States will sit down and negotiate, “My guess is that at some point the leaders of the two countries will be looking at the whole range of issues, including trade, technology, Ukraine, etc., and I think there are a lot of potential topics that could be discussed together.”

150 years of U.S. tariff barriers in the third quarter

Lamy said that throughout US history, this is the third time in 150 years that they have surrounded themselves with tariff barriers. The first two were the McKinley Tariff Act in the late 19th, the Smoot-Hawley Tariff Act in the 1930s, and “now it’s the third episode of U.S. tariff barriers – the Trump tariffs. ”

The United States has had a tradition of isolation since its founding, and it was itself born out of a tariff war, with the Tea Party formed in rebellion against high tariffs imposed by British colonizers, and the origins of the Civil War, Lamy said. “So the U.S. has a long history of psychological, historical and cultural factors when it comes to tariffs.”

Trump always refers to former U.S. President McKinley as a very great president, but Trump forgets that McKinley said toward the end of his life that tariffs were stupid,Lamy told Caixin.

“The results of the McKinley tariffs were stupid, and the results of the Smoot-Hawley Tariff Act were stupid. There’s no reason why Trump’s tariffs can’t be stupid, especially as the world has globalized and the infrastructure of globalization has grown. I don’t think it makes sense to try to isolate a large country from the rest of the world. But clearly, that’s what he’s trying to do.” Lamy said.

“I still believe in globalization.”

The U.S. imports 13 percent of the world’s imports and exports 9 percent of the world’s exports, so this isn’t de-globalization and it’s not a global trade war, it’s a trade conflict between the U.S., which imports 13 percent of the world’s imports, and the remaining 87 percent, and “the remaining 87 percent shouldn’t be contaminated by this horrible disease,” Lamy said.

The remaining 87 percent should wring their hands and stick to their obligations and powers at the WTO, which include protecting the U.S. if it raises tariffs, but also work to manage the situation together, Lamy called, “The U.S. wants to go his own way, but let’s not be contaminated by this.”

Lamy said the U.S. has in fact left the WTO, “They invoke the exception clause of national security as if the U.S. is now facing a huge security threat, which is false.” Rummy said we now have to think about a world trade system like this, with the United States on one side and the rest of the world on the other.

The question that remains, Lamy said, is whether, ultimately, the U.S. and China will come to some sort of agreement, and if they must, it will include many other factors beyond trade.

Lamy reiterated his February interview with Caixin, “I still believe in globalization, this is not a global issue, this is a bilateral issue between the U.S. and a lot of the countries that are being subjected to the tariffs, it’s a bilateral trade issue, it’s not a global trade issue.”

China and the United States have embargoed each other

Lamy said to Caixin, Trump’s first term, China and the United States started a trade conflict, to Trump’s second term, it is a mutual embargo. Lamy said, because taking into account the current tariff rates on both sides, is now equal to both sides of the mutual embargo. The next big question is where are the huge amounts of Chinese products that used to go to the United States going to go now?

Lamy said that many countries have begun to discuss the issue, because taking into account the imbalance of China’s economic growth, China’s domestic consumption is unable to absorb all of the original ideal U.S. products. Therefore, China should speed up the adjustment to promote internal circulation, rather than relying on export growth. 

As to whether China’s original exports of U.S. goods will flow to Europe, Lamy said some doubt, because the European Union from China to buy things, and from the United States to buy things are not the same. “This is normal because international trade is about buying what you need from someone who is better condition to produce it, and China and the US don’t export the same range of goods and services, so there is no real substitution.”

Regarding the so-called fair trade concept proposed by the United States, Lamy said the concept is very confusing. He said fair trade is a transaction that is fair in the eyes of the participants. A factory can only exist if both buyers and sellers, importers and exporters, believe it is fair. Fair trade is very much like free trade, which is very upside down. “It’s very nice for banquet speeches, but in reality it doesn’t have a real contact.”

Lamy said China could indeed open up more, for example in services. “It’s important for many other countries to know whether China can open up its economy further.”

90-day pause in outlook

According to Lamy, there are two groups of countries – small countries that are frightened and have no ability to retaliate, and large economies such as the European Union, China, and India, which have a greater ability to retaliate and could seek a balanced agreement.

According to Lamy, while this is not what Trump wants to see, things won’t go the way he thinks they will, and in order to lower tariffs, these countries will need to pay a price, “It’s not going to work, at least not for the big economies, it’s like the mafia extorting money, it’s not going to work for the big shots.”

In short, Lamy said, as the EU has already said, “We’re ready to consider negotiations, but a win-win negotiation, not a negotiation where one side wins and one side loses, the latter being just Trump’s idea.”

When asked what the EU would do then if Trump said that if the EU retaliated, then he would raise tariffs further. Lamy said that if a win-win deal is not possible, “then we will retaliate, possibly with tariffs on goods and possibly with higher tariffs on US services, the latter of which the US has a huge trade surplus with the EU.”

The purpose of retaliating in this way, Lamy said, is to put added pressure on U.S. consumers and investors to realize that they will suffer a higher price in terms of the impact of tariffs on the U.S. economy.

“So this is self-inflicted injury, taking a gun and shooting yourself in the foot. As long as the U.S. domestic economy is in the spotlight, the purpose of retaliation by other countries is to increase the damage that comes from the U.S. self-inflicted injury.” Lamy said.

In light of the fact that Trump also postponed tariffs on Mexico and Canada for a time, but ultimately imposed tariffs on most goods from both countries, a reporter from Caixin asked Lamy what he thought about what kind of tariffs the European Union would end up facing. Lamy replied, “I don’t know, because one of Mr. Trump’s own virtues, one of his gifts is unpredictability.”

What reforms to make at the WTO

In the face of rampant tariffs imposed by the United States, countries including China and Canada have filed petitions with the WTO. What reforms does the WTO need to make next?

Lamy said the WTO must learn to survive without the United States. That’s why the EU is establishing an interstate dispute settlement mechanism with other countries. The mechanism usually adjudicates disputes between countries without the United States.

“We already have two WTOs, one with the US but not working and one without the US but working.”

However, Lamy also acknowledged that so far there is no clear-cut alliance like the one he said. That is, these countries will stick together and not indulge in protectionism. For now, some countries are hesitating because they are under pressure from the United States.

As for what kind of reforms the WTO needs, Lamy argued that the WTO needs to strengthen the subsidies discipline, which is now very weak. Also, it needs to promote digital trade, and it needs institutional reforms that give the WTO director general more power to make proposals on how to reform the WTO.

“Don’t have a proposal that takes years from initiation to negotiation,” Lamy said, ”that’s why the EU is too slow. If the DG had made a proposal, I’m sure the negotiations would have been much faster.” He added, “It is always difficult to reach an agreement between a large number of countries, but we need to do it.”