The games Donald plays

 

By now, anybody who is anybody – and plenty who aren’t – has had their say on the Trump tariffs and their possible implications. Much ink has been spilled documenting the twists and turns of the Trump Administration’s actions and the subsequent market movements. If there is one lesson to be learned from recent weeks, it is not to overreact to latest events because likely as not, there will be a rollback which renders the previous position invalid. That is not to say markets are wrong to sell off/rally as Trump’s whims dictate – after all, investors have to take a position based on available information because each signal from the White House alters the landscape of risks, costs and growth expectations. But it is no way to run an economy.

More than a game

One way to think of Trump’s strategy is through the prism of game theory, and there are some elements which echo the main findings of Thomas Schelling’s classic 1960 book, The Strategy of Conflict – a seminal work in game theory and strategic decision-making, particularly in the context of conflict, negotiation, and deterrence. One of the key takeaways of Schelling’s work is that conflicts are not merely power plays that pit one side against another, but are instead contests that highlight strategic interdependence – in other words, the actions of one player have an effect on the strategy of the opponent.

Schelling also highlighted the role of brinkmanship in which pushing one party further outside their comfort zone forces them to change their own strategy. This is very clearly the case in the context of the US-China trade row which threatens to inflict significant economic damage unless cooler heads soon prevail. China responded to the 145% levy on exports to the US with a tariff of 125% on US imports, highlighting the impact of brinkmanship. But the strategic interdependence element also came into play when the US exempted Chinese-made smartphones from higher import levies – the number one Chinese export to America by value – when the inflationary impact of smartphone tariffs became clear. It was a small de-escalation in a much bigger dispute but it highlights that there are some people in the US Administration who appear to understand the risks of escalation.

Another game theory concept highlights what can happen if actors in the dispute focus purely on the pursuit of their goals – Martin Shubik’s dollar auction problem which I originally used as a demonstration of the irrationality of Brexit negotiations. In brief, the dollar auction problem is a two-person thought experiment in which a dollar is initially auctioned off at a substantial discount to its face value. In subsequent rounds the price is bid up, with the highest bidder winning. But the twist is that the loser must also pay their bid. Consequently, both bidders have an incentive to continue bidding beyond the value of the prize in order to minimise losses, which results in a lose-lose outcome.

In the trade context, neither China nor the US wants to look weak in the eyes of the world leading to a cycle of escalating tariffs, even when both countries incur economic losses. The rational solution to this problem is to back down early or find a co-operative solution which minimises losses for both sides. Unless this approach is adopted, the key lesson highlighted by the dollar auction paradox is that once the bidding process becomes entrenched, the competing parties lose sight of their original goals and produces an outcome where the costs of winning outweigh the cost of defeat.

Credibility and how to lose it

One aspect of Schelling’s work that has not been adhered to is the principle of credibility. Schelling made the point that in strategic interactions, the ability to credibly commit to a course of action conveys a decisive advantage and that threats and promises must be credible to be effective. In the case of trade, however, Trump has not acted credibly. He has backtracked on his tariff policies on a number of occasions, leading many to wonder whether he is bluffing. While Trump sets great store by the art of the deal, the art of the bluff can take you a long way in life, love and poker. But bluffing only works if opponents believe the bluffer will follow through. While Trump has the power to impose tariffs, the question is whether doing so is politically or economically wise. According to a recent poll, 56% of respondents disapprove of his handling of the economy while 75% believe tariffs will push prices higher in the short-term. If Trump were attempting a further run for the White House, it would be politically dangerous to go further with the tariff policy. But because he is not bound by this constraint, further trade escalation cannot be ruled out, especially since 34% of poll respondents believe Trump's economic policies will pay off in the long run (admittedly down from 41% at end-March).

In game theoretic terms, a key weakness of Trump’s approach is that he takes a zero-sum approach to strategy – in other words, winner takes all and the loser gets nothing. This might work in the casino business – although Trump’s record as a casino owner is terrible, having twice filed for Chapter 11 bankruptcy – but it does not work in politics. One reason for this is that politics is not a one-shot game in which strategy is formulated without any concern for future consequences (as the dollar auction problem illustrates). Geopolitical decision making is a multi-shot game in which today’s actions have an impact on future decisions. For example, the US may ultimately need Europe onside if it is to successfully pursue its economic policy with regard to China. But by damaging relations with Europe today through its approach to both trade and security, it becomes less likely that Europe will side with the US in future.

We cannot continue in our game theory mode without talking about a Nash equilibrium – a situation where no player can improve their outcome by unilaterally changing their strategy, assuming the other players keep their strategies unchanged. Since high US tariffs hurt domestic consumers, the US might improve its welfare by lowering tariffs — even without immediate Chinese reciprocity. This suggests that the current position does not represent a stable Nash equilibrium. But since US tariffs also make China worse off, China has an incentive to reciprocate by reducing its own tariffs. Rolling this forwards, both sides engage in tariff reduction until the point at which we reach a stable welfare position. Such a strategy works because it builds trust gradually and is credible, even in the absence of explicit cooperation.

Trust busting

Looked at from a logical standpoint, Trump’s trade policy appears inconsistent because (a) it will make US consumers worse off and (b) he has not followed through on his calls, undermining their credibility. Against that, his policy could be seen as a form of calculated ambiguity or strategic brinkmanship, with Trump attempting to pressure trading partners into concessions and rallying domestic support by appearing strong on trade. By merely postponing tariff implantation, Trump keeps everyone off balance, thus enhancing his leverage and keeping his threats alive without fully committing.

Perhaps the best definition of the current situation is one of strategic ambiguity, based on the goal of retaining flexibility in order to exert pressure and manipulate expectations. Such a strategy might work if the short-term volatility serves a longer-term purpose, but other than putting maximum pressure on China, it is hard to see what the longer-term plan is. At some point Trump has to commit on tariffs one way or the other but when he does, he will have to accept the consequences. America’s putative allies may be amenable to Trump’s threats but China most certainly is not.

Last word: Common sense is not so common

All of this may sound like obvious common sense – don’t escalate conflicts that hurt both sides, don’t bluff unless you’re willing to follow through, and don’t ignore the long-term consequences of short-term moves. Yet time and again, these lessons are ignored in the heat of political battles. This is where game theory proves its value: not as an abstract academic exercise, but as a practical framework for understanding strategic behaviour and anticipating outcomes. By highlighting the incentives, interdependencies, and likely responses of all players, the theory of games offers a rational lens through which to view even the most irrational-seeming policies.

Trading places

Hiding in plain sight

Since his inauguration as US President, Donald Trump has turned the world upside down, as he indeed promised on the campaign trail. Like many people, I have underestimated his determination to follow through on issues such as trade policy and the nature of his relationship with traditional allies, especially in Europe. Although Trump’s bark proved to be worse than his bite during his first term in office, the restraints have come off this time around given the changed nature of his Administration which is much more ideological in nature. That said, Trump has consistently espoused an “America first” strategy – the clue was always in the name – and the President is only acting in line with the Henry Kissinger doctrine that “America has no permanent friends or enemies, only interests.”

One reason for misreading Trump is that his definition of American interests differs from those who see American leadership as rooted in alliances, democratic values and global stability. In this framework, the US sees itself as a stabilising force in global affairs, willing to bear costs to uphold a rules-based international order which allows it to exert its soft power. By contrast, Trump prioritises transactional relationships and a narrower, more nationalist view of US interests, placing more emphasis on short-term gains, economic advantage and the assertion of US sovereignty over collective global commitments. This explains his scepticism towards NATO; his withdrawal from international agreements like the Paris Climate Accord and the WHO, and his willingness to engage with authoritarian leaders based on perceived strategic or personal benefit rather than ideological alignment. For those accustomed to the traditional American foreign policy playbook, this divergence creates misunderstanding. Critics may interpret his actions as erratic or uninformed when, in reality, they follow a consistent logic – one that prioritizes strength, economic leverage, and a rejection of international obligations that he perceives as constraints rather than assets.

But this does not mean that the strategy is optimal – certainly not for the western allies, nor indeed for the US. Despite what Vice President Vance might think, the US and Europe share many common values and there is a benefit to keeping one’s allies onside. Indeed, the only country to invoke NATO Article 5 – the principle of collective action in the event that a member of the alliance is attacked – is the United States in the wake of the 9/11 attacks. Elon Musk’s closeness to the Trump Administration may be one reason why Tesla sales have slumped in Europe, falling in March by 36.8% and 63.9% year-on-year in France and Sweden, respectively. This in turn suggests that Europe may be less willing to erect trade barriers against Chinese products if it can supply better and cheaper products than the US (ignoring for the time being that the EU has already imposed tariffs on Chinese EVs). The wider point being that there may well be economic blowback on the US if the Trump Administration fails to recognise the longer-term consequences of its actions.

This time may be different … or it may not

One of the least trustworthy phrases in markets is “this time is different” – one which is invoked every time a new paradigm appears likely to upset the status quo. Consequently, we should be wary of drawing too many conclusions from the current shenanigans emanating from the White House. We cannot know, for example, whether the current breach in relationships within the western alliance will extend beyond Trump’s term in office (whether that will include a third term remains to be seen). History may provide some clues.

In the 1930s, for example, the US pursued a policy of isolationism which advocated non-involvement in European and Asian conflicts and non-entanglement in international politics. This was stoked by Republican Senator Gerald P. Nye, who claimed that American bankers and arms manufacturers had pushed for US involvement in World War 1 for their own profit, costing many lives while not serving US interests. This was compounded by the Great Depression, which forced Americans to concentrate on their domestic economic problems. Had it not been for the Japanese attack on Pearl Harbor in 1941, the world’s geopolitical history might have been very different.

Domestically, there are also parallels with the McCarthy era of the early-1950s when paranoia regarding “reds under the bed” resulted in huge political upheaval in Washington. The parallels are not exact, of course, since history does not repeat exactly, but it does rhyme occasionally and there are some elements of McCarthyism which chime with Trump’s modus operandi. Perhaps most obviously, Senator Joseph McCarthy used anti-communist fears to rally support, claiming that the US was riddled with communists (here for his famous “Enemies from Within” speech in 1950). McCarthy’s suggestion that “a moral uprising [that] will end only when the whole sorry mess of twisted warped thinkers are swept from the national scene” has echoes of Trump’s promise to “drain the swamp” and crush the “deep state”.

Like McCarthy, Trump has initiated attacks on the institutional framework of the United States: In McCarthy’s case, he launched a number of unfounded attacks on prominent individuals while Trump has variously railed against the FBI, the DOJ and the mainstream media. Both used the media to spread their message (quite how McCarthy would have adapted to social media is a fascinating what-might-have-been), sowing dissension and polarisation. Both also suffered a fall from grace with McCarthy’s influence fading after the infamous army hearings of 1954 while Trump has twice been impeached, found guilty of criminal offences and lost a presidential election. But while McCarthy quickly faded from the scene once the Republican Party realised he was more of a liability than an asset, Trump’s political career has bounced back.

Where the parallels end is that Trump controls a major political party with a much wider base of popular support whereas McCarthy was just a Senator with a genius for self-promotion. It may yet be the case that the Republicans abandon Trump if his strategy proves to be ruinous for the US but he will not fade into obscurity as did the Senator from Wisconsin. There are many in the GOP who buy into Trump’s views – his is not a one-man crusade. And while public opinion has indeed shifted against Trump – latest polls put his approval ratings at 47.9% versus 50.5% at the start of February – this is far from catastrophic, and is in any event higher than at any time in his first term (see chart below).

It’s the economy, stupid

Donald Trump’s political fortunes will depend heavily on US economic prospects. Goldman Sachs recently raised its subjective assessment of a US recession in the next 12 months from 20% to 35% while JP Morgan puts the prospect of a global recession at 40%. These numbers suggest that the odds are still against a downturn but they are rising. Moreover, given the strength of the economy bequeathed to Trump, voters may not be very forgiving of a self-inflicted economic downturn, especially if tariffs have a material impact on the prices paid by American consumers. What really matters from a political perspective is the depth of any recession. It is possible that the Administration could spin a mild correction as the price for taking back control though that might be a risky strategy. But a more aggressive downturn would unlikely play well, given the impact this will have on jobs and incomes. With the US midterm elections scheduled for November 2026, Republican party strategists will be aware that such an outcome runs the risk that they will lose control of Congress.

Key takeaways

The commentariat has spilled much ink in predicting the implications of a Trump presidency and while history suggests it is wise to ignore some of the more excitable predictions, there is little doubt that we are operating in changed geopolitical circumstances. Europe no longer considers the US a reliable partner, and while that may change post-Trump, governments do not have the luxury of time to wait him out. As The Economist put it: “There was a time when America’s allies could count on it to do right by them, even if they got into arguments. These days, by contrast, America’s allies have to prepare for the worst.” As for Trump’s domestic position, it is too early to tell whether voters are buying into his economic strategy. But polling evidence does suggest that there has been a sharp rise in the share of Republican voters who believe the EU is unfriendly – perhaps hardly surprising in view of Trump’s claim that the EU was “formed in order to screw the United States”. By the same token, European voters clearly have a less positive view of the US.

Whether the “special relationship” between the US and Europe can recover from this remains to be seen. As in a marriage, once one partner demonstrates reduced commitment, it reduces the incentive of the other party to hold it together. At the very least, this will lead to estrangement; at worst, divorce. But even a divorce can be amicable.

Is the tide turning?

One of the mounting concerns over the last four years has been the extent to which policy is being conducted on the basis of belief rather than evidence – particularly in the Anglo-Saxon world. The danger was always that at some point those who ignored the evidence would start to come unstuck. We appear to be reaching this point. The question is whether voters are beginning to see through the bluster.

This was exemplified by two items that surfaced on Twitter yesterday from people who are not known for their adherence to evidence-based analysis. The first example was provided by the current occupant of the White House whose TV interview on Covid cases in the US was a car crash of epic proportions. Amongst other things, Trump failed to appreciate the importance of normalising the number of cases and deaths to account for differences in the size of population and appeared not to understand the argument that the journalist from Axios was putting to him. As much as anything, it showed up Trump’s inability (or maybe unwillingness) to engage in intellectual debate. It was far worse than anything I remember four years ago during the presidential campaign. Having recently watched the outstanding film Hillary by Nanette Burstein, I could not help wondering why the US public hated Mrs Clinton so much that they chose a reality TV star in preference to her as president (if you are interested in recent US politics, the film is a must-see). 

The second item was as bad, if not worse in its own way. This series of Tweets by former leader of the Tory party and Brexit hardliner MP Iain Duncan Smith, explaining why the EU Withdrawal Agreement was such a bad deal for the UK, was incredible. IDS argues that the EU wants “our money and they want to stop us being a competitor.” As if that were not enough, the following statement was both wrong and a masterclass in irony: “To avoid their own budget black hole, the EU gets £39billion as a “divorce payment” from us, reflecting our share of the current EU budget. But it gets worse. Buried in the fine print, unnoticed by many, is the fact we remain hooked into the EU’s loan book.” 

It is wrong because it fails to differentiate between the liabilities incurred by the UK which it must meet on its departure and some kind of exit payment. The UK is not somehow filling in holes in the EU budget. It agreed to undertake certain projects whilst it was a member of the EU and agreed that it must pay its share of the liabilities incurred. But the supreme irony is in the phrase “Buried in the fine print, unnoticed by many.” It is the job of MPs to scrutinise legislation. The text of the Agreement was published in October 2019. It then went through the UK parliament, where bills are debated three times by the House of Commons before being passed into law precisely to avoid any hidden items from sneaking through. So what precisely had he and his colleagues been doing prior to January 2020 when they voted by 330 to 231 to pass the Withdrawal Bill? 

The sheer absurdity of the ultra-Brexiteer position is difficult to understate. They clearly seek absolute autonomy over every aspect of the UK’s legal and economic framework without ever once acknowledging that no country in the world – not even the superpowers – have that kind of control. This handy little guide gives an overview of all the areas where the Centre for Brexit Policy think tank believes the UK should simply rip up any agreements with the EU in order to obtain absolute sovereignty. The people who believe this stuff are simply zealots who have no regard for how the international economy works. I have been calling them out for the past seven years but like cockroaches their arguments just won’t die, irrespective of how much logic you apply to them. 

They share with Trump a desire to break down the status quo without giving any real thought to what might come in its place. Their various projects run on finding grievances in order to stay relevant by tapping into the perennially dissatisfied. In a way, the worst thing that could happen to them is that we give in to their fantasies because then they would become irrelevant, having nothing to protest against. But that way madness lies, so we won’t go there.

All this begs the question whether voters think differently now compared to four years ago? In the US, Trump has had worse net approval ratings over the last three years than he is polling today but you have to go all the way back to summer 2017 to find them (chart). It is not a good look just three months before a presidential election. Nor do the polls find much support for Brexit (at least not in the form proposed by the British government over recent months). According to the European Social Survey, just 35% of Brits supported Brexit, with 57% wanting to rejoin the European Union. It is just one survey and we have learned not to trust the polls but this is consistent with the message coming from a number of polling sources in recent years. There is no appetite for the hard Brexit which the UK government says it is prepared to deliver. 

The collective cries of rage on both sides of the Atlantic were hailed in many quarters as the full throated roar of a population willing to take back control and make their respective countries great again. But after giving the electorate just four months to consider the immensely complex topic of Brexit, which was decided by the narrowest of majorities, politicians have had four years to implement it and now its leading protagonists do not appear to like what they voted for. In the US, such was Donald Trump’s popularity that he actually polled far fewer votes than Hillary Clinton. Indeed the vote deficit was the largest in history of anyone going on to be declared president (almost 2.9 million). There was no huge majority in favour of the populist policies on offer. And now that they are proving difficult – if not impossible – to live up to, maybe the sound you hear is that of the tide turning.

Buying Greenland - a valuation perspective

A history of US territorial purchases

Recent indications that Donald Trump is mulling the prospect of the US buying Greenland are not quite as ridiculous as many people seem to think. Indeed, the US has a long history of buying territory. Back in 1803, the newly formed United States bought the territory of Louisiana from France for $15 million ($341 billion in current prices). Large chunks of what are now Arizona and New Mexico were bought from Mexico in 1854 for $10 million ($305 billion in current prices), whilst in 1867 it bought the territory which now comprises the state of Alaska from the Russian Empire for a total of $7.2 million ($124 billion in current prices).

Moreover, the US has previously tried twice (and failed) to buy Greenland. In 1867 it looked into the possibility of acquiring Iceland and Greenland, and in 1946 President Truman offered Denmark $100 million of gold in exchange for Greenland. Based on the standard purchasing power measure, used in the calculations above, this is equivalent to $1.3 billion in current prices but based on gold price movements over the last 73 years this rises to the equivalent of $4 billion.

From a historical perspective, this is all both fascinating and ironic. It is ironic given the hostility of the United States to imperialism in the first half of the twentieth century that its history is so littered with examples of territorial acquisition. It is also fascinating because it demonstrates the international trade in territory that has taken place in the relatively recent past. However, it is a practice that has died out largely because the expansion of global trade means that countries are able to acquire what they need from elsewhere at a much lower cost. Moreover the issue of inhabitants’ rights mitigates against the practice. It is much more difficult to sell people’s rights to the highest bidder these days following the advent of pesky irritants such as the Universal Declaration of Human Rights, adopted by the United Nations in 1948. Of course, you don’t actually have to buy the outright ownership of territory: You can lease it, as Britain did with large parts of Hong Kong between 1898 and 1997 and as the US still does with the infamous Guantanamo Bay in Cuba. 

Applying corporate valuation methods 

Although Denmark has rejected the idea of selling Greenland, there is nonetheless an interesting debate to be had about how to value the sale of territory. It is thus illustrative to think about how companies are valued. There are essentially three main methods: (i) asset valuation; (ii) the value of revenue streams and (iii) a discounted cash flow approach. We can apply all of these methods in assessing the value of territory. 

(i) Valuing the assets 

One of the standard measures of corporate valuation is the ratio of the market price to the book value of assets. If we assume that this is unity, we can use international data on national balance sheets as a measure of the market value of all financial and non-financial assets. The latter comprises items such as the value of buildings and other fixed assets such as machinery; the value of inventories and natural resources such as land. Financial assets are the net value of all currency holdings, gold, financial instruments and net loans outstanding. In the UK last year, the value of net financial assets was near zero and the total net worth of £9.75 trillion was comprised of net non-financial assets. The US has the world’s highest net worth (chart), measured at $98.2 trillion in 2018 (31% of the world total), followed by China at $51.9 trillion (16.4% of the total). 

 

For the record, Denmark’s net worth was $1.3 trillion (0.4% of the world total). If we allocate Greenland’s share on a pro rata population basis relative to the whole of Denmark, its net worth drops out at $12.5 billion – around what the US Federal government spends on the Disaster Relief Fund, or 1.8% of the defence budget. This is, of course, a rough and ready calculation which takes no account of the expected future value of Greenland’s natural resources but it is a good starting point. 

(ii) Valuing the revenue stream 

What about valuations on a revenue basis? The obvious metric to use is GDP where the US is again ahead of the pack with total output last year recorded at $20.5 trillion. Being generous, Greenland’s GDP last year was around $3 billion. If we are applying corporate valuation methods, the standard measure is to value the company at a multiple of expected earnings. Applying a P/E multiple of 15x, which is in line with most major equity markets, this implies a market valuation for Greenland of $45 billion – slightly short of Montana’s GDP ($49.2 bn last year) but higher than that of Wyoming ($39.8 bn). If the US were engaged in a corporate transaction it would have no real difficulty in finding the funds out of its cash flow. 

(iii) The discounted cash flow 

The discounted cash flow issue is more tricky. Climate change is having a big impact on Greenland’s geography and according to the Brookings Institution in 2014, “due to global warming, Greenland’s mineral and energy resources … are becoming more accessible.” According to one report, oil could contribute around $78 bn to the national coffers over the next 40 years and after accounting for development costs, “a discounted price for future energy and other resources suggests a price in the $30 billion range could be fair value. Even adding the 10X current GDP and the energy resource value together would be a value of about $57 billion.” 

How to fund the acquisition 

So there you have it. On the basis of the estimates produced here, the US would have to stump up somewhere around $50 billion to purchase the territory of Greenland – or about 0.25% of annual GDP. This is rather less than the present value amount of nineteenth century territory purchases. How might it be funded? A straight cash swap, in which the Fed prints the requisite dollars, would require an increase in the value of notes in circulation of 3%. A debt for equity swap, in which the US Treasury issues notes, would require an increase of just 0.3% in the amount of debt held by the public. In financial terms, the US would clearly not have a problem funding the acquisition. 

The resistance of reluctant sellers 

The only trouble is, Denmark is unlikely to sell at any price. Soren Espersen, foreign affairs spokesman for the populist Danish People's Party, said of Trump in a broadcast interview, "if he is truly contemplating this, then this is final proof, that he has gone mad.” But we should not be overly dismissive – like many old ideas coming back into fashion, the notion of selling territory to earn a bit of extra cash could appeal to governments in these straitened economic times.

Indeed, rather than going to war with Iran, the US could attempt a hostile financial takeover of that country by forgoing the annual GDP of a state such as Connecticut to buy it (this would cost around $272 bn on an asset valuation basis). It would come more expensive if we used the 15x P/E multiple, where the GDP of California and Texas would be required to meet the asking price of $4.1 trillion. But let’s face it, we have heard a lot worse ideas from Trump!

Dealing with Donald

British Prime Minister Benjamin Disraeli is credited with coining the phrase “There are three kinds of lies: lies, damned lies and statistics.” But Disraeli never met anyone like Donald Trump who has created a fourth kind of lie in the form of fake news – a damned lie of a wholly different order of magnitude. Fake news goes well beyond a mere bending of veracity – it reflects an  untruth created with the express purpose of dissemination via various forms of media in order to attract such a huge following that it becomes virtually impossible to counter with the truth.

Trump’s world view both informs and is informed by fake news. His attitudes towards trade, for example, which his Administration views as a zero-sum game, are informed by the dodgy input of Peter Navarro who believes that the US trade deficit is a major drag on American economic prosperity. But as Trump pumps this message to a wider audience, so he gains support for taking measures that defy economic rationality. The idea of engaging in a trade war with China, for example, is an illogical proposition in which there are no winners – only losers. Admittedly, since the US imports much more from China than it exports, it can ratchet up tariffs on a far wider range of goods than China can match and in that sense the US would expect to “win” a trade skirmish. But this is a very short-term way of looking at things. There is little doubt that China will overtake the US as the world’s largest economy before too long and as a result it will write the rules governing world trade. If China takes to heart the lesson that economic nationalism is the way to go, before too long it will be able to throw its weight around in ways that the US may not like.

Even in the short-term, China can make life difficult for those US firms operating in the Chinese market. For example, Apple’s sales in China (at around $13bn) are only slightly lower than those in Europe ($13.9bn) and are growing at a much faster rate. Over the last six years, Apple’s European sales revenue has grown at an average rate of 2% per annum versus 19% in China. Another way to think of this is that Apple generates sales in China equivalent to the amount that 235,000 workers would generate in terms of salary income. In an accounting sense, these sales compensate for the absence of jobs that would otherwise be located in the US.  It’s all about swings and roundabouts.

Another aspect of Trump’s world view that increasingly disturbs is his ability to ride rough shod over long-standing allies. He has threatened to withdraw from NAFTA and has already imposed duties on European steel imports. Last week’s visit to Europe was hardly a triumph of diplomacy. Before sitting down with Angela Merkel, Trump denounced Germany as a "captive of Russia" and suggested that "Germany is totally controlled by Russia." He further undermined the US commitment to NATO by demanding that every member should reach the agreed threshold on defence spending of 2% of GDP by next year (the current target date is 2024) otherwise he would "go his own way." During his visit to NATO headquarters in Brussels he even demanded a rise in defence spending to 4% of GDP. He does have a point that there has to be a greater degree of burden sharing on defence, but the way to go about it is not to annoy allies because at some point you are likely to need them again.

Similarly, his intervention in the Brexit debate was bizarre. According to The Sun, Theresa May’s soft Brexit approach means that the UK’s “trade deal with the US will probably not be made.” His intervention in a domestic British issue was – to say the least – unusual and his backing for Boris Johnson was highly inflammatory. Trump subsequently backed away from criticisms of Theresa May reported by The Sun, claiming that it was “fake news.” But this fake news was captured on tape. Trump claims to have been similarly misquoted following his meeting with Russian president Putin.  When asked whether it was Russia that interfered in the 2016 presidential election campaign, Trump responded “I don't see any reason why it would be.” He later backtracked saying, “In a key sentence in my remarks, I said the word 'would' instead of 'wouldn't’ … The sentence should have been: 'I don't see any reason why … it wouldn't be Russia.”

What we are faced with is a US President who his allies simply no longer trust – certainly not on trade issues or defence cooperation. Increasingly they cannot take what he says at face value because even he is not prepared to stand by what he says. Martin Wolf in the FT offers a view of Trump based on the fact that the US position at the top of the pyramid is threatened by China and his nationalist kneejerk reaction is what the people want to hear. But he also suggests that the US economy “has recently served the majority of its people so ill” that Trump is the anti-establishment politician who can give “the rich what they desire, while offering the nationalism and protectionism wanted by the Republican base.” As one of the below-the-line reader comments put it, “America is being led by an ignoramus who thinks he's a genius, on behalf of plutocrats who claim to be populists, at the expense of the desperate who will believe anything.” Better perhaps to say “at the expense of the desperate who need something to believe in” but the point is made. 

Trump is the response to a system that failed: He exists because the old guard led the economy over the cliff in 2008 and are perceived to have left ordinary voters to pick up the tab. The reason why many Germans and pro-Remain Brits are scratching their heads at Trump’s behaviour is because they are not the ones who have been left behind. They don’t need to believe in a Trump-like figure and they can see through fake news. But they do not form a majority. Moreover, Trump does not play by the old rules because he gains nothing from doing so. There is thus no point in trying to tackle him on conventional terms.

Quite how we deal with a problem like Donald is hard to work out. Part of me hopes that he is a storm that will blow itself out when his policies are demonstrated to have failed. But I fear that he could be the first in a series of nationalist politicians who decide to tear up the rulebook in order to get things done. We only need look at Erdogan in Turkey or Duterte in the Philippines to see that there is a market for strongman politicians. And if the west becomes similarly infected then the rule-based economic system we have all grown up with will be in serious trouble.