Trump needs Japan on his side if he wants to achieve a ‘trade truce’ with China

What’s curious about this weekend’s meeting between Trump and Abe ahead of the G20 is that Trump is not seeking to find common ground in an effort to contain China’s ambitions – or at least if he is, it is not evident to the Trump-watchers in Washington

Donald Trump is in Tokyo meeting Prime Minister Abe, and the principal subject unsurprisingly will be trade tensions between the US and Japan. The Brookings Institution here in DC has done a good summary of the issues, making the key point that using national security as a front for cutting imports is a spurious argument. It is certainly hard to see why Americans buying Toyota cars (many of which are assembled in the US) should undermine US security.

Leave aside the details and focus on this key point: Japan is in economic decline. True, it is the third largest economy in the world, after the US and China, but in relative weight it is becoming less important – in contrast to China. So it is in the self-interest of the US to support Japan as a regional counterweight to China. Attacking its key industry, car manufacturing, must therefore be counter to US strategic interests.

This leads to a wider question. What do we know about the impact of the current trade tensions?

Here there is some modest good news. Trade volumes seem to have recovered a little from the downswing that began about a year ago. If you look at the first quarter of this year, volume was down. But in March they started to pick up, following falls in January and February. The Netherlands Bureau for Economic Policy Analysis tracks world trade each month and has just reported this first bit of positive news. Support comes from reports that air freight is starting to pick up a little, and the forward-looking purchasing manager indices for export orders have started to point to an increase.

Of course trade volumes could slip back again, but what seems to be happening is that companies are changing (and simplifying) their supply chains so they rely less on imported components and more on home-sourced ones. If that sounds like good news – global supply chains have arguably become too complicated – be careful. Companies choose to buy stuff from abroad because it is cheaper to do so. So costs to consumers will tend to increase, and there will at the margin be some loss of overall wealth.

Come back to Trump and Japan. The president will be back there for the G20 summit meeting in Osaka at the end of June. This will be an important one, for it will remind everyone that while the US remains the key to global trade negotiations, the rise of China and India will start to limit its authority. India’s prime minister Narendra Modi has just been re-elected with a clear majority, his popularity driven by the country’s economic success under his leadership. (The Indian economy is set to pass the UK and France this year in size.)

The headline issue will be whether there will be a trade truce (let’s not expect lasting harmony) between China and the US. We are currently seeing the usual speculation in advance of the summit. What’s curious about this weekend’s meeting between Trump and Abe ahead of the G20 is that Trump is not seeking to find common ground in an effort to contain China’s ambitions – or at least if he is, it is not evident to the Trump-watchers in Washington.

It is odd because the latest data from the US economy suggests Trump may need some allies in the tussle with China. In the past few days there have been signs of a weakening in the US economy. For example, the Federal Reserve Bank of Chicago’s national activity index fell in April, a point picked by Capital Economics but not by the markets. In addition, the Markit activity indices for April fell, with manufacturing at a 10-year low and services at a three-year low. Capital goods orders were weak too.

I don’t think it is helpful to grab every indicator that points down and say this means that recession is round the corner. The point is simply that The Donald may not have as strong a negotiating hand as he thinks. While the US economic boom continues, he can claim his trade policies are supporting it. But how will he react when it weakens, as it eventually will?