By Theo van de Kletersteeg
In this world of political correctness, it’s hard to find supporters of Donald Trump who are willing to speak out, particularly in Canada where trade-related issues have taken on serious emotional overtones. I would like to offer an additional perspective that might help us understand how we in Canada found ourselves in trade conflicts with Mr. Trump almost from the moment he was inaugurated.
In addition to issues related to trade, the Trump Administration is also at odds with Canada and many other nations about issues related to immigration, funding of Defence efforts, and others. Moreover, Mr. Trump has not endeared himself to many by exhibiting a blatant disregard for facts, and saying one thing one day, only to say the opposite the next day. However, we must obviously make a clear distinction between Trump’s personality features, and his ability to carry out to the duties of President of the United States. In many ways, Trump’s actions and behaviours are nothing but unconventional tactics designed to throw both friends and foes off-balance, making him highly unpredictable, and difficult to deal with. Underneath it all, though, is a solid strategy championing his well-announced policy of making America great again. From Trump’s point of view, making America great again is based on creating greater economic prosperity which will, as he sees it, fix most of America’s problems, and will allow America to regain its position as the world’s “top dog”. Although reviled and ridiculed by the media, his core political supporters stand firmly behind him. More to the point, Trump’s policies have caused the U.S. economy to fire up like it hasn’t for decades, with unemployment near all-time lows, and the stock market near all-time highs. Trump’s rhetoric and abrasive language have rubbed many the wrong way. However, if results are what counts, it’s hard to deny that, from an economic point of view, he has so far achieved more than any other U.S. President in modern history.
First, we must understand that the trade disputes between Mr. Trump’s Administration and those of his trading partners have nothing to do with being friends or foes, and has nothing to do with past relationships. In fact, it’s only about one thing: money. Mr. Trump has a very simplified, but very effective view of global economics: in terms of trade, when other nations are exporting goods to America, America takes money out of its “pocket” to enrich the exporting nation. Instead of importing, the Trump Administration feels that America must export a lot more so that it, rather than its trading partners, can become the beneficiaries of the cash involved. Likewise, in terms of NATO Defence spending, the United States and its NATO Allies have implicit understandings of the functioning of the Alliance, and its responsibilities both in times of peace and conflict. As anyone will understand, large sums of money are involved to maintain the capabilities of the organization. Trump feels that America is carrying an unreasonably large share of these expenses which, once again, means that America is taking money out of its “pocket” to benefit Canada and Europe. In other words, Mr. Trump feels that in many ways, America is subsidizing a great many nations which, since the end of World War II has cost America trillions of dollars. Trump wants to put an end to the “subsidies” that have allowed countries like Canada, Europe and China to build up their economies, enabling many to create standards of living that arguably surpass those of the United States.
We may think of the United States as the powerhouse of the world, and it still is. However, its military dominance is under threat as other nations acquire technologies and capabilities that have the potential of outwitting U.S. defences. After World War II, the U.S. provided the necessary financing to allow the nations of Europe and Japan to rebuild their economies. In the process, the U.S. created mighty competitors that benefited tremendously from utilizing the latest technologies in their brand-new factories, which soon become more productive than the legacy U.S. production facilities of the 1930s and 40s. Furthermore, to encourage economic growth elsewhere, America typically imposed very few restrictions on imports, and charged duties that were typically not much greater than amounts of symbolic value. Meanwhile, overseas trading partners charged duties that were far in excess of America’s, and imposed regulations that made it more difficult for America to export its manufactured products.
The upshot of the above has been that during the past 75 years, America’s dominant economic role has taken a serious backseat, and the country is presently mired in skyrocketing federal debt, and Budget deficits.
Let’s say a few words about the United States merchandise trade deficit. As will be evident from the table, the U.S. merchandise trade deficit has risen dramatically and without interruption since the early 90’s. This was not always the case. In fact, until about 1976, the U.S. produced trade surpluses more or less on annual basis. We must also consider that the U.S. incurs a huge annual deficit in the trade in services. In 2017, for example, this trade resulted in a deficit of $287 billion.
All other things being equal, trade surpluses result in a stronger currency, which is good for one’s domestic economy because it enables industry to import technology relatively inexpensively, which in turn tends to keep the domestic economy productive and competitive. In addition, imports of consumer goods will be at more affordable prices, thus keeping down inflation. As we know, the economy is complex and, while positive or negative trade balances are key indicators for an economy, they do not tell the entire story. Other important factors include government budget surpluses or deficits, foreign investment, and debt. In addition, some factors influence others. For example, when governments operate at a deficit, they must borrow the difference between revenues and expenditures, which increases the national debt. To create a more favourable merchandise trade balance, as Donald Trump is attempting to do, one can impose tariffs and regulations to discourage imports, and one can create a more hospitable domestic environment (lowering taxes and regulations) to encourage both domestic and foreign investors to invest in plant and equipment to increase production for domestic consumption, and for export.
During the 20th century, the U.S. government has operated at Budget deficits during the vast majority of years. In 1918 and 1919, government expenditures represented 250 per cent of government revenues, resulting from the high cost of preparing for and waging war. During the thirties, the federal government spent more than it took in to alleviate the impact of the Depression. From 1942 to the late sixties America was mired in deficits to pay for its war activities during WWII and the Vietnam war. Looking at the record, it seems that since the seventies, deficit spending at roughly 20 per cent of annual revenues became embedded in U.S. government operations, with no apparent attempt being made by government to operate within its means. The only exceptions were the years 1998 to 2001, when three consecutive budget surpluses were recorded. Recently, the Budget deficit shot up to $1.4 trillion in 2009, the year of the Financial Crisis, representing 67 per cent of government revenues, and remained in excess of $1 trillion for three more years, but subsequently declined to about 13.5 per cent of revenues by 2015. Last year (2017), however, the budget deficit was back to its long-term average of 20 per cent of revenues, and is expected to rise to 28.8 per cent of revenues by 2019.
From a high of 118.9 per cent of Gross Domestic Product (GDP) in 1946, U.S. federal debt declined to 33.6 per cent of GDP by the end of the Vietnam war in 1975. At that time, the gross national debt of the United States stood at $542 billion. By 1982, however, the debt had jumped to $1.1 trillion, but still represented “only” 34.3 per cent of GDP. Since that time, however, budget deficits have been on a tear, with gross national debt standing at $20.2 trillion as at the end of 2017, and representing 105.4 per cent of GDP.
Mr. Trump, before announcing his candidature for the Office of President, obviously considered what he could bring to the table, if elected President. Trump, the deal-maker, decided that he could possibly re-make the American economy like no other President had done before him, because none had been hard-nosed businessmen. However, having looked at all the numbers, just like he did when he was CEO of the Trump organization, he realized that not only would this be a “now or never” game, it would also be a risky roll of the dice, not unlike the games played by his customers at Trump’s casinos. Trump’s game plan would be to spur domestic growth by cutting taxes and regulations, but would the expected higher tax revenues in future years pay for the loss of current tax revenues and significantly higher borrowing charges? He decided to minimize the risk by “levelling the playing field” (as he sees it) with America’s trading partners, to reduce America’s trade imbalances, and with its military allies, to have its Allies carry a greater share of the cost of military preparedness, and military operations.
Trump will not lose this fight, partly because the U.S. is the elephant in the room and is willing to bully its friends into submission, and partly because he cannot afford to lose. In Trump’s mind, this is America’s last opportunity to maintain global economic and military dominance, although he realizes that, ultimately, China will assume those roles. Moreover, he genuinely feels that America has generously ceded far too much economic power to its trading partners, which situation he feels he is morally bound to correct.
What’s the risk? It’s impossible to tell because we are in unchartered waters. Clearly, although the risk is currently low, the risk is that the U.S. is overextending itself which, coupled with possible unease exhibited by foreign investors, may trigger another financial crisis, with even worse possible consequences than the 2009 crisis.
What are America’s trading partners to do? America’s trading partners must realize that Donald Trump is not going away, and his policy and trade initiatives are not going away. Also, no matter how America’s trading partners will kick and scream, Donald Trump is not going to lose this battle. To achieve the best possible outcome, in my opinion, would be for America’s trading partners to recognize the nature of the problem, to recognize America’s point of view, and to recognize that they will not be able to negotiate a resolution to these problems unless they are willing to put some things on the table that will appease Donald Trump.
As for Canada, it is highly regrettable that our government did not understand (and/or refused to believe) that Trump’s arrival on the scene marked a sharp departure from the “traditional” ways that most governments do business and, as result, inflamed what was clearly going to be a negative experience for Canada. For example, our government did not understand that trying to “negotiate” with Governors, Congressmen and Senators would not only be futile (given that Trump had left them with no powers to influence), but (given that Trump would obviously not appreciate peer-to-peer negotiating partners to carry on lobbying activities with others) would likely produce a hardening of Trump’s position. Chalk this up to philosophical differences between the leaders of the two countries, and the inexperience of the Trudeau team. Similarly, Canada’s subsequent decision to impose retaliatory tariffs was nothing but a political move by the government in office to rally ordinary Canadians to mount the barricades to “make Trump pay” for his “illegal and unjustifiable” imposition of duties. From a business point of view, Canada did not handle the trade “negotiations” well, but was unwilling to admit that publicly, and attempted to turn a negative to its political advantage. In the meantime, trade uncertainty continues, and Canadians will soon be paying for the retaliatory tariffs. In addition, the invoice for compensation offered to Canada’s steel and aluminum industries announced by the Prime Minister will also be presented to taxpayers. And when we thought things could not possibly get any worse, on July 31, media reported that American officials had taken the “highly unusual step” of rejecting Canada’s bid to take part in senior-level NAFTA talks between the U.S. and Mexico in early August, amid observers reporting a “steady souring of relations between Ottawa and the White House”.
Supported by popular opinion, our government is digging in its heels, apparently oblivious to the long term damage it is doing. On the other hand, Jean-Claude Juncker, President of the European Commission, met with Donald Trump on July 25 and appeared to be the first global politician to “blink” by agreeing to negotiate a pact with the U.S. for the mutual elimination of tariffs, non-tariff trade barriers and subsidies on non-auto industrial goods, and to cooperate on further trade expansion. Canada, the U.S.’ closest ally and friend, should have been at the table first, not the EU. However, the EU appears to have taken a far more pragmatic approach to overcoming the present difficulties, which Mr. Trump will remember, in a positive manner.
Canada has much to lose in this “battle of wills” and, as usual, it will ultimately be ordinary workers, not the wealthy, who will pay paying for the fallout. Right now, the Canadian economy is doing well during the longest-running North American bull market in history. However, when the music stops, quite a few us will have difficulty finding a chair to sit on, burdened by massive levels of debt. More importantly, despite decades of talk, Canada continues to be a nation whose economy depends on the exploitation of natural resources, and we all know that demand for lumber, mining products and other natural resources is cyclical. It behooves us to settle our trade issues with the U.S., even though we will need to make concessions we don’t want to make. In the short run, Canadian business executives need to know whether to invest in Canada or in the U.S., foreign investors need to know whether they should go ahead with plans to invest in Canada, or move to the U.S. In the medium to long term, Canada needs to develop a plan to create sustainable international competitive advantage in new industries, supported by international investment – we cannot do this in the face of major unresolved trade issues with the United States.
Timing for reconciliation with the U.S. Administration is right: Finance Minister Bill Morneau has promised a review of, and action on Canadian competitiveness in the Fall, and settlement of outstanding trade issues would go a long way to restoring confidence in Canada’s ability to work with its long-standing friend and ally, and could be part of a comprehensive package of initiatives to strengthen the nature of Canada’s economy.
My advice to the Prime Minister is to stop playing political games, and recognize that perpetuation of the trade disputes will detract us from building a better and stronger economy for tomorrow. Let’s bite the bullet, let’s determine which “sacred cow(s)” we can give up, and let’s make a deal.