Recalling “Trump Unchained”
It started with the sacking of his Secretary of State Rex Tillerson in March 2018, almost a year ago. US President Donald Trump has gradually but forcefully unchained himself from moderating influences in his administration. And in that time period, he also seen very little defection from Republican allies, giving him every reason to believe he can govern as he sees fit.
We can look back with certainty that this is what’s happening. For example, this is how I put the Tillerson move at the time:
The dismissal of Rex Tillerson as Secretary of State and the way it was handled mark a clean break. Gary Cohn was already out as his economic adviser. But it was the Tillerson fiasco that made plain Trump is cleaning house. He is purging all vestiges of opposition to his ‘America First’ doctrine. What Trump wants now is a top-down approach, where he calls the shots and his cabinet executes. That’s a lot easier if they are of the same mindset.
Gary Cohn’s replacement, Larry Kudlow is a supply-sider who agrees on domestic policy with Trump. He was not brought in to engage Trump. He was brought in as a salesman. His job is to sell Trump’s economic agenda to Wall Street…
Apparently, the next to leave is the National Security Adviser McMaster. John Bolton is a potential replacement…But if someone like Bolton does get into position, it would suit Trump’s instincts for an aggressive policy against Iran and North Korea…
On Iran, Israeli Prime Minister Netanyahu is privately predicting that Trump will abandon the Iran nuclear deal. What happens after that is unclear…
Any one of these situations can blow up. Several involve possible military confrontation, oil price spikes and damage to energy infrastructure. But I haven’t even mentioned the trade side of things. In 2017, Trump did not keep his promises on trade. The domestic agenda — taxes and healthcare — took up too much political space…
Trump plans to keep his promises about protecting US jobs. The goal for Trump is to deliver on his campaign promises…
That means unilateral action, threats and ultimatums to achieve what he wants. To do so while also minimizing the legal ramifications, Trump is likely to lean heavily on national security as the motivating rationale behind protectionist policies. This is what he did with the Broadcom hostile bid for Qualcomm. And I imagine this is what he will continue to do in other trade areas as well.
The risk of a trade war has, thus, increased.
Putting “Trump Unchained” in today’s context
A year later, all of that reads true. The only aspect of that narrative that has not panned out is one part where I spoke of Trump becoming more aggressive toward North Korea (due to Bolton). But the other agenda items have progressed much as anticipated, now that Trump has purged all opposition to his preferred unilateral way of dealing with things.
- Kudlow has (successfully) sold the Trump agenda to Congress
- Bolton has come onboard
- Trump did reverse course on Iran and re-impose sanctions despite European protests
- And Trump is now turning to trade
Most eyes are cast toward US – China trade relations, where a March 1 deadline looms before Trump can impose punitive sanctions against China. But, Trump has also turned up the rhetoric against US allies in Europe too. And Europe has threatened to respond in kind.
President Trump has threatened to reignite a transatlantic trade war by imposing hefty tariffs on European car imports.
“I like punitive tariffs”, he said ahead of a US Commerce Department report this week which is expected to recommend that the EU vehicle industry be classified as a threat to US national security because it robs the country of an industrial base needed to produce military hardware.
Mr Trump is expected to raise tariffs tenfold from 2.5 per cent to 25 per cent within the next three months.
Relations between the US and Europe have now slumped to their worst level since the start of the Iraq war as Brussels vowed to retaliate with “swift and adequate” measures of its own.
Analysts fear that a tit-for-tat trade conflict could tip Germany into recession as well as inflicting substantial damage to the American economy. German car exports to the US were worth almost €27 billion in 2017 while the car trade between the US and the EU is estimated to be worth at least around €50 billion a year.
The threat is a stall speed global economy
Trump’s unilateralist approach creates a lot of geopolitical risk because it upends existing US policy stances. And that change alone creates uncertainty, which invites unexpected policy counter-moves. And while my background in foreign policy makes it tempting to discuss that here, I am going to stick to the economics. And that’s because I believe we are moving into stall speed. And that makes tariffs a threat which could tip us into a global recession.
Here’s how I put it in May, as the US economy was still on the upswing:
…the risks and rewards suggest some type of tit-for-tat on a multilateral basis that involves all of the US trading partners. And so a base case scenario now shaves a chunk off of expected GDP growth, say 03.-0.5% for example.
Where this gets interesting is under the circumstances where a reasonable worst case scenario approaches a 1% loss of GDP growth or greater, especially given that there is already a marked dichotomy between job growth in the goods-producing industries and the service sector in the US. In Europe, where there is less fiscal space, the variability in economic growth makes countries like France and Italy particularly vulnerable, given the present wrangling over deficits and fiscal stimulus in Europe.
So there are reasonable scenarios in which monetary policy continues to tighten, fiscal policy does not loosen and the economic trajectory slides down into stall speed, even before the full economic impact of tariffs are felt. And in my stasis-shock model of the economy, this jolt would be enough to cause reasonably large inventory purges, production downshifts, job losses and consumption growth declines.
So, yes, a trade war could be the veritable straw that broke the camel’s back, particularly in a world in which a recession in late 2019 or 2020 is already a distinct possibility.
The trade war would be an exogenous shock. And if the economy is already on the edge, it would push us over that edge. This is certainly the case in Europe, which is much closer to recession than the US. And it is also true for China as well. These regions have more to lose than the US. Trump knows this, which makes the likelihood that he goes for tariffs greater.
It’s not abundantly clear to me that President Trump wants to serve two terms. And even if he does, it is not clear he will be able to do so given legal threats that still hang over his administration. So it would make sense if he felt like he was living on borrowed time as a President, and was keen to move forward aggressively on his agenda.
What’s more, Trump has lost a year, shackled to more moderating influences and the 2020 campaign is already on top of us. So, even if he does run in 2020, Trump is going to be keen to be aggressive on his policy agenda. The border wall is a perfect example because he believes this is what he promised his base. And his unilateralist actions show he is desperate to make good on that promise, having seen his agenda stymied by the legislative process.
In short, I expect Trump to remain in full-on ‘America First’ mode on all fronts – on domestic issues, on trade issues and on foreign policy issues. And, on trade, that means the chances of a tit-for-tat trade war with either Europe or China (or both) is high. And given where we are in the economic cycle, I expect a trade war to be damaging enough to risk a global recession.
And as that risk bears down on us, we should remember that Trump will be playing for his legacy. As November 2020 nears, he will be keenly aware of the need to execute more fully on his ‘America First’ agenda because the clock will be ticking on his first – and potentially only – term in office. That’s how he will view it. And that’s going to play a big role in how he makes decisions.
I still see the US economy as being in a good place right now. Increasingly, some of the incoming data has alarmed me. But trend growth is still well above 0%. As we move forward though, I expect the trend to continue down. And I wouldn’t rule out recession before 2019 is over. Trump Unchained contributes to that.