COLUMN-The cold military logic behind Trump's trade war

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, Nov 1 (Reuters) -

The U.S. military has a tent problem.

The only domestic supplier of the specialist polyester fibre used in its tents has gone out of business with potential “significant impact to multiple tent and fabric systems”, according to a multi-agency assessment of weaknesses in the U.S. defence complex.

Tents are just one of nearly 300 strategic frailties identified in the country’s military supply chains. (“Assessing and Strengthening the Manufacturing and Defense Supply Chain Resiliency of the United States”, September 2018)

The list ranges from the cold-rolled aluminium used for armour plating through submarine shaft maintenance to the silicon power switches used in missile systems. And that’s just the handful of examples that made it into the declassified section of the report.

“All facets of the manufacturing and defense industrial base are currently under threat, at a time when strategic competitors and revisionist powers appear to be growing in strength and capability,” the report states.

Topping the list of “strategic competitors” is China.

“China’s non-market distortions to the economic playing field must end or the U.S. will risk losing the technology overmatch and industrial capabilities that have enabled and empowered our military dominance.”

It is this linking of trade, particularly of raw materials such as metals, with defence that forms the ideological underpinning of President Donald Trump’s tariffs.
WEAPONISING TRADE

When the U.S. Administration imposed tariffs on imports of steel and aluminium, it did so on national security grounds.

The use of the so-called “Section 232” provisions has been dismissed by most market analysts as a fig-leaf for good old-fashioned protectionism.

A lot of governments feel the same, judging by the flurry of appeals to the World Trade Organization.

However, from a U.S. perspective, there is an indisputable logic to identifying China as a strategic competitor and then seeking to break supply chain dependence on that competitor.

Particularly since the U.S. believes that “the erosion of parts of our industrial base, is, in part, attributable to the industrial policies of major trading partners that have created an unfair and non-reciprocal trade environment.”

Seen from the Oval Office, it is not the United States that is weaponising trade but rather the United States that is responding to ongoing weaponisation by China.

An extreme example is the near total reliance of the U.S. defence sector on rare earths mined and processed in China.

“China has strategically flooded the global market with rare earths at subsidized prices, driven out competitors, and deterred new market entrants,” the authors of the report write, noting pointedly the flexing of rare earth export quotas to pressure Japan at the time of the two countries’ 2010 maritime dispute.

But similar arguments play out across a wide spectrum of metals, including the likes of aluminium and steel.

China, it’s worth remembering was the largest single supplier of aluminium products to the U.S. last year. Russia, another country specifically identified as a threat in the report, was the second largest supplier of primary aluminium.

Markets may not like the message, but they should take President Trump at his word when he argues that “a healthy (...) industrial base is a critical element of U.S. power”.

Military might rests on industrial might, a big problem for a country that estimates it lost 66,000 manufacturing enterprises over the first 16 years of this century.

Including the makers of U.S. army tents.

NO EASY DEAL

“Artificially cheap loans from banks and low-priced inputs for Chinese aluminum are contributing to excess capacity and undercutting American workers and businesses.”

That’s not a Trump tweet.

Rather it was how the previous Obama Administration justified a WTO complaint against China’s aluminium sector in January 2017.

Some time during President Barack Obama’s eight-year tenure, U.S. policy to China shifted from engagement to containment.

The Trump Administration has simply accelerated the process to outright confrontation, explicitly linking China’s industrial policy to its growing military capability, both at the perceived expense of the United States.

Such a linkage mitigates against any quick resolution of the two countries’ trade dispute because the escalating stand-off is about far more than just trade.

It is about China’s state nurturing of key manufacturing sectors using all the levers of a centrally-planned economy.

“Chronic overcapacity in China” is down to “China’s failure to transition to a market economy”, according to the WTO complaint.

The Trump Administration agrees, in essence demanding China dismantle its industrial policy.

But how can Beijing compromise, given it’s precisely the model that has propelled its economic growth over the last couple of decades?

This “trade war” isn’t going to be over any time soon.

RECONSTRUCTING SUPPLY LINES

Back with the U.S. army’s tent problem, the solution, according to the inter-agency report, will require “decisive efforts to modernize and revitalize the domestic fiber and textiles industry”.

Which could read as a template for what the U.S. is hoping to achieve through tariffs. Those on aluminum and steel are specifically aimed at encouraging restarts of idled domestic capacity.

Restarts, however, will only lessen not eliminate U.S. import dependency.

The report also recommends expanding direct investment in the industrial base, reengineering key military inputs and greater use of the National Defense Stockpile programme.

A core goal is “diversifying away from complete dependency on sources of supply in politically unstable countries who may cut off U.S. access”.

Revitalising U.S. materials supply chains will also need cooperation with allies such as Canada, the largest single supplier of primary aluminium to the U.S. market and one that is recognised as an integral part of the U.S. industrial-military complex.

It’s a fact that has been forgotten in the specific tariffs tiff between Presidents Trump and Trudeau.

But Canada is part of the longer-term solution to Chinese dominance of the aluminium market. If the U.S. is going to build new smelters, it’s unlikely to do so on expensive home soil but rather across the border to capitalise on its neighbour’s massive hydro power capacity.

Tariffs on Canadian aluminium and steel are part of President Trump’s often bewildering “deal or no deal” approach to trading partners.

Beneath the apparent chaos of U.S. trade policy lies a comprehensive rethink of the country’s industrial-military policy, specifically its raw material supply chains and its manufacturing sector.

That didn’t start with this Administration and it won’t stop when President Trump leaves the White House.

The upheaval to metals markets and indeed to broader markets has only just begun.