Prisoner's Dilemma

# 587

The new face of global trade, with apologies to artist, Huang Yongyu.

There’s only one topic in the news this week: Donald Trump’s tariffs. Ever since Trump’s “Liberation Day”, we’ve been bombarded with chaotic, ever-changing headlines about a tariff regime that makes no sense to every economist who has broached the subject. I’m no economist (you can check with my accountant) but there are many aspects of this tumultuous policy that are worth discussing.

The President began by imposing a range of tariffs on every nation on earth - including islands in the Antarctic inhabited only by penguins - according to a formula whereby any country with a trade surplus with the USA was penalised. Places such as Australia, which has a trade deficit, were hit with a 10% tariff anyway. Notably, a few liberal-minded states such as Russia, Cuba, Belarus and North Korea were excluded. Ukraine was not.

As world markets tanked and roughly US$6 trillion was wiped off the American stock market, Trump had a sudden change of heart. By the end of the week, he had “paused” tariffs for 90 days, reducing them to a flat 10% for most nations, with the striking exception of China, which had retaliated rather than come grovelling. As I write, Chinese goods are subject to an insane tariff of 125%, which will have a knock-on effect around the world.

As the stock market surged, Trump was triumphant, pretending this had been his strategy all along. CNN said that Wall Street’s reaction wasn’t “a victory lap for investors – it’s a gasp for oxygen.”

Even to a non-economist it seems axiomatic that this week’s crazy roller-coaster ride will do untold damage to the global economy. The fact that Trump introduced such an irrational set of tariffs in the first place, promised they would be permanent, then backtracked within days while merely “pausing” the new measures, seems like the very definition of uncertainty. This nutty game of cat & mouse appears to be little more than test of the President’s power to bully and extort every nation on earth. Although it should be admitted that the bullying and extortion begin at home, where Americans are going to be whacked with higher prices and rising rates of inflation at a time when Elon Musk and his droogs have been cutting a swathe through government services and programs, consigning thousands of long-term employees to the unemployment queue.

Trump 2.0 is Disneyland for billionaires – a fantasy realised, whereby the rich can virtually choose whether or not to pay taxes; where investigations into corporate crime are discontinued and pardons issued to the convicted; where government expenditure on social services, education, foreign aid and the arts (just for starters) is slashed, and the money used to compensate for massive tax cuts. It’s looking more and more like the New Feudalism, in which wealthy oligarchs play Lord of the Manor, and the majority of workers become serfs.

Treasury Secretary, Scott Bessent, gave voice to this fantasy when he suggested that all those people laid off from specialised, white-collar jobs in government departments will be able to work in the factories that companies will be building to avoid Trump’s tariff regime. They might also pick up a few hours on the farms, now that cheap migrant labour is being deported. In this attractive scenario, highly skilled, university educated bureaucrats, scientists, etc. can retrain as manual labourers. Let’s just hope they haven’t got a mortgage, or kids in private schools. It’s the new American Dream: spend five years at college and get a job on an assembly line. Yet even these jobs aren’t secure, as AI is taking over from fallible humans, with Elon Musk’s enthusiastic backing.

The whole process bears a strange resemblance to those years of the Cultural Revolution in China, which saw top party cadres and bureaucrats plucked from their jobs and sent to the countryside to learn from the peasants. How ironic that capitalism rampant has the same outcomes as communism in extremis.

The overwhelming focus on China-as-the-enemy reflects the obsessions of Trump’s economics advisor, Peter Navarro, known for writing books highly critical of China when he had never been there. As someone who has visited both China and the USA at regular intervals over the past couple of decades, first-hand comparisons between say, Shanghai and New York, show the former growing more commercially active and prosperous, while the latter becomes a slum for most people, apart from a wealthy elite. Try a simple comparison of the airports: Shanghai is busy, clean and efficient, while JFK is a horror show. Chinese artists produce amazing work under all kinds of pressures, while American contemporary art is mired in painful wokeness.

For all this, if forced to make a choice I would still prefer to live in the USA rather than China, because of the pervasive presence of Big Brother in all aspects of Chinese life. But as Donald Trump transforms the United States into an authoritarian state, that choice is becoming more problematic. Best to simply bunker down in laidback Oz.

Quite by coincidence, while Trump was launching his tariff circus I was reading The Prisoner’s Dilemma, a novel by Richard Powers, a wordy American writer a little too much in love with his own erudition. The actual ‘Prisoner’s Dilemma’ is a piece of game theory, whereby two prisoners are held in isolation by the police. They haven’t got enough information to convict the pair, but they pitch a deal to each of them separately: testify against the other guy and you go free, while he gets three years (or death, in some variations). If each testifies against the other, they will both get three years. If neither accepts the deal, they will both be imprisoned for a year on a lesser charge.

From this basic scenario, one may construct many complex outcomes, but I’m not going down that path. The interesting connection is with Trump’s tariff assault on China. By singling out America’s major competition, he is trying to isolate the Chinese from all those countries who are scrambling to kiss his arse and make a deal. His message is straightforward: “Save yourselves, and let China take the rap.” Some are already bending over backwards to satisfy his demands.

If every country were to resist Trump’s dictates and slap reciprocal tariffs on American goods it would go a long way towards defusing his pernicious strategy and increasing the pressure on the American consumer. Trump is a bully, and the only way to deal with bullies is to stand up to them. He’s also prone to childish tantrums, which are best quelled by being ignored.

The problem is that so many countries don’t have the economic leeway to eliminate America as a major trading partner. The distress would be felt most severely by people who are already living in poverty. China is going to feel that pain and pass it on to its citizens, but in an authoritarian state the government can do what it likes, and the Chinese themselves are unbelievably resilient. In countries where leaders need to be elected, or there is marked instability, the politicians feel they can’t risk opposing Trump. They are like small shopkeepers who accept it’s best to pay the Mafia protection money rather than take a stand. They are the prisoners willing to accept the deal rather than hold firm.

And so, we teeter on the brink of a disastrous axe fight between the USA and China, where the rest of the world risks being collateral damage. The false dawn of the stock market’s bounce-back will do little to allay the fears of investors who need a stable economic environment in order to lay their plans. If anything, it looks like the apotheosis of insider trading.

Trump, with his flip-flopping rules, his willingness to scrap trade agreements, his “paused” tariffs, is positioning the United States for an investment drought, and encouraging other countries to look for alternative trading partners. With his ugly tactics and the cessation of foreign aid, he is turning America into an international pariah, and a target for widespread ideological hatred.

No-one can realistically calculate the costs of these self-defeating policies but there is near unanimity that it’s all going to end in disaster. How big a disaster is anyone’s guess, if economic tensions escalate into more belligerent confrontations. Trump seems to think it’s a showdown at the O.K. Corral, but China says it’s ready to fight “to the end”. Xi Jinping has every reason to believe he’s got enough in the tank to outlast America, and a propaganda machine capable of stirring up ferocious hatred against the enemy. The US, on the other hand, is a nation divided, currently plunged into a state of administrative chaos.

All those countries that are willing to bend the knee to Trump will be less willing to join him in an all-out boycott of China, which is likely to be his next outrageous demand. In matters of pride, Xi is far less likely to cave than Trump, who has already backtracked on numerous policies. He’ll need the skills of Houdini to get out of the fine mess he’s made this time.

In cultural terms, Trump’s tariffs will inevitably hurt the circulation of art internationally. It will make American galleries and collectors more insular and render international galleries and artists less willing to deal with the US. It will have an impact on the make-up of the big international art fairs, as seen at the recent Art Basel Hong Kong, where American collectors were largely absent. There are a thousand small costs that will be incurred, each one a disincentive for collectors. As for the question of whether works of art will be subject to the tariffs, there’s no general agreement among lawyers and experts. It will require specific rulings in Congress, and most probably test cases in court. All of this is hugely dispiriting for potential buyers.

A more general concern is that the globalising tendencies of the art market, which have been building for the past decade or two, are not simply a financial matter. As collectors and museums have become more willing to buy work from artists based in many countries, even some of the poorest, it has generated a new range of artistic perspectives beyond the strongholds of New York and Europe. Trump’s tariffs not only threaten to make the world a poorer place in economic terms, but to narrow people’s cultural outlook, closing down atttudes that were being slowly prised open. If King Donald can’t build a wall on the Mexican border, he’ll build it within the hearts and minds of his subjects.

This week’s art column, ironically, comes from the belly of the beast – New York City, where I caught the Caspar David Friedrich retrospective at the Metropolitan Museum of Art. Friedrich was not only a great painter, but a man with a cosmic vision of art who imbued all his images with meaning. The Met’s show is the last of a series of blockbusters celebrating the artist’s 250^th anniversary. The piece was published a week-and-a-half ago in The Australian, which is now this country’s most art-friendly newspaper. Shame about the politics.

The film being reviewed is Small Things Like These, in which Cillian Murphy plays a coal seller in an Irish town, who doesn’t much like the way the nuns treat the young women they are ‘rescuing’ for God. Enslaved and brutalised in the convent laundries, the only saving grace for these girls is that they don’t have to worry about tariffs.