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Peak Trump: honeymoon drawing to a close?

, May 1, 2018, 0 Comments

trump-honeymoon-marketexpress-inOn the domestic front, Mr Trump’s undoubted major achievement has been to push ‘yuge’ tax cuts though a Republican Congress without conceding savings on federal spending. This certainly boosted equity prices and it seems many companies are proposing to pass on the benefit to shareholders in the form of higher dividends and share buy-back programmes.

The President has been quite open in promoting the welfare of better-off folks such as himself and he may even share Ben Bernanke’s faith in trickle-down growth but it seems many ungrateful investors are already starting to worry about economic growth and the fiscal deficit. Bloomberg’s Tracy Alloway recently suggested that the ‘Trump Trade’ was running out of steam. The President may well be pleased with a weaker dollar and unconcerned about higher 30-year US Treasury yields but his amour-propre is surely hurting from the two-way movements of the S & P 500.

Others may take a less benign view of the Trump Trade or, indeed, overall of the President’s first 15 months in office. His die- hard supporters are still resolute but a 57% disapproval rating suggests that just about everyone else is backing away. Almost certainly not coincidentally, a record number of Republican members of Congress are retiring at November’s mid-term elections. It is increasingly likely that both houses will turn blue, making life ever more difficult for Mr Trump as the Mueller Investigation reveals more and more shady dealings and worse.

Nevertheless, on the foreign front the President has also enjoyed considerable initial success. For all the talk of decline the US continues to possess by far the biggest weapons, military and financial, and Mr Trump has certainly not hesitated to brandish them, albeit somewhat haphazardly. Ironically, the biggest defeat has been inflicted on Russia, which may have nuclear weapons but economic vulnerability means that Mr Putin will have to be more circumspect with his mischief-making. In contrast, China is more economically robust but feels sufficiently militarily vulnerable as to lean heavily on North Korea to limit the US presence in the region.

The EU and Japan will never be military rivals to the US but they are only partly economically dependent on it and are capable if under duress of reaching agreement both with each other and with China. Iran is no match militarily but by teaming up with Russia could represent a serious threat to US-allied Israel and Saudi Arabia. Beating up Canada and Mexico on trade may seem simple enough but would have long-term political consequences as well as short-term economic costs.

Nevertheless, it is fair to say that Mr Trump’s unpredictability has discomfited all his counterparts and his impetuosity is making them reconsider their strategies. For now, he can clock up ‘quick wins’ but the apparent lack of strategies of his own will increasingly be used against him by those more seasoned in international politics and diplomacy as well as economics.

Mr Trump is not the first to point out that some countries, notably but not only China, are guilty of unfair practices but he and his immediate trade team are out on a limb when it comes to retaliating with crude mercantilist policies. The theory of comparative advantage says that even when one country can produce both of two goods at a cheaper cost than another country, it can still be to the benefit of both countries to specialise each in one good and trade with the other as long as each country has a comparative advantage in the production of that good (it can produce it at a lower opportunity cost of supply – it has to give up less to produce that good than the other country). By specialising and trading, the theory goes, both countries will be able to benefit from going beyond their own production possibility frontier.

It should be noted that an increasing proportion of China’s exports are assembled from imported components and raw materials and higher tariffs, including those on the additional $100bn mooted by Mr Trump, may not have as severe an impact as he envisages on its economy, which is increasingly focused on Consumption and Services. In contrast, China is specifically targeting US domestic agricultural and manufactured exports. In fact, China’s real need is for foreign investment, which is why it will go some way to making concessions while protesting that there is no appeasement.