Donald Trump played the US-UK trade deal for all it was worth by hailing it as the opening of the floodgates for deal after deal to follow and Sir Kier Starmer – although slightly less effusive – was also smiling like the Cheshire cat. Yet the rest of the world was broadly underwhelmed. Was this it?
It sounded like a bunch of football fans having watched their side score the first goal in the first match of the new season and immediately extrapolating the chances of them winning the league. It’s not a bad start but it’s not much beyond that. Trade deals, comprehensive ones, take tens of thousands of hours of negotiation to perfect. What we got was the outer shell of a framework deal.
Has Starmer been humbugged by Trump or has he played a blinder by stroking the Donald’s ego and overcoming inertia in the way in which railway engine drivers have cleverly learnt to push their train backwards before going forwards?
As a matter of coincidence, I had seen the Prime Minister early yesterday morning as he gave the opening address at the London Defence Conference to which I had very kindly been invited and of which I can only say that I wouldn’t have missed it for all the world. He very much hit the right tone when outlining the threat that Russia poses and by adding that he would never have thought that he would in his lifetime see Russian tanks entering a European country again. In my lifetime they have been at it in Hungary in 1956, in Czechoslovakia in 1968, in Moldova in 1992 – with Ukrainian backing – and in Georgia in 2008. The status of the independent Chechen Republic of Ichkeria is debatable, but it too enjoyed the pleasure of Russian tanks crossing its borders.
When I was a kid growing up in Switzerland we used to tell the joke of the American, the German and the Russian. The American says: “For local stuff, we use the Chevy Impala but, for long distance, we take the Cadillac”. The German replies: “Ja. For local we have ze VW Beetle and for ze long distance we have ze Mercedes”. The Russian finished off: “Locally we use Lada but when we go further we take tank”. I suppose the 30 years from the early 1990s to the early 2020s were the mirage and all that Russia has done is to revert to predictable form. Not that that helps us a lot until we acknowledge that it is we who had critically misread the runes. I digress.
Starmer spoke well until he reverted into his practiced routine rhetoric about jobs and prosperity for working people and how much his government was planning to spend on defence. He seemed far more interested in how many skilled jobs the defence industry was about to create than to what purpose the kit was hopefully not going to be employed. His government will defend working people. What about the rest of us? I’m surprised he never mentioned the legendary £22 billion black hole. But credit where credit is due and he did well to set up what was to become one of the most interesting days I have spent in a very long time.
Meanwhile, my phone repeatedly vibrated in my pocket and when I took it out it confirmed that the Bank of England had again cut rates, again by a quarter of a point, and now Bank Rate sits at 4.25%, in line with Fed Funds at 4.25%-4.50% but still significantly higher than the ECB’s Central Refinancing Rate of 2.25%. Despite the PM’s upbeat address, fine words butter no parsnips and B of E governor Andrew Bailey was obliged to once again cut the Old Lady’s forecast for the UK’s economic growth. On Wednesday, the Fed had once again passed on the opportunity to cut rates and once again Fed Chairman Powell had to the inevitable opprobrium of the President justified the decision with the uncertain inflation outlook. Bailey and Powell are sitting between different rocks and different hard places although they share the conundrum that whatever the problems in their respective economies are, they are not resolvable by monetary policy alone.
It’s hard to look at MAGA and Trumpism without Joseph Schumpeter coming to mind. Although Schumpeter is inextricably associated with creative destruction, he had in fact borrowed the concept from none other than Karl Marx. Marx had believed that ruinous competition in capitalism will lead to the demise of one business after the other until in the end all of them are gone and capitalism collapses in itself.
Schumpeter on the other hand sees an ongoing progression of phoenix-like destruction and rebirth.
Trump has clearly got his arms around the destruction bit although what is to follow seems to be progressively less certain. It didn’t take as much as high-school economics to see that his reciprocal tariff plan was singularly naïve and despite all the bluster it is becoming ever more obvious that he is quietly reining in his ambitions. The UK trade deal, hailed by the President as the gate to Nirvana is really just a shabby mirage. Sure, it’s better than nothing but if this is the template for all the promised trade deals to come, then the President’s intention of reshaping the USA as a manufacturing hot spot will fall well short of his ambition. Notably, import tariffs on UK steel and aluminium have been scrapped.
US wage levels are on a global scale uncompetitive enough without adding the burden of increasing the cost of the most basic of industrial components. The cost of building new steel mills is huge, and lead times are long meaning, unless the rest of the manufacturing value chain can be aligned to create a top-down, commercially competitive industrial complex, nobody will realistically want to take the huge financial risk.
These are issues that will not find resolution in a matter of weeks or months, so they are hard for markets to price. Back when – we’re talking the late 1980s when the London euro bond market likened the Wild West – I had a young bond sales lady cover me from Citibank. I can see the face but not remember the name. As was done in those days, she gave a routine call in the morning and another one after lunch when New York came in. It was not unusual for her to report at 8:30 am that Citi’s long term market view was bullish but at 1:30 pm that it was bearish. Although the twice daily phone calls have gone the way of all things, and despite the gazillions of terabytes of computing capacity employed in market analysis, I don’t think the swings in long term outlooks have changed much and the game of “everybody into the pool, everybody out of the pool” appears to be the same as it always has been. With every passing day and with every new announcement of an impending Executive Order, the economic outlook for the USA seems to change too.
I was intrigued to see Sir Kier standing at a Jaguar Land Rover plant surrounded by car workers to join Donald Trump in announcing what has ultimately been seen to be fairly threadbare heads of a trade agreement. Chancellor of the Exchequer Rachel Reeves, that famous ex-Bank of England economist, who has by the way and in case you hadn’t noticed in recent weeks become progressively more inaudible and invisible, also chose a JLR plant as a backdrop for one her rather vacuous but supposedly morale-boosting speeches. With all due respect, the not-much-of-a-trade-deal deal has delivered as much for JLR as could be hoped for and in exchange for us getting American beef and ethanol, is not all bad for the UK.
Back to old Schumpeter, the hundred and a few days of the Trump administration have so far not been all that good. The destruction has been successful but the plan for the creative bit is still looking uncertain. Trump wants it all done yesterday, Jay Powell wants to sit quietly and see how things pan out. It would take a very dedicated MAGA fan to find that Trump 2.0 has been all that successful. The promised post-Biden stabilisation of Washington’s finances is further away than it was and not closer. The promised inflow of tariffs is of course not coming from exporting countries but from Joe and Megan SixPack’s pocket and the love-in with Vald the Invader has so far delivered dick on a stick.
This weekend brings round one of trade negotiations between Washington and Beijing, much to the joy of Geneva’s hoteliers and restaurateurs, and be prepared for Trump to try to sell sparrows as eagles.
China this morning reported its trade figures for April where shipments to the US were down by 21% and imports by 14%. Overall exports were in US dollar terms up by 8.1% although that will have been boosted by the underlying weakness in the dollar itself. In April, the greenback lost 5% against the pound and the euro, 6% against the yen and 4% against the yuan.
Back in Europe, the pathway is also unclear. On Wednesday, Chancellor Merz’s new Minster for Internal Affairs wrote to the Federal President announcing that the verbal agreement originally struck between Mutti Merkel and the presidency that instituted the open borders to more or less all comers was off and that migrants would no longer be allowed unchallenged into the country. The wording is such that the interpretation as to what country of origin is to be deemed to be unsafe is to be tightened up and the migrant’s claim to be unsafe will no longer be taken at face value. Germany is struggling with what is essentially a high-skill manufacturing economy and an excess of low skilled labour.
Merz not having been elected by the Bundestag at the first time of asking should serve to remind the rest of Europe that, despite the lifting of the constitutional Black Zero, the path for Germany’s economic recovery is not smooth. As little as most Europeans were impressed by JD Vance’s invective at the Munich Security Conference in February, he did highlight a critical problem and one to which I alluded a long time ago. Brussels has, albeit with the best of intentions, created a raft of laws and regulations that guarantee a level playing field within the EU while seemingly forgetting that the rest of the world doesn’t give a fig and ruthlessly takes advantage of the ensuing inflexibility.
When the legendary trillions of euros of borrowings that Berlin can now potentially unleash and invest in fixing the country’s creaking infrastructure and spend on upgrading its armed forces hit the road, will every cent have to be justified before the courts to prove that nothing uncompetitive has been taking place? We must never underestimate, despite the inevitable political grandstanding about European solidarity, that charity begins at home. Nor should petty jealousies, especially the area around Paris, be underestimated. France’s immediate fiscal flexibility is limited although Young Macron will be licking his lips at the prospect of the very capable French defence industry getting its mits on lots of German euros. I’m not sure that’s the idea. As someone recently commented to me, the time has come for Mercedes Benz and BMW to give up trying to make EVs and to learn how to build armoured stuff.