US president Donald Trump has been spitting the dummy. Most of the toys are now out of the cot.
Other people have been picking up those toys. Prepare for massive change in the international order.
This article is about fundamental changes which are likely to occur – I say likely, but there will be plenty of scrambling to prevent it – and how things might pan out.
One factor in the changes is a simple process of counting quotas, with worldwide implications.
Another factor is Mr Trump & his desire to open acrimonious fights. The latest revelation on that front was about a border patrol agent who died in December. Mr Trump used the event to promote his wall fronting Mexico, saying the agent had been “lost” [as in died] and his partner “badly beaten”, although the partner had radioed in that he thought he’d hit a culvert and investigators found no evidence of any other cause. Texas governor Greg Abbott offered a reward “to solve this murder”. By the time the story reached the Fox News airwaves, illegal immigrants had bashed the first agent to death with rocks.
You might consider that incident a minor side issue in the international scheme of things, except that it’s a standard ploy and it colours expectations of Mr Trump’s behaviour in other forums.
On top of some other factors already in play – currency, the sharemarket rollercoaster (particularly US, but internationally), some trade conflicts and some trade aspirations – I’ve followed through on some wider trade questions, examined how the international applecart might be completely overturned, and provided you with some sections of text where you can use your own judgment on what people & institutions are saying.
Those pieces of text are:
- a repeat of the opening to my newsletter last Wednesday
- part of an article by Russian president Vladimir Putin, and
- segments of the BRICS summit declaration last September.
If you’re like me, most of your sources for international matters will be American. Your choice then is to go left (or our right, depending on your view of how people lean in the US), right (or further right, if like me you think there’s not much that’s truly on the left), or, if you have a lot of time, hunt for something in the middle, neutral, balanced, can be substantiated.
BRICS & the IMF
We have this constant focus on the US because of the oh-so-frequent outbursts from its oh-so-remarkable president, but the game is getting serious.
One occasion, which will tell how serious, occurs on Friday-Sunday 20-22 April, when the International Monetary Fund (IMF) & World Bank Group hold their joint annual spring meetings in Washington.
Since the IMF was founded in 1945, the US has held a power of veto (over 15% of the vote). After the latest adjustment of quotas, the 5 BRICS nations (Brazil, Russia, India, China & South Africa), combined, will also have veto potential.
I’ve been following the writings (sometimes rants) of Jim Rickards (lawyer, economist, financial writer, editor of Strategic Intelligence) via the Daily Reckoning website (and also the separate website of Daily Reckoning founder Bill Bonner), and last year Mr Rickards was convinced the change in power at the IMF would result in its special drawing rights usurping much of the $US’s role in international exchange.
It didn’t happen, but that may be just a matter of timing for processes to be completed. Or, if the 5 aren’t yet ready, they may hold off for another 6 months or a year.
However, Mr Rickards is at it again, this time pointing to that April meeting of the IMF where, he says, the BRICS nations’ combined voting strength will rise from 14.2% to 16.21%, while the US vote will fall from 16.54% to 16.44% – still veto power for the US, but with fewer mates in support of its case.
Privileges & power written in for US
Among the privileges the US has had for decades, its greenback has held primacy as the international reserve currency. Primarily through the BRICS relationship, Russia & China began using their own currencies for trade between them last year, and both Russian president Vladimir Putin & the BRICS summit declaration point to more of that, plus changes along the lines of this statement from the summit declaration: “We resolve to foster a global economic governance architecture that is more effective & reflective of current global economic landscape, increasing the voice & representation of emerging markets & developing economies.”
Under the old order, that would have been squashed in a backroom, although official statements wouldn’t have put it quite that way.
China has also signed currency swap agreements with over 20 other countries, setting the greenback’s role aside in each case. To demonstrate how this matters, Mr Rickards pointed to the US love affair with cars – and the price of fuel, which has long been far lower than anywhere else in the developed world: “Why do we pay less? Because oil is priced & purchased in our dollars.”
Here’s the exercise in today’s money: US gallon = 3.785411784 litres, $US1 = $NZ1.38, average US petrol price currently $US3.12/gallon of premium 91-octane unleaded according to the American Automobile Association, = $NZ1.14c/litre. Auckland price currently? Around $2/litre.
Pointing the finger – but the backing is shrinking
President Trump has accused China, in particular, of currency manipulation & theft of intellectual property and has pressed for sanctions against Chinese suppliers of washing machines & solar modules, and Canada on lumber & dairy products. US airline maker Boeing tried too, but failed in a bid to have heavy tariffs imposed on Canadian planemaker Bombardier.
Broadly, in addition, any sign that a foreign company has an element of government ownership will mean it can be targeted for “unfair” competition.
Trump wants one-on-one, others work on multi-partnerships
Mr Trump rejected the Trans Pacific Partnership, which still favoured US corporates after much negotiation, and wants changes to the North American free trade agreement with Canada & Mexico.
Meanwhile, other countries are moving into multi-partner relationships – both for constructive trade reasons and, particularly now, as protection against a wild card.
Now, you have a revised TPP being finalised without US involvement, the BRICS nations are gradually starting to get a multitude of joint activities underway, and China is working on closer relations across Central Asia, into Europe and into Africa through its reinvented Silk Road, the “one belt one road” of land & sea routes.
The international reserve currency question is a big one. The move away from the greenback has already begun, and could accelerate quickly if the IMF goes the BRICS nations’ way. The US administration could find itself a rock on the road, being driven into the ground by every other nation.
US trade & infrastructure parked on a tightrope
While Mr Trump has talked jobs for struggling areas of the US and promoted exports, the official unemployment rate has been falling (with a couple of blips) for 2 years and has been at 4.1% for 4 months, and average hourly earnings have crept up 2.9% in the last year. He wants a low exchange rate to be internationally competitive, and low interest rates to keep the cost of federal debt down, but can expect inflation if the economy continues to improve (net of stimulation-targeting debt injections).
To get his massive infrastructure programme underway, Mr Trump wants local contributions of about 80%, federal no more than 20%. Previously, infrastructure programmes have been directed through the federal coffers, and neither states nor cities will have the funds to meet this changed requirement.
Swat: Deal “non-existent”
As an example of how the whole idea of continuity, forward planning for project funding and acceptance outside the presidential palace of how everything’s supposed to work, CNN Money ran a story at the end of January on how all that smart thinking can be upended: “Deep underneath the Hudson River between Manhattan & New Jersey lies a century-old rail tunnel, heavily damaged during Superstorm Sandy, that still carries 200,000 riders/day.
“Engineers say the tunnel should be replaced as soon as possible, at a cost of $US12.7 billion. In 2015, the Obama administration agreed to supply half the funding for it, and designs are nearly complete. But in December, President Trump’s Federal Transit Administration sent a letter to the Port Authority of New York & New Jersey declaring the deal ‘nonexistent’.”
Mr Trump has been intent on unwinding every measure his predecessor, Barack Obama, put in place, but CNN said this rail tunnel project had implications for travel through both Democrat- & Republican-voting districts.
Congress set up a commission in 2010 with Amtrak & mid-Atlantic governments as partners, which put a $US38 billion price tag on repairing the north-east corridor line. The House of Representatives approved a $US500 million “down payment” last year to start the repairs, but CNN said the Senate approved only $US26 million, no agreement has been finalised, and added this most important factor in the politics of US public money: “The North-east Corridor is now at a political disadvantage in Washington because it connects Democratic cities with limited influence.”
The North-east Corridor Commission has estimated shutting the service down – not by choice but for danger or damage – would cost the US economy $US100 billion/day.
The original letter from New York state budget office director Robert Mujica was cursory, mentioning progress being made but saying nothing about agreement reached by 2 states on their proposed shares of the cost. On New Year’s Eve, Mr Mujica wrote a longer explanation, but it seemed he was responding to a “don’t want to” federal letter.
Under the terms so far revealed of the Trump infrastructure plans, the 7 years of planning for this major work will have been wasted, but other states might also not be able to take up the offer if they can’t source enough funds locally.
With US public debt escalating beyond $US20 trillion, the local & state governance structures militating against early starts, the potential for an early collapse in soaring sharemarket prices, and big changes in international economic structures, the Trump infrastructure programme looks in danger.
Buy American law: blatantly protectionist
While I was looking for the original correspondence to balance the portrayal by CNN (which didn’t mention the numerous questions raised by the federal transport official, deputy administrator Jane Williams), I spotted a piece of New York state legislation passed on 15 December, the New York Buy American Act, requiring state entities to include a contract provision requiring the use of US-made structural iron & structural steel for all surface road & bridge projects.
One of the most contentious clauses in the Trans Pacific Partnership documents when the US was still involved in writing it – the investor-state dispute settlement provision – was designed to combat this kind of lopsided trade law.
The New York law is blatantly protectionist legislation – just one of the 6 state senate & assembly leaders quoted in Governor Cuomo’s release thought product quality was an important ingredient worth mentioning.
Making sense of a complicated picture
That, I think, sets a picture more fully than the newsletter lines I wrote last week (repeated below). In short:
- Lines of finance could change, though that might take longer than some of the other potential & likely changes
- Trade directions could be radically altered, by positive additions such as the central Asian growth, and by negatives such as the influence of internal US bickering
- The cost of money, or the currency of trade, or both could change
- US leaders’ behaviour may reinforce other nations’ determination to take their trade elsewhere, and
- US infrastructure-related businesses, unable to function properly at home, may look (at least short-term) for work elsewhere.
Click to read page 2: Spitting the dummy page 2: Putin, BRICS & last week’s summary
31 January 2018: Trump changing longstanding rules of play on infrastructure
4 September 2017: BRICS leaders’ Xiamen declaration
1 September 2017, Vladimir Putin article: BRICS: Towards New Horizons of Strategic Partnership
Jim Rickards on Collide (subscription required)
CNN Money, 26 January 2018: The biggest infrastructure nightmare facing the US
29 December 2017: Federal Transport Department letter to New York state budget director
31 December 2017: New York state budget director response to Federal Transport Department
14 December 2017: Governors Cuomo & Christie announce commitment to fund 100% of states’ half of new Gateway tunnel
13 December 2017: New York state budget director letter to Federal Transport Department outlining funding agreement progress
New York governor Andrew Cuomo, 15 December 2017: Governor Cuomo signs “Buy American” legislation for all structural iron & steel on New York roads & bridges
Washington Post, 9 February 2018, opinion article by Dana Milbank: Trump concocted a story about a border agent’s death. The truth won’t catch up.
Attribution: BRICS, Vladimir Putin, Jim Rickards, CNN Money, New York State, US Federal Transport Department, Washington Post.