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  • President Trump’s ‘Xanatos Gambit’ Trade Policy

    Posted by Trent Telenko on April 27th, 2019 (All posts by )

    I’ve written previously in my column “President Trump’s ‘Xanatos Gambit’ Government Shutdown” of President Trump’s tendency for building political strategy trees were every possible outcome is to his advantage. (See the “Xanatos Gambit” strategy tree example in the figure below)

     

    https://static.tvtropes.org/pmwiki/pub/images/XanatosGambitDiagram_7509.jpg

    This is a decision diagram example of a “Xanatos Gambit. Source: https://tvtropes.org/pmwiki/pmwiki.php/Main/XanatosGambit

    It very much looks like President Trump has done the same thing with the Democrats and “China lobby” GOP Senators with the post-NAFTA US-Canada-Mexico (USMCA AKA “You Smack-A”) trade agreement and the US economy.

    THE US ECONOMY, NAFTA & USMACA

    The key thing you need to understand regards NAFTA and American manufacturing is that NAFTA was geared to allow the “China lobby” of multinational corporations to use Canada and Mexico as an “international arbitrage opportunity” for Chinese slave labor wage manufactured goods to be assembled at Canadian and Mexican production facilities and avoid American tariffs.

    Multinational corporations exploiting this “international arbitrage opportunity” was “The Great Sucking Sound” that Ross Perot talked about which killed the US domestic refined metals industry and hollowed out middle class manufacturing jobs in the American economy.

    President Trump’s USMCA removes that “international arbitrage opportunity” via original 75% North American manufacturing content requirements for metals and intermediate manufacturing goods as well as a Mexican minimum wage rules on the order of $15 an hour for automotive parts assembly.

    In response the “China lobby” has been paying large campaign contributions to both House Democrats and “free trade” GOP Senators to try and keep NAFTA, as well running info-war spots everywhere in the corporate media and “movement conservative” publications/media outlets about the benefits of “free trade.”  This has resulted in public statements by Speaker Pelosi that the House does not intend to vote for USMCA.

    This is where Pres. Trump’s ‘Xanatos Gambit’ strategy tree kicks in via a macroeconomic and trade policy manipulation of the very simple economic equation of gross domestic product:

    GDP = US ECONOMIC ACTIVITY + EXPORTS + FOREIGN INVESTMENT – IMPORTS – EXTERNAL INVESTMENT

    The American economy just grew 3.2% in the 1st quarter of 2019.  It would have grown another 0.3% but for the 30-odd day federal government shut down.  The “markets” were expecting 2.5% GDP growth.  The huge half-percent GDP “miss” boiled down to:

    1. The USA exported more.

    2. The USA imported less and

    3. There was more external foreign investment than expected.

    All three were the result of a combination of Trump administration policies on oil/LNG fracking, tax & regulatory cuts and trade/tariffs.

    First point, the USA will be a net energy exporter — of oil, natural gas & coal combined — in 2020 if it isn’t one already.

    Some rough numbers:  In 2012 US oil production was ~8 million barrels a day, all for domestic consumption, and in 2019 it is 12.6 million with some exports.  Today’s US oil consumption is 20 million barrels a day.  That increase in oil production that has reduced imports of oil by a net of 4.6 million barrels a day has also been accompanied by the displacement of coal and oil in both electrical production and manufacturing by cheaper natural gas, thus freeing both the coal and oil not used to be exported. This combined economic change since 2012 alone is worth a 1% increase in GDP growth a year compared to 2012.

    Second, the Trump administration’s systematic and sustained attack on Obama era federal regulatory growth is reducing business compliance costs particularly in the energy sector for new infrastructure projects.  These are the “anti-green” actions the Democrats accuse the Trump administration of.

    Third, the Trump administration/GOP tax bill, in addition to increasing spending power for the middle class, has had a huge -YUGE- reduction in capital gains taxes and a one-time break in repatriating overseas capital holdings. This has made America a much more attractive place to hold and invest money.  Particularly for energy companies like Exxon, which are dropping this foreign capital inflow into the Permian basin for oil and natural gas fracking and energy export infrastructure from the Permian to the Gulf Coast.

    Finally, in terms of trade and tariffs, President Trump’s tariffs on Chinese steel and aluminum combined with the business implications of USMCA rules have made further investment in Canadian automotive plants a net loss position.  American metal content is now economically competitive for energy sector infrastructure and automobile parts such that US Steel among others are reopening US metal plants.

    Taken together every part of the GDP equation has been directly affected by the Trump administration macroeconomic policies to get that 3.2% GDP number.

    This is where the Xanatos Gambit for USMCA arrives.

    Things will be worse for the China lobby without a vote on USMCA than with one.

    Short form:

    NAFTA is dead regardless of any action or inaction by the House.  All the House and Senate can do is not vote on USMCA.  The legislative branch cannot revive a NAFTA trade agreement the federal executive has withdrawn from.

    This means without a signed USMCA trade deal Pres.Trump can — and will — lay on even more tariffs on the multinational corporations playing price arbitrage in Mexico and Canada between Chinese and American manufacturing.

    While such trade sanctions can reduce the American economy like a tax increase, when we are likely at close to 4% economic growth in late 2019 to early 2020 from the accumulated investment in energy projects bringing defacto energy independence, a 3.5% economic growth rate with tariffs is still pretty good.

    And when the House refuses to vote in USMCA, NAFTA still dies.

    Pres. Trump can and will lay on new massive new anti-Chinese tariffs on Canadian and Mexican front companies for China without USMCA rules.  This will be massively popular in the Midwest in an election year and will hurt the income streams of the multi-nationals supporting the Pelosi Dems and McConnell RINOs.

    From Trump’s point of view, What’s not to like about America’s manufacturing base employing the Midwestern white working class growing while the “international arbitrage opportunity” of China’s slave labor economy contracts?

     

     

    28 Responses to “President Trump’s ‘Xanatos Gambit’ Trade Policy”

    1. Gavin Longmuir Says:

      “While such trade sanctions can reduce the American economy like a tax increase.”

      Maybe. Economies are so complex, with so many moving parts — some parts approximating to the theoretical supply/demand curves and other parts behaving differently.

      Contrary to the Free Trade lobby (which seems to be divorced from any reality other than getting paid to lobby), the US has been losing a trade war with China for decades; the US trade deficit is all the proof of that one needs. Since President Trump started fighting back (over the opposition of an apparently bought-&-paid for Congress), things have happened which did not conform to the Free Traders’ simplistic model. China cut back some of its taxes on exports to help Chinese manufacturers still sell goods in the US at the same price to the customer. In effect, the US tariff became a US tax on the Chinese government! What is not to like?

      If a tariff does indeed result in an increased price for US consumers, that certainly would be a negative for those consumers — but not necessarily for the US economy as a whole, because the tariff income goes to the US government and is promptly spent in the US. If the higher consumer price allows US businesses to reopen and hire workers who generate further economic activity through the multiplier effect and pay taxes, that positive for some producers has an offsetting effect on the negative for certain consumers. Overall, will the tariff be a net positive or negative? That is hard to say, and probably varies from product to product.

      Bilateral free trade between near-peers with similar regulatory burdens should allow for the theoretical benefits of Comparative Advantage, where everyone is better off. But unbalanced trade rules between a low tariff US and a mercantilist China has been a recipe for losing an economic war. No wonder the Chinese liked the deal they had pre-Trump.

    2. Roy Kerns Says:

      Very interesting arguments, Trent. I have difficulty in simply listing the multitude of factors shaping trade. Trying to create a mental model of how these factors interact proves even a bigger challenge.

      How, for example, does one balance your “very simple” equation for GDP (even if it were correct) with trade offs (no pun intended) about how tariffs and trade restrictions: a) raise costs to U.S. consumers; b)decrease the likelihood that, say, China develops a part of its population who gain from China’s GDP equation enough that they have a huge interest in China not making problems with China’s customers; etc.

      Meanwhile, on the other hand: what sanity is there in a trade policy which makes great economic sense (assume it does) but which means the U.S. cannot itself sustain its construction trades much less its military? (Go into a Lowes or Home Depot and try to buy bolts, screws, hardware not made in China; visit Pittsburgh and other mill cities and wonder how come there are square miles of ghost inhabited mills and factories, then wonder where the metal comes from for armored vehicles)

      While I cannot recommend abandoning thinking about the factors and trying to create a model (informed, responsible citizen and all that), I find myself at least a bit skeptical about any simple equation. More than for the fabled 3-body problem of physics, even a numerical approximation may have serious limits. A computer program type multi-variable model, where I can tweak inputs to see how they change outputs, relies on the assumptions shaping the program, ie, depends on how close the correspondence is between model and reality. For a parallel, think of the enormous (denied) errors of predictions by climate models, whose assumptions define the results.

      Xanatos GAmbit observations lead to hoping Trump et al have better thinkers than I am….

    3. Pouncer Says:

      So then do we have any evidence that China is behind any sabotage of Boeing?

    4. Bill Brandt Says:

      An astute analysis, I believe.

      I have thought in the last few days of the promises made for NAFTA, and the assumptions before the China floodgates opened, both proven wrong.

    5. David Foster Says:

      Pouncer…”So then do we have any evidence that China is behind any sabotage of Boeing?”

      The failed angle of attack sensor was from a Minnesota company. The engineering management decisions to trim down repeatedly based on a single sensor weren’t made in China. I don’t know where the software changes to implement those decision were written, but by all accounts it performed as specified. I don’t see any reason to believe that China had anything to do with these accidents, or that they were caused by sabotage in any form.

    6. Trent Telenko Says:

      Gavin,

      There is no such thing as free trade between a free and unfree society.

      There is only managed trade because “comparative advantage” is determined for political and not economic advantage .

      Since NAFTA to Trump, China has managed US-China trade.

      Since Nov 2016, the Trump Administration has.

      The difference in U.S. economic growth reflects this new reality.

    7. David Foster Says:

      Here’s an interesting-looking analysis of *who pays* for increased US tariffs on Chinese imports. Their two-line summary is: “We calibrate a simple economic model and find that a 25 percentage point increase in tariffs raises US consumer prices on all affected Chinese products by only 4.5% on average, while the producer price of Chinese firms declines by 20.5%. The US government has strategically levied import duties on goods with high import elasticities, which transfers a great share of the tariff burden on to Chinese exporters.

      Haven’t yet had a chance to read the detailed analysis, but here’s the summary:

      http://www.econpol.eu/publications/policy_brief_11

    8. Whitehall Says:

      We could mine and enrich a lot more domestic uranium, maybe enough over our own needs to export but the regulatory burden on uranium mining and milling is relatively huge.

      I would add that besides the infamous Uranium One deal the Obama administration seemed to be actively killing off our domestic uranium enrichment industry too. Obama put much of our major uranium district (the Colorado Plateau) into some no-mining status by executive order.

      Note that Uranium One was not about Russians “stealing” our uranium resources but rather about reducing a competitor to producers controlled by Russians.

      However, this is small beans compared to LNG and coal exports.

    9. MCS Says:

      The first rule of war is that you can’t win a battle you won’t fight. The classic strategy is to let the enemy overextend himself in pursuit then cut him off at the knees.

      Anybody paying the slightest attention knows that the Chinese economy is over extended in many places such as metals production. This allows Trump to pick and choose where he attacks so that he inflicts the most damage on China and their allies at the least cost to us. This also lets him lower sanctions on one sector when things start to move the right direction while raising them in another to maintain momentum.

      China is especially vulnerable in iron and steel. As far as I know, they import nearly 100% of their iron ore and metallurgical coal. They have to pay for these in hard currency. About the only advantages that China has is in low labor cost and environmental indulgence. The trend for both is moving in the wrong direction.

      Trump talked about closing the Mexican border and elicited a predictable response. Reallocating personnel from border crossings to illegal entry enforcement has the same effect. We’ll never know whether this move was all part of the plan or something that came up after.

      The difference is a willingness to take action rather than make another speech.

    10. Anonymous Says:

      Davis, Whitehall, MCS,

      What you are all describing is the Trump Administration managing U.S. – China trade for maximum U.S. Political Advantage.

      Per the report cited, Chinese industry is paying most of the price of the Trump Administration tariffs and the benefits are concentrated in the U.S. Metals worker labor market.

      I’ll add that the parasitic multinational corporations in Mexico and Canada living on the refined metals arbitrage advantage of the old NAFTA trade regime are also losing their shirts to the advantage of the U.S. Auto parts labor market

    11. MCS Says:

      It’s called winning.

    12. Gavin Longmuir Says:

      Trent: “There is no such thing as free trade between a free and unfree society.”

      Strongly agree! The fascinating thing is there are intelligent people around who are so mesmerized by simple equations that they believe unilateral free trade is a smart idea. As someone once said — There are ideas so dumb only an intellectual could believe them.

      Within the community of free trade aficionados, there is too much focus on monetary tariffs and not enough recognition of the importance of non-tariff barriers. Differences in regulations between countries are very significant non-tariff barriers. So are strange requirements such as the EU’s insistence that imported bananas do not have excessive curvature. One of the most difficult non-tariff barriers is consumer preference — most of the automobiles imported into Japan are Japanese brands manufactured in other countries, because there is very strong social pressures on Japanese citizens to buy Japanese vehicles. Even if another country could provide vehicles better and cheaper, it would not matter.

      The real question for Free Traders is — if free movement of goods is desirable, what about the free movement of labor?

    13. Trent Telenko Says:

      Anonymous above was me.

    14. MCS Says:

      Like a lot of other problems the sort of “free” trade where we accept unlimited duty free imports while ignoring lack of reciprocity started as a result of WWII. The alternative was extending the Marshal Plan indefinitely. It was extended to Asia as a way of fighting Communism and increasing good will. Like NATO and every other government program, it is now seen as some sort of basic human right and any hesitation on our part to pick up the tab as a violation.

      Eight years isn’t going to be enough to change direction and the noises coming from the Republicans guarantee that we won’t have longer.

      if you look closely, you’ll see Japan, Korea and Europe loosing their ship building industry to China.
      https://gcaptain.com/knud-e-hansen-designs-ice-class-hybrid-roro-vessels-finnlines/

    15. Mrs. Davis Says:

      Let’s see, from the founding the main source of revenue for the federal government was tariffs, a tax on consumption and foreigners. Tariffs couldn’t be raised too high because consumers would squawk. So federal revenues were constrained. Growth in the last half of the 19th century was about 4%+ as I recall.

      Then we implemented the progressive reforms including the Federal Reserve and income tax, tax work, introduce unaccountable regulatory state, and reduce tariffs (prices) for imports. And growth rate has been declining ever since.

      I dunno.

    16. David Foster Says:

      Tariffs were an issue in the run-up to the Civil War…they were viewed as benefiting the North and harming the South.

      But, of course, there was no law or natural phenomenon preventing the South from developing its own manufacturing, which would have made them much less import-dependent.

    17. MCS Says:

      Slavery is what prevented the South from developing manufacturing. Free immigrants didn’t care to compete with slaves. Chernow’s Washington biography shows how the system worked. Washington would import a craftsman, usually by indenture. This man would then train slaves as carpenters or whatever. Much of the Capitol was built by slaves, rented out by their owners. I expect that most of the indentured workers moved north at the end of their contract.

      The planting economy and very poor roads made importing from England easy since that is where the cotton was sold. The Northern economy was much more dynamic, it was where all the money from the slave trade and trade in general went. The South lacked opportunity for anyone that didn’t have the money to purchase land and slaves.

    18. David Foster Says:

      There were some serious efforts to develop industry in the Old South, especially by William Gregg, a builder and promoter of textile mills. He had limited success in interesting the leadership class in such development, partly because of the difficulty of recruiting skilled labor, as noted by MCS, but also because manufacturing just wasn’t something that the Cool Kids of that time and place were supposed to be involved in.

      There is some echo of this in rather negative and even contemptuous attitude toward manufacturing in the US that has been common (on a bipartisan basis, though especially on the Left) in recent decades until just the last few years.

    19. MCS Says:

      The best description of the post-industrial service economy was two people selling each other insurance.

    20. Trent Telenko Says:

      MCS said:

      >>Eight years isn’t going to be enough to change direction and the noises coming from the Republicans guarantee that we won’t have longer.

      Pres. Trump was always going to be an “Indian Summer” on the way to very troubled times in America.

      What he can do, and is doing, is hugely strengthen the American economy and vastly damage America’s enemies.

      Structurally, an energy exporting America with high tariff’s on Chinese goods and possibly an entry toll system on a walled Southern border are all Federal government income streams that the FAT Cats in DC will be unwilling to give up.

      The Federal judiciary he appoints and the restructured US Economy he leaves behind will be legacies that will take a great deal of fugg-headedness to tear down.

      And the economic collapse of Iran and Russia a’la Venezuela seems to be his goal vis a vis America’s enemies through building up America’s energy export sector.

      Since the Russians are scrapping their sole carrier and both their nuclear battlecruisers, as well as suddenly being interested in arms control agreements on nukes and military AI, these actions argues Pres. Trump is succeeding here as well.

    21. Grurray Says:

      A couple weeks ago Trump said that if it wasn’t for the Fed’s monetary tightening regime the stock market would be 20% – 30% higher and GDP would be 4% instead of 3%.

      I’m not so sure about the GDP, but he might be right about stocks. The bond markets reversed last fall while the Fed was still talking about raising rates, and the mismatch caused stocks to fall into the end of the year. The Fed has been backpedaling since the start of the year and is probably going to be forced to lower rates sometime soon. They have been relentlessly behind the curve.

      Whatever the actual number, auditing the Federal Reserve and exposing their operations to public scrutiny will only be good in the long run for America and the economy.

    22. Mike K Says:

      from the founding the main source of revenue for the federal government was tariffs, a tax on consumption and foreigners. Tariffs couldn’t be raised too high because consumers would squawk.

      Tariffs were in place to protect American industries as they developed. They were also a source of revenue but that was not the main reason.

      McKinley was for high tariffs as the American Industrial Revolution was still going. The railroads had driven the economy for years but were finished. Steel and oil were just getting going. There was a point where they became counter productive, as with Smoot Hawley after we had the biggest economy and Europe was trying to recover,

      Now, we are at the end of a period of deindustrialization as we have exported our steel and auto industries to China and textiles to Indonesia.

      Tariffs may be a reasonable way to rebuild the industry that was exported. Google, Apple, Facebook and Microsoft don’t make anything but dominate our economy. Apple designs things but they are made in China. “Knowledge workers” are being replaced by H1B visa holders who function as wage slaves.

      The Wall Street Journal is not a reliable source for news about the economy anymore, except stock prices.

    23. miguel cervantes Says:

      yes, they leave out the first 150 years, now one needs to calibrate between a fordney mccumber and the smoot Hawley version, and don’t trigger it right after a stock market bust,

    24. Trent Telenko Says:

      Mike K said –>

      >>The Wall Street Journal is not a reliable source for news about the economy anymore, except stock prices.

      There are no trustworthy sources on the American economy anymore.

      Media outlets are are reporting political and corporate “narratives” about the economy that have very little relation to reality.

      Between Trump Derangement syndrome and the innumeracy of the reportorial class, they have no clue and could care less if what they are reporting is true or not.

    25. Trent Telenko Says:

      Grurray said –>

      >>A couple weeks ago Trump said that if it wasn’t for the Fed’s monetary tightening regime the stock market would be 20% – 30% higher and GDP would be 4% instead of 3%.

      Pres. Trump was calling out the Fed on interfering with the American economy to make sure he loses in 2020.

      The refusal of the nominally GOP controlled Senate to put a man Pres. Trump trusts onto the Fed board tells you all you need to know about what is really going on here.

    26. Grurray Says:

      Even for stock prices the WSJ isn’t really that great. Their charts are just so-so. Other valuation data can be easily found elsewhere. I don’t know how they justify their high price anymore.

      As for the Fed, unlike most I actually believe Trump is a good businessman and knows perfectly well the precarious state of the government’s finances. Trump’s big concern is the rising deficit. In order to rally reticent Republicans to his side during the darkest days of the Russia hoax, he had to look the other way when they rammed through the omnibus spending bill. Now with higher rates increasing government borrowing costs, the bursting budget could soon cause a bigger economic explosion. Powell and the Fed have an agenda that has diverged from the Executive’s in ways quite different from what we saw during the Obama, Bush, and Clinton administrations.

    27. Anonymous Says:

      Mostly off topic, but you have to admire the flow-chart gambiteer’s commitment to their opponent’s bad press when, rather than fight you with a dragon, an army of mooks, and their heir all at once, they’d rather fight you one-on-one and accept their own death provided they make you look bad.

      I guess I’m saying the gambiteer is really dumb and/or has really skewed priorities.

    28. raymondshaw Says:

      Trent, sorry to quibble, but US oil consumption is not 20 MM barrels/day. Refinery runs are currently about 17 MM barrels/day. Crude oil
      imports are running in the range of 6.5-7 MM barrels/day, while refined products export are running about 5.5 MM barrels/day. These numbers come from OilPrice.com Intelligence, which comes out about twice/week. Getting the actual domestic consumption is tricky from this source, as
      inventory buildup and drawdown varies seasonally, as do these other production numbers. I would guess that actual domestic consumption is somewhere around 16MM barrels/day, say + or – 1MM barrels/day. There was a time when we did consume over 20 MM barrels/day, probably 20 years ago. Back then, we consumed 500,000 barrels/day of road tar.