Europe and the World Need to Be Strategically Patient with Trump

Jacob Kirkegaard

Jacob Kirkegaard

Peterson Institute for International Economics and German Marshall Fund

Jacob Kirkegaard is a Senior Fellow at the Peterson Institute for International Economics and German Marshall Fund.

As international delegates begin arriving in Washington, DC, for the first IMF/World Bank semi-annual meetings of the Trump era, among the biggest question facing leaders from around the world is what to make of the Trump administration’s frequently faulty understanding of how the world works. One cannot, for instance, read U.S. Commerce Secretary Wilbur Ross’s restatement of the unfounded link between alleged protectionism and U.S. bilateral trade deficits as anything other than gobbledygook. Rather, it is the empirical link between trade and current account deficits and low national savings rates that is very strong and has been accepted Economics 101 for decades.

Regretfully for the White House, its intended large tax cuts would only aggravate this situation and increase U.S. bilateral and overall external deficits. The real threat of a protectionist backlash by the Trump administration therefore might only materialize in a few years’ time, as an inflationary Trump boom peters out and the man himself gets into reelection mood. Fortunately for America’s main traditional partners in Europe and around the world, such a scenario remains unlikely for several reasons.

First of all, it is important to understand how politically weakened Donald Trump is as president already. Never elected with a voting majority, his approval rating is already lower than either George W. Bush or Barack Obama ever suffered in their eight years in office. Twitter or not, Donald Trump’s ability to command political events is consequently greatly weakened, as he increasingly becomes an electoral liability to his own party and Republican members of Congress.

As a result, it is becoming ever more doubtful that his administration will succeed in delivering a much-needed overhaul of the U.S. corporate tax code and broader tax reform. As controversial a measure as healthcare and not achieved in Congress since 1986, it is hard to see fifty votes in the Senate for things like the new proposed Border Adjustment Tax, without which there will not be enough new revenue to materially reduce headline corporate tax rates as part of a broader, roughly budget neutral tax reform. Another major risk of transatlantic trade tension will therefore likely be avoided without any need for EU retaliation threats or political interventions. Yet, this will be at the economic cost of also abandoning much if not all of Donald Trump’s promised fiscal stimulus and potential structural improvement of the U.S. business tax environment.

Second, it must be recalled that Trump won a surprise victory by also to a significant degree running against parts of his own Republican Party orthodoxy. Hence he is no natural unifier of his ideologically deeply split party. In particular, infighting in the Republican Caucus in the House of Representatives has now reached an intensity where conceptually in legislative matters it begins to make sense to regard the conservative House Freedom Caucus as a separate party distinct from the regular GOP. Donald Trump notoriously promised on Twitter to fight both the Freedom Caucus and the Democrats in 2018. Given that the Democrats plus the Freedom Caucus together have a majority, this is a call that effectively turns his Republican administration into a traditional European minority government in the House of Representatives—one that will have to negotiate for its majority for each policy proposal.

Now, the U.S. constitutional separation of powers traditionally operates such that it is Congress that legislates and not the president, but a president with a Congressional majority of the same party has a critical role in setting the political agenda in Washington. However, in today’s Republican Party, it is doubtful that Donald Trump retains that level of political influence. This matters greatly for issues like trade negotiations or immigration, where the executive branch otherwise has traditionally had a fair degree of independent political decision-making power. If Trump goes directly against the core positions of his own party on, for instance, renegotiating existing trade agreements, expect a Republican-led Congress to explicitly take away the president’s ability to unilaterally withdraw from trade agreements or impose new import tariffs. Republican Senator Mike Lee (UT) has already introduced the Global Trade Accountability Act to subject all executive branch trade measures to Congressional approval.

And third, Donald Trump has proven himself to be an administratively ineffective president, unable to appoint a team that is essentially on the same political page, and with his close family playing an increasingly dominant role. This guarantees that his presidency will continue to be mired in political infighting, ethics controversies, and potentially even be linked to politically explosive connections to Russian meddling in the election process. Unless one is willing to believe that Donald Trump is suddenly willing to excommunicate his close family from the West Wing, genuinely disinvest himself from his business empire, and release his tax returns, the prospects for Donald Trump to suddenly emerge from under all these clouds remain dim.

Without the popularity to push his own agenda though Congress and supported by only parts of his own party, Donald Trump has few prospects for passing the most controversial and economically nationalist parts of his electoral platform. The rest of the world should therefore not get overly alarmed by much of the president’s theatrics. In the end, he will not be able to fundamentally rewrite the American economic order and links with the rest of the world. Rather, he is likely to continue to trip himself up in domestic political drama. The best strategy for the rest of the world to deal with Trump is therefore not to panic, or try to go toe-to-toe with Trump, as he is guaranteed to be willing to go lower, but to simply be patient. “The Donald” is his own worst enemy.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American-German Institute.