Trade wars: What if Trump and Lighthizer are playing chess?

In chess, a gambit is a move where a player sacrifices a low-value piece to gain a tactical advantage. It’s a high-risk move, but it’s a calculated risk. Proper use of gambits requires deep knowledge of the game and strategic insight, and it’s a move made by an advanced player.

The US Trade Representative (USTR) Robert Lighthizer is the trade negotiator equivalent of a chess grandmaster. He’s been at the forefront of international trade negotiations since the 1980s, when he was a Deputy USTR in charge of a global negotiation to reduce foreign market share in US steel consumption. He spent the next 30 years as a trade lawyer, before being appointed to head up Donald Trump’s protectionist trade policy.

Trump and Lighthizer, despite substantial differences in background and personality, share the same policy agenda. This agenda is no secret: their stated goal is to reduce the US trade deficit by reworking trade agreements to improve the terms of trade for US-based firms. Trump’s views on these issues are well known, and they have been consistent since he first wrote about them in the context of Japanese competition back in the 1980s. And Trump did not pick Lighthizer’s name out of a hat: as far back as 2011, Lighthizer is on record supporting Trump’s trade agenda.

Last week, the Administration’s trade policy recorded its first big win. South Korea agreed to substantial changes in their existing free-trade agreement, KORUS. Most of the changes are concessions to the US. The US will have more open access to South Korea for its exports, with special provisions for the automobile and pharmaceutical sectors. South Korea agreed, in principle, to stop using the bilateral exchange rate as a tool for trade policy. In exchange for a permanent exemption to the section 232 tariffs, South Korea agreed to restrict its steel exports to the US to 70% of 2015-2017 averages. In an official statement, the USTR Lighthizer hailed these changes as “substantial improvements to KORUS that will help rebalance our trade, reduce our trade deficit, and expand US export opportunities.”

The timing of the KORUS renegotiation process suggests that the successful KORUS renegotiation was the result of a purposeful strategy:

  • January 5: First round of KORUS talks
  • January 23: US implements tariffs on washing machines and solar cells and modules
  • January 31/February 1: Second round KORUS talks
  • March 1: Trump announces tariffs on steel and aluminum
  • March 15: Third round of KORUS talks

The timing of tariff measures led to a gradual ramping up of pressure on South Korea between negotiating rounds. The imposition of solar panel and washing machine tariffs hit major Korean brands like Samsung and LG, and hit South Korea far harder than China. South Korea complained about these tariffs at the second round of KORUS, but it wasn’t yet ready to make enough concessions. So, the US upped the ante with the threat of steel tariffs on South Korea, the 3rd largest exporter of steel to the US. By the end of March, Lighthizer walked away with a renegotiated KORUS that heavily benefitted the US, while South Korea limped away with a series of concessions but a permanent exemption to the steel tariffs.

It is possible that the timing was coincidental – but this would be convenient. We should consider the possibility that this was strategic – that Trump and Lighthizer are working together to advance their trade agenda, using basic negotiation strategies to maximize the chances of success. It’s known that Lighthizer and Trump discussed the KORUS negotiating strategy well in advance. Trump told Lighthizer to use the threat of immediate withdrawal from KORUS as a tactic to gain concessions. Lighthizer is no opponent to strong-arm negotiating strategies. As he once remarked, “the art of persuasion is knowing where the leverage is.”

In NAFTA, we see a similar pattern. In November, just before the 5th round of NAFTA talks, the US slapped anti-dumping duties on Canadian softwood. Just before the 7th round of NAFTA talks on March 5, Trump announced the steel and aluminum tariffs. Canada is the largest exporter of both steel and aluminum to the US. They breathed a sigh of relief on March 8 when they received an exemption, but Trump warned Canada that the exemption was temporary. Then, on March 21, Trump announced that their exemption would end at the end of April, putting immense pressure on Canada and Mexico to rapidly conclude talks. Since then, it has been reported that there have been major breakthroughs on automobiles, one of the largest sticking points in the negotiations since the beginning.

When Trump signed the memorandum on steel and aluminum tariffs, he said that country-specific exemptions would be handled by Lighthizer. These tariffs are a gambit: they are designed to force countries to enter into bilateral talks with Lighthizer, outside of the WTO, which is what Trump said he wanted all along. The EU and China have both entered bilateral talks with Lighthizer already.

The tactics being employed by Lighthizer and Trump are risky; at FSG, we recently increased our likelihood assessment for a US-China trade war occurring up from 15% to 35%.  But just because these tactics are risky doesn’t mean they can’t work. Strong-arming trading partners and allies into granting the US trade concession won’t be a popular strategy. But so far, these tactics seem to be working as intended.

For FSG clients, please contact us or your Client Services Director to consult with our analysts about the implications of these events on your business.

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