On the Seventh Day ...

… 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.”