THE SCOWCROFT GROUP
A Global Business Advisory Firm
Trump Policies, China and
Persistence of Global Risk
Jakarta Geopolitical Forum 2017
Kevin Nealer, Principal
May 18-20, 2017
900 Seventeenth Street NW, Suite 500, Washington D.C., 20006 | 202.296.9312 | www.scowcroft.com
United States
Understanding Trump: Pattern Recognition, Not Policy Analysis
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Uneasy marriage of nationalism with GOP’s traditional small government agenda:
Nationalist elements
Small government agenda
Renegotiate trade deals/practices
Repeal Affordable Care Act (“Obamacare”)
Restrict immigration
Rollback Obama-era regulations
Question international institutions (NATO, WTO, EU, UN)
Reduce marginal tax rate on individuals and corporations
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Sustained fiscal stimulus/deficit/infrastructure spending unlikely; counter to GOP
policy
– Q2 2017 debt limit increase may not be smooth
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Markets overstating positives (supply side incentives) and negatives (trade war risks)
– Globalization rollback should lower P/E ratios over time
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United States
Cabinet and Cabinet–level Positions: People are Policies
The lag in sub-cabinet appointments inhibits policymaking
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473 of the 554 sub-cabinet positions requiring Senate confirmation await nominees
Lack of political guidance results in career professionals deferring choices on all but routine policies
Commerce
Wilbur Ross
OMB
Mick Mulvaney
Defense
James Mattis
US Trade
Representative**
Robert Lighthizer
Energy
Rick Perry
Senior Counselor, Chief
Strategist*
Stephen Bannon
Homeland Security
John Kelly
Senior Advisor
Jared Kushner
Interior
Ryan Zinke
National Security
Advisor*
Lt. Gen. H.R. McMaster
Justice
Jeff Sessions
National Economic
Council*
Gary Cohn
State
Rex Tillerson
National Trade Council*
Peter Navarro
Treasury
Steve Mnuchin
Counselor
Kellyanne Conway
Notes: * Does not require Senate confirmation; ** Awaiting confirmation
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United States
Risk in Trump’s Agenda: The Three Arrows
“Trumpnomics”
In what order?
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Deregulation
Infrastructure
Replace ACA
Reform Dodd-Frank
Reduce net neutrality rules
Rollback of EPA regulations
• $1 trillion infrastructure plan
• Clean Power Plan
• Clean Water Act
• Climate Action Plan
• Energy
• Fossil fuel emphasis
• Drilling offshore and on
federal land
• Keystone XL and Dakota
Access pipelines
• Support extractive industries
Tax Bill
• Revenue neutral tax reform
• Corporate and individual tax
rate reductions
• Simplified tax code
• Tackling corporate inversions
• Border adjustment provision
• Expedited environmental
review process
• Repatriation of jobs by
American companies
• "Buy American, Hire
American"
• Enhanced role for CFIUS
process for foreign investment
• Boost manufacturing and
small businesses
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United States
BAT: Trade or Tax Policy?
Border Adjustability Tax (BAT)
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Exports exempt, imports taxed. Focus on where something is consumed, not made
Not protectionist. Would equity
investors believe economists? Would
voters?
– Economists in both parties say
BAT not protectionist (currency
would adjust to negative impacts
on exporters and importers)
If presented as protectionist, WTO
members likely to resist
– In a neutral setting, WTO might
accommodate, given similarity to
VAT systems
Revenue from BAT critical for
corporate tax reform. Accounts for
28% of revenue offsets in House tax
Source: Deutsche Bank Markets Research, Robin Winkler & George Saravelos, Bloomberg
Note: Chart shows estimated impact of a 20% U.S. border tax adjustment on net trade
writers 2016 bill
with U.S. in % of GDP, prior to currency adjustment
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United States
Consistent Protectionist Theme
Trump has held the same views on trade since 1999
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Focus on China: Navarro (“Death by China”) & Lighthizer
Political necessity: Trump won in OH, PA, MI, WI on economic nationalist promises
Freedom of action: Trump can withdraw from trade agreements, unilaterally initiate new trade
cases, and impose higher tariffs
Trump has motive, means, and opportunity to be an activist on trade
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Would BAT encourage Trump to declare
victory and go home on tariffs?
April 6 Xi visit: Possible floor under
China trade risk
Source: Gallup
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Trump Team Statements on China
“We can’t continue to allow
China to rape our country”
Trump, Indiana rally, May 2016
“I mean, look, we’re being hurt very badly by China with
devaluation; with taxing us heavy at the borders when we
don’t tax them; with building a massive fortress in the middle
of the South China Sea, which they shouldn’t be doing; and,
frankly, with not helping us at all with North Korea”
Trump, Fox News interview, Dec. 2016
“Building islands and then putting
military assets on those islands is
akin to Russia’s taking of Crimea.
It’s taking territory that others lay
claim to”
…
“We’re going to have to send China
a clear signal that first, the islandbuilding stops, and second, your
access to those islands is not going
to be allowed”
“They have ripped us
to shreds. Ripped us
absolutely to shreds.”
Trump, Virginia rally, Aug. 2016
“We’re going to war in the
South China Sea in five to ten
years. There’s no doubt about
that. ”
Bannon, Breitbart podcast, Mar. 2016
Tillerson, confirmation hearing, Jan. 2017
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United States
Important Central Banks Are Tightening
The Federal Reserve influences the
marginal cost of capital around the globe.
It has quickened the pace of its tightening
(there were 12 months between the 1st
and 2nd rate hikes, then 3 months from
the 2nd to the 3rd)
The Fed funds rate expected at the end of next
year has risen by 100bp since last fall
Tighter liquidity has produced a higher
interbank lending rate of 150bp since last fall
The PBOC is a key determinant of growth
in the marginal producer in the global
economy (China was expected to account
for 40% of 2016 world GDP growth).
China is in the process of reversing its
stimulus from a year ago
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The Disappearing China Consensus
Even as Chinese Investment in the US Topped $30 billion Last Year…
Source: Gallup, January 2017
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The Disappearing China Consensus
Corporate Attitudes Are Changing
Source: The US-China Business Council, 2016 China Business Environment Survey
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The Disappearing China Consensus
Corporate Attitudes Are Changing
Source: The US-China Business Council, 2016 China Business Environment Survey
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The Disappearing China Consensus
Corporate Attitudes Are Changing
Source: The US-China Business Council, 2016 China Business Environment Survey
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The Disappearing China Consensus
Corporate Attitudes Are Changing
Source: The US-China Business Council, 2016 China Business Environment Survey
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The Disappearing China Consensus
Fundamentals Matter: “The China price” Advantage Declines
Source: Euromonitor International
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The Disappearing China Consensus
US Attitudes on China
Source: Pew Research Center
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The Disappearing China Consensus
US Attitudes on China
Source: Pew Research Center
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The Disappearing China Consensus
The Disappearing China Consensus
US Attitudes on China
Source: Pew Research Center
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The Disappearing China Consensus
US Attitudes on China
Source: Pew Research Center
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The Disappearing China Consensus
US Attitudes on China
Source: Pew Research Center
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The Disappearing China Consensus
US Attitudes on China
Source: Pew Research Center
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Trump & China Risks
China/Mexico
trade activism
Trade agenda statements
South China Sea
Miscalculation risk
Taiwan call
Durable risk for Taipei
“One China”
reversal
Residue suspicion
North Asia
19th Party Congress
North Korea nuclear
threat
Perception risk of being
“soft” on US
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Asia
Korean Peninsula: Significantly Increased Tensions
Timeline of recent events
Key takeaways
Feb. 11
North Korea tests Musudan medium-range ballistic missile
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Feb. 13
Kim Jong-nam assassinated in Kuala Lumpur
Feb. 18
China suspends coal imports from North Korea in sign of growing
frustration
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Feb. 27
US hosts trilateral talks focused on nuclear weapons with South
Korea and Japan
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Mar. 1
Annual US–South Korea joint military exercises begin, an event
North Korea views as an act of aggression
Mar. 6
North Korea launches four missiles said to prepare to target US
bases in Japan
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Mar. 7
US commences deployment of THAAD missile defense system in
South Korea, which China opposes
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Mar. 10
Constitutional court upholds President Park Geun-hye’s
impeachment; presidential election scheduled for May 9
Apr. 16
North Korea’s missile launch fails minutes into test
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Hawkish response to North Korea missile tests
by China, Japan, and South Korea
– South Korea says relations at worst point
in decades
US defense commitment to South Korea
reaffirmed by Mattis on his visit
Frayed relations with China have left North
Korea increasingly isolated
− Support of UN sanctions, curtailing of
coal, assassination of Kim Jong-Nam
Can US cooperate with China on North Korea,
despite opposition to THAAD?
Impeachment of Park Geun-hye creates
political instability and leadership vacuum
− Opposition Democratic party likely to win
Abandonment of Track 1.5 talks in New York
removes potential avenue of dialogue
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Asia
Korean Peninsula: Significantly Increased Tensions
Source: Center for Strategic and International Studies (by The New York Times)
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Asia
China: US–China Relations in an “Election Year”
Visit by President Xi April 6 limited short-term China trade risk
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Trump will maintain “tough on China” stance and hawkish South China Sea policy
But both leaders seek to project stability and focus
on aligning interests:
– Cooperation on North Korea?
– 100 Day Trade Review
– Chinese investment in US infrastructure and
job-creation? (CFIUS Limits)
Risk of more fundamental problems likely to be
delayed, not eliminated
Source: Gallup
Chinese leadership transition places emphasis on risk management over reform
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Xi is using the National People’s Congress to position allies ahead of 19th Party Congress
Xi may seek to bend retirement rules to enable him to stay in power beyond a second term
Xi will respond decisively to any Trump provocations on security or trade
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Asia
China: Trade Maybe Defining Issue in 2017
The signal to the Trump administration is that Beijing remains cautiously confident
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Dealing with internal priorities while preparing for a challenging trade environment
No major economic moves by China expected until after the October Party Plenum
– Emphasis continues to be on financial regulation reform
Trump has a range of options in dealing with Chinese trade issues
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Options range from import tariffs, tightening approval processes or initiative unfair trade cases
and intellectual property violations
Countervailing duty law allows US industries to seek tariffs to offset unfair subsidies
Decision not to label China a currency manipulator (a campaign promise)
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Formulation of formal trade policies delayed until Lighthizer confirmed
Beijing spent FX to prop up yuan in 2016 due to capital outflows
Alternative: Using currency as basis for countervailing duty case
CFIUS reform – limits on Chinese investment
Trump & WTO Compliance – Structural risk of a US Policy Change
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Americas
Mexico: High Tensions Over Trade and Immigration
NAFTA likely to be renegotiated, not repealed (under Art. 2205)
• Discussions will include all three signatories and are expected to begin in May
• Canada and Mexico pursuing bilateral trade agreements (e.g. CETA)
• Unclear if parties will pursue win-win outcomes or appeal to domestic bases
US-Mexico relations at lowest point in decades
• Mexicans angry about Trump rhetoric, trade, and immigration policies
• US may impose taxes on Mexican goods (or remittances) to pay for border wall
• Relationship driven by Kushner and Videgaray
• Mexico has options to counteract Trump and could reduce security cooperation
Populism risks further deterioration of ties
• Opposition candidate Andres Manual Lopez Obrador (ALMO) could win 2018
presidential election
• Likely to push harder line against the US
• Pena Nieto’s low approval ratings increase challenges to cooperate with US
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Europe
Russia: Potential Cooperation Limited; Rivalry Continues
Trump’s relationship with Putin remains unclear
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Ukraine/Baltics testing ground for relations
Putin is playing the long game
Syria risk
Barriers to rapprochement
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Trump campaign links (end-summer intelligence
investigations)
Congress (Republicans, Democrats) and Pentagon
Moscow’s nationalist policy relies on “enemy in the
west”
Potential lifting of sanctions unlikely
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Congressional opposition strong
Rhetorical inconsistencies by administration
US effectiveness in countering Russia?
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Potential for further conflict with intelligence
community
US commitment to NATO; Russia intent on
undermining security alliance
Russian interference in US and European elections
Source: The Washington Post
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Europe
EU: Flashpoints and Elections
Historic turnout of 80.2% in
March 15 vote. PVV failed to
win but gained 5 seats and is
2nd largest party in parliament
with 20 seats
FN candidate Marine le Pen is
a strong contender for the
French presidency; second
round voting is May 7
Conservative Prime Minister
May called snap elections
June 8; party is likely to gain
seats
AfD could enter parliament;
polling at 9% (March 6–10).
Merkel likely to (narrowly) win
in September but inherit a
weaker mandate
Source: The New York Times
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