I am getting an unpleasant sense of déjà vu!
On 1 March 2018, towards the end of a week when he had been subjected to barrage of negative news stories, US President Donald Trump rushed out an announcement on steel and aluminium tariffs imposed on (highly questionable) national security grounds. Close to a year later, we may be on the brink of something very similar.
Let's us start with the most topical and probably most important 'bad news' for the US President.
- Mr Trump’s approval ratings (on which he is known to focus avidly) have been slipping by an average of around 0.5pp per week since the start of the government shutdown — albeit while remaining well above levels we saw in 2H2016. Expert opinion is that it is far too soon even to suggest that the shutdown stands to have a negative impact on his reelection prospects. Especially since, historically, sinking presidential and congressional approval ratings have tended quickly to bounce back once a shutdown is over. On the other hand, there is still no sign of how the ongoing impasse is going to be broken; and it could soon start to have a significant impact on the real economy, as well as dragging on investor sentiment.
- On 7 February, Mr Trump’s former personal lawyer, Michael Cohen, is due to testify publicly to the House Oversight and Reform Committee (but note that there are reports that he may be having second thoughts as a result of alleged intimidation by the President). Even though Mr Cohen may be restricted over what he is permitted to discuss by the Mueller investigation (eg possible collusion between the Trump campaign team and Russia), his testimony stands to be blockbuster bad news for Mr Trump.
- Meanwhile, Mr Trump’s nominee for Attorney General, William Barr, has stated publicly at his confirmation hearing that, in his opinion, Robert Mueller would not be involved in a “witch hunt”. Even though Mr Barr was (not unreasonably) guarded over how much of Mr Mueller’s final report would be released by the Justice Department into the public domain, this strongly suggests that he would do nothing to prevent the investigation from running its full course.
There are myriad other factors in play too which could hurt Mr Trump (not least the possible failure or minimalist outcome of the ongoing trade talks with China). But these three are more than enough to make it clear that the pressure on him is only likely to increase in the coming weeks.
The events of last February/March are far from an isolated example of Mr Trump’s remarkable ability to seize control of the headlines to his own advantage in what FiveThirtyEight’s Nate Silver recently referred to as “the insane velocity of the news cycle under President Trump”. So, it is an odds-on certainty, in my view, that, as the pressure continues to mount, Mr Trump will do whatever he feels he needs to do to deflect and distract.
Which, acknowledging that it is far from Mr Trump's only option (think North Korea, eg) takes me back to trade.
Last May, following up on the steel and aluminium tariffs, Mr Trump charged the US Department of Commerce with a similar investigation, ie based on ‘national security’, of autos and auto parts. The Department is due to report back with its recommendations no later than 17 February. On 17 January, Senator Chuck Grassley, who speaks regularly with the President and USTR Robert Lighthizer, told reporters:
“I think the president's inclined to do it. I think Europe (is) very very concerned about those tariffs ... It may be the instrument that gets Europe to negotiate.”
Established readers may recall that I have always been sceptical about the ceasefire agreement struck between Mr Trump and Jean-Claude Juncker, the President of the European Commission, last July. It should, therefore, come as now surprise when I say that I think he is probably right on the first count, ie that Mr Trump is minded to impose tariffs, possibly of around 25%, on auto imports from Europe and, perhaps, more widely (Japan? South Korea?). And he is certainly correct about the concern which this prospect raises in the EU which is already looking shaky economically and where there is legitimate concern that a further slowdown could fuel already rampant populism in the run-up to the European Parliament elections on 23-26 May. However, I am less convinced about his third suggestions, ie that tariffs may get the Europeans to the negotiating table.
The problem here is rooted in why there are currently no substantive trade talks taking place between Brussels and Washington. When Mr Juncker left Washington last July he believed he had a deal with Mr Trump to keep farm products off the table. However, the US has since insisted that they must be part of the agenda. But the EU has stood its ground.
[Addendum — 19 January: On 18 January the European Trade Commissioner, Cecilia Malmström confirmed that, as part of negotiations towards zero tariffs for all industrial goods and subject to confirmation by EU members states, Brussels is willing to put the total elimination of auto tariffs on the table in trade talks with the US (and even offered to go otherwise to zero while allowing the US to retain some protection for its truck producers). However, she again rejected Washington's demand that agriculture be included in the talks. And she underlined that if Mr Trump were to impose tariffs on auto imports from Europe, retaliation would be immediate.]
The reason for this is very simple: Europe’s leaders would face a huge public backlash at the prospect of US farmers being given open access to the EU market — think hormone-raised beef, chlorine-washed chicken, GMOs. Whether or not longstanding consumer fears are justified, they are an undoubted and deeply-rooted reality. Thus, much more likely, in my view, is that European officials are correct to warn that auto tariffs would kill off talks completely and trigger EU retaliation.
The bottom line? Although Sino-US trade talks are likely to continue to grab the headlines, as US Treasury Secretary Steve Mnuchin demonstrated yesterday, a sharp deterioration in EU/US trade relations remains a very real and potentially very damaging prospect.