Week One: The Art of the Deal

“I aim very high, and then I just keep pushing and pushing and pushing to get what I’m after.” - Donald J. Trump

Trump has wasted little time getting his feet under the desk: the flurry of executive orders has been both broad and expedient. Some developments are unsurprising, if contentious: rescinding climate-related provisions; pardoning Capitol Hill rioters; reversing Federal ‘DEI’ policies; halting asylum claims; deporting illegal immigrants; purging political opponents.

Other diktats signal a return to outward belligerence: the (unofficial) ‘renaming’ of the Gulf of America, the declaration of a 51st State of Greenland and the threat to “take back” the Panama Canal. Although such rhetoric will have little potency, it may embolden China’s own territorial claims. Others are simply red herrings: like waging war on the innocuous Delta Smelt. And, of course, the ethically questionable launch of $Trump and $Melania meme coins – which remind us perhaps of crypto’s wider credibility challenges.

Of course, not all executive orders are lawful – ‘checks and balances’ still exist in the post-Trump world, as we’ve seen in recent days. But as a signalling mechanism, they are clear: POTUS is here to provoke, disrupt and (he says) to win.

Nowhere is this more visible than in Trump’s weaponisation of trade. Restraint at his inauguration has since given way to a more confrontational and haphazard trade strategy. Most visible are the 25% tariffs that have been threatened on imports from Mexico and Canada, and a further 10% duty on Chinese goods commencing in February. The former, if implemented, would likely have a significant negative economic impact on continental trade (the US is reliant on manufactured goods from Mexico and raw materials from Canada).

If there is a small silver lining to these targeted trade salvos, it may be that they temper the effectiveness of unilaterally raising tariffs across the board - those threats lose their potency once implemented. On this count, the Treasury Secretary, Scott Bessent, has favoured a ‘gradual’ approach: raising total US import tariffs by 2.5% each month. Other proposals in the pipeline include reviewing existing free trade deals and multilateral agreements (e.g. USMCA), as well as identifying currency manipulators.

His objective? Not only to reduce the trade deficit and protect US industry from perceived unfair competition, but also to extract concessions from its trade partners. Whether this is about migration (Mexico and Colombia), competition (China), tax revenues (Ireland) or simply the trade deficit itself (Europe).

But there are no simple answers to the complex problems which America faces (not that it is doing that badly to begin with, as we note elsewhere…).

This is most obviously true perhaps of Trump’s mercantilist view of the world, where domestic prosperity is supposedly contingent on the balance of trade. Trump believes that high tariffs (or trade restrictions, such as non-tariff barriers) – alongside a weaker dollar – would improve competitiveness, boost exports and ultimately lead to faster growth.

Trump’s policies are not grounded in economic analysis. The balance of payments is not driven by competitiveness alone, or even substantially, but mostly by an imbalance in demand, and differences in product ranges. Even if Europe or China, for example, pledge to purchase more US goods, the deficit may not disappear if US buyers continue to spend freely, and on many things unavailable at home. The trade (current account) deficit is synonymous with a low national US savings rate relative to its capital spending. As things stand, tariffs alone may not make the US save more and/or spend less on capex. Nor will they resolve more structural competitiveness issues. This need not matter as much as the President thinks: the US' current account deficit can just as well be seen as the rest of the world willingly allowing the US to run that savings shortfall.

Tariffs are essentially a sales tax: they raise prices for households and for businesses that rely on imported inputs to make their products. In turn, this reduces consumer and business purchasing power, and may restrict competition and choice. The 2018-19 trade war may not have prompted a big inflation surge, but manufacturing employment fell, and some US exporters were forced to lower prices in response to retaliation from lost sales aboard. The fact that the trade deficit still widened during this period illustrates the point: the balance of trade is driven not just by substitutional considerations such as relative prices and costs but by the myriad macroeconomic factors which drive national saving and investment.

Of course, none of these economic misgivings likely matter. Trump knows that the US has the upper hand in many negotiations (his recent success in apparently securing the fragile ceasefire deal in the Middle East may testify to this). But such a projection of ‘hard power’ may not yield the lasting economic benefits that the new administration is hoping for. Soft power is often more productive – as one of Trump’s predecessors famously noted.

Past performance is not a guide to future performance and nothing in this article constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.