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The art of the deal: Trump is juggling many problems

John Redwood, Charles Stanley’s Chief Global Strategist, looks at Donald Trump’s trade wars and asks whether Germany is next?

USA flag talk

by
John Redwood

in Features

12.02.2019

It turns out the first two years of the Trump Presidency were the easy bit.  He worked with a Republican Congress to put through big tax cuts. Stock markets loved it. The President watched as companies paid higher wages and bonuses, shares rose on the back of higher earnings, dividends and share buy backs, and President Trump claimed credit for an improving economic picture.

Candidate Trump always had a two-part agenda. The proposals on credit, banking, tax and infrastructure were positive, expansion-minded ideas that helped equity markets rise. The rhetoric on trade wars and restriction of migration were policies many in markets did not like, were liable to worry nervous investors and pushed shares down when they are prominent in the national conversation.

The President promised to end the Nafta Treaty, which he said was a bad deal. After a lot of argument he has settled for a modest revision now called the US-Mexico-Canada Agreement. It offers a bit more protection for US automobile production and comes with a few extra tariffs, but overall makes little difference to likely trade flows. He is now locked in a long and difficult dispute with China, identified as number one trade cheat for its approach to intellectual property, and for its forest of asymmetric tariffs and restrictions on foreign businesses. It seems likely he will want a deal before the March deadline, when he has threatened to impose wide ranging 25% tariffs on Chinese exports. Were he to go ahead and do so, it would be bad news for China and for the US. It would give another downward push to world expansion and activity.

Whilst pursuing China, he has kept a possible trade war with Germany in the pending file marked autos. He has sitting on his desk a report into alleged unfair trading in cars. Doubtless the 10% tariff on US cars into Germany and the wider EU is part of that dossier. The US charges a much smaller tax. When Mr Trump surveys his handiwork so far he sees that the US trade deficit has gone up again, with China and Germany the main surplus countries on the other side of the account. He may find it irresistible to have a go at Germany in due course.

Meanwhile he is locked in argument with the Democrats over paying for a longer border fence or wall at the Mexican frontier. The first time he took on the new Democrat majority in the House he was reckoned to have lost. He presided over a long period of partial government shutdown, with various facilities closed and staff unpaid. He allowed government to re-open without securing a promise of money to build his border defence. Now he is facing another shutdown on Friday, unless he agrees there will be no money for his wall. The two sides are currently in dispute about how much money there will be for other features of border security, with the President accusing his Democrat opponents of wanting to make the US less safe by cutting detention places for illegal migrants.

All this poses a problem for the President who prides himself on “the art of the deal” and sells himself as the man who can get good deals done. When he was in business there was less press and public scrutiny of what he did, with some claiming his counterparties worked out how to meet his tough words and demands whilst still doing a reasonable deal for themselves. President Trump will know he must not appear just to back down in each case, but he must also want to land one of these potential deals. In government, it is possible to isolate one opponent, put on pressure, and get a better settlement. When a government has too many arguments on too many fronts it comes across as beleaguered or weak and makes it more difficult to settle one or more of the disputes on favourable terms.

President Trump has removed some of the pressures abroad for the US by backing talks with North Korea and withdrawing troops from the Middle East. It still leaves him today fighting on two fronts, trade and migration. It probably means Germany is safe for a bit longer. It looks as if a settlement with China is easier and more likely than a settlement at home. The unyielding approach adopted by Nancy Pelosi for the Democrats so far plays well in the liberal media and leaves the President little leverage to save his wall. Settlement of the Chinese trade account matters more to financial markets than the border row, with many expecting President Trump to have to avoid a prolonged second shutdown of government anyway.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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