Big Read: Only way to avoid a trade war is to cut tariffs, not raise them

President Donald Trump is busy overturning the Western consensus on trade, threatening a trade war and raising tariffs on imports from friendly nations in the name of national security. Photo / AP

It is an image that could become a symbol of our age.

Angela Merkel, the German chancellor, was photographed leading the argument against Donald Trump at the G7 meeting in Quebec last week.

She is surrounded by her counterparts from the world's richest nations and leans over the table to press her point to the unyielding US president.

He sits arms folded, jaw set against the assembled crowd.

The argument is about free trade - or the increasing lack thereof. Trump is busy overturning the Western consensus on trade, threatening a trade war and raising tariffs on imports from friendly nations in the name of national security.

It has enraged America's erstwhile allies in Canada, the EU and Japan.

There is no doubt that Trump has got a lot wrong on trade. He is hopelessly confused over trade deficits.

He focuses on bilateral trade figures through a distorted lens that views imports as a sign of weakness and exports as an indicator of economic virility.

He has raised tariffs that are going to increase the cost of goods for US consumers.

He reduces complicated macroeconomic trends into a simplistic "Us versus Them" narrative.

Combined with an "America First" campaign and an eye for conspiracy theories, this means Trump sees "bad deals" and "rip offs" everywhere.

The trouble is, he also has a point about some tariffs and international trade practices. What's more, there are plenty of US voters who agree with him.

Look at the photo again and you can see that it can be interpreted in two ways.

If you dislike Trump, you see a petulant man-child, refusing to engage with the political grown-ups; if you support him, you see the US President taking a principled stand - or sit - against a crowd of bullies.

Western liberals have enjoyed sharing the image with each other on social media in and have a good laugh at Trump's expense.

President Donald Trump is busy overturning the Western consensus on trade, threatening a trade war and raising tariffs on imports from friendly nations in the name of national security. Photo / AP

Meanwhile, it is almost certainly playing well with his base back home.Likewise, the other G7 countries are playing into Trump's hands on trade.

First, he raised tariffs on steel and aluminium imports.Then, they retaliated by threatening tariffs on bourbon, denim, motorbikes - iconic American products made in key Trump-voting states ahead of the forthcoming midterm elections.

On the face of it, this is a considered and astute move. There is only one problem: it won't work.

First of all it gives all the excuse Trump needs to escalate the trade war further.

So far the US tariffs have largely applied to raw materials, but now the EU is talking about consumer goods and big-name brands.

Steel towns have acquired a powerful status in the US psyche, giving them huge political clout.

American-made cars sold in the EU face a tax of 10 per cent; European cars sold in the US only have 2.5 per cent.

Attacks on American cultural symbols risks doing the same with a whole swathe of industries.

How long before Trump does the same?

German car makers must be getting increasingly nervous.

And, second, it is also painful for European consumers who might be partial to American booze, jeans or bikes.

EU leaders are fighting this trade war with their own citizens' wallets.

World leaders are being drawn into a self-destructive negative sum game.

Trade benefits both sides of a transaction, but that is at very real risk of being forgotten in the stampede to conflict.

If European leaders were prepared to acknowledge that Trump is not completely wrong about everything, they might be able to avert the trade war and do their own citizens some good in the process.

They could slash taxes, seize the moral high ground and save free trade.

Some of EU tariffs really are unfair. Take cars, for example. American-made cars sold in the EU face a tax of 10 per cent; European cars sold in the US only have 2.5 per cent.

There are reasons for that disparity - and goods on which it works the other way - but it is unlikely that the average American has the time or the inclination to go into these nuances.

If European leaders were prepared to acknowledge that Trump is not completely wrong about everything, they might be able to avert the trade war and do their own citizens some good in the process.

Trump certainly doesn't.How much better would it be if Europe resisted being drawn into Trump's game with tit-for-tat retaliations and long-winded explanations of the status quo.

They could instead take a more radical step - cut the tariffs on American goods.

This would result in cheaper products for European consumers and it would demonstrate the EU's credentials as a true champion of free trade.

That is the stated position of Germany, the UK, Italy and France - plus Canada and Japan in the G7.

So why not prove it? Instead of hiking tariffs in the name of free trade, cut them.

Slash taxes, boost trade and back up words with actions. Instead of railing against American protectionism, power ahead with Europe-led globalisation.

The EU's leaders claim to represent the virtues of free trade against the forces of protectionism.

Now, at the moment when it faces its biggest threat in decades, is the best time to demonstrate they really believe in it.

To those who have become engaged by the Trump mindset of international conflict, or who see this as a battle of wills, it could feel like a defeat.

Trump will claim victory. But, then again, he will claim a victory no matter what.

The fact is, this is the only tactic that is likely to avert a global trade war.