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Here's the only way Trump can win the two-front trade war with China and the EU

  • The Trump administration is trying to find a way to ease tensions and avoid a trade war with China.
  • Meanwhile, the EU and other nations are ready to strike if tariffs exemptions expire.
  • With a two-front trade war in play, tactics that promote market competition among U.S., EU and China firms, should be Trump administration's clear-cut strategy.
President Donald Trump
Carlos Barria | Reuters
President Donald Trump

Even before Donald Trump became the 45th president of the United States, he called for an aggressive renegotiation of global trade deals. His push to reform trade with China, in order to close the trade deficit, was a hallmark promise of his campaign.

At the beginning of the month, President Trump delayed enacting tariffs aimed at key Chinese exports, for an additional thirty days. With another decision to delay or enact punitive tariffs looming, President Trump walked back on trade "truce" comments made by his team over the weekend and now demands that China begin closing the trade gap.

Interestingly, the trade deficit metrics cited overestimate the size of the trade deficit, by about half, and as a result are a bit misleading. Chinese labor and assembly accounts for only a small proportion of costs while the majority of costs are derived from components produced from all over the world.

However, since the final good is exported from China, the entire price is chalked up to a Chinese export, overestimating the trade imbalance. Nevertheless, the president is now requesting that Chinese consumers purchase more than $200 billion of American made products over the next two years. Not surprisingly, Chinese officials are balking at the request.

"Negotiating trade deals to eliminate the Chinese trade deficit will likely have harmful, long-lasting, global impacts."

Amid all of the Chinese trade talks it is easy to forget that there is also an escalating trade conflict with the European Union. Punitive tariff exemptions of 25 and 10 percent on exported EU steel and aluminum are set to expire June 1st and it seems that the president's team is unhappy with how negotiations are unfolding.

Comments made by the EU trade commissioner suggest that little headway will be made before the deadline and that either tariffs or restricted market access will be likely.

With a trade war now on two fronts, it seems the president's decisions are coming from one of two places: competition or cooperation.

If President Trump would like to close the trade deficit with China, his stance with the EU should be one of cooperation. Additionally if the U.S. wants to discuss violations of American intellectual property rights, as a claim with the World Trade organization suggests, it requires joint pressure from both the U.S. and the EU.

Moreover, the EU would likely need the help of the U.S. to pressure China, which exports half of the world's steel, to stop depressing steel prices and forcing EU businesses to close.

However, the EU has already indicated that they will not negotiate under the looming threat of steel and aluminum tariffs; their position is clear, they should share exemptions along with Australia, Argentina, Brazil and South Korea.

What is also clear is that American made goods like Harley Davidsons, denim jeans, and bourbon will be the first items hit with retaliatory tariffs from the EU.

Globally, firms have begun to respond to a budding two-front trade war as tariff exemptions are set to expire. If President Trump is committed to his populist political-economic agenda, then tactics that promote market competition among U.S., EU and China firms, should be the clear-cut strategy.

Otherwise, negotiating trade deals to eliminate the Chinese trade deficit will likely have harmful, long-lasting, global impacts. Here in the U.S., consumers should expect to see prices rising for many imported EU and Chinese products and jobs in the steel and manufacturing sectors not rebounding.

The next few weeks will be an important test for President Trump and his team, if we expect to win this zero-sum game.

Commentary by economics expert Jason Reed, assistant teaching professor of finance in the University of Notre Dame's Mendoza College of Business.

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