The US is at Risk of Losing a Trade War with China

The “best” outcome of President Donald Trump’s narrow focus on the US trade deficit with China would be improvement in the bilateral balance, matched by an increase of an equal amount in the deficit with some other country (or countries). In fact, significantly reducing the bilateral trade deficit will prove difficult.

.. macroeconomics always prevails:

..  if the United States’ domestic investment continues to exceed its savings, it will have to import capital and have a large trade deficit.
..  because of the tax cuts enacted at the end of last year, the US fiscal deficit is reaching new records – recently projected to exceed $1 trillion by 2020 – which means that the trade deficit almost surely will increase, whatever the outcome of the trade war. The only way that won’t happen is if Trump leads the US into a recession, with incomes declining so much that investment and imports plummet.
.. The “best” outcome of Trump’s narrow focus on the trade deficit with China would be improvement in the bilateral balance, matched by an increase of an equal amount in the deficit with some other country (or countries). The US might sell more natural gas to China and buy fewer washing machines; but it will sell less natural gas to other countries and buy washing machines or something else from Thailand or another country that has avoided the irascible Trump’s wrath.
.. But, because the US interfered with the market, it will be paying more for its imports and getting less for its exports than otherwise would have been the case. In short, the best outcome means that the US will be worse off than it is today.
.. The US has a problem, but it’s not with China. It’s at home: America has been saving too little. Trump, like so many of his compatriots, is immensely shortsighted. If he had a whit of understanding of economics and a long-term vision, he would have done what he could to increase national savings. That would have reduced the multilateral trade deficit.
.. There are obvious quick fixes: China could buy more American oil and then sell it on to others. This would not make an iota of difference, beyond perhaps a slight increase in transaction costs. But Trump could trumpet that he had eliminated the bilateral trade deficit.
..  As demand for Chinese goods decreases, the renminbi’s exchange rate will weaken – even without any government intervention. This will partly offset the effect of US tariffs; at the same time, it will increase China’s competitiveness with other countries—and this will be true even if China doesn’t use other instruments in its possession, like wage and price controls, or push strongly for productivity increases. China’s overall trade balance, like that of the US, is determined by its macroeconomics.
.. China has more control of its economy, and has wanted to shift toward a growth model based on domestic demand rather than investment and exports. The US is simply helping China do what it has already been trying to do. On the other hand, US actions come at a time when China is trying to manage excess leverage and excess capacity; at least in some sectors, the US will make these tasks all the more difficult.
.. if Trump’s objective is to stop China from pursuing its “Made in China 2025” policy – adopted in 2015 to further its 40-year goal of narrowing the income gap between China and the advanced countries – he will almost surely fail. On the contrary, Trump’s actions will only strengthen Chinese leaders’ resolve to boost innovation and achieve technological supremacy, as they realize that they can’t rely on others, and that the US is actively hostile.
.. If a country enters a war, trade or otherwise, it should be sure that good generals – with clearly defined objectives, a viable strategy, and popular support – are in charge. It is here that the differences between China and the US appear so great. No country could have a more unqualified economic team than Trump’s, and a majority of Americans are not behind the trade war.
Public support will wane even further as Americans realize that they lose doubly from this war: jobs will disappear, not only because of China’s retaliatory measures, but also because US tariffs increase the price of US exports and make them less competitive; and the prices of the goods they buy will rise. This may force the dollar’s exchange rate to fall, increasing inflation in the US even more – giving rise to still more opposition. The Fed is likely then to raise interest rates, leading to weaker investment and growth and more unemployment.
.. Trump has shown how he responds when his lies are exposed or his policies are failing: he doubles down. China has repeatedly offered face-saving ways for Trump to leave the battlefield and declare victory. But he refuses to take them up.
Perhaps hope can be found in three of his other traits:
  1. his focus on appearance over substance,
  2. his unpredictability, and his
  3. love of “big man” politics.

.. Perhaps in a grand meeting with President Xi Jinping, he can declare the problem solved, with some minor adjustments of tariffs here and there, and some new gesture toward market opening that China had already planned to announce, and everyone can go home happy.

.. In this scenario, Trump will have “solved,” imperfectly, a problem that he created. But the world following his foolish trade war will still be different: more uncertain, less confident in the international rule of law, and with harder borders. Trump has changed the world, permanently, for the worse.

Even with the best possible outcomes, the only winner is Trump – with his outsize ego pumped up just a little more.

 

How Mnuchin Keeps a Steady Grip in a Tug of War on Trade

Two weeks ago, Steven Mnuchin, the Treasury secretary, declared that the trade war with China was “on hold” and that the United States would temporarily holster its tariffs. The reassuring comments calmed markets and raised hopes that Mr. Mnuchin, one of President Trump’s most enduring and trusted advisers, was winning the internal trade battle that has gripped the White House.

Then Mr. Trump weighed in. In a one-two punch last week, the president doubled down on the trade war with China and threw in ones with Canada, Mexico and Europe for good measure.

.. The scolding laid bare the uncomfortably familiar spot that Mr. Mnuchin finds himself in: trying to be a voice of moderation and a statesman in an administration that sees diplomatic norms and protocols as signs of weakness.

He has so far managed to stay in Mr. Trump’s good graces while advocating a more free-trade approach, but that balancing act is showing signs of strain.

.. Mr. Mnuchin, unflappable in public, is privately making his case with a president

.. The internal tensions boiled over in May during a trade mission Mr. Mnuchin led to China, when he dressed down Peter Navarro, Mr. Trump’s hawkish trade adviser, by reminding him where he stood in the administration’s pecking order after Mr. Navarro confronted him about being sidelined from the talks.

.. Current and former White House and Treasury officials say Mr. Mnuchin has managed to thrive by employing a mix of assertiveness and obsequiousness, staking out his position to the president but quickly changing course to carry out Mr. Trump’s marching orders, even if his message did not win the day.

.. Mr. Trump tweeted that he was going to find a way to help put back in business a Chinese telecommunications company that had been punished for violating American sanctions on Iran and North Korea. The decision blindsided administration officials and lawmakers

.. Mr. Mnuchin, along with the commerce secretary, Wilbur Ross, was dispatched to Capitol Hill to try to calm angry Republican lawmakers and explain the rationale behind allowing the company, ZTE, to remain in business.

.. those close to the secretary say he has learned to appreciate Mr. Trump’s use of the threat of tariffs as a negotiating tool.

.. focused on the president’s desire to see the bilateral trade deficit reduced, rather than emphasizing some of the other trade barriers

.. Stephen K. Bannon, Mr. Trump’s former top strategist, has said that Mr. Mnuchin is in over his head in the negotiations and that he is letting Mr. Trump’s leverage slip away by failing to force China to make major changes to its industrial policy.

.. it was apparent that the Chinese government was trying to elevate Mr. Mnuchin’s role in the negotiations because they see him as the American official most likely to cut a deal.

.. “Among the possible choices, they see Mnuchin as being less hawkish than some of the other counterparts,”

.. populist voices outside the administration have already been heckling Mr. Mnuchin as inept amid reports that the United States was on the verge of making an agreement with China that was viewed as merely symbolic.

.. Mr. Mnuchin has at times found himself the subject of derision, characterized as a fawning banker who cannot tell the president “no.”

.. Last year, the Treasury secretary was scoffed at by economic policymakers from across the political spectrum for insisting that the $1.5 trillion Trump tax cuts would pay for themselves.

.. Mr. Mnuchin told members of the conservative House Freedom Caucus to “vote for the debt ceiling for me.” His plea was met with groans and hisses.

.. Last August, fellow alumni of Yale, where Mr. Mnuchin earned a bachelor’s degree, called on the secretary to resign when he defended Mr. Trump’s handling of racially inspired violence in Charlottesville, Va. A month later, Lawrence Summers, a Clinton administration Treasury secretary, called Mr. Mnuchin the “greatest sycophant in cabinet history” for supporting Mr. Trump’s criticism of football players who knelt during the national anthem.

.. points to his role in successfully steering the Republican tax cut package, which many said would never pass, through Congress.

.. Within the Treasury Department, Mr. Mnuchin has developed a reputation as a micromanager. He resisted choosing a full-time deputy for more than a year, preferring to oversee everything from carrying out the new tax law to overseeing financial sanctions.

.. When the Internal Revenue Service systems failed on Tax Day, the response to the crash was slowed because Mr. Mnuchin was in New Hampshire

.. He had required that any big decisions be cleared by him

.. Mr. Mnuchin’s closest aides describe him as a collegial and mentoring figure.

.. Despite his earnest persona on television, he is known to possess a wry sense of humor

 

Trump’s Reckoning Arrives

The president’s unpredictability once worked to his advantage—but now, it is producing a mounting list of foreign-policy failures.

.. Trump’s election jolted almost every government into a frantic effort to understand what to expect. Other countries’ uncertainty enhanced Trump’s relative power—and so, perversely, did Trump’s policy ignorance and obnoxious behavior.

.. presidents are surrounded by elaborate staff systems to help them—and oblige them—to think through their words and actions.

If we impose tariffs on Chinese products, how might they retaliate? What’s our next move after that?

If we want to pressure Iran more tightly than our predecessors, what buy-in will we need from other countries? What will they want in return?

What do we want from North Korea that we can realistically get?

Team Trump does not engage in exercises like this.

.. Team Trump does not do it because the president does not do it. His idea of foreign policy is to bark orders like an emperor, without thinking very hard about how to enforce compliance or what to do if compliance is not forthcoming.

The administration canceled the Iran deal without first gaining European, Chinese, Japanese, or Indian cooperation for new sanctions.

Trump started a trade war with China without any plan for response to the inevitable Chinese counter-moves.

.. The U.S. has abjured its right to inspect Iranian nuclear facilities without any workable plan to impose global sanctions instead. India and China each trade more with Iran than with the entirety of the European Union—and neither is very vulnerable to U.S. pressure.
.. First, because he talked so much and tweeted so much, he revealed much more of himself much earlier than other presidents. His ego, his neediness, his impulsiveness, and the strange irregular cycles of his working day—those were all noted and analyzed before any formal action of his presidency.
.. for example, Australia, his offensive words had limited the ability of Australia’s democratically accountable leaders to cooperate with him.
.. Second, foreign leaders have concluded that the shortest path to Trump’s heart runs through his wallet. Oil states such as the United Arab Emirates and Saudi Arabia have rushed to be helpful to the business interests of Donald Trump and his son-in-law Jared Kushner, seeking an advantage over regional rivals like Qatar. Authoritarian leaders who could hamper Trump-licensed businesses—like Turkey’s Recep Erdogan and Rodrigo Duterte in the Philippines—have exploited their perceived leverage, acting with apparent impunity.
.. Third, Trump’s highly suspicious dealings with Russia before the election potentially put him at the mercy of countries in a position to embarrass him.
.. Only 17 percent of South Koreans trust Trump to do the right thing
.. At a time of relatively low military casualties and strong job growth, the president’s popularity at home roughly matches that of George W. Bush’s during the worst months of the Iraq war, 2005–2006, and Barack Obama’sduring the most disappointing months of the weak recovery from the recession of 2009.

Why corporate America loves Donald Trump

American executives are betting that the president is good for business. Not in the long run

MOST American elites believe that the Trump presidency is hurting their country. Foreign-policy mandarins are terrified that security alliances are being wrecked. Fiscal experts warn that borrowing is spiralling out of control. Scientists deplore the rejection of climate change. And some legal experts warn of a looming constitutional crisis.

.. Bosses reckon that the value of tax cuts, deregulation and potential trade concessions from China outweighs the hazy costs of weaker institutions and trade wars.

.. the investment surge is unlike any before—it is skewed towards tech giants, not firms with factories. When it comes to gauging the full costs of Mr Trump, America Inc is being short-sighted and sloppy.

.. The benefits for business of Mr Trump are clear, then: less tax and red tape, potential trade gains and a 6-8% uplift in earnings.

.. During the Obama years corporate America was convinced it was under siege when in fact, judged by the numbers, it was in a golden era, with average profits 31% above long-term levels.

Now bosses think they have entered a nirvana, when the reality is that the country’s system of commerce is lurching away from rules, openness and multilateral treaties towards arbitrariness, insularity and transient deals.

.. so far this month 200-odd listed American firms have discussed the financial impact of tariffs on their calls with investors. Over time, a mesh of distortions will build up.

.. American firms have $8trn of capital sunk abroad; foreign firms have $7trn in America; and there have been 15,000 inbound deals since 2008. The cost involved in monitoring all this activity could ultimately be vast. As America eschews global co-operation, its firms will also face more duplicative regulation abroad. Europe has already introduced new regimes this year for financial instruments and data.

.. The expense of re-regulating trade could even exceed the benefits of deregulation at home. That might be tolerable, were it not for the other big cost of the Trump era: unpredictability. At home the corporate-tax cuts will partly expire after 2022.

.. Bosses hope that the belligerence on trade is a ploy borrowed from “The Apprentice”, and that stable agreements will emerge. But imagine that America stitches up a deal with China and the bilateral trade deficit then fails to shrink, or Chinese firms cease buying American high-tech components as they become self-sufficient

.. Another reason for the growing unpredictability is Mr Trump’s urge to show off his power with acts of pure political discretion.

  • He has just asked the postal service to raise delivery prices for Amazon, his bête noire and the world’s second-most valuable listed firm.
  • He could easily strike out in anger at other Silicon Valley firms—after all, they increasingly control the flow of political information.
  • He wants the fate of ZTE, a Chinese telecoms firm banned in America for sanctions violations, to turn on his personal whim.

.. When policy becomes a rolling negotiation, lobbying explodes. The less predictable business environment that results will raise the cost of capital.

.. Mr Trump expects wages to rise, but 85% of firms in the S&P 500 are forecast to expand margins by 2019

.. Either shareholders, or workers and Mr Trump, are going to be disappointed.

.. In a downturn, American business may find that its fabled flexibility has been compromised because the politics of firing workers and slashing costs has become toxic.

.. American business may one day conclude that this was the moment when it booked all the benefits of the Trump era, while failing to account properly for the costs.