By Dan Steinbock
The US election was a divisive global event and continues to be fought over even after Trump’s win. But recently, these political struggles moved to an entirely new phase: the Trump administration currently faces an investigation into Russian interference in the Presidential election. The investigation is being led by DOJ appointed special counsel Robert Mueller, former director of the FBI. In this process is the potential to undermine an effective presidency.
In order to assess the probable impact of this investigation on Trump’s stalled policy agenda, it is important to understand what is actually new in his trade, political, and military stances.
A copycat critic
During a series of meetings during the NATO summit in Belgium and at the G-7 gathering in Italy, President Trump was quoted as calling Germany very, very bad on trade. That was followed by German Chancellor Angela Merkels speech, in which she said that the times in which we can fully count on others are somewhat over. Merkels Atlanticist supporters saw the speech as signalling the end of the postwar Western consensus.
Trump is neither the first nor unique in his criticism of Europe. Following the end of the Cold War, every US president, in one way or another, has engaged in similar criticism. The notion that Europeans are free riders, enjoying the benefits of an international order safeguarded by the US without contributing much to it, is an old one in Washington. Soon after he received his Nobel Peace Prize, Obama began to complain about those NATO members who do not pay their fair share in global affairs. In particular, he launched an anti-free rider campaign. In this, he pushed European allies to lead the 2011 NATO intervention in Libya to prevent the Europeans and the Arab states from holding our coats while we did all the fighting.
What about deficit criticism? Thats not unique to Trump either. Following the global financial crisis, both Obama and former Fed chief Ben Bernanke often argued that Germanys trade surplus is a problem. Unlike China, which has been working to reduce its dependence on exports since the early 2010s, Germany has not. As a result, Obama and Bernanke often pleaded Chancellor Merkel to launch Keynesian investment initiatives and promote German consumption, but without success. To Obama and Bernanke, that was frustrating; to Trump, hypocrisy.
Where Trump diverges
Whats new in the current Atlanticist friction, however, is Trump’s willingness to push both NATO payments and trade distortions in parallel. Also new is Chancellor Merkel’s shrewd timing in using anti-Trump sentiments to foster pan-European unity. Until recently, her center-right Christian-Democrats (CDU) were struggling against Social-Democrats (SDP) and the radical right, Alternative for Germany (AfD). But when Trump began his efforts to divide Europe before election season, Merkel started her attempt to rally Germans behind CDU, taking advantage of anti-Trump sentiments in the Old Continent. Thereafter, CDUs polls began to rise again.
While Trumps policy agenda is not entirely new, it is tougher, broader, and less politically correct than its precursors. However, Muellers investigation will cast a dark shadow over the White Houses policy agenda.
Slowly building friction over trade
During the 2016 campaign, Trump threatened to use high import tariffs against nations that have a significant trade surplus with the US. In 2016, the deficit list was topped by China ($347 billion), Japan ($69 billion), Germany ($65 billion), Mexico ($63 billion), and Canada ($11 billion). On a per capita basis, Germany is the leading deficit offender.
In his campaign, President Trump promised to renegotiate America’s key free trade agreements, including the North American Free Trade Agreement (NAFTA). Right after his inauguration, he used an executive order to pull out of the Trans-Pacific Partnership (TPP), which was seen as President Obamas legacy deal. In turn, NAFTA renegotiations are set to start soon. However, according to US Trade Representative Robert Lighthize, the Trump administration will seek to expand NAFTA trade rather than to overturn it. As these talks are to begin late-August, they will be followed closely by other bilateral trade talks (South Korea, Japan, and Taiwan), amongst allegations of currency manipulation. Since these negotiations are likely to endure through the fall, major trade friction may not be likely until 2018.
The Trump administrations tone about China has also softened following an internal struggle between Trump’s trade hawks (head of the National Trade Council Peter Navarro, and trade advisor and former CEO of steel giant Nuctor, Dan DiMicco), and their more moderate opponents (Treasury Secretary Steve Mnuchin, and chief of National Economic Council Gary Cohn). After the two-day summit at Mar-a-Lago, President Trump and President Xi Jinping announced a 100-day plan to improve strained trade ties and boost cooperation.
However, unless the plan can offer major breakthroughs after the summer, deficit rhetoric may escalate toward the year-end. Since sanctions fall under executive actions, Trump tends to have more strategic manoeuvrability in these areas. Then again, both Republican neoconservatives and Democratic liberal internationalists support sanctions against North Korea, Russia and (with some qualifications), Iran.
Headwinds against tax reforms
Until recently, progressive taxation has played a critical role in all advanced economies. In America, that model has been under a siege since the Reagan years. Today, the US personal income tax rate is one of the lowest among the G20 economies, whereas US corporate tax rates are ranked high internationally. As a result, US companies have parked more than $1 trillion worth of cash abroad. Nevertheless, Muellers investigation is likely to overshadow Trump efforts at tax overhaul, which depends on legislative support for success.
The Trump administration hopes to simplify the number of individual income tax brackets. It would like to reduce the tax rate on capital gains, non-corporate business taxes, and those in the highest bracket. Its goals also include repealing the alternative minimum tax, the Affordable Care Act (the Obamacare) surtax, and estate tax. Critics expect the total costs of the plan to soar to $5 trillion over a decade. Regardless, Republicans are ready to move ahead with a repeal bill. While it has been diluted, it still divides Republicans in the Senate and House of Representatives. Senate Majority Leader Mitch McConnell suspects that the new bill will not pass through the Senate.
More controversy
The Trump corporate tax plan is seen as even more controversial. In 2016, these rates were around 30-35% in major advanced economies (France, Japan, Germany), except for the UK (19%). The US rate (39%) is the highest among all G20 economies. Trumps plan would almost halve rates to just 15%, which would put America ahead even of low-tax city paradises, such as Singapore (17%) and Hong Kong (16.5%). With reduced rates, the White House hopes that US companies’ overseas profits and corporate operations will return home. In reality, such expectations are inflated.
There has been no major outflux of foreign firms from large emerging economies, which offer growth that is 3-4 times faster than in the US or Europe. Since the 1970s, US trade deficits have been a regional issue mainly with Asia. As costs are rising in China, emerging Asia will take the mantle, but US trade deficits will prevail. Even when relocation offers some benefits, the US and other multinationals may prove reluctant to move their core operations; an increasing number of these companies rely on emerging-economy middle classes and new innovation hubs for their profitability.
While the Trump administration will try to push its stalled policy agenda, it must now do so with the White House in shackles.
Dr Steinbock is the founder of DifferenceGroup. He has served as Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).
This commentary was released by The World Financial Review on June 2, 2017. The online version will be followed by a print version (July-August 2017).
Featured Image Source: Wikipedia
The continuation of this article can be read here: The Russian reset: Can Trump do what others couldn’t?