The Branded Economy

Last week Donald Trump, in his own estimation, succeeded in replacing what he claimed to be the "worst trade deal in history" with what he claims was "the best trade deal in history." If true, this would not only make good on one of his central campaign promises, but it would be a genuinely significant development. In reality, the unveiling of the United States-Mexico-Canada (USMCA) trade deal is just the latest iteration of the President's talent for branding. As is the case in other aspects of the president's view of economic matters, the difference between then and now is almost purely semantic.

As originally written in 1994, the North American Free Trade agreement (NAFTA) comprised hundreds of pages organized into 22 chapters. As Canada and Mexico are the United States' largest trading partners, the agreement covered countless industrial, agricultural, and service sectors. Since then it has gone through many updates and expansions, adding to its complexity and reach. But during his campaign, Trump continuously faulted NAFTA, which was drafted during the Bill Clinton Administration, as a primary source of America's economic woes. He promised to scrap it and replace it with something better. In a Rose Garden ceremony he was careful to point out that the new deal was not "NAFTA 2.0" but an entirely new animal. But that is just not the case.

As far as anyone can tell there are only a few differences between the two agreements, focusing on autos, dairy, and intellectual property rights. And even those changes are not particularly significant.

For instance, automakers can qualify for zero tariffs if 75% of their vehicles' components are manufactured in the U.S., Canada or Mexico, up from 62.5% under NAFTA. These changes amount to rounding errors in areas that are notoriously opaque to begin with.

USMCA's provisions on wages for auto-workers are potentially a bigger deal. Starting in 2020, 30 percent of vehicle production must be done by workers earning at least $16 per hour. That's about three times the wage of the average Mexican autoworker. The percentage rises to 40 percent in 2023. This may lead some to believe that big changes are afoot. But given the current rise in automation this may not make that big an impact. It also may mean that more cars made in Mexico will simply be shipped to other markets, thereby depriving U.S. consumers of inexpensive cars.

Canada also agreed to loosen its restrictions on dairy imports from the U.S., allowing American farmers to expand exports for about $560 million worth of dairy products. That's about 3.5% of Canada's dairy industry, and less than 1% of ours. While this may be a small hit to Canadian farmers, it will actually benefit Canadian consumers, and will be a rounding error for U.S. farmers.

USMCA's tougher intellectual property rules may make the biggest impact. The pact includes new rules that will make it harder for Canadians to buy patented drugs at prices below rates that are available to Americans. While this will certainly raise drug prices for Canadians, it is far from certain, as negotiators suggest, that it will lead to lower prices in the U.S. In fact, prices will rise for U.S. patients who have been able to buy cheaper drugs in Canada.

That's basically it. Everything else stays more or less the same. I can't imagine how the agreement will make any significant changes in the size and scope of trade on the Continent. But that hasn't stopped Trump from claiming that he has reinvented the wheel.

For the last few months, while Trump has touted the successes of his tariffs, the actual American trade deficit has expanded remarkably. The deficit jumped by an astonishing 9.5% in July to hit $50.1 billion, the highest monthly increase since 2015. A further expansion to $53.2 billion in August confirms that this was no anomaly. But if the President says that "we are winning on trade" loud enough he hopes that people believe it. Perhaps they will.

In his Rose Garden press conference announcing his new trade deal Trump put America's trading partners on notice that they should "consider it a privilege to do businesses" with us. As I argued in a March commentary earlier this year, Trump fundamentally does not understand how trade, and more precisely trade deficits, actually work. Is it really a privilege for our trading partners to loan us money that we will never repay so we can buy their stuff on credit? In my estimation, we are the ones enjoying the privilege. We are consuming more than we can actually afford. But in Trump's logic, that means we are being robbed. It takes a hell of a salesman to pull that one off, and Trump always rises to the occasion.

Trump pulled the same stunt with his "Obamacare Repeal." When he did away with the "individual mandate" (the requirements that taxes must be paid if individuals fail to get insurance) he claimed at the time that he had "fixed" America's broken health care system. Nothing could be farther from the truth. Obamacare was, and is, a clear disaster that is destined to fail. But the only thing that made it at least temporarily viable was the requirement (in my mind unconstitutional) that those who don't have insurance must pay a fine. That requirement kept younger, healthier people in the risk pools longer. By doing away with the mandate, Trump simply moved forward the date in which the system goes bankrupt. This solves nothing yet sets Republicans up to be blamed for the failure. But for now, Trump just declares "victory" and walks away.

Trump is doing the same when it comes to the economy in general. During the campaign he continually derided the improving economic statistics as "bogus." But all the economic and market trends that are currently in place began during the Obama Administration. During the campaign I agreed with Trump that the economy was not at all as good as the pundits claimed, and that the real unemployment rate was much higher than the rosy numbers cooked up by government statisticians. He was also right to point out that the jobs being created then were not the high paying jobs Americans really craved. But ever since he won the election his story has changed completely. Now he argues that the economic statistics are 100% reliable. But just for the record, average monthly job creation is essentially the same during the Trump administration as it was during the Obama years, and wage gains continue to lag inflation. Despite that, Trump claims the current economy as the "best in the history of the country."

The same holds true for stocks. During the campaign Trump argued that the average 22% gain in the S&P 500 during the Obama administration constituted a "big, ugly bubbly." He was right. Stocks have continued to rally during his time in office...but at a rate lower than was averaged during Obama's reign. But gone are his bubble claims. Now he sees the stock market is the best gauge of economic health.

So that's his playbook. Substance does not matter. It's all an exercise in branding and marketing. Throw a big gold name on building and hope no one notices that the building itself is made of plywood. Claim that you are a self-made billionaire, who succeeded with minimal help from his father, burnish that image on TV, and deny any report that is contrary to that narrative. It works better than you can imagine.

So we have entered an age where substance has not only taken a back seat to style, but has been left completely on the side of the road. Trump is the ultimate salesman, but at some point the quality of the product actually matters. We have the "Trump Steaks" economy. The packaging looks good but the meat isn't. In this environment I am convinced that the next economic calamity will arrive without any advanced warning or preparation. Just like the last one. Only this time I believe it will be much worse. Deregulation and tax cuts for the rich may once again be unfairly blamed for the problems, setting the stage for a Democratic administration far to the left of Obama to come rescue the economy with socialism. But next time the Fed may not able to provide the kind of backstop in did in 2008 and 2009. Nor should we expect our trading partners to ride to the rescue. Under those circumstances the dollar will be in danger of losing its role as the reserve currency, finally revoking the privilege that all Americans have enjoyed for more than 75 years.

Read the original article at Euro Pacific Capital