G-7 leaders need to offer Trump a ‘golden bridge’ of retreat to avert a trade war, chief economist says

Cooler heads will prevail despite the steady ramp-up of rhetoric on trade tariffs, the founder of New York-based consultancy High Frequency Economics believes.

Finance ministers of the world's wealthiest nations will meet at the G-7 summit Friday in Quebec, and it is likely to be rife with awkwardness. In addition to the U.S., the G-7, or Group of 7, consists of Canada, France, Germany, Italy, Japan and the U.K. — all countries that have been hit by the Donald Trump administration's sweeping tariffs on steel and aluminum exports.

And they are not happy about it. Since last week, the European Union (EU), Canada and Mexico have announced retaliatory tariffs on American goods, continuing along a trajectory many economists fear will lead to an all-out trade war.

But speaking to CNBC on Thursday, Carl Weinberg, the consultancy's chief economist, threw water on those fears.

"Our view is that wiser heads are going to prevail, the adults in the room are going to prevail, and that the Trump approach to trade is perhaps unsophisticated and doesn't fully encompass all the issues that are on the table," Weinberg said. He described the current tiff as Trump's strategy of trying to negotiate a hard deal and then backing down.

"We think at the end of the day, it's not going to succeed, the partners are not going to budge and give us what we want... he's going to end up backing down. What we need to find is a 'golden bridge' of retreat," Weinberg said, alluding to the term coined by the sixth-century BC Chinese general Sun Tsu describing a method of offering your opponent a safe means of admitting defeat.

In this way, he suggested, Trump could perhaps depart with what he could call the "best deal ever," although it's not the one he initially demanded.

A daily research note from High Frequency Economics published Tuesday said that, "We are not counting on that uncertainty suddenly disappearing, but we are assuming that negative fallout on growth will remain limited. We are assuming that a full-fledged trade war will be averted."

But the stakes are high and the mood ahead of the summit isn't positive. Canadian Prime Minister Justin Trudeau publicly called Trump's tariffs "insulting" and "totally unacceptable," and the American president recently held a phone call with his French counterpart Emmanuel Macron that was described as "terrible." Meanwhile, White House economic advisor Larry Kudlow placed the blame squarely on U.S. trade allies and insisted that Trump would not back down.

Trump's trade threats have already cost $1 trillion in stock market value, according to a J.P. Morgan strategist, and the World Bank warned recently that increased tariffs would set global trade levels back to those of the 2008 financial crisis. J.P. Morgan Chase CEO Jamie Dimon said that trade turmoil could be the "fly in the ointment" that could end the economic recovery.

Nevertheless, Weinberg was confident that negotiators were working to reach an agreed-upon document — the joint statement that participant countries always release at the end of the summit — that all members could be happy with.

"We've never not had a communique from a G-7 finance ministers' meeting before, and I'm hoping that this won't be the first economic leadership summit in which we don't get a joint document," he said.

Still, the seasoned economist didn't have specifics. "I think we will get the tariffs walked back, but I can't see a clear path as to how that's going to happen. That's our hypothesis — because nobody wins from this."