DONALD Trump is governing exactly the way he promised to govern by focusing on immigration and trade. Throughout the election campaign he never wavered on these two key promises to his electoral base, the people who were key to getting him into the White House.
It was also clear during the campaign that he was unclear on how he would get from Point A to Point B – making America great again.
Nobody should therefore be surprised or shocked by events since 20 January.
What happens next? He carries on exactly as he is doing today of focusing on immigration and trade because as CNN reports from a Pennsylvania diner, his base is very happy. The squeezed middle class believes he is delivering on his promises.
The experience curve suggests that the new White House will get better at communicating and formulating policy. But being unclear about how to get from Point A to Point B is a very successful business approach that President Trump is now applying to governing the US. In his 1987 book, The Art of the Deal, he wrote:
“For starters, I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first. In addition, once I’ve made a deal, I always come up with at least a half dozen approaches to making it work, because anything can happen, even to the best-laid plans.”
So expect lack of clarity about the detail to continue. We might, for instance, end up with many more proposals on how to reform the US tax system. As Sean Spicer, the White House press secretary, said in his clarification on the proposal for a 20% Border Adjustment Tax (BAT) that would fund the proposed US-Mexico wall:
It could be a multitude of things. Right? It could be, instead of 20% it could be 18 it could be 5. We could go in another direction, we could talk about tariffs, we could talk about, y’know, other, custom-user fees, or a hundred other things.
The Art of the Deal is also useful in that it gives a pointer to how he will continue to handle relationships with other countries. This could have very serious geopolitical and economic consequences:
My style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing to get what I’m after. Sometimes I settle for less than I sought, but in most cases I still end up with what I want.
The economic consequences
In all this chaos, though, we have to still try and think through what existing policy proposals might mean for the US and global economies.
Let’s assume that Trump settles on a BAT, and this is supported by the Republican majorities in the House and the Senate.
Drilling down to the effect on the US polymers industry, the Houston-based chemicals consultancy ChemPMC writes in this excellent blog post that under the proposed new tax, exporters would receive a tax benefit in the form of a top-line deduction based on their export revenue. [It is worth reading this Forbes article very closely in order to understand how the BAT would work). Meanwhile, importers of basic raw materials, components of finished goods or the finished goods themselves would lose out under the BAT.
On the surface the US polymers business would benefit as it sources all of its raw materials locally, and is a major exporter. But the US polymers industry would, in fact, lose out as the same blog post points out.
Firstly, this would be the result of a stronger dollar that is likely to result from the reflationary impact of Trump’s fiscal spending programme. Secondly, Mexico and the other countries subject to the BAT would respond with their own new trade barriers.
The US polymers business would thus see its export competitiveness undermined rather than supported by the BAT. This would be a significant blow to US polyethylene producers that are carrying out major capacity expansions from this year onwards.
We have to then widen the issue out and consider the effect of this new tax proposal on the wider US and global economies economy, and so of course on US and global polymers demand.
Mexico exports 80% of its goods to the US, but 40% of those goods contain US content, according to research by the Financial Times. The FT uses the autos industry and airbags to illustrate this point. Airbags are designed and made in the US, stitched together in Mexico and shipped back to the US for testing.
Complex auto-industry supply chain relationships also bind Canada into the equation as it, along with the US and Mexico, is a member of the North American Free Trade Agreement (NAFTA). A BAT would be bad enough for Mexico and Canada. But more importantly, there is President Trump’s threat to renegotiate NAFTA, or perhaps even entirely withdraw from the free-trade deal. He doesn’t need Congress’s approval to do this as he has the executive authority.
At stake are commercial flows between the three NAFTA partners of $1.1 trillion per annum and many, many jobs. The FT adds that 31,000 US car and car parts jobs could be lost if the US either imposes the border tax, some other forms of effective tariffs, or pulls out of NAFTA. In Canada, 117,000 people are employed in its auto industry. And in Mexico, the car industry accounts for 17.6% of its entire manufacturing industry and employs 673,000 people.
Many other options remain on the table because, as I said, President Trump is following his The Art of the Deal playbook. But people need to stop the Denial. He is not going to change direction on trade. Greater protectionism seems inevitable with only question being what shape it takes.
The BAT might thus die a death to be replaced by straightforward heavy new import tariffs that could apply to Mexico, Canada and other countries – most importantly amongst which would be China. China exports more goods to the US than any other country – $482 billion worth of goods in 2015, the latest data available. Even just a 1% rise in US imports would cause a 093% drop in China’s exports to the States at a time when it can ill afford a slowdown in its economic growth.
Yesterday, Germany was another country singled-out for criticism by Peter Navarro – the head of the US president’s new National Trade Council. He accused Germany of deliberating undervaluing the Euro to boost its exports. Exports account for about half of Germany’s GDP. The US is now as a result at risk of ending up in a trade with Germany and the rest of the EU.
As more and more countries and regions are blamed for a decline in US manufacturing jobs, the greater the risk of descent into a global trade war where the US imposes new trade barriers and everyone else reciprocates.
There are no good outcomes in 2017
It might be that Wilbur Ross, President Trump’s nominee for Commerce Secretary, is proved right in his assessment that the White House’s new approach will raise US GDP growth to 4% – double what it is today. Perhaps all the jobs temporarily lost as a result of this radical departure from previous policies won’t matter as the net employment game will be huge – both in the US and globally.
But I believe this cannot happen in 2017 because of short term disruptions to global manufacturing supply chains, to the value of currencies and to long-established geopolitical relationships. I have therefore now come to the conclusion that a global recession isn’t just a strong possibility in 2017; it has instead become almost inevitable.