Steve Eisman: Quantitative Easing was a failure: it didn’t get corporations to borrow and invest. Rather, they borrowed and bought up their own stock.
Steve Eisman: Inequality was cause of Financial Crisis (10:17)
Steve Eisman: They made money because of their leverage (debt ratio) and they mistook their leverage for genius (12:19)
Steve Eisman was one of the few who predicted the 2008 financial crisis, and he made his name by foreseeing the collapse of subprime mortgage market.
Michael Lewis portrays him as one of the heroes in the bestselling book The Big Short and Steve Carrell plays an outspoken version of him in the Oscar-winning movie of the same name.
EFN:s Katrine Marçal meets Steve Eisman at Claridges hotel in London.
they’re all getting screwed you know you
know if they care about they care about
the ballgame or they care about what
actresses went into rehab I think you
should try medication no no we agreed if
it interferes with work you hate Wall
Street maybe it’s time to quit I love my
job you hate your job I love my job
you’re miserable I love my job I love my
mark Steve Iseman welcome to the offense
I’m glad to be here so you’ve been
portrayed in a book and in a film what
did you prefer I would say they were
both fairly accurate as the way I was
back then and let’s just leave it at
that okay okay so I’ve heard that some
Brad Pitt’s almost caladium in the film
it’s not true I got a phone call from
Adam McKay who was the author director
of the movie in November of 2015 to say
that he was writing the movie and that
there was a possibility that Brad Pitt
would play me to which I responded that
the only thing Brad Pitt and I have in
common is that we both have really good
so being one a few people who sold the
financial crash coming how did it feel
to have see this big disaster unfold and
not being able to do anything about it
the analogy I use it’s a little bit like
Noah in the ark yeah so you know Noah’s
on the ark he’s okay and that he saved
his family but he’s not exactly happy
hearing everybody screaming outside
that’s was sort of my experience all
right did you think the financial market
potential market from the financial
sector would get back get back to
business and get back to some kind of
normal as quickly as it did no I didn’t
expect it would it would happen that
quickly you know a lot of that was the
fact that the government backstop the
system and once the become a backstop
the system it was what the financial
markets did come back but the banking
system has been changed so in the book
and the film it becomes very clear that
you’re you betting against the subprime
mortgage market is not
just a trade but it’s kind of a moral
crusade are you still on this moral
crusade I’m not because a lot has
you know dodd-frank I think really fixed
a lot of things leverage has come down
enormous ly the Consumer Financial
Protection Board has been put in place
to protect consumers I the world’s very
different from what it was pre-crisis
hmm but now many of these things are
threatening I mean Donald Trump has
promised to repeal vast parts of the
dodd-frank act for example it’s not
something I’m in favor of I think that
will be a big fight you know it’s
possible the industry is going to get
deregulated to a degree we’re not going
to go back to what we where it was so
for example you know Citigroup used to
be levered 35 to 1 today its levered 10
to 1 I feel if we go into some type of
deregulation maybe you get 2 to 3 turns
more leverage it’s not something that
I’m personally in favor of but I don’t
think it’s a calamity hmm so do you
think with Donald Trump be president
today if more than one banker had gone
to jail for the financial crisis it’s an
excellent question and the answer is I
don’t know you know I don’t know
I’m cold about it I’ve thought about it
I think there’s a definite very strong
sentiment that it was wrong that nobody
went to jail I’m not going to say if
that sentiment is right or not but
there’s definitely a very strong
sentiment in the country that that’s the
case and I think people are very angry
that nobody did go to jail again I’m not
going to say whether that’s right or
wrong and if people had gone to jail I
think that would have soothed some of
the hangar that was seen in the election
so it’s possible that impact of the
election but it’s impossible it’s
impossible to say right so now taxes are
going to be can’t and Finance regulators
because the populace to campaign against
Wall Street 1 correct correct okay so
what do you do with investment then I
hear you you are investing quite a lot
in bank stocks well I mean there’s
there’s two issues there’s what I think
about finance the financial system and
what I think about financial stocks and
the two don’t necessarily
correlate so with respect to the
financial system I think that what’s
been done has been a good thing but it’s
been very intense bank the dodd-frank
act and the Fed forcing people to
de-lever to de-risk etc so from a
financial system I’m very happy I could
say very strongly the United States
financial system has never been held
this healthy in my lifetime but it’s
been very painful for financial stocks
because as you de-lever and do risk you
make less money and therefore it hurts
your stock price so the last six years
or so have been extremely painful for
financial stocks especially banks as
they’ve de-levered and dearest well if
we’re going to go into world where we’re
going to deregulate and leverage is
going to go up at least some just
reverse the story
so therefore financial stocks should do
well right okay
like I said financial system financial
stocks but you are not necessarily the
same an interest rates in America are
going up yes that’s very good for banks
so America is kind of moving from a
monetary stimulus to a fiscal stimulus
with something but it’s like that’s
something I’m in favor of yes I think
it’s a good thing the infrastructure
investment yeah that’s right until not
believe that quantitative easing is a
successful strategy why not there are
too many negative impacts for from it to
I mean look it was a noble experiment
there was no fiscal expansion there was
no other game in town so I don’t blame
the Fed for doing it the idea was that
lowering rates would cause people to go
up or out on the risk curve and vest in
the economy and really the other thing
happened was they went out on the risk
curve by buying back their own stock
they didn’t really invest in the economy
and with lower rates that hurts consumer
because they makes us money we pay the
money in the bank so I haven’t you know
when we started the monetary policy of
us growth was one-and-a-half to two
percent and after we did it it’s one and
a half to two percent so in my view
quantitative easing is a failure
alright so in November you said to the
Guardian in Europe but Europe is screwed
you guys are still screwed referring to
their non-performing loans in the
Italian depends of the country yes
are we in Europe still screwed well my
wife wish I hadn’t said that
yes so okay oh we in big trouble not big
it depends on the country you know Italy
has a very large non-performing loan
problem I don’t see the Italian
government doing anything to really
solve that problem if they like before
Christmas that was a nasty suppose that
was just monte de Paz yeah and you never
like to say monte de Partie because it’s
such a great name and the world’s oldest
bank as the world’s oldest bank correct
and I don’t you know you could try and
Simmel to deposit ten times fast it’s
very hard but it’s not really solving
the problem I mean this is something
called a Texas ratio which is a ratio
that bank analyst Achon myself compute
which is non-performing loans divided by
tangible book value plus reserves
basically the numerators all the bad
stuff divided by the money you have to
pay for the bad stuff and one of the
great lessons about bank analysis is
that one in Texas ratio gets over a
hundred percent the bank is done and in
Italy the two largest banks are in paisa
and you credit and their Texas ratios
are at ninety percent and every other
Bank in Italy is over 100 percent so I
don’t envy Italy the problem ok famous
ahma is the country there’s the bigger
than I think it won’t come and I think
the problem with the banks generally in
Europe is that they are still under
capitalized and they they are they do
not make enough money per dollar
employed basically European banks don’t
charge enough for this
services they never have and they’ve
tried to make up the difference with
leverage and in a world where you have
to use less leverage that model doesn’t
what about Deutsche Bank quite the same
well don’t you make sort of the poster
child for that let’s think about this
this way so today if a bank has a 1%
return on asset and is loved or ten to
one the return on equity is 10% that’s
the simple formula so you know Citigroup
for example doesn’t even have a 1% ROA
but they’re not that far off but
Deutsche Bank today has a 30 basis point
ROA they need to improve their
profitability by more than three times
there’s no way Georgia Bank on its own
can improve its profitability three
times the entire European banking system
has to be price you know how that’s
going to ever happen I don’t know but
until it does your paint banks it could
be a problem
they’re going to be a problem so you’ve
been in here in London for a few hours
now and you must have realized already
that the only thing people talk about
here with breakfast yes
so what financial risks do you see
coming from brexit big question is a big
okay what will happen in March I have no
idea you have no I really have no idea
honestly I don’t think and more
importantly anybody else has any idea
that it’s going to be an adventure a not
so it’s going to be a fun adventure but
it’s going to be an adventure so you
said that we’re very bad at dealing with
crises that develop very slowly and you
put the blame on the big financial
crisis of 2007-2008 on income
distribution really do you see that
changing at all I mean let me explain
that yes because it’s not intuitively
obvious how the two are connected so you
know my thesis is that one of the
underlying causes of the financial
crisis it was bad income distribution so
you know when I say that people’s eyes
generally clays are like you know what
are you talking about
but I think that there’s a
cause-and-effect relationship in that
you know starting in the 90s when income
distribution started to get really poor
in the United States rather than focus
on that and what the solutions worth of
that problem let credit get democratized
that was the euphemism for will will
make loans to people that we didn’t make
loans to before so rather than get
people’s incomes up they let them lever
themselves [take out more debt] and one of the ways people
lever themselves was by taking out loans
on their homes and loving themselves
that way and so I think one of the
causes of the subprime mortgage crisis
is that you know post dodd-frank hard to
get a mortgage loan yeah you know
incomes have only started to start
growing again we’ll have to see what it
does the new administration can do
so it don’t Frank it’s harder to get a
loan but well it’s hard to get a
mortgage why although I don’t think that
I caused a defect of dodd-frank I think
it’s more of an effect of all the fines
that were imposed on the banks for the
mortgage crisis and so the banks I think
not unjustifiably are kind of worried
about making mortgage loans that they
might they might not should or should
not make so the financial crisis what he
said the main problem was the products
the tools available or the culture ah I
would say is one of the unsung aspects
of the financial crisis that people have
definitely not written that up about
which is psychology yes and what I mean
by psychology is you have an entire
generation of Wall Street executives who
grew up in the 90s in the early aughts
who really only had one experience which
is they made more money every single
year now what they didn’t really notice
was that as they were making more money
every single year the leverage of their
various institutions was increasing
every single year
now they thought they were making more
money because it was them but really
what was happening as they were making
more money because their institution was
becoming more levered and really what
happened was they mistook leverage for
I wrote that sentence by the way I read
that I do it’s a good son it’s a good
sentence I don’t write a lot of good
sentences but that’s definitely one of
them tweetable yes it’s very good right
if I tweeted I would tweet listen I am
so let’s imagine you went to a Wall
Street executive in circa 2006 and you
said to the CEO of you know pick the
name of your institution and you’d say
dude listen the entire paradigm of your
career is wrong you have to de-lever so
did you ever have a conversation like
that I did I’ve never told this story
before there’s like AI now it can be
told story okay um so the day is
February 2008 and I have a meeting with
the head of Risk Management and one of
the big Wall Street firms we won’t name
them anyone else today but it wouldn’t
matter because I would have had the same
it would have been the same conversation
with any of them
given what was discussion one so I sit
down with a head of risk management of
one of the big farms it’s one month
before Bear Stearns almost to the day
and I say to him you have got to de-lever
and you’ve got to de-lever now because
Armageddon is coming the point of it is
the direct that’s almost a direct quote
I used the word Armageddon and he looks
at me and he says you know I hear what
you’re saying but you know we at X we
can be much more levered to the bank now
back then there was a bank based in
Detroit called net city it was a
medium-sized regional bank and it had a
lot of subprime mortgages so it was a
bit of the topic of the day and so I
said to him you know do you know what
happens if knacks City goes down and he
says no what happens I said nothing the
regulator’s come in they seize the bank
they pay off the depositors they fix the
bank they sell the bank the government
takes something of a loss end of story
do you know what happens if your firm
goes down planet earth burns who should
be more levered and he looked at me like
I was speaking ancient Greek like he
just it was so outside his paradigm it’s
like he didn’t know I was talking about
and I realized it was over that there
was no way these guys were going to do
what needed to be done before the world
blew up but I think we’re going to see
someone to go to jail right
I mean you can have to break up the bank
partido I don’t know I don’t know I have
a feeling in a few years people are
going to be doing what they always do in
the economy tanks they would be blaming
immigrants and poor people it’s not X
equate from you is that Hollywood’s a
great quote it’s a great mark it’s not
yellow it was written by Adam McKay with
the author and director and but did you
think in those terms back then oh I
always think in those times always
thinks in terms of disaster yes why is
that just I have a very strange DNA do
you see this paradigm changing at all
this culture I was told check it steady
change they’ve been beaten to a pulp
you know the dodd-frank gave much more
power to the Fed to regulate the banks
that power was put in the hand of
Governor Daniel Tarullo and I think he’s
done a tremendous job of de-levering the
banks in the United States you know I
would say the CEOs of the bank’s fought
him kicking and screaming but I’d say in
the last year or two they gave up and I
know you said before that Europe’s done
not as good of a job with that that’s
correct why well it’s what your starting
point so you know just pre-crisis
Citigroup is levered thirty five to one
deutsche bank is lowered over 50 to one
so today’s Citigroup is levered ten to
one and deutsche bank depending on how
you calculate is probably levered twenty
five to one so everybody’s leverage is
lower European banks have always been
much more levered than US banks so
they’re still more levered they just
left levered than they were right not
they’re not de-levered enough to my taste
but that again we gets back to the Paula
Mills they’re not profitable enough per
dollar employed so the regulator’s in
Europe let them be more levered I think
it’s a mistake but that’s the way the
systems it works okay and everyone’s
asking you what the next one of the
crisis is going to be so I don’t have a
dick I know I’m not going to ask you
money I will ask you that question I say
you know everybody’s trying to pick the
next big short and I’ve done that
already I’m in no rush
okay thanks a lot Steve Eisman thank you
Thirty-five years ago business publications were writing that major money-center banks would fail, and quoted investors who said, “I’ll never own a stock again!” Meanwhile, some state and local governments as well as utilities seemed on the brink of collapse. Corporate debt often sold for pennies on the dollar while profitable, growing companies were starved for capital.
If that all sounds familiar today, it’s worth remembering that 1974 was also a turning point. With financial institutions weakened by the recession, public and private markets began displacing banks as the source of most corporate financing. Bonds rallied strongly in 1975-76, providing underpinning for the stock market, which rose 75%. Some high-yield funds achieved unleveraged, two-year rates of return approaching 100%.
The accessibility of capital markets has grown continuously since 1974. Businesses are not as dependent on banks, which now own less than a third of the loans they originate. In the first quarter of 2009, many corporations took advantage of low absolute levels of interest rates to raise $840 billion in the global bond market. That’s 100% more than in the first quarter of 2008, and is a typical increase at this stage of a market cycle. Just as in the 1974 recession, investment-grade companies have started to reliquify. Once that happens, the market begins to open for lower-rated bonds. Thus BB- and B-rated corporations are now raising capital through new issues of equity, debt and convertibles.
This cyclical process today appears to be where it was in early 1975, when balance sheets began to improve and corporations with strong capital structures started acquiring others. In a single recent week, Roche raised more than $40 billion in the public markets to help finance its merger with Genentech. Other companies such as Altria, HCA, Staples and Dole Foods, have used bond proceeds to pay off short-term bank debt, strengthening their balance sheets and helping restore bank liquidity. These new corporate bond issues have provided investors with positive returns this year even as other asset groups declined.
The late Nobel laureate Merton Miller and I, although good friends, long debated whether this kind of capital-structure management is an essential job of corporate leaders. Miller believed that capital structure was not important in valuing a company’s securities or the risk of investing in them.
My belief — first stated 40 years ago in a graduate thesis and later confirmed by experience — is that capital structure significantly affects both value and risk. The optimal capital structure evolves constantly, and successful corporate leaders must constantly consider six factors —
- the company and its management,
- industry dynamics, t
- he state of capital markets,
- the economy,
- government regulation and social trends.
When these six factors indicate rising business risk, even a dollar of debt may be too much for some companies.
Over the past four decades, many companies have struggled with the wrong capital structures. During cycles of credit expansion, companies have often failed to build enough liquidity to survive the inevitable contractions. Especially vulnerable are enterprises with unpredictable revenue streams that end up with too much debt during business slowdowns. It happened 40 years ago, it happened 20 years ago, and it’s happening again.
Overleveraging in many industries — especially airlines, aerospace and technology — started in the late 1960s. As the perceived risk of investing in such businesses grew in the 1970s, the price at which their debt securities traded fell sharply. But by using the capital markets to deleverage — by paying off these securities at lower, discounted prices through tax-free exchanges of equity for debt, debt for debt, assets for debt and cash for debt — most companies avoided default and saved jobs. (Congress later imposed a tax on the difference between the tax basis of the debt and the discounted price at which it was retired.)
Issuing new equity can of course depress a stock’s value in two ways:
- It increases the supply, thus lowering the price; and it
- “signals” that management thinks the stock price is high relative to its true value.
Conversely, a company that repurchases some of its own stock signals an undervalued stock. Buying stock back, the theory goes, will reduce the supply and increase the price. Dozens of finance students have earned Ph.D.s by describing such signaling dynamics. But history has shown that both theories about lowering and raising stock prices are wrong with regard to deleveraging by companies that are seen as credit risks.
Two recent examples are Alcoa and Johnson Controls each of which saw its stock price increase sharply after a new equity issue last month. This has happened repeatedly over the past 40 years. When a company uses the proceeds from issuance of stock or an equity-linked security to deleverage by paying off debt, the perception of credit risk declines, and the stock price generally rises.
The decision to increase or decrease leverage depends on market conditions and investors’ receptivity to debt. The period from the late-1970s to the mid-1980s generally favored debt financing. Then, in the late ’80s, equity market values rose above the replacement costs of such balance-sheet assets as plants and equipment for the first time in 15 years. It was a signal to deleverage.
In this decade, many companies, financial institutions and governments again started to overleverage, a concern we noted in several Milken Institute forums. Along with others, including the U.S. Chamber of Commerce, we also pointed out that when companies reduce fixed obligations through asset exchanges, any tax on the discount ultimately costs jobs. Congress responded in the recent stimulus bill by deferring the tax for five years and spreading the liability over an additional five years. As a result, companies have already moved to repurchase or exchange more than $100 billion in debt to strengthen their balance sheets. That has helped save jobs.
The new law is also helpful for companies that made the mistake of buying back their stock with new debt or cash in the years before the market’s recent fall. These purchases peaked at more than $700 billion in 2007 near the market top — and in many cases, the value of the repurchased stock has dropped by more than half and has led to ratings downgrades. Particularly hard hit were some of the world’s largest companies (i.e., General Electric, AIG, Merrill Lynch); financial institutions (Hartford Financial, Lincoln National, Washington Mutual); retailers (Macy’s, Home Depot); media companies (CBS, Gannett); and industrial manufacturers (Eastman Kodak, Motorola, Xerox).
Without stock buybacks, many such companies would have little debt and would have greater flexibility during this period of increased credit constraints. In other words, their current financial problems are self-imposed. Instead of entering the recession with adequate liquidity and less debt with long maturities, they had the wrong capital structure for the time.
The current recession started in real estate, just as in 1974. Back then, many real-estate investment trusts lost as much as 90% of their value in less than a year because they were too highly leveraged and too dependent on commercial paper at a time when interest rates were doubling. This time around it was a combination of excessive leverage in real-estate-related financial instruments, a serious lowering of underwriting standards, and ratings that bore little relationship to reality. The experience of both periods highlights two fallacies that seem to recur in 20-year cycles: that any loan to real estate is a good loan, and that property values always rise. Fact: Over the past 120 years, home prices have declined about 40% of the time.
History isn’t a sine wave of endlessly repeated patterns. It’s more like a helix that brings similar events around in a different orbit. But what we see today does echo the 1970s, as companies use the capital markets to push out debt maturities and pay off loans. That gives them breathing room and provides hope that history will repeat itself in a strong economic recovery.
It doesn’t matter whether a company is big or small. Capital structure matters. It always has and always will.
As a Democratic Senate aide for the past seven years, I had a front-row seat to an impressive show of obstruction. Republicans, under then-Senate Minority Leader Mitch McConnell, decided they would oppose President Barack Obama and Senate Majority Leader Harry Reid at every turn to limit their power. And it worked: They extorted concessions from Democrats with threats of
- fiscal cliffs and
- financial chaos.
I know firsthand that Democrats’ passion for responsible governance can be exploited by Republicans who are willing to blow past all norms and standards.
Now we have a president who exemplifies that willingness in the extreme. Partly, this explains why he faces more questions about his legitimacy than any president in recent history and why he drew three times as many protesters as inauguration attendees last weekend. But in something of a mismatch, Republicans’ unified control of government means that the most effective tool for popular resistance lies in the Senate — the elite, byzantine institution envisioned by the founders as the saucer that cools the teacup of popular opinion.
Senate Democrats have a powerful tool at their disposal, if they choose to use it, for resisting a president who has no mandate and cannot claim to embody the popular will. That tool lies in the simple but fitting act of withholding consent. An organized effort to do so on the Senate floor can bring the body to its knees and block or severely slow down the agenda of a president who does not represent the majority of Americans.
The procedure for withholding consent is straightforward, but deploying it is tricky. For the Senate to move in a timely fashion on any order of business, it must obtain unanimous support from its members. But if a single senator objects to a consent agreement, McConnell, now majority leader, will be forced to resort to time-consuming procedural steps through the cloture process, which takes four days to confirm nominees and seven days to advance any piece of legislation — and that’s without amendment votes, each of which can be subjected to a several-day cloture process as well.
McConnell can ask for consent at any time, and if no objection is heard, the Senate assumes that consent is granted. So the 48 senators in the Democratic caucus must work together — along with any Republicans who aren’t afraid of being targeted by an angry tweet — to ensure that there is always a senator on the floor to withhold consent.
Because every Senate action requires the unanimous consent of members from all parties, everything it does is a leverage point for Democrats. For instance, each of the 1,000-plus nominees requiring Senate confirmation — including President Trump’s Cabinet choices — can be delayed for four days each.
While the tactic works well, as we’ve seen for the past eight years, there remains the question of strategy. Should Democrats be pragmatic and let Trump have his nominees on a reasonable timetable, so as not to appear obstructionist? So far, this has been their approach to some of Trump’s Cabinet picks.
But it’s also fair to say that, by nominating a poorly qualified and ethically challenged Cabinet, Trump forfeited his right to a speedy confirmation process, and Democrats should therefore slow it down to facilitate the adequate vetting that Trump and Senate Republicans are determined to avoid by rushing the process before all the questionnaires and filings are submitted. Four days of scrutiny on the Senate floor per nominee, even after the committee hearings, is a reasonable standard for fulfilling the Senate’s constitutional responsibility of advice and consent.
Democrats can also withhold their consent from every piece of objectionable legislation McConnell tries to advance. With 48 senators in their caucus, they have the votes to block most bills. But even when Democrats don’t have the votes, they can force McConnell to spend time jumping through procedural hoops. This is the insight McConnell deployed against Reid to manufacture the appearance of gridlock, forcing him to use the cloture process more than 600 times.
Finally, Democrats can withhold their consent from Trump until they feel confident that foreign governments are not interfering in our elections. Credible reports hold that U.S. intelligence agencies are investigating whether Trump’s campaign cooperated with the Russian government on Vladimir Putin’s personally directed meddling. Withholding consent from Trump’s agenda until an independent, bipartisan probe provides answers is not just reasonable; it’s responsible. If Democrats withhold consent from everything the Senate does until such a process is established, they can stall Trump’s agenda and confirmation of his nominees indefinitely. Sen. Richard Durbin has been a leader in demanding an independent investigation. But unless Democrats back their calls with the threat of action, McConnell will steamroll them and never look back.
Of course, it would be unwise to deploy this strategy blindly. The kind of universal obstruction pioneered by McConnell during Obama’s presidency is not in Democrats’ nature: They believe in the smooth functioning of government.
But Democrats’ concern with delivering results for their constituents is also part of who we are and something we should embrace. Even for innately cautious Democrats, some issues demand dramatic action. If Trump wants to put their concerns about his legitimacy to rest, he can reach out with consensus nominees and policies, and come clean about his ties to Russia and his tax returns (which may show whether he has compromising financial debts to Russian interests). Until then, Democrats can stand up for America by withholding their consent.
WASHINGTON — President Trump’s tariffs were initially seen as a cudgel to force other countries to drop their trade barriers. But they increasingly look like a more permanent tool to shelter American industry, block imports and banish an undesirable trade deficit.
More than two years into the Trump administration, the United States has emerged as a nation with the highest tariff rate among developed countries, outranking Canada, Germany and France, as well as China, Russia and Turkey. And with further trade confrontations brewing, the rate may only increase from here.
On Tuesday, the president continued to praise his trade war with China, saying that the 25 percent tariffs he imposed on $250 billion worth of Chinese goods would benefit the United States, and that he was looking “very strongly” at imposing additional levies on nearly every Chinese import.
“I think it’s going to turn out extremely well. We’re in a very strong position,” Mr. Trump said in remarks from the White House lawn. “Our economy is fantastic; theirs is not so good. We’ve gone up trillions and trillions of dollars since the election; they’ve gone way down since my election.”
He called the trade dispute “a little squabble” and suggested he was in no rush to end his fight, though he held out the possibility an agreement could be reached, saying: “They want to make a deal. It could absolutely happen.” Stock markets rebounded on Tuesday, after plunging on Monday as China and the United States resumed their tariff war.
Additional tariffs could be on the way. Mr. Trump faces a Friday deadline to determine whether the United States will proceed with his threat to impose global auto tariffs, a move that has been criticized by car companies and foreign policymakers. And despite complaints by Republican lawmakers and American companies, Mr. Trump’s global metal tariffs remain in place on Canada, Mexico, Europe and other allies.
The trade barriers are putting the United States, previously a steadfast advocate of global free trade, in an unfamiliar position. The country now has the highest overall trade-weighted tariff rate at 4.2 percent, higher than any of the Group of 7 industrialized nations, according to Torsten Slok, the chief economist of Deutsche Bank Securities. That is now more than twice as high as the rate for Canada, Britain, Italy, Germany and France, and higher than most emerging markets, including Russia, Turkey and even China, Mr. Slok said.
The shift is having consequences for an American economy that is dependent on global trade, including multinational companies like Boeing, General Motors, Apple, Caterpillar and other businesses that source components from abroad and want access to growing markets overseas.
While trade accounts for a smaller percentage of the American economy than in most other countries — just 27 percent in 2017, compared with 38 percent for China and 87 percent for Germany, according to World Bank data — it is still a critical driver of jobs and economic growth.
Mr. Trump and his economic advisers say the administration’s trade policy is aiding the American economy, companies and consumers. And despite the tough approach, the administration continues to insist its goal is to strike trade agreements that give American businesses better trade terms overseas.
At a briefing last week, Steven Mnuchin, the Treasury secretary, praised the president’s trade policies for helping economic growth thus far and said the administration supports “free and fair reciprocal trade.”
But if the goal really is freer trade, the administration has never been further from achieving that goal than it is today, said Chad Bown, a senior fellow at the Peterson Institute for International Economics.
“They’re heading in the opposite direction,” Mr. Bown said.
Beyond an update to the United States agreement with South Korea, no other free trade deals have been finalized. Mr. Trump’s revisions to the North American Free Trade Agreement with Canada and Mexico still await passage in Congress, while trade talks with the European Union and Japan have been troubled from the start, with governments squabbling over the scope of the agreement.
Mr. Trump came into office fiercely critical of the failure of past administrations and global bodies like the World Trade Organization for failing to police China’s unfair trade practices. He withdrew the United States from multilateral efforts like the Trans-Pacific Partnership, a multicountry trade deal negotiated by President Barack Obama, and the Paris climate accord.
That shift has created an opening for other countries to step forward as global leaders, including Europe, Japan and China, despite its position as one of the world’s most controversial economic actors. On Tuesday, China submitted its proposals for overhauling the World Trade Organization, including broadening the privileges of developing countries, a status that China claims for itself.
Advocates of free trade fear that governments in India, China, South Africa and elsewhere might find Mr. Trump’s model of protectionism appealing and erect even higher barriers to foreign companies.
While the United States and China could still strike a trade deal that would roll back many of their tariffs, that likelihood has appeared to diminish in recent weeks.
Progress toward a deal came to a sudden halt this month when China backtracked on certain commitments and Mr. Trump threatened to move ahead with higher tariffs.
“We had a deal that was very close, and then they broke it,” he said on Tuesday.
The two sides continue to disagree over whether the deal’s provisions must be enshrined in China’s laws. But they are also arguing over Mr. Trump’s tariffs, which were intended to prod the Chinese to agree to more favorable trade terms for the United States. China insists those tariffs must come off once a deal is reached, but the Trump administration wants some to remain in place, to ensure China abides by its commitments.
In an interview on Tuesday on CNBC, Senator Marco Rubio, Republican of Florida, supported the administration’s tactics.
“Ideally, you wouldn’t have tariffs,” he said. But the United States already faces “all kinds of impediments” to gaining access to the Chinese marketplace, including tariffs, subsidization of industries and theft of intellectual property.
“We already have a series of hundreds of billions of dollars of Chinese penalties against the United States which are threatening our long-term viability,” Mr. Rubio said.
Canada and Mexico have repeatedly pressed the administration to lift its tariffs on steel and aluminum now that negotiations over the Nafta revision are done. The three countries signed the United States-Mexico-Canada Agreement in November, but the pact awaits passage in all three legislatures.
The Trump administration still views the tariffs as a source of leverage in case it needs to demand final changes to the deal from Canada and Mexico. But Canadian and Mexican officials — as well as many in Congress — say the levies are actually an impediment because all three legislatures will refuse to finalize the deal while they are in place.
A similar standoff could soon unfold with the European Union, which Mr. Trump has accused of being a “brutal trading partner” and being “tougher than China.”
The president, who wants Europe to open its markets to American farmers and companies, has already imposed tariffs on European metals and is threatening to levy a 25 percent tax on imports of European cars and car parts if the bloc does not give the United States better trade terms.
Europe has absorbed Mr. Trump’s steel and aluminum tariffs without too much damage. But car tariffs would strike the most important industry in Germany, which has the Continent’s biggest economy. European officials would regard car tariffs as a breach of a truce they worked out last year with Mr. Trump, and they have said they would refuse to negotiate as long as car tariffs were in place.
Cecilia Malmstrom, the European commissioner for trade, repeated on Monday that the European Union had prepared a list of American products worth $22.5 billion — including ketchup, suitcases and tractors — that would face immediate retaliatory tariffs.
“We’re prepared for the worst,” Ms. Malmstrom said in an interview with the Süddeutsche Zeitung newspaper in Germany.
European officials still hold out hope that Mr. Trump will see them as allies and not geopolitical rivals like the Chinese. And he could ultimately delay the decision and extend the Friday deadline for countries that are in trade talks with the United States.
But the president shows no signs of backing away from his stance that tariffs have helped the United States.
On Tuesday morning, Mr. Trump posted on Twitter that tariffs had rebuilt America’s steel industry and were encouraging companies to leave China, making it “more competitive” for buyers in the United States.
“China buys MUCH less from us than we buy from them, by almost 500 Billion Dollars, so we are in a fantastic position,” Mr. Trump tweeted. “Make your product at home in the USA and there is no Tariff.”
WASHINGTON — In the middle of his crowded dinner in Buenos Aires with President Xi Jinping of China, President Trump leaned across the table, pointed to Robert Lighthizer, the United States trade representative whose skepticism of China runs deep, and declared, “That’s my negotiator!”
He then turned to Peter Navarro, his even more hawkish trade adviser, adding, “And that’s my tough guy!” according to aides with knowledge of the exchange.
Now, with talks between China and the United States set to begin this week in Beijing, Mr. Lighthizer, aided by Mr. Navarro, faces the assignment of a lifetime: redefining the trade relationship between the world’s two largest economies by Mr. Trump’s March 2 deadline to reach an agreement.
And he must do it in a way that tilts the balance of power toward the United States. His approach will have significant ramifications for American companies, workers and consumers whose fortunes, whether Mr. Trump likes it or not, are increasingly tied to China.
First, however, Mr. Lighthizer will need to keep a mercurial president from wavering in the face of queasy financial markets, which have suffered their steepest annual decline since 2008. Despite his declaration that trade wars are “easy to win” and his recent boast that he is a “Tariff Man,” Mr. Trump is increasingly eager to reach a deal that will help calm the markets, which he views as a political electrocardiogram of his presidency.
Mr. Trump has repeatedly told his advisers that Mr. Xi is someone with whom he can cut a big deal, according to people who have spoken with the president. On Saturday, Mr. Trump called Mr. Xi to discuss the status of talks, tweeting afterward that good progress was being made. “Deal is moving along very well,” Mr. Trump said.
The administration has tried to force China to change its ways with stiff tariffs on $250 billion worth of Chinese products, restrictions on Chinese investment in the United States and threats of additional levies on another $267 billion worth of goods. China has responded with its own tit-for-tat tariffs on American goods. But over a steak dinner during the Group of 20 summit meeting in Argentina, Mr. Xi and Mr. Trump agreed to a 90-day truce and to work toward an agreement that Mr. Trump said could lead to “one of the largest deals ever made.”
Mr. Lighthizer — whose top deputy will meet with Chinese officials this week ahead of more high-level talks in February — has played down any differences with Mr. Trump and views his role as ultimately executing the directive of his boss. But the trade representative, who declined to be interviewed, has told friends and associates that he is intent on preventing the president from being talked into accepting “empty promises” like temporary increases in soybean or beef purchases.
Mr. Lighthizer, 71, is pushing for substantive changes, such as forcing China to end its practice of requiring American companies to hand over valuable technology as a condition of doing business there. But after 40 years of dealing with China and watching it dangle promises that do not materialize, Mr. Lighthizer remains deeply skeptical of Beijing and has warned Mr. Trump that the United States may need to exert more pressure through additional tariffs in order to win true concessions.
When Mr. Lighthizer senses that anyone — even Mr. Trump — might be going a little soft on China, he opens a paper-clipped manila folder he totes around and brandishes a single-page, easy-reading chart that lists decades of failed trade negotiations with Beijing, according to administration officials.
“Bob’s attitude toward China is very simple. He wants them to surrender,” said William A. Reinsch, a former federal trade official who met him three decades ago when Mr. Lighthizer was a young aide for former Senator Bob Dole of Kansas. “His negotiating strategy is simple too. He basically gives them a list of things he wants them to do and says, ‘Fix it now.’”
Mr. Trump’s selection of Mr. Lighthizer last month to lead the talks initially spooked markets, which viewed the China skeptic’s appointment as an ominous sign. It also annoyed Chinese officials, who had been talking with the Treasury secretary, Steven Mnuchin, a more moderate voice on trade and the primary point of contact for Liu He, China’s top trade negotiator. Mr. Mnuchin has urged the president to avoid a protracted trade war, even if that entails reaching an interim agreement that leaves some issues unresolved.
Mr. Mnuchin, who attended the G-20 dinner, helped Mr. Trump craft an upbeat assessment declaring the Buenos Aires meeting “highly successful” in the presidential limousine back to the airport, according to a senior administration official.
The disparate views among Mr. Trump’s top trade advisers have prompted sparring — both publicly and behind the scenes.
During an Oval Office meeting with the trade team the fall of 2017, Mr. Lighthizer accused Mr. Mnuchin and Gary D. Cohn, the former National Economic Council director, of bad-mouthing him to free-trade Republican senators.
The argument grew so heated that the White House chief of staff, John F. Kelly, quickly pulled the combatants into the nearby Roosevelt Room and away from the president, where the argument raged on for a few more minutes, according to two witnesses.
Emily Davis, a spokeswoman for the United States trade representative, disputed the account.
Mr. Lighthizer has since worked to increase his own face time with Mr. Trump. He has joked to colleagues that he has more influence with Mr. Trump during winter months because he is able to hitch a ride on Air Force One during the president’s flights down to Mar-a-Lago, which is several miles from Mr. Lighthizer’s own $2.3 million waterfront condo in Palm Beach, Fla.
He used that access to argue to Mr. Trump that the United States has never had more leverage to extract structural reforms on intellectual property, forced transfer of technology from American companies and cybercrime. But while Mr. Trump has jumped at the chance to claim victory in changing China’s ways, experts say that what Mr. Lighthizer is demanding would require significant shifts in how Beijing’s central government and its manufacturing sector coordinate their activities, and that might simply not be possible in the short term.
“Good luck with that,” Mr. Scissors said.
Those who know Mr. Lighthizer say he will try to force concessions through a combination of pressure tactics, like tariffs, and public condemnation. Mr. Lighthizer — who described his own negotiating style as “knowing where the leverage is” during a 1984 interview — typically presents few specific demands during initial talks while publicly bashing efforts by the other side.
He used that approach during recent talks with Canada and Mexico to revise the North American Free Trade Agreement, criticizing foreign counterparts as intransigent and characterizing complaints by American businesses as pure greed.
Mr. Lighthizer’s unsparing view of China comes, in part, from his childhood in Ashtabula, Ohio, an industrial and shipping town on the Great Lakes hit by the offshoring of steel and chemical production. For much of his career, Mr. Lighthizer was a lonely protectionist voice in a Republican Party dominated by free traders, alternating between jobs in government and a lucrative private law career representing large American corporations like United States Steel in trade cases against China.
Mr. Lighthizer found his way into Mr. Trump’s orbit through his work in the steel industry, where he gained prominence by filing lawsuits accusing Japan and China of dumping metals into the United States, in violation of trade laws. In 2011, Mr. Lighthizer caught Mr. Trump’s eye with an opinion piece in The Washington Times, in which he defended Mr. Trump’s approach to China as consistent with conservative ideology and compared the future president to Republican icons like Ronald Reagan.
Taciturn in public and self-deprecating in private, Mr. Lighthizer sees himself as a serious player on the world stage: Two recent guests to Mr. Lighthizer’s Georgetown townhouse were greeted by the stern visage of their host staring down at them from an oil portrait on the wall.
The trade adviser is guarded around Mr. Trump, often waiting until the end of meetings to make his points and quietly nudging the president away from actions he views as counterproductive, current and former officials said. That was the case in mid-2017 when he cautioned the president against withdrawing unilaterally from the World Trade Organization, adding for emphasis, “And I hate the W.T.O. as much as anybody.”
He does not always get his way. In the wake of a new trade agreement with Mexico and Canada this fall, Mr. Lighthizer urged Mr. Trump to consider easing steel and aluminum tariffs on those countries and replacing them with less burdensome quotas. Mr. Trump rejected his plan, according to negotiators from all three countries.
A poker-faced Mr. Lighthizer broke the news to his Mexican and Canadian counterparts by declaring the proposal was inoperative, one of the officials said.
The president also ignored Mr. Lighthizer’s advice in early December when he announced that he intended to begin the six-month process of withdrawing the United States from Nafta in order to pressure House Democrats into passing the new United States-Mexico-Canada Agreement.
That threat undermined months of quiet negotiations between Mr. Lighthizer, labor groups and Democrats like Senator Sherrod Brown of Ohio and Representative Nancy Pelosi of California to try to win their support for the new trade deal. Mr. Trump has yet to follow through on his threat, and Mr. Lighthizer continues trying to work with Democrats to get the new trade deal approved.
“Bob is trying to provide stability and focus in a completely chaotic environment,” Mr. Brown said. “I can’t speak for Bob, but I am certain he is frustrated. How could you not be frustrated as the U.S. trade representative for a president who knows what his gut thinks but hasn’t put much of his brains into trade?”
Rep. Jerrold Nadler (D-N.Y.), the incoming chairman of the House Judiciary Committee, said in an appearance on NBC’ News’s “Meet the Press” that Thursday’s guilty plea by Cohen, Trump’s former personal attorney, raises the question of whether Russia continues to have leverage over Trump.
.. “Does the Kremlin have a hold on him over other things?” Nadler said. “There certainly was leverage during the campaign period and until recently because they knew he was lying, they knew he had major business dealings or that Cohen on his behalf had major business dealings.”
.. Sen. Mark R. Warner (D-Va.) said Sunday that “most Republicans who were about to nominate Donald Trump in the summer of ’16 would probably have thought it was a relevant fact” that Trump was still trying to do business with Russia at the time.
.. “What I find particularly interesting with the revelation of Cohen’s plea is that he’s saying he lied to protect then-candidate Trump’s stories that he had nothing to do with Russia,”
.. “So, the president seemed to already be changing his story a little bit and say, ‘well, it was all legal.’ ”