Five Keys to Understand Trump

(draft of my monthly column for a Chinese paper)

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
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
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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