Marsha Vande Berg: Trumpian Disconnect in North America

2018-01-25 IMI

This article appeared in the Bulletin January 2018 published by OMFIF. Marsha Vande Berg is a Distinguished Career Fellow at Stanford University. Fragmentation threatens essential trade relations Markets are entering the new year clinging tightly to the uncertain view that job expansion and strong consumer spending will continue, that gains in capital markets will persist, and that countries like China and India will propel the world economy. Global growth projections are pushing upwards of 3.5% – but there remains an uneasy undertow to this outlook. Investors understand that markets thrive on perceptions, sometimes accurate and sometimes not so accurate. This dichotomy is especially problematic in the US, where there is a growing disconnect between the success of domestic markets and the politics of a country managed by a leadership that eschews governing. As the Trump administration attempts to overhaul the domestic political and regulatory discourse as well as Washington’s global leadership role, confidence in markets and the economy is sure to be tested. For now, the economy has managed to maintain its ‘sugar high,’ as described by former US Treasury Secretary Larry Summers. The stock market kept its gains and climbed even higher as the most consequential tax bill in three decades was ushered into law in December 2017. The passage of the Tax Cuts and Jobs Act of 2017 marked Donald Trump’s most significant legislative victory. It promises economic growth that will trickle down to help pay for the $1.5tn in tax cuts weighted in favour of corporates and wealthier taxpayers. Its funding will depend on motivated corporate spending at a time of almost full employment, as well as key policy advances requiring bipartisan support. So far there are few if any indications that the Democrats intend to go along with their Republican counterparts. At some point, this euphoria is sure to abate. Signs could appear as early as the forthcoming debate on the 2018-19 federal budget. In addition to the tax law failing to receive Democratic votes in the House or the Senate, Republican-led efforts to advance related initiatives will be met with harsh questioning on the soundness of US fiscal policy in the light of the country’s 104% debt to GDP ratio, the outlook for the dollar and interests rates, and new leadership running monetary policy. The outcome of major midterm elections in 2018, which could determine which party controls Congress at the start of next year, will play a significant role. Much of this is not new. What is new is an awareness of the potential for disruption owing to a lack of seriousness about governance and the value of longstanding relationships. This does not mean that 30-year-old treaties should not be examined and renegotiated to update terms; but upending such norms requires thoughtful consideration about the advantages and downsides of what has come before. Whether on trade, deregulation or filling crucial government positions, there is the threat that the depth of the disconnection between the economy and US politics will engender policy error and geopolitical risk. ‘Worst trade deal ever made’ On trade, the Trump administration signaled its unequivocal preference for bilateral over multilateral agreements when the president pulled the US out of the Trans-Pacific partnership. e has disparaged economies with large bilateral trade surpluses against the US as harmful to domestic business and manufacturing. Trump has also made his intentions to renegotiate the North Atlantic Free Trade Agreement clear to Mexico and Canada. ‘We are in the Nafta (worst trade deal ever made) renegotiation process with Mexico and Canada. Both being very difficult, may have to terminate?’ Trump tweeted in August 2017. Although a round of talks was completed in October, populist political rhetoric is surfacing in Mexico. The July 2018 presidential race is turning into a referendum on which candidate will stand up to Trump. The longstanding and vital relationship between Mexico and the US is under severe strain, reflected in the populist jabs from both sides of the 2,000-mile border. While the ruling Institutional Revolutionary Party is yet to name its candidate, Andre Manuel Lopez Obrador, a fiery leftist and former Mexico City mayor, is an early front-runner. Obrador has described Trump as an ‘irresponsible bully’ and promised to reject any deal on Nafta that is not in Mexico’s favour. A fractured US-Mexico relationship and a less than favourable trade agreement for any or all of the three countries in Nafta would portend major changes for manufacturing and businesses dependent on global supply chains. Since Nafta took effect in 1994, US trade with Mexico and Canada has more than tripled, while Mexico and Canada rank as the second and third largest exporters to the US after China. Both, likewise, are leading importers of US products. Indifference to governance Trump has invited suspicions of cronyism in selecting the heads of important government agencies. They are poised to implement his intended deregulation of business and the financial sector. These appointees, ranging from the US Treasury secretary to the chairs of the Securities and Exchange Commission and the Federal Reserve, must deal with two critical issues. First, key supporting positions in each agency are yet to be filled - indeed, they may never be filled. Second, Trump’s confidants may find that outsized problems quickly overwhelm decision-making, at the same time that staffs are not in place to keep the government operational. Such indifference by the White House to the mechanics of governing is striking. It threatens the delivery of services to citizens, as well as Washington’s capacity to extend US influence in global decision-making and rule-setting. Inseparable from the emerging Trumpian view, this reflects a more narrowly defined participation in global relations than was the case with the president’s predecessors. In early December 2017, the number of Trump appointments and Senate confirmations lagged considerably behind that of Barack Obama and George Bush at the same point in their administrations. Of the 4000 positions a president has the opportunity to fill, 1200 require Senate confirmation. As of 6 December, 253 Trump nominees had been confirmed and 492 are pending. At the same point in Obama’s first term, 413 had been appointed and confirmed, and 616 were pending, while George Bush had 481 confirmed and 705 pending. The ostensible strength of the economy, represented by US stock markets’ impressive performance since Trump took office, means the implications of this administration’s indifference may be slow to register. But they will emerge soon, and not only for investors.

DOWNLOAD

Marsha Vande Berg: Trumpian Disconnect in North America

related articles

tags