Pay to Play in the USA. This is the label I would affix to the trading system that President Trump is erecting to replace the global world trading system he inherited.
The new trading order involves tariffs, of course, but it will have more to do with bilateral trade deficits. Donald Trump has always viewed America’s trade deficits as his bête noire, and now wants to close the gap with each partner.
That’s what made it easier to reach a deal with the UK, with which the US runs a rare trade surplus. Trump called the deal “full and comprehensive”, a typical exaggeration for a limited deal that retains a 10 per cent tariff on most British exports. It is seen by the administration as “a framework for other countries”.
• Starmer’s team were losing when Trump rang to say he’d won a deal
Most important, it contains an agreement by Britain to accept US “security requirements” for its pharmaceutical and steel industries, which would exclude China from UK supply chains and ownership of production facilities.
Trump cited “a special relationship … [with] “our oldest ally … always treated us with great respect”. Ambassador Lord (Peter) Mandelson, standing next to the seated president in the Oval Office, took the opportunity to offer him “a modest discount” on a Rolls-Royce. A date has yet to be set for the state banquet at Buckingham Palace.
Over the next few weeks, Trump will gather his secretaries of state, Treasury and commerce, and the vice-president to decide just what each trading partner must pay “for the privilege to [set up] shop in the United States of America”. The entry fee will be “a fair number … a low number”, undoubtedly reflecting, among other things, the size of America’s trade deficit with that country. If the foreign country chooses not to pay the posted price for being allowed to sell goods in the US, it can sell them elsewhere or flog them in America after paying the steep tariffs now in place.
There is more than one way to skin a protectionist cat.
The trading partner might agree to purchase more from America, which has liquefied natural gas (LNG) and agricultural products available in virtually unlimited quantities. Or it might agree to rein in its exports, as Japan did in 1981 when it signed a “voluntary” agreement to limit its export of cars. Or — as France, West Germany, Japan, the UK and the US did in 1985 — sign a new “Plaza Accord”, agreeing to intervene in currency markets to depreciate the dollar to make foreign goods more expensive in the US, and US goods cheaper abroad.
Meanwhile, Federal Reserve chief Jerome Powell resisted pressure from the president and the business community to lower the bank’s benchmark interest rate. “Uncertainty about the economic outlook has increased … The risks of higher unemployment and higher inflation have risen … but they haven’t materialised yet,” and the Fed is “in a good position to wait and see”.
Powell waits for a “locked-in policy” on taxes and on tariffs, while the president, to whom Powell is never gentle on his mind, to borrow from Glen Campbell, roars: “Too late. Jerome Powell is a FOOL who doesn’t have a clue.”
The Fed’s refusal to lower rates is not the only problem Trump has with Powell. Kevin Warsh, a former Fed governor, has caught the president’s ear at several meetings. In an opinion piece in The Wall Street Journal, Warsh noted that the Fed had joined a network of central banks devoted to greening the financial system, and announced “it plays a leading role in climate-related work”. In January this year, it withdrew from the Network of Central Banks and Supervisors for Greening the Financial System.
The Powell Fed also expanded its powers by reimagining its legal remit for maintaining “maximum employment” as a “broad-based and inclusive goal’ — which, Warsh argued, meant it would not only maintain full employment as traditionally understood, but aim to reduce the black unemployment rate. “The Fed has neither the expertise nor the prerogative to make judgments in these … politically charged … areas,” wrote Warsh.
This assumption of “a more expansive role inside our government on all matters of economic policy” … included quantitative easing (QE), buying Treasury bonds and keeping interest rates down to make loose fiscal spending policy easier and “a near-permanent feature of central bank policy”. Little surprise that Warsh is top of Trump’s list for a successor to Powell.
Republicans facing the mid-terms are keeping an eye on opportunities in the jobs market, glutted with victims of Elon Musk’s chainsaw, and seers are raising their forecasts of a recession. JP Morgan research raises the probability of that from 40 to 60 per cent, the same guess as Harvard University’s Larry Summers. Goldman Sachs’s chief economist puts it at 45 per cent, with a higher probability of an “event-driven downturn” that will drive the unemployment rate from its current 4.2 per cent to 4.7 per cent. But Brian Moynihan, chief executive of Bank of America, disagrees and sees no recession this year.
Expect these forecasts to be revised as Pay to Play in the USA unfolds.
Irwin Stelzer is a business adviser
