How President Trump has lost all economic policy credibility
The events of the past few weeks destroyed whatever credibility Donald Trump may still have had on economic policy. And investors are celebrating. At this point, evidence that Trump tweets signify nothing is, in effect, good news.
Let’s review what happened. First, having gone to great lengths to get a new trade agreement with Mexico and Canada — an agreement very similar to the existing agreement, but one he could slap his name on — Trump basically blew up his position by threatening to impose new tariffs unless Mexico did something about border issues completely unrelated to trade.
This weakens, if not destroys, Trump’s ability to negotiate future agreements, on trade or anything else. Why make deals with an administration that reneges on its promises whenever it feels like it?
But then, barely a week later, Trump called the whole thing off in return for a statement by Mexico that it would ... do things it had agreed to months earlier.
It’s unclear what caused Trump to back down, but perhaps the warnings of U.S. manufacturers — horrified at the possibility that Trump’s tariff tantrum would disrupt their supply chains — finally made it through to the Oval Office, or the golf course, or wherever he was when he finally listened.
Avoiding a destructive trade war is a good thing. But the world learned from this climbdown that Trump’s threats are as empty as his promises.
An aside: Recent events have surely reduced the chances that Congress will ever approve the USMCA, the Trump-negotiated replacement for NAFTA.
Democrats in the House were already reluctant to pass enabling legislation, giving Trump something to boast about, unless they got some serious concessions on issues that matter to them, like labor rights.
Trump’s counter was a threat to withdraw from NAFTA with no replacement. But this would have catastrophic economic effects, leading into an election year. After last week’s climbdown, who believes he’d carry through on that threat?
Trump was unhappy at news reports that accurately described his deal with Mexico over migrants as the nothingburger it was. So in addition to lashing out at “fake news,” he introduced a whole new claim: “MEXICO HAS AGREED TO IMMEDIATELY BEGIN BUYING LARGE QUANTITIES OF AGRICULTURAL PRODUCT FROM OUR GREAT PATRIOT FARMERS!”
That claim is peculiar, despite the extra persuasiveness that comes when YOU MAKE YOUR ASSERTIONS IN CAPITAL LETTERS.
Like many Trump tweets, it reads like a clumsy translation from the original Russian (“great patriot farmers”?). More importantly, there’s nothing about agriculture in the official agreement. And that’s not something the Mexican government could deliver, even if it wanted to.
Some readers may recall that a few months ago China tried to avert trade conflict by promising to buy 10 million tons of U.S. soybeans. The ploy didn’t work, but it was at least feasible: State-owned enterprises make up a large part of the Chinese economy, and Beijing can just order them to buy stuff. Mexico, however, is a market economy, in which the private sector, not the government, decides how much Iowa corn to import.
So was Trump confusing Mexico with China? Did he forget that the China deal he was touting months ago actually fell through? Who knows?
What’s clear, however, is that on trade policy — his signature issue — the U.S. president is seriously out to lunch. And you might think this would worry investors.
But as I said, markets appear to be celebrating: As I write this, stock markets are up, while long-term interest rates — a better barometer of investor views about economic prospects — are off their recent lows. What’s going on?
The answer, I’d suggest, is that financial markets are basically discounting Trump’s rants.
Yes, he’s deeply ignorant about policy. Yes, his ragetweets constantly remind us of his egomania and insecurity. But we’ve known all that for a while; Trump’s personality is, in effect, already priced in.
Markets appear to be betting that he tweets loudly but carries a small stick.
Is this a good bet? I have my doubts.
The trade war with China still seems to be on, and Europe may be next. More generally, when you have an attention-seeking president, ignoring his antics could well provoke him into even more extreme behavior. But for now, investors are effectively treating Trump as crazy but harmless. Is America great, or what?