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Five Keys to Understand Trump


(draft of monthly column for Caixin)

The election of Donald Trump as the 45th President of the United States surprised many people, even seasoned political observers and astute investors. He failed to win the popular vote but did carry the electoral college, which is how the US elects its chief executive. His victory is a bit of a Rorshcach test, where people project the issues that allowed Trump to succeed, with different observers making different claims.

It is not clear how important it is to build a wall on the border with Mexico, bring back manufacturing jobs, limit refugees from several Moslem-majority countries, or get rid of the vested interests in Washington (“draining the swamp”). It seems that many people may not have voted for a particular program, but voted against the status quo which Hilary Clinton seemed to embody.

Domestic and international investors and policymakers are getting a better sense of the priorities of the new administration and how it will govern. Several features have become clearer.

First, it is essential to understand that President Trump has surrounded himself by many people who do not agree with him. There are two important wings in his government. The first wing is revisionist in its populism-nationalism appeal. It is mercantilist and protectionist. The second wing is within the liberal globalist tradition. On matters of foreign exchange, Treasury Secretary Mnuchin is key, and he comes from the second wing.

Although he may have his own approach at some juncture, for now, Mnuchim seems prepared to use the new quantitative criteria the Treasury Department developed to define currency manipulation. China does not meet the criteria. Indeed, despite what is said during the campaign, no US President has concluded China has manipulated its currency for export advantage for more than two decades. Still, it is possible that out of the Trump-Xi meeting next month comes plans for new trade talks, as have been initiated between Japan’s Finance Minister Aso and US Vice President Pence.

Second, it is important to understand that Trump is first and foremost a negotiator. When he says things, it needs to be understood in this context. It is like a person trying to buy a used car. The dealer asks a certain price, but the potential buyer denigrates the very car she wants to purchase. The bumper has a dent. The paint is scratched. The upholstery is ripped. The car smells. The point is not to whine about the car.

The objective is to lower the price, get a better deal. It is not to express a fundamental truth or signal a policy commitment. Trump’s feint to depart from the one-China policy and subsequent back down seemed to curry favor among Chinese officials, and some suspect that it may have been behind China’s tougher stance toward North Korea.

Third, it would be a mistake to think that the Trump Administration augers an isolationist period. Trump directly rejected such accusations at the press conference following his recent meeting with German Chancellor Merkel. Indeed, it would be more appropriate to think of Trump as being more unilateralist than isolationist. The multilateral system is rejected because it limits  America’s ability to pursue its national self-interest.

Under President Trump, the deployment of military hardware and personnel to Asia and the Middle East, the tougher stance toward North Korea, (“era of strategic patience is over”), the strong statements regarding interests in the South China Sea, show little inclination in adopting a narrower definition of America’s interest. Without the Trans-Pacific Partnership, America’s pivot to Asia relies more on hard power than trade and prosperity, even though half of the US top ten trading partners are in Asia, as is more than half the world’s population.

Fourth, Trump will not encroach upon the independence of the Federal Reserve. He does not need to: instead, he will influence the central bank the old-fashioned way, through the power of appointment. There are two vacancies among the seven Board of Governors. A third opening will exist after Governor Tarullo steps down in April. Early next year, Yellen’s term as Chair is completed and Fischer’s term as Vice Chairman ends near midyear.

Over the next 18 months, Trump will nominate at least five of the Board of Governors, including the Chair and two Vice Chairs. We do not expect monetary policy to deviate much from its present course of gradual rate hikes over the next couple of years. The balance sheet will gradually shrink as the first step of ceasing recycling maturing Treasuries that may begin late this year or early next year.

Fifth, the unwieldy coalition that makes up the Republican Party and the lack of cooperation from Democrats jeopardizes President Trump’s economic agenda of tax reform, deregulation, and an infrastructure spending program. The failure to legislate an alternative to the Affordable Care Act (Obamacare) highlights the task ahead:  Either toughen the discipline of the Republican Party or reach a deal with some Democrats. The same tactical choice will present itself with tax reform.

Ironically, it is not clear if the Trump Administration has the requisite negotiating skills and strategic vision. Instead, the risk is that in preventing a filibuster over the Supreme Court nominee, moderate Democrats will be further alienated, while the Freedom Caucus, which appears to have been decisive in scuppering the health care reform, will be emboldened in its opposition to the border adjustment, that is needed to fund tax reform.


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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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