… Donald created chaos. In recent days, the Trump Administration
has imposed an immigration ban which is generating controversy around the
world, whilst today the head of the National Trade Council, Peter Navarro, publicly
accused Germany of using a “grossly
undervalued” euro to “exploit”
the US and its EU partners. Both these issues call into question the underlying
principles of the international economic and financial framework. Whilst recent
events reveal that the new Administration is not going to play by the old rules,
and we are going to have to live with it, they also display a degree of
callowness regarding how the world works.
On a wider view, businesses and investors do not like what
they have seen and heard. It is potentially the first step towards a more
protectionist world which will damage the US as much as its trading partners.
Of more concern is that the global financial system has historically worked
best when the global superpower acts in its benevolent self-interest by
maintaining access to its markets, allowing unrestricted access to its
financial markets and generating higher global incomes which benefit everyone –
corporate America included. Any sense that the system is to be gamed in favour
of the US will not end well for anyone.
Navarro’s comments in particular were worrying on many
levels, not the least of which because he is wrong. It is true that Germany is
running an excessively large external surplus which, as I have pointed out in a
previous post (here),
does put undue strain on the workings of EMU. But ironically, a higher surplus
ought to put upward pressure on the currency, rather than weaken it. After all,
it is not as if the whole of Germany’s surplus is solely generated at the
expense of other EMU members. Moreover, the perceived weakness of the euro is
due more to ECB asset purchases than to any deliberate action on Germany’s
part, something which has been strongly opposed by the German contingent at the
ECB (notably Bundesbank President Weidmann, who has been a vociferous critic of
QE).
An excellent article in The Economist a couple of weeks ago
noted that “there are reasons to be
worried about the head of Donald Trump’s new National Trade Council” (here).
In particular, The Economist notes that Navarro’s view that unbalanced trade is
responsible for a slowdown in US growth since 2000 is simply “dodgy economics.” It goes on to suggest
that Navarro “seems to think that once
they [China] comply with global trade rules, the trade deficit will close and
manufacturing jobs will return to America’s shores … This is a fantasy. When
manufacturing production moves overseas and then returns, productivity has
usually risen in the interim; so far fewer jobs come back than left.”
Navarro’s views on the EU are equally wrong-headed. He said
in a recent FT interview that “The
unequal treatment of the US income tax system under biased WTO rules is a
grossly unfair subsidy to foreigners exporting to the US and a backdoor tariff
on American exports to the world that kills American jobs and drives American
factories offshore.” Whatever else it might be doing, Europe is not
stealing US manufacturing jobs. It might be getting more of its share of US corporate
taxes than the government would like but there is a simple solution to that –
cut the corporate tax rate, which is amongst the highest in the industrialised
world.
But perhaps what is most worrying of all – and it was
highlighted by a number of below the line commentators on the FT website, who
are a pretty savvy bunch – is that the US government appears to be trying to drive
a wedge between EU nations by highlighting the fact that Germany is “exploiting”
other European partners. Certainly, it seems to have a preference for
negotiating bilateral deals with the intention of (as one commentator put it) “the destruction of the EU, by peeling one
nation at the time from the EU, till the whole thing collapses.” That might
be a bit over the top but it is a common theme.
Even more worrying from a UK perspective, as the inestimable
Gideon Rachman noted in the FT yesterday, is that “the election of Mr Trump has transformed Brexit from a risky decision
into a straightforward disaster (here).” I have long believed that the main risk Trump poses to the UK is that
many of his policies may well not be in the UK’s national interest. As Rachman
put it, “If Britain had voted to stay
inside the EU, the obvious response to the arrival of a pro-Russia
protectionist in the Oval Office would be to draw closer to its European
allies. Britain could defend free-trade far more effectively with the EU’s bulk
behind it … As it is, Britain has been
thrown into the arms of an American president that the UK’s foreign secretary
has called a madman”.
When a man who wants to build a wall on the southern US
border to keep out Mexicans; who wants to ban immigrants from one of the most
tolerant and open societies in the world and who threatened to jail his
political opponent, thinks Brexit is a good idea we really need to think again!
As the Ancient Greek storyteller Aesop wrote, “A doubtful friend is worse than a certain enemy. Let a man be one thing
or the other, and we then know how to meet him.”
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