Midterms may cool trade war

Trump cre­ated the China trade cri­sis; U.S. elec­tions may have given him rea­son to end it

The Expositor (Brantford) - - BUSINESS - JOE CHI­D­LEY

Talk­ing heads are still de­bat­ing who won and who lost the U.S. midterm elec­tions — or at least they were, be­fore Don­ald Trump fired his at­tor­ney gen­eral and suc­cess­fully changed the me­dia topic-du­jour once again. But the fact is, the over­all re­sult was a yawn. The elec­tions went pretty much as ex­pected. The House of Rep­re­sen­ta­tives went to the Democrats; Repub­li­cans con­sol­i­dated con­trol of the Se­nate. Pres­i­dent Trump still pro­claimed vic­tory (in­clud­ing over those Repub­li­cans who dared not en­list his sup­port dur­ing the cam­paign and lost). So what else is new?

If you’re look­ing for real win­ners, you might point to in­vestors in U.S. stocks, which en­joyed their big­gest post-midterm lift since 1982 on Wed­nes­day. His­tor­i­cally, stocks tend to en­joy nice runs af­ter midterm elec­tions, in part be­cause they elim­i­nate un­cer­tainty. This one might prove es­pe­cially wel­come for in­vestors, and it just might last a while. The rea­sons: grid­lock, in­fra­struc­ture and — hold on — China.

As much as the cit­i­zenry gets frus­trated with po­lit­i­cal grid­lock, it’s rarely a bad thing for busi­nesses or in­vestors. Grid­lock means sta­bil­ity. This time around, it en­sures the Trump cor­po­rate tax cuts are safe. It also means a nice bal­ance of en­mity be­tween the House of Rep­re­sen­ta­tives and the pres­i­dency. (I’ll leave the Se­nate out of the equa­tion, be­cause it has now lost any in­cen­tive to dif­fer with Trump on any­thing.) Given the po­lar­iza­tion of Democrats and Trumpub­li­cans, they will pro­duce many bit­ter words, but not much leg­is­la­tion. In short, the U.S. po­lit­i­cal sys­tem, in­so­far as it will not ac­com­plish any­thing in any rea­son­able length of time, will func­tion as de­signed. Good news for in­vestors!

Some, how­ever, see a ray of hope for agree­ment on in­fra­struc­ture. Trump has said he can work with Dems on a big, beau­ti­ful stuff-build­ing pro­gram, and that has helped lift in­fra­struc­ture and con­struc­tion-re­lated stock prices. But we have been down this pot­hole-y road be­fore. The Pres­i­dent promised a tril­lion-dol­lar build­ing pro­gram back in the 2016 cam­paign, re­mem­ber? Also, the deficit is al­ready soar­ing un­der Trump (it hit US$780 bil­lion in fis­cal 2017-2018, an in­crease of 17 per cent in fis­cal 2017-2018). The Repub­li­cans have been talk­ing spend­ing cuts to ad­dress the soar­ing debt, but you can for­get about those with a Demo­cratic House. As­sum­ing some level of san­ity when it comes to tap­ping debt mar­kets even more, the Pres­i­dent’s in­fra­struc­ture pro­gram, if it ma­te­ri­al­izes, could end up be­ing not that big or that beau­ti­ful.

A brighter ray of hope for in­vestors might ac­tu­ally lie in the prospect for some kind of res­o­lu­tion in the U.S.-China trade war, which is al­ready bit­ing into the out­look for China’s econ­omy, U.S. cor­po­rate earn­ings and global growth. If it’s go­ing to hap­pen be­fore the pain gets worse, it will have to be soon: the tar­iff level on about US$200 bil­lion worth of Chi­nese im­ports to the States is sched­uled to rise from 10 per cent to 25 per cent in Jan­uary. So the meet­ing be­tween Trump and Chi­nese Pres­i­dent Xi Jin­ping at the G20 sum­mit at the end of No­vem­ber will be one to watch for in­vestors.

At first glance, it might look like the midterm re­sults will lower the odds of a res­o­lu­tion, given that Democrats also favour a hard line on trade with China; if any­thing, doubters say, the new House will sup­port Trump’s an­tag­o­nis­tic path. Yet, on trade, the House is ba­si­cally ir­rel­e­vant; it’s one of the few are­nas where the Pres­i­dent has wide dis­cre­tion. And Trump will go his own way on it, no mat­ter what the House thinks.

But what is he think­ing? Pre­elec­tion, he was talk­ing up how well dis­cus­sions with the Chi­nese pres­i­dent have been com­ing along. Some dis­missed that as a midterm ploy, but even now he’s been tweet­ing about big “Trade Deals” to come. Of course, you don’t want to put too much faith in Twit­ter Trump, but there might be sound po­lit­i­cal rea­sons for him to make peace with Xi. And the big­gest could be this: with Democrats in the House, he’s run out of other op­tions to juice the econ­omy.

For a pres­i­dent who likes to brag he’s done more for the U.S. econ­omy than any other in his­tory, that’s a prob­lem. His sig­na­ture achieve­ment — those cor­po­rate tax cuts that are help­ing to run up the deficit — was a one-time adrenalin shot. What’s he got left? Be­fore the midterms, Trump trial-bal­looned the no­tion of tax cuts for the mid­dle class — an un­de­liv­er­able prom­ise that would have no chance at all in the new con­gres­sional con­fig­u­ra­tion.

But a deal with China? That’s within his purview. Any im­prove­ments to the re­la­tion­ship will prob­a­bly be mod­est — per­haps some con­ces­sions from China on low­er­ing the non-prob­lem trade deficit, and un­der­tak­ings to lower bar­ri­ers to in­vest­ment and pro­tect in­tel­lec­tual prop­erty.

China will likely give back noth­ing it hasn’t promised to give be­fore. But for Trump’s po­lit­i­cal for­tunes, the de­tails of the agree­ment will be ir­rel­e­vant. First and fore­most, it will be his deal. And it will al­low him to claim vic­tory, no mat­ter how weak it is or how much the cri­sis was of his own mak­ing.

It would also be good pol­icy. And for in­vestors, it would pro­vide a breather from wor­ry­ing about the world — at least, that is, un­til Trump man­u­fac­tures an­other cri­sis, prob­a­bly when the next elec­tion cy­cle comes around.

JO­HANNES EISELE/AFP

A guard ges­tures at an en­trance to the first China In­ter­na­tional Im­port Expo (CIIE) in Shang­hai last week. There was a notable ab­sen­tee among the dozens of na­tional pavil­ions at a mas­sive Chi­nese im­port fair — the United States — a no-show that un­der­lines how Trump eco­nomic poli­cies are caus­ing trad­ing part­ners to turn more to­ward China.

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