The late Peter Sutherland would smile. Sutherland’s stellar career took in stints as Ireland’s youngest ever Attorney General, youngest ever EU Commissioner, father of the student Erasmus Programme, Director General of GATT and its successor, the World Trade Organisation, topped off with Chairman roles at Goldman Sachs and BP. He was a pretty decent rugby prop forward too. Sutherland’s appreciation of equilibrium at scrum time, laser-like attention to detail and powerful negotiation skills were critical to his success in securing 123 sovereign signatories to the General Agreement on Tariffs and Trade (GATT) in 1993 when the highly complex Uruguay Round of global trade talks were in danger of collapse. He might always have been “Suds” to his friends, but in the international business world Sutherland was the “father of globalism”. And, he truly understood the complexity of global trade agreements. So, what would he make of the Trump regime’s shakedown of the global trading system? Well, as all students devouring legal judgments in the UCD Sutherland School of Law will know, precedent is key. And…..we have Brexit as our stare decisis case study.
Recall the Brexiteer mantra of “Global Britain” and those fantasy soundbites like “we hold all the cards”, “they need us more than we need them”, or best of all “Britannia Unchained”. Sound familiar? In hindsight, the freedom to pursue new trade deals featured far more chains and ridicule than expected. Britain is still to create the promised bi-lateral free trade deals with the likes of the US and India, while Truss-trumpeted deals done in Pacific Rim countries have had no more impact than if these faraway agreements had been signed by penguins. We mentioned “equilibrium” earlier and this really isn’t just a scrummaging thing. The brilliant Nobel Prize winning research by John Nash, featured in Hollywood’s “A Beautiful Mind”, are the foundation of all game theory analysis applied to trade deals. The Nash Equilibrium is a key concept in game theory where knowledge of other players’ strategies (politics) gives no players incentives for deviating from their own strategy. Hence, we experienced a “hard” Brexit. Now, think about China and the US currently engaged in escalating tariff retaliations. Also, remember the Pacific penguins.
The Trump trade team seem to believe they have 70 nations queuing up to sign trade deals with the US. Let’s be very clear, and Britain can attest to same, the signing of bilateral trade agreements (two countries in isolation) is extremely difficult to execute. Peter Sutherland would quickly point out that a change in trade terms with one country automatically opens up the possibility of trade being diverted through more favourably disposed countries eg China production switching to Vietnam during the Trump 1.0 administration. Trade is by definition MULTI-LATERAL and requires Nash-like understanding of game theory and trade negotiation. Britain’s trade delegations can sheepishly tell you all about how their Japan deal negotiations went. The short version is that Japan told Britain any new trading terms would be inferior to the EU because the EU was a far bigger and more important trading partner. Now, cast your minds back to Trump 1.0 and his renegotiation of an existing trade agreement (NAFTA) with Mexico and Canada. This “straightforward” renegotiation took TWO YEARS to complete. The current Trump trade advisory team are delusional about their ability to close out a series of bilateral trade deals in 90 days. Also, there is no Nash or Sutherland on the US team. In fact, it’s far worse than that…
*Trump’s White House Counsel on Trade, Peter Navarro, and his alter false ego Ron Vara, went on TV last night to claim bond yields (which “didn’t intimidate” his mobster boss) were going down while the rest of the sane world saw them continue their worrying climb higher.
*US Secretary of Commerce, Howard Lutnick, continues to laugh hysterically in his media appearances and reassured all viewers on Fox yesterday that the US economy would “explode”. Yes, Howard, that’s what we all fear.
*If you were hoping AI was going to help frame a complex trade agreement then think again. US Secretary of Education, Linda McMahon, was outside her WWE wrestling comfort zone but still managed to stun a panel discussion this week with her comments on how “A1” would impact teaching. Yep, Linda hasn’t really heard the “AI” term in conversation before, and her reading to date on the topic picked up the AI term as “A1” which is a steak sauce apparently.
Not only will trade deals not get done there is now a US institutional credibility issue. As I write, the US dollar, US Treasuries and US stock markets are being sold by investors all over the world. Typically, the US dollar and Treasuries would strengthen in a period of stock market volatility so this is HIGHLY unusual erosion of trust in US governance. There is perhaps worse to come. Lost in the crazy headlines this week was a decision by the US Supreme Court to allow Donald Trump to fire officials leading two independent agencies. Again, the critical point is precedent. These officials have the same legal status as that of Federal Reserve governors. Already, Trump is whining about the Fed not cutting interest rates so the possibility of Federal Reserve Chair, Jay Powell, being removed by Trump can’t be ruled out. We should also be aware that the trade war with China could go financial and some commentators are speculating about the US government reneging on US Treasury interest(coupon) payments. A hint of either of these actions would make this week’s market gyrations look like jelly ripples in comparison. And yet, it’s possible we could have an “Orange Swan” event in the global financial system. Also, if it’s black swans you’re looking for, keep an eye on Chinese internal politics.
President Xi looks like he’s in for the long haul in this trade war with the US, but he’s not sure about his comrades. Latest reports suggest that the second ranking general in the People’s Liberation Army(PLA), He Weidong, has been purged. That level of rank in the PLA being purged has not happened since 1968 during Mao’s Cultural Revolution, and signals some dissent within the Politburo. Regime change in Beijing is a long-shot but most of the action in the near term will be in Washington.
Business decision-making is paralysed and the charts showing US Economic Policy Uncertainty Index in this week’s Financial Times were unprecedented, surpassing even Global Pandemic levels of confusion. Consumers aren’t feeling much better. The results of the University of Michigan consumer survey has just hit the screens and the commentary is ugly:
“Consumer sentiment PLUNGED 11% this month to a preliminary reading of 50.8, the second-lowest reading on records going back to 1952. April’s reading was lower than anything seen during the Great Recession”
This all reads as gloomy stuff but there’s a potentially “beautiful” outcome not quite in Trump’s strategic vocabulary. Financial markets, business and voters are all aligning in rapid fashion and beginning to smell incompetence. Was it only a few weeks ago that Trump’s security team shared military operational details with the outside world in real time via mobile phone chat groups? This week, team Trump stands credibly accused of almost blowing up the world’s financial markets. Whether you’re a Fox News viewer, or an oil worker in Galveston, or a farmer in Idaho you know something’s up and it isn’t pensions, savings or 401ks. Global trade needs great thinkers not spoofers, and the world is calling this ugly trade bluff quickly.
