62: What Have We Done?

show about the global economy. Today is November nine, but it is the day after election day in the US, so obviously we're going to be talking about what a Trump president means for both the US economy and all over the world. So I'm here with Dan and Scott. It's just us, it's just the bench Park team today, and we're going to try to hit all of the major topics. We're going to talk about Mexico, China, EU. But let's just jump in, all right, Dan, First question

I want to ask you. Trump is sitting in the Oval Office. It's his first economic briefing as the president of the United the States. What does the world look like? What do they tell him? The first thing he confronts is that he is a prisoner of the two to three percent world. So what do we mean by that? We mean continued projections ever since the world economy began growing again, that it would grow between two percent and three These I m F numbers published twice a year.

Stephen pol Is, the government of the Bank of Canada, called this two to three percent world the world of serial disappointment. We just can't seem to break through it. Two percent of the advanced economies, three for everyone else. It's just been unyieldingly the same. Okay, And so that's what they're going to tell him. That's what he will find. And is that a disappointment? Is that A I don't, I don't. I guess I'm trying to figure out, is that in the world will look in the world we

live in? Okay, No one economy swims alone. Now, the United States is the largest, still by quite a considerable margin, but it is only one and you know, many, many, many US corporations are part of this global supply chain which spans the world. Where influenced by China, Japan, Germany, and we influence them, probably more than they would care to recognize. But you just can't swim alone. No GDP is an Ireland got it. So he's going to realize

that the world is perhaps weren't connected. Prisoner of the two to three serial disappointment. Okay, moving over to Mexico. That was a country that Trump brought on, brought up quite a bit during the campaign, and a few weeks ago on Benchmark, we spoke about what Mexican trade actually looks like after a trip that Dan went on to Selector,

which of course is a Mexican department store. And just in case you weren't listening to that episode, we looked at where the goods in Mexico actually come from, and quite a bit we're from the US. So Scott, can you talk about how you can actually untangle that? Well, Look, this is a deep, deep trading relationship that benefits both sides. Uh.

The U s exports to Mexico. UH in the first nine months of this year totaled one hundred and seventy two billion dollars, which makes it the second largest destination behind Canada and and overall worldwide UH for trade, it's the third biggest trading partner of the US behind Canada and China. So it's it's not going to be easy.

I mean, it's still possible that uh, you know, Trump, especially if he has the support of Congress, could potentially withdraw from NAFTA UH with six months written notice, and you know that would obviously affect Canada as well. But you have so many different products, so many companies that have located in Mexico. I was reading one story that said, it's almost it's almost like it's a continuous economy in

some ways between the US and Mexico. So as much as Trump wants to build a wall and and change the relations in that way, it's going to be really wrenching to completely upend that that relationship economically. But if Trump is indeed hell bent on desolving these relationships, what can Dan tell me about what he can actually do without congressional approvalges kind of in the privacy of his new oval of quite a lot, According to Gary Hufbauer

the Peterson Institute for International Economics in Washington. For example, the president can proclaim additional duties to maintain what are called reciprocal concessions with Canada and Mexico. He can impose import restrictions after finding some kind of national security risk. He can impose a maximum tariff or some kind of other restriction for a hundred and fifty days. No national

security investigation is required. There After a foreign country is perceived to be restricting US commerce, the President can take retaliate reaction. And there's this thing called Trading with the Enemy Act n. Seventeen. Trading with the Enemy. This is the name of a trade agreement, not a movie. It's like, this is the name of an Act of Congress. Now the date nine seventeen. We're going to go back to

World War One, Woodrow Wilson. But anyway, according to that, the president has very broad wartime powers to regulate all forms of international commerce, sees and freeze foreign assets. Now here's the tricky thing. Statute does not actually define what war is. So there's okay. And of course we've spoken so much about the wall, and that's of course what he meant by Mexico paints for the wall. It's through these prohibitive tariffs and duties that could be placed via

all of them. I think he literally means the Mexican government would pay for the physical construction. I think we need to move on because there's no way we can talk about I think he how about this. What he has said he meant in the campaign is that the Mexican government or Mexican corporations would pay for the construction of that wall. There is just so much to unpack in the wall. I'd say, let's move to a different wall in the world, the Great Wall of China. How's

that first segue? Dandy like that? You know, China got a lot of attention from Donald Trump during the campaign, and to be fair, not just him. Nevertheless, he is the winner. So but this is a very different type of China and an economic relationship with China. Then he's that he's inheriting compared with what President Obama inherited from George W. Bush. At this point in two thousand and eight, China was not the world's second largest economy. Japan was.

Where was it on the list? It was number three, was number after US and Japan's Now, look, it's true the China's economy is much bigger, but in some ways China's economic challenges are greater. So the years of double digit economic growth in China appear to be behind us. We've settled into this growth of six or seven, number one, number two. It's an economy that increasingly dominated by services

and consumption. Very few American companies are going to go to Guangdong and open a furniture factory wage bills are going up and up in China. Okay, um at the vaunted Chinese current accounts surplus, which includes merchandise trade curplus, was ten of China's GDP when Barack Obama was elected. It's now about three and according to I MF forecasts, by the time the election rolls around, it might not

exist at all. And by the way, this manipulation thing, right, So if China's manipulating its currency now, it's about preventing it from falling faster. Chinese currency has been weakening, not stronger. So in response to the concerns of manufacturing, does Donald Trump want a weaker Chinese currency, because that's what would happen if China was ordered or told to butt out of f X intervention. I don't know if he wants

a weaker Chinese currency. Whatever. Whatever he wants is for the US to win, you know, and he can define that winning whatever he whenever he finds the facts in the end. Right, Okay, that's great. But if China is manipulating its currency now and he says he'll say that day one, mind you, we've sort of heard that before. Nevertheless, if he goes ahead and does that. It would be because China is intervening to stop the juan weakening. Further, if your economy is softer, your currency is not going

to appreciate. Now the tendency is for you want to depreciate if they take the extreme devil's advocate position down. You could say that going way backt to you know, ten or twenty years ago, China has has net manipulated its currency downward. And and thus Trump still wants China to pay for that and should unwind its reserves even more to strengthen the yun to where it presumably should be. Yeah,

and that's a popular view. But I guess the impression that we should leave our listeners with is this is a very different kind of Chinese economy that Donald Trump's inheriting compared with the one Barack Obamba inherited from George It's not even by it's not even led by a exports and investment anymore. It's I mean, it's really shifted

in large parts of consumers and uh um services. I mean, you know when you go there and I lived there for three years, it's just you know, everywhere you still have the factories, but you just have such a consumer economy. China is litted with russ belts. Visited one of them myself, where steel manufacturers have moved on on to find something cheaper and something more cost effective. And this is within China. I mean, it's a very different type of economic beast.

Regardless of the fact that he was campaigning on a platform I shouldn't very different kind of economic animal than it was. But regardless of the fact that he was campaigning on this platform that as if China hadn't changed, Since it doesn't, he so that and that's the he was campaigning on what is largely a caricature of the way the Chinese economy was and what sort of sticks

in the popular imagination. You know is at an event at the Asia Society and not so long ago where we in the audience were told that most top US journalists have never been to China. I found that pretty amazing and pretty frightening. Let's hope they're not writing about national security or economics. Let's hope we're going to take a short break for a word from our sponsor, and when we get back, we're going to be talking about some of the economic implications back at home. Brought to

you by Bank of America. Merrill Lynch. Seeing what others have seen, but uncovering with others may not. Global Research that helps you harness disruption voted top global research from five years running. Merrill Lynch, Pierce, Fenner and Smith Incorporated. Welcome back. So we've traveled around the world. We've looked at Mexico, we've looked at China. So let's talk about what happens actually back home. I mean, we've been talking about a lot of bringing back manufacturing jobs. I mean, Scott,

how can he actually do that? That's a good question, and we really, you know, it really remains to be seen whether you know, it'll really take some either bullying of manufacturers or major tax incentive of or you know, some some something that we don't really know about that

that would actually um help create those jobs. I mean, they've come down so far from where they were, say thirty years ago, they've barely grown under Obama, and he's gotten some credit for helping return some of those jobs. But the bottom line is that you know, you talked to almost any economists and they'll say it's going to be really tough to bring back, you know, jobs, The

manufacturing jobs to where they were in the seventies. Say, even though there's this mystique about it that you know, this is this is what will make America great if we can bring back those jobs. But you know, Trump is actually placed to create twenty five million jobs. There are just under eight million unemployed people in the in the country. So you know, you have to look at how he's going to take people out of the labor force. Uh, I mean, I mean who are out of the labor

force and back put them back in. Uh. You know, that would pretend actually make up some of those jobs. But you know, there's there's a lot of tax I think I think he's heavily relying on the proposals to have to cut corporate taxes that would perhaps help spur investment and this diminishing relative importance of manufacturing. By the way, the US is not the only one where this is happening. This is happening right around the Western world and in

some cases parts of the Eastern world. It's certainly true of the UK, It's probably true of Germany, is probably true of Japan, and as we said, China is now a services and consumption economy. It's no longer dominated by manufacturing and exports. I mean, like you just mentioned, China has its own rest belt just the way we do. I mean, it's it's not unique to the U S.

It's it's just um. I mean. One other thing he mentioned too, was talking about infrastructure bringing, you know, kind of improving those you know, the crumbling bridges and roads that we keep hearing so much about. I mean, Dan, how plausible is that is the plentities proposed? Okay, Well, comes the tough part. You've got to translate what you say in the campaign to actual government policy, and then depending on what that is, you've got to get something past.

I mean, this was going to be true of Hillary Clinton as well if she were the winner. Okay, but look, let's take it at face value. Some infra infrastructure spending, a massive tax cut, well, that could translate into quite a fiscal boost at a time when the unemployment rate is already quite low and monetary policy is quite easy. That could be quite a boost. Whether it gets us to the three or four percent but he said he

wants to get to is another question. And whether it's actually long lasting or or something that's just temporary and results in temporary construction jobs. You know, it has to be spent very smartly in a way that would encourage

future development, I would suppose. And if you look at the way US financial markets are performing today, never mind the swoon last night, performing today, they're behaving as if there will be some kind of boost to the economy from the fact that the same party controls the White House and both Houses of Congress, meaning that the prospects for some fiscal expansion are there. So there actually might be maybe a bright side to what happened last night

in the US. Well, I don't want to characterize it as good or bad. What the markets are telling you is that there is a decent prospect of some fiscal stimulus. Okay, Dan Scott, thank you so much for giving your your wonderful insights on what the global economy might look like now that Donald Trump is our president elect. Thanks for joining us on Benchmark. You can find us on Bloomberg dot com, iTunes, pocket cast, Stitcher, SoundCloud, and a few others.

Um while you're there, take a moment to rate and review the show so that more listeners can find us. And you can follow me on Twitter at the real Daniel Moss just joking at you, almost d see And I'm at Scott Admund L A and m A N. And I'm just by Kate Smith. There's no just there. See you next week. Brought to you by Bank of America. Merrill Lynch. Seeing what others have seen, but uncovering what others may not. Global Research that helps you harness disruption

voted top global research from five years running. Merrill Lynch, Pierce, Fenner and Smith Incorporated