The Trump Prism

One cannot count the number of verbal bombs which Donald Trump threw during the 2016 presidential campaign.  Many were calculated provocations, baiting TV networks to put him front and center of the day’s evening news, others were fodder for his enthusiastic fan base. 

Trump’s campaign was brutal and divisive.  But it led him to victory, Pyrrhic as it could still turn out.

So what did we learn about Donald Trump that will likely shape his presidency?  What is he likely to focus on? 

From the campaign, we learned that:

·        He wants to “win” and that winning is everything,

·        To that end, he will fight to the last minute,

·        He sees himself as the leader of a movement, not a staid party,

·        He feels that middle class Americans want him to put them first.

Whether it is Hugo Chavez, Charles de Gaulle or Donald Trump, there is much to be learned from their earlier writings.  This is what the President wrote 30 years ago[1]:

“Most people are surprised by the way I work.  I play it very loose.  I don’t carry a briefcase... You can’t be imaginative or entrepreneurial if you got too much structure.  I prefer to come to work each day and just see what develops…I can be a screamer when I want to be.”

Running the Trump Organization is not the same as running the US government, but a 70 year old man will not drastically change his habits, particularly if he considers that they made him very successful.

Summing it all up, it is reasonable to conclude that for President Trump, ultimate success will mean winning (or believing he could win) a second mandate, that progress will be measured mostly by domestic milestones (“the economy, stupid”[2]), and that foreign policy will be a means to that end.

Priority #1 will be improving Americans’ disposable income.  This necessitates growing the economy faster.  Regulatory and tax reforms will be necessary but not sufficient.  As I see it, he and his advisors believe that China is the single biggest external obstacle to reach their goal. 

As this effort will consume vast amounts of political and financial resources, and these are to an extent limited, it will be imperative to reallocate some existing ones.  So, Europe will be asked to shoulder more of the security responsibilities which are regional (Eastern Europe) and near-regional (Middle East) in nature: hence the call for NATO members to meet the 2% of GDP defense threshold. The same will go for Japan and South Korea.

Finally, I believe that the talks of a “rapprochement” with Russia stem from the same rationale – freeing time and resources – rather than an infatuation with Putin.  It shouldn’t be difficult to improve on the current bilateral relationship, but by how much is an open question: Russia has its own priority objectives, some of them expansionary in nature; additionally, any effective accord will have to also involve Europe.

Let us look at the foreign trade issue into some details.  The table below depicts the US trade in goods and services with select partners in 2015:

Trading Partner	Trade volume	US deficit w/partner	Deficit as a %
China	$   659 billion	$336 billion	51 %
European Union	$1,063 billion	$  99 billion	9 %
Japan	$   290 billion	$  57 billion	19 %
Mexico	$   584 billion	$  49 billion	8 %
Canada	$   663 billion	$  12 billion	2 %
South Korea	$   129 billion	$    8 billion	6 %

      Source: US Trade Representative. Statistics are for goods and services. Korean data is for 2012.

It is clear that there is only one critical imbalance - with China which accounted for 2/3 of the overall US trade deficit - and a few important others.    

The US economy is perhaps the most efficient and advanced in the world, yet it has consistently produced trade deficits for four decades!  Either its currency has been overvalued, or the terms of trade have not been fair.  It is difficult to conceive of many other explanations.

Germany, with a 2015 US goods surplus with the US of $74 billion (42.6%) has benefitted from a very undervalued currency[3].  China has long managed its currency and tightly protected its domestic market[4].  So has Japan.

I have no doubt that rebalancing trade will be a bruising battle.  Trump has chosen a very experienced cadre of international trade specialists[5].  As for China, it has not succeeded in really boosting domestic consumption[6], its slowing economic growth has called for ever increasing credit creation and popular sentiment is uncertain (low wages, high pollution, no ready outlet to vent frustrations).  It is apparent that the new US administration believes it holds strong cards to force a change, while the Chinese leadership probably feels that it has little margin for error[7].

Mexico is a different situation.  Over the last 20 years, it has not had a single annual global trade surplus, but in 2015 it had a US surplus of $49 billion vs. a global deficit of $15 billion.  The surplus was mainly the result of its close integration with the American economy[8], favorable cost differentials and history.  Politically, it is an easier target than China, but a trade war would have immediate fallouts because its industrial integration with the US is often based on just-in-time supply chains and of its extensive shared border region.

Nafta will be amended/updated with a view to reducing the trade imbalance.  This will mainly be done by boosting US exports and taking advantage of the opening of the energy sector to foreign operators.  Mexico will not send a check for the “wall”, but president Trump will likely declare victory by pointing to the reduced trade deficit.  In the end, Mexico is a better place for US companies to invest (where they can operate freely and aren’t forced to share their technology) than China, and it is likely to benefit from any relocation away from Asia.

A word of caution:  There is little point in repatriating basic industries which generate low added value (and thus pay low wages) and cause the kind of pollution that chokes big Asian cities.  Furthermore, creating high paying jobs requires qualified labor.  There were 5.5 million unfilled job openings last November[9]; while employers’ expectations were often too high, it is clear that there is a skill gap, and so far there hasn’t been any broad initiative to help displaced or unskilled workers bridge that gap.  Upgrading the skills of millions will take time.

While Donald Trump has a track record of being a successful negotiator, all of the above reforms – if successful - will take time to bear fruit, months and more likely years.  It took over two years for Ronald Reagan’s policies to translate into tangible economic improvements.  In the meantime, a president needs to retain the support and confidence of the people.  In today’s divided society, it will be a quite a challenge.

The Trump agenda will also take place in the context of a more fluid global scene.  The world is no longer divided between two stable political and security blocks, Europe is economically weak and more politically frayed than ever, Islamic Jihad is a new threat, and the list goes on.  This will give the new president more room to move, but big mistakes will still be costly: they might just result in chaos rather than war.

My crystal ball has a faint green glow.

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[1]  The Art of the Deal.

[2]  The famous slogan of James Carville who was Bill Clinton campaign strategist.

[3]  According to former Fed chairman Ben Bernanke, that undervaluation likely exceeded 20% in 2015.

[4]  Even if it is now struggling to keep its currency from depreciating too fast.

[5]   Wilbur Ross as Commerce Secretary Robert Lighthizer as US Trade Representative, among others.

[6]   The percentage increase in the share of GDP accounted by domestic consumption resulting mainly from a drop in capital investments.

[7]  Politically and socially.

[8]  The top US imports for Mexico were machinery (US$ 112 bn) and vehicles (US$ 74 bn).

[9]  US Bureau of Labor Statistics.