Trade paralysis

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Steve Okun during an interview with The Fiji Times while in Suva early this month. Picture: DIONISIA TABUREGUCI

UNCERTAINTY seems to be the only certain thing in global trade these days as US President Donald Trump’s famous tariff policies that he has indiscriminately dished out to friends and foes of America alike throws world order into a tailspin.

The Fiji Times spoke to international trade expert Steven Okun, founder and chief executive officer of Singapore-based APAC Advisors and a former official in the Clinton Administration. Mr Okun was in Fiji upon invitation of the Fiji-USA Business Council, where he delivered his perspective of global trade under Trump to various audiences.

Below are excerpts from the interview.

FT: How has President Trump’s tariff measures affected global trade?

Mr Okun: We’re in an era of total uncertainty and that’s because the Trump administration’s approach to trade and the America-first trade policy is very different than what we’ve ever seen, a shift away from the global rules-based trading system. Whereas before, the US side worked in its collective interest, the America-first approach is very different in two ways, and this is where it really impacts Fiji. The first is that the United States under Donald Trump separates trade from national security. The United States under Donald Trump does not look at the trading relationship with any country in the context of the geostrategic importance, the geopolitical importance, the bilateral importance. A country like Japan for instance, which is a treaty ally of the United States, gets hit with very high tariffs. A country like South Korea, a treaty ally of the United States, with which the US has a free trade agreement, is hit with very high tariffs because Donald Trump only looks at one metric, and that is the trade balance between the US and that country. So, while geopolitically, the importance of Fiji to the United States hasn’t changed, the approach to Fiji has changed because the approach to every country has changed and because the US has a trade deficit with Fiji, it therefore is going to put tariffs on Fiji.

FT: That seems to be the main point. Friend or foe is equally hit by Trump’s tariff measures.

Mr Okun: It’s the only thing that matters – what is the trade balance. And it’s trade in goods. The US often has a trade surplus in services. But Donald Trump really kind of has a mentality from the 1970s, which counts when you can build something with your hands – and that’s what he focuses on. He doesn’t think of anything outside of the trade balance and that is what dictates his approach to that country when it comes to tariffs.

FT: Do you think this will be the new normal?

Mr Okun: Well, this hasn’t been normal for about 80 years. It’s not normal. It’s a very different approach and he has said it. When it comes to Donald Trump, it’s very simple. Believe him. Believe him when he says something. Believe him when he says that tariff is his favourite word in the dictionary. He believes in tariffs and he believes this is in the US’ national interest.
Most economists and trade experts disagree with him but that’s what he believes.

FT: What about businesses in the US. How are they faring in this?

Mr Okun: Well, what you’re seeing is two-fold. While he’s announced the tariffs, he’s postponed most of it. Not all of them, but most of them have been postponed so what companies have been doing is pre-ordering to get the goods from Asia, Europe, wherever they’re coming from into the United States before the tariffs hit.
So, we haven’t seen the supply chain crunch or the inflation you would see when tariffs take effect and once this pre-running of the tariffs come to an end.
So, businesses have been pre-ordering and stacking up on inventory, which is inefficient, but they’ve been doing that to mitigate the tariffs before they take effect.
And the other thing is businesses have stopped investing. Because when you don’t know what the tariffs are, when you don’t know what the rules are, you don’t know whether you can invest. So if you have an ongoing business, of course you keep that running, you’re keeping everything in place but you’re not expanding nearly as much as you would have because you don’t know what the rules are going to be going forward.

FT: What could be the likely scenario for Fiji?

Mr Okun: Well, one is, you’re waiting for certainty and then when the tariffs do come into effect, we don’t know when and we don’t know what number yet.
But when those tariffs do come into effect, three things when the tariffs come into effect: one is, if you are a buyer, you’re going to try to pressure the supplier to reduce costs to protect your margins.
So if you are upstream in the supply chain, you’re going to get pressured from your buyer. So, if Fiji is the origin where these products come from, then companies from Fiji, even if they’re not exporting to the US, can be impacted by the tariffs.
Two, if you are the one who is exporting to the US, you have two options. One is you can eat some of the cost of the tariff, so what you’re going to pass on to your supplier is going to come out of your bottom line.
The third thing is the end consumers. They are going to pay more for their products and that’s going to result in inflation in the United States, it’s going to result in fewer goods being bought. So that’s where the tariffs are going to get paid from and we don’t yet know what percentage is going to be allocated to each of those entities in that scenario. So, it’s going to be the supplier, the buyer/seller and then the ultimate purchaser, everybody is going to take a hit on this. Most likely it’s going to come from the US consumer.

FT: For now, it’s the 10per cent tariff (for imports into US)…

Mr Okun: There’s a 10 per cent universal tariff levied on everyone including countries like Singapore which has a trade deficit with the United States. The US actually has a trade surplus with Singapore.
The US has a Free Trade Agreement with Singapore and yet the US put tariff on Singapore. So if Singapore is going to get tariffed, everybody is going to get tariffed. And tariffs are relative. If everybody is paying a 10 per cent tariff, that’s ok, then your costs go up and inflation is going to go up. But from a competitive standpoint, so long as it’s relative, everybody is the same, then countries like Fiji gets 32 per cent and another country that Fiji is competing with gets a lower number, then Fiji is worse off. If they’re at a higher number, then Fiji is better off. So we don’t know the impact to any given country because we don’t know relatively how it is going to fare compared to its competitors.

FT: So you have a list of countries that will be tariffed (reciprocal tariffs) but we don’t know where it’s all going?

Mr Okun: No we don’t. And he (President Trump) has deadlines, but they’re made up. These are meaningless deadlines. I mean, actually, the deadline that Congress set for the President to follow when it came to TikTok, Congress gave a hard deadline that if ByteDance (parent company of Tik Tok) dis not divest its ownership from TikTok, TikTok could not operate in the United States.
That deadline has come and gone and Donald Trump’s ignored it. And he has no Constitutional authority to ignore that deadline but no one is holding him to it. These deadlines, the latest of which is August 1 when it comes to the reciprocal tariffs announced on Liberation Day, that’s a made-up deadline. So if he’s ignoring a real deadline, he may meet the August 1 deadline or he may not.
So if you can’t know what the rules are, you can’t invest. And if you know what the rules are, then you can say well we’re going to leave that market, we’re going to go and do another market. So you need to know the rules. If you can’t price risk into your business, if it’s unknowable, you’re going to not invest.

FT: What about the World Trade Organisation (WTO). Is it still relevant?

Mr Okun: It is close to being meaningless. Now, the Americans will say with some justification that China is not following the rules of the WTO.
That’s what the US would say, that a lot of this originates with China when the US advocated for China’s entry into the WTO and China would then, over time, become like the current members of the global rules-based trading system – it wouldn’t engage in unfair trading practices, there wouldn’t be state subsidies, there wouldn’t be forced technology transfers, there wouldn’t be players to come in and compete unfairly. China never lived up to a lot of its commitments when it joined the WTO.
That is where Donald Trump, in particular in Trump 1.0 and really now in Trump 2.0, would question: ‘what good is the WTO? The WTO is no good, China never followed the rules so why should we follow the rules?’ So we’re now going into a new era where we don’t see a multilateral trading system, a global multilateral trading system.
We see from the US perspective, the desire to have bilateral trade and we see other countries creating plurilateral systems or regional trading blocs. ASEAN would be one, CPTPP is such an agreement, RCEP (Regional Comprehensive Economic Partnership) another plurilateral system, and that’s something that I think a country like Fiji should be looking at, same as a country in South East Asia — are there blocs we can be part of, can the Pacific nations come together and collectively get a better Agreement with the United States.
And you really have to get down to company level. Some companies are really going to be hit by this, so, what’s going to happen to those companies, what’s that going to do to the economy. Should those countries, if they lose a market, be looking to different markets?
If they’re going to be impacted on product level, maybe they should start selling a new product.
So from a macro level, it’s going to depend on how much exposure a country has to the United States, how much exposure a country has to China.
At firm level, there could be significant impact and that’s going to impact every country.