A sideways look at economics
To say that it has been hard to read the real intentions of President Elect Donald Trump since the election would be an understatement. Which is it to be: Trump Lite or Donald Dark? Below is an impression of how the Fathom view has evolved as the ‘facts’ (in our ‘post-fact’ world) have emerged.
Fiscal stimulus is going to happen, the stock markets are up, the US dollar is stronger and US monetary policy is on the road to normalisation. What’s not to like? We’re definitely in ‘Trump Lite’, right?
-Fact # 1: Hardliners on immigration have been nominated for the Cabinet
Okay, so he builds a wall, or a fence/wall (what’s that called? A whence? A fwall? Part wall, part fence – a Pence?) but we’re still in ‘Trump Lite’, right?
-Fact # 2: His nominee for Commerce Secretary, Wilbur Ross, is a China hawk and claims that the US is already in a trade war with China
Sure, but that’s not the same thing as slapping a 45 percent tariff on imports from China, is it? It’s still consistent with Trump Lite, right?
-Fact # 3: Mr Ross has pledged to renegotiate the US/China trading relationship to make it more ‘fair’.
Tough on immigration and tough with China. That’s starting to feel a bit ‘Donald Dark’…
-Fact # 4: China has pledged to fill the shoes left by a more inward looking US.
That won’t happen. China is doubling down and doesn’t have sufficient internal demand to step into the US’s shoes. Donald Dark beckons…
-Fact # 5: Around 4% of China’s economy relies directly on exports to the US.
OK, but it’s like the scorpion and the frog – it might be in China’s interests to play nice, but that doesn’t mean it’ll happen. What if China doesn’t play ball – wouldn’t the US lose out?
-Fact # 6: The gains from exploiting patterns of comparative advantage would be reduced. Import costs would rise, supply chains would be disrupted and US firms would have to employ more expensive labour at home to substitute for imports from China.
Right, and the US would lose an important export market too?
-Fact # 7: The US exports very little to China, and almost nothing of what it is really good at. The US is good at developing intellectual property and exports a lot of this around the world, a point reflected by its revealed comparative advantage (RCA) in this sector. (See table below. Contact us or refer to our recent blog post for more details on RCA). Yet China only pays $6 billion for the use of US intellectual property products every year, a tiny fraction of the more than $400 billion worth of capital and consumer goods it sells to the US every year.
So China has a lot more to lose in a trade war than the US does. Which makes it more likely that the US will engage in that war. I don’t understand – does that mean it’s Trump Lite or Donald Dark? Or something in between? With apologies to Eminem:
So will the real Don Shady please stand up
And put one of those fingers on each hand up
And to be proud to be outta your mind and outta control
And one more time, loud as you can, how does it go?
I’m Don Shady, yes I’m the real Shady
All you other Don Shadys are just imitating
So won’t the real Don Shady, please stand up,
Please stand up,
Please stand up
