DURING his election campaign Donald Trump painted an image of an America that had been economically hollowed-out by unfair overseas competition. And in his inauguration speech on 20 January he talked of rusted-out factories scattered like tombstones across the landscape of our nation, and then added:
One by one, the factories shuttered and left our shores, with not even a thought about the millions upon millions of American workers left behind.
The wealth of our middle class has been ripped from their homes and then redistributed across the entire world.
Now starts the hard work of devising new trade policies that work for the benefit of the whole of the US. This article by George Friedman, geopolitical forecaster and international strategist, suggests this is going to be a difficult task:
- Only 10 US states get more than 10% of their state GDP from exports: Indiana, Kentucky, Louisiana, Michigan, Mississippi, South Carolina, Tennessee, Texas, Vermont, and Washington.
- Texas and Michigan would be very concerned about NAFTA being renegotiated, or even scrapped, as their economies are highly dependent on the free-trade deal.
- Meanwhile, the US Pacific Northwest is highly reliant on trade with China. The states within this region would thus be adversely affected by a decision to impose heavy new import tariffs on China, as China would be sure to reciprocate.
This regional disparity not only makes it difficult to work out how to produce a net gain for the US economy from the White House’s radically different approach to international trade.
Another problem is that even if the Trump team can clearly demonstrate a net economic gain in trade bills that they put before Congress, the divergent economic interests of the US states may result in a legislative logjam.
Or the president could opt for executive orders to reshape trading relationships, thus bypassing Congress. But these orders would have to be so-designed that they again produce a net gain for the whole of the economy, whilst also not provoking too much political opposition.
There is also the more fundamental question of whether the focus on trade as being the root of US economic problems is the right focus. Grep Ip writes in the Wall Street Journal:
Mr Trump’s argument implies there should be some correlation between protectionist barriers and the trade balance. There isn’t. Brazil and India are highly protectionist yet run persistent trade deficits because they save less than they invest. Conversely, Germany, and Switzerland have low tariffs yet run persistent trade surpluses because of their high saving relative to investment. His views are echoed by several other commentators and economists.
None of this is again a commentary on the rights or wrongs of Mr Trump’s approach. It is instead meant to further underline that because what he is attempting is untried and so untested, the details really matter – perhaps more so than during previous administrations when more familiar economic and geopolitical ground was being trodden.
And to quote Machiavelli’s great book, The Prince, President Trump’s problem is also this:
There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.
Mr Trump could be taking the right new approach, he could be a true innovator. But will he be given the time and support necessary to be able to prove he is right? Machiavelli suggests that he may not.
Stock market investors are of course averse to this kind of complexity, uncertainty and ambiguity. They instead like a nice simple story that drives markets higher or lower, even if the truth behind the story is highly debatable.
Hence, today’s bubble in US equities on the assumption that President Trump will both be able to implement the whole of his policy agenda, and that it will work by boosting US GDP growth towards the White House target of 4% per year.
What might cause the bubble to start to deflate? As I discussed on Monday, it will perhaps be the failure to get healthcare reforms through the House tomorrow. Even if healthcare reforms pass through the House and then the Senate, will they work?
Put trade policies aside for the time being. Healthcare reforms may end up being the first concrete example of just how difficult it will be for the Trump administration to make its radical agenda work.