During the 2016 campaign, it became clear that to take Donald Trump seriously meant not to take him literally. This insight continues to be lost on many who are trying to show that the US President is factually wrong about trade, or given that the US runs a current account deficit and the world lends it money, as opposed to being "the piggy bank that everyone steals from."
It is not that the facts don't matter, but in the current context, they will not turn the debate. The key point is that the US Administration is adamant about trying to reduce the trade deficit. Even if the US does not have a trade deficit with nearly every country as was claimed (the US has a trade surplus with almost half of the countries), or that it does levy a tariff on dairy imports, the Trump Administration has tapped into a powerful undercurrent. The old free-trade consensus has been broken for many years.
Many Americans, continue to struggle to make ends meet, and ensure a better life for their children. Although unemployment is low, and the JOLTS data shows that there are more jobs than unemployed in the US, job insecurity runs high. While economists generally argue that free-trade is good, many acknowledge there are winners and losers, like there is from all policy. The problem is that officials have facilitated an environment where the winners do not compensate the losers.
At the same time, given the disparity of income and wealth in the US, among the highest for mature economies, cheap imports of consumer goods, help American households make ends meet. Walmart (NYSE:WMT) estimates that 140 mln Americans (or roughly 45% of the population) shopped at its stores weekly last year.
At best American seems ambivalent about trade. After WWII and into the early 1970s, there was a consensus in the US on foreign policy and trade. That consensus broke partly as organized labor became more hostile toward it. Recent trade agreements were possible because the clear majority of Republicans were joined by the small free-trade wing of Democrats. Say what one wishes about authenticity, but Trump was factually right when he noted as he pulled out of the TPP, that both Clinton and Sanders had opposed the treaty as well. Although there is some contrarian thinking now and some Democrats and trade unions seem to be in favor of some aspects of free-trade, like NAFTA, it is not clear who or how a free-trade consensus will be rebuilt.
Although the US Administration's acerbic wrath was aimed at Canadian Prime Minister Justin Trudeau, US relations with Europe are strained. But too many observers seem to see the US-European relationship through rose-tinted glasses. It has been anything but smooth.
Throughout the post-WWII period, US and Europe’s interest often diverged. Recall the Suez Crisis (1956) in which the US forced the UK (and France and Israel) to withdraw from Egypt with threats of serious economic harm (intervene against sterling and deny the UK IMF assistance). By the early 1960’s, it was not the Red Army that was accused of invading and colonizing Europe, it was American multinationals (see Schrieber’s bestseller The American Challenge, published in 1967). The demand for US gold that prompted the undoing of Bretton Woods was not from the Soviet Union but the British and French. And the US unilaterally ceased the conversion of official dollar holdings for gold unilaterally without warning or notice.
After forcing the French out of Indochina, the US took up the position and this also alienated Europe. The French pulled out of joint NATO command. Seeing the Soviet threat as urgent, Reagan insisted on putting theater nuclear weapons in Germany much to the chagrin of Germans who took to the streets to protest. The US penchant of trying to apply its laws beyond its territory (extraterritoriality) frequently irks European officials.
The inter-capitalist rivalries were contained by the collegiality of officials, which those journalists calling for the end of G7 summits because the US is isolated fail to appreciate, and a common core of values. It is precisely that collegiality and shared core values of a liberal multilateral trading system that is under threat now and why the current tension among the leading capitalist countries is profoundly different than past disputes. Moreover, faced with a formidable threat from the Soviet Union, the Cold War also helped contain inter-capitalist rivalries.
Trump is the first US President to meet with the head of North Korea. It is not because North Korean officials did not want to meet US officials. It is because US officials have seen little reason to meet. Two things have changed. The US Administration eschews conventional wisdom, is inexperienced and has gutted the State Department. North Korea claims to have acquired the capability to strike the US mainland with intercontinental ballistic nuclear missiles.
Game theorists dubbed Nixon’s strategy to scare the North Vietnamese to the negotiating table by seeming willing to do anything including using nuclear weapons “Mad Man.” At the meeting in Singapore, it appears both parties are pursuing “Mad Man” tactics. Some US allies in the region, who have been within range of North Korean conventional and nuclear missiles, are worried that the US will sacrifice their interests in the bilateral talks.
Like many, if not most, observers, we are skeptical that North Korea will give up the weapons that got it to be taken seriously by the United States. North Korea achieved what Iran, Iraq, and Syria failed to do. Kim Jung-Un is cruel to his own people, but he has played his hand well on the international stage. Trump said he did not need to prepare for his meeting, while North Korea will be represented by many of the same people who previously outmaneuvered the US. Ironically, they may know the US better than it knows itself. There have been four nuclear deals with North Korea in the past quarter-century. North Korea has received around $1.3 bln in assistance from the US in food and oil.
Perhaps it comes down to what denuclearize the peninsula means. The US triad of land, air, and sea-based nuclear weapons mean that it does not need to have nuclear weapons in South Korea to threaten North Korea will such weapons of mass destruction. The US ground forces in Korea were never large enough to stop a North Korean invasion. They were a trip wire that would ostensibly trigger the full might and fury of the world’s most powerful military. Does de-nuclearization lead to US troop withdrawal from North Korea?
Although there may be some headline risk from the summit with two unpredictable negotiators, the fundamental outlook for South Korea remains robust. Foreign investors have not been enthusiastic about Korean shares this year. Through last week, foreign investors sold an average of $177 mln worth of Korean shares a week (or ~$2.02 bln year-to-date). The KOSPI is flat this year, but the KOSDAQ, which is where there have been many IPOs this year, is up 9.8% this year.
In conclusion, we see little benefit it debating the merits of trade, or pointing out that the average trade-weighted tariff in the US, Europe, Canada, and Japan are all very close. GATT and the WTO have been successful in reducing tariff barriers ot goods trade. It has does less well on services, which are an increaingly important part of trade and agriculture. However, the failure of domestic programs to help those that suffer from the consequences of trade has fractured the free-trade coalition in the US/. Trump did not cause that fracture but rather assumes as given that there the coalition no longer exists. The threat posed by the Soviet Union helped contain inter-capitalist rivalries, but diverging interests and the variance in threat perceptions are hardly new. New attempts to resolve longstanding problems are surely needed, but autarky and protectionism and treating allies like enemies are not new.
Ultimately, we view geopolitical developments as the broad context in which investors must operate. However, in the medium and long-run asset prices and currencies are determined by policies and investor preferences. Actions speak louder than words and policy matters.