by Edward Harrison, Credit Writedowns
Special report from Credit Writedowns
Ever since Donald Trump unexpectedly won the US presidential election, there has been an unending stream of anti-Trump tirades in the media. The emotions creating this wave of criticism make it difficult to have a reality-based view of the potential economic consequences of a Donald Trump presidency. So I am going to try to frame four issues of concern on an international level here that I think are relevant: Trump’s proximity to Russia, Trump’s proximity to big business, Trump’s hawkishness on China, and Trump’s hawkishness on Mexico.
The Russian Connection
The first issue is the one that is getting all of the play, sucking the air out of the room for thought about the other issues. If you use twitter extensively, as I used to, you would see endless speculation about Russia stealing the US election and Trump cozying up to Russia. And I’m getting sick of it, frankly. Most of what I see is about moral judgments of an us-versus-them or good-versus-evil variety – very black-and-white and not very useful. With Russia, there are a number of interrelated questions – some of which are moral in nature – that make it difficult to deal with.
The first and most obvious question is how to respond to Russia’s aggressive foreign policy. I think of Russia’s annexation of Crimea as akin to the US annexation of Texas in 1845, and come away with economic and defensive geo-strategic motives for Putin. Others see not just military aggression but also a serious violation of international norms akin to Hitler’s Anschluss of Austria. And that is what makes Russia so difficult – because there is a deep moral judgment here that goes beyond economics. And once Russia annexed Crimea, calls by neoconservative elements in the US to reinvigorate the Cold War can be justified under the premise that Putin will move again. So you can’t just dismiss the neocon case against Russia out of hand.
Thus, if Trump tries to follow a pro-growth economic strategy by engaging Russia constructively – as seems likely, there is still a non-zero chance his engagement would be seen as weakness, leading to a Russian response that ends in all-out financial warfare between the US and its allies on the one side and Russia and its allies on the other. But even if this outlier scenario does not happen, we are still likely to see years of wrangling over whether to contain or to engage Russia.
Corporatism and State
And while that wrangling is going on, the three other issues will be more important economically – at least in the medium-term. My biggest concern is actually Trump’s proximity to big business. Take Rex Tillerson for example. The Exxon Mobil CEO’s name has been bandied about as a potential secretary of state. As someone who was a diplomat in the US foreign service and left because of all of the political appointees dominating policy choices out of DC, I see this one cabinet pick as extremely dangerous. Let’s be clear: Tillerson is not a diplomat or even a foreign policy expert. He is a businessman with special interests that make a pro-oil skew in US foreign policy likely under Trump.
The State Department I witnessed in the early 1990s was one that increasingly marginalized on the ground HUMINT – human intelligence – in favor of top-down policy choices driven by the pre-determined worldview dictates of political appointees. And if you get a guy in as head – without any foreign policy experience, you might as well merge State with the Commerce Department. I remember when I was at the US Embassy in Bonn, Germany in 1994 and there were endless demarches by State to the German government – at the behest of Chiquita banana – over the EU’s banana policy. The EU was protecting former EU colonies by imposing higher tariffs on bananas from elsewhere. And our job at the embassy – with the Cold War having ended and diplomacy taking on a more econ orientation – was to point out how that cheated EU consumers as well as the companies lobbying our government like Dole and Chiquita to change that policy.
That’s what a Tillerson State Department will be all about. But it will be corporatism masquerading as liberty – because it will be about the US using its diplomatic muscle to help big business make more money. This will take the US further down the road of policies that favour the big guy over the little guy, and that widen inequality – something that got Trump elected in the first place. After Obama’s failure to tackle this problem, voters installed Trump in protest. And if he doesn’t deliver – which I fear he won’t given how his cabinet is filled with big business types – it’s anyone’s guess what happens next in US politics.
Confrontation with China
Then there is Trump’s hawkishness on China. As cozy as Trump was with Russia regarding campaign rhetoric, he was distant from China. According to the BBC, Trump is now talking about potentially reversing the longstanding US “One China” policy. Irrespective of whether this is just a negotiating tactic, it is another example of Trump’s rhetorical escalation against China. Now, in that kind of diplomatic environment, what if Trump’s economic policies lead to a strong US dollar? What does China do with its currency? I would think the Renminbi would decline like all the other currencies. Would Trump label China a currency manipulator? Does Trump intend to start a trade war with China if that happens? I think these are big questions from an economic perspective.
Mexico
And then there is Mexico. Notice that the Mexican Peso has cratered in recent weeks. In that sense, Trump’s election has made Mexico an even more advantageous place to produce. It isn’t clear to me that Trump can enact policy that will be able to effectively target companies that offshore jobs. Instead he may just have to erect barriers that reduce trade and hurt consumers all around in order to get what he wants. And that would be a net negative for growth. Huge across the board tariffs might work politically in places that voted for Trump, but they would be detrimental economically.
Right now, I am trying to tune out the anti-Trump political hysteria in the US that’s centered around Russia stealing the election and anti-democratic ideas of faithless electors. All of that is meaningless economically. But there are other significant issues at stake here with corporatism, China and Mexico.
Econintersect Disclosure
GEI Managing Editor, John Lounsbury, has in the past been a contributtor to Credit Writedowns.
