Merlin Weekly Macro: ‘Here’s Donny!’ – Trump at Davos

Like Jack Nicholson crashing his way through the door in The Shining, menacingly declaring ‘Here’s Jonny!’, Donald Trump did much the same this week with his virtual appearance at Davos. Collaboration? Cooperation? Kumbaya? Not a bit of it. He is competing against them!

Amid The Donald’s miscellaneous electioneering ramblings, he managed to bury the message quite well. But wade through the wanderings of his mind and see through the blizzard of Executive Orders being fired off in all directions this week, underneath is a brutally simple, crystal clear philosophy. Spelling it out from Trump 1.0: ‘A-M-E-R-I-C-A-F-I-R-S-T’; and now Trump 2.0, ‘MAKE-AMERICA-GREAT-AGAIN’. These are not mere electoral slogans; they are a complete ideology. Underpinning the foundations are his four rock solid pillars which drive everything he does: American competitiveness; the American worker; the American taxpayer; and his unequivocal and unembarrassed belief in America itself. Understand that, and the random pieces of the policy jigsaw all slot together remarkably easily, interconnecting into a complete picture.

He's politically astute too. The denizens of Davos annually manage to come away from their week’s deliberations in the snow with an even bigger democratic deficit than when they arrived, so far removed are the patrician decisions from their electorates that the proletariat feels even more disenfranchised. Perception becomes reality. Trump, the disruptive anti-establishment antidote to Davos, is unfailingly on the side of the little people. It is almost a contradiction in terms that a billionaire businessman with many character flaws (actually, an asset in his case) can be the champion of working class America, but that is precisely how he became President not once but twice.  

Tariffs

As we’ve talked about before in these columns, tariffs are not merely a trade barrier, they are a geopolitical lever. To think of Trump as isolationist and anti-globalist is completely to miss the point. He knows that at 25% of global GDP, the US is the world’s biggest consumer economy. Sustainable economic expansion, however, requires wealth creation and an affluent society. It needs capital with which to fuel it. The US economy might be dominated by the US consumer which directly drives over 70% of GDP, but it is not an island.

He has a problem with countries (in his terminology, ‘counterparties’) which have large trade surpluses with the US, and especially those which he also sees as being on the take, for example where the US is either paying for or underwriting their defence expenditure (e.g. Germany and Japan). So here’s the deal, just as he put it to the shocked and nervous campers at Davos: by all means sell us your cars, washing machines and microwave ovens; if you build factories in which to make them in America and create American jobs, I’ll give you a great big tax incentive (lifted straight from Joe Biden’s Inflation Reduction Act, his IRA, but there it was only applicable to the ‘green’ economy; for Trump, it applies to all imports); if all you want to do is make them at home and ship them over the water, I’ll land a great big tariff on you, I’ll collect the revenues to fund US tax cuts; the choice is yours.

And while the rest of the world is trying to harmonise on tax, removing it as a national competitive lever, Trump is doing precisely the opposite: he is overtly using corporate tax incentives as a deliberate lure. Trump does not see global trade as a nil-sum game: he only sees winners and losers. He of course is a winner; in his mind, compromise is for losers. Alongside trade tariffs, corporate tax for him is a war-winning weapon.

If he succeeds, Trump’s actions will have two marked effects: first, they will distort the global allocation of capital in the US’s favour; second, they will create directional change in global trade flows as countries which export to the US are forced to find different lower friction routes to market for their products. We have already seen evidence of this happening because of Joe Biden’s ‘Made in America’ incentives in his IRA. Potentially inflationary tariffs pose a challenge to the central banks and their deployment of monetary policy: interest rates are most efficacious in influencing domestic consumer behaviour on the demand side of the economy. What Trump is manipulating are the global supply side dynamics which are far less susceptible to the effect of a change in national interest rate policy.

The Artificial Intelligence Revolution

Trump probably has no greater insight than the rest of us about what AI will achieve. But his billionaire tech buddies have told him it’s going to be not just big, but huge. The control of data and its outputs are going to confer significant geopolitical leverage. Data is power. In yet another game of winners and losers, Trump is going to ensure that the US is the AI power-house. At the Federal level he sees his job as providing secure foundations on which to exploit the potential.

Hence half a trillion dollars of investment in semiconductor chip foundries (so he’s not reliant on Taiwan or China), data centres for storage and processing (no sub-sea cables to be cut by the Russians) and electricity. And lots of electricity to meet the burgeoning demand as the AI industry rapidly expands. It will be from full-time generating sources, not intermittent means such as solar and wind.

Trump has launched an international AI arms race which he is determined the US will win.

Drill Baby, Drill

Which leads seamlessly to his energy policy. As he describes it, oil is ‘the liquid gold beneath our feet’. It confers a strategic advantage over Europe, China and India. The US is energy self-sufficient in the way that none of his competitors is. America is master of its own destiny in energy supply, not at the mercy of foreign governments.

He made two promises on the stump. To the public, he said he would ‘bring prices down’.  Pumping oil and lowering or maintaining the price of gasoline and heating oil is what he can do at the federal level to help the cost of living crisis while real wages catch up to take the burden off household budgets. The second was to US industry and helping its competitiveness: he cannot control global commodity prices, nor does he determine wages; but he can help reduce energy costs, a significant component of total production costs.

Paris Climate Accord

Which in turn links directly to his second withdrawal of the US from the Paris Climate Accord. At the state and corporate levels, be sure that policies will continue to help mitigate against global warming. The US will not simply stop fighting climate change. But at the federal level, Trump refuses to entertain the notion of what he sees as national penury and a submission of national competitiveness and the destruction of American jobs on the anvil of climate change policy while China and India play by what he sees as different rules. Antediluvian? Anti-social? Pragmatic? It depends on your point of view. But at least for four years, the world is going to have to live with it, and adapt to it, like it or not. Remember, Trump sees this as competition not collaboration.

Getting the US taxpayer off the hook

Trump is determined to make central government as lean and efficient as possible. Hence the appointment of Elon Musk to blow up the machinery of government and to start again. With all his obvious attributes and his equally apparent flaws, whether Musk is a political asset or a liability remains to be seen. As we discussed a couple of issues ago, the Republicans are deeply concerned about the government deficit and the level of debt.

But Trump worries about the liability to the US taxpayer as regards foreign policy. He resents how much as been spent on Ukraine. It is that rather than any care for the country or sympathy for the Ukrainian people which is driving his desire for a peace solution between Putin and Zelensky. There is a simple economic calculation at work: if a deal is not forthcoming, should he keep funding Ukrainian defence, or if he turns off the funding taps and Ukraine folds, is it going to cost America more defending Europe if Putin attacks somewhere else.

Which then directly informs his policy on NATO. He is going to demand that the qualifying minimum defence expenditure rises from 2% of GDP to at least 3%; he will not guarantee to defend any country he deems to be delinquent or cheating (it is speculated that he will also demand a bang-for-buck audit of all members, not only focusing on economic inputs but hard, empirical defence outputs). He (and it is a widely held view in the US) resents that however much progress has been made getting to 2% across nearly the whole membership, even if they are technically compliant still too many NATO countries effectively abrogate their national and mutual defence responsibilities to the US.

Corrosive, combative and competitive

The contrast between a new American government full of vim, innovation, self-confidence and direction, and a rudderless insecure Europe mired in the glue of regulation, homogenising and pasteurising everything it touches, cannot be starker. In 30 years, the US has remained at a quarter of global GDP; what today constitutes the eurozone has surrendered ten percentage points of share over the same period from 24% to 14%. It is difficult not to see that gap widening further.  

Trump is a man in a hurry. The Republican Congressional clean sweep is only guaranteed for 17 months. While Republicans are unlikely to demur from anything discussed above, as has already been seen in only a handful of days, there are many in the government camp who are deeply unsettled by Trump’s social policies, particularly what they regard as illegal and immoral deportation orders. Trump has the hide of a rhino. He will win some and lose some (and those he loses in the courts he will state categorically that he made the order, you watched him sign it, the system blocked it). But what is abundantly clear, especially for foreign leaders, is that until they really appreciate what makes him tick, how the pillars of his mandate drive every iota of his philosophy, they will probably tackle him the wrong way. And come off worst every time.

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