Thought of the Week:
“Though this be madness, yet there is method in’t.” This famous aside by Polonius in Act 2, Scene 2 from Shakespeare’s Hamlet clues in the audience that Hamlet’s increasingly irrational behavior may not be insanity, but a feigned act designed to serve a larger purpose. Whether Hamlet was operating strategically, suffering from clinical depression, or truly going mad over the course of the play remains a topic of debate among scholars and critics alike. However, versions of Shakespeare’s idiom—generally along the lines of “there’s a method to his madness” or “crazy like a fox”—have been widely used across literature and pop culture from The Great Gatsby to The Catcher in the Rye to The Silence of the Lambs. Today, a growing number of analysts are asking whether there may be a method to President-elect Trump’s trade policy madness. The president-elect’s plan to impose tariffs on all foreign goods seemingly relies on an economic theory that challenges contemporary thinking about the causes behind chronic trade deficits and what can be done to shrink them. While David Ricardo’s classic 19th century trade theory teaches that countries export goods to earn money to pay for their import needs, and when each country specializes in those goods in which it has a comparative advantage, then all trading nations benefit, the truth is that the modern trading system doesn’t work that way. In fact, trade surplus countries, like China, subsidize production of multiple items far beyond their own domestic needs. Yet, the prevailing contemporary explanation for the existence of chronic trade deficits almost exclusively lays the blame on consuming nations, like the U.S., for living beyond their means. There is supporting evidence for this claim—the U.S., for much of the last 40 years, has imported more than it has exported, has seen its savings rate decline to less than half of what it was in the 1990s, and has witnessed soaring government budget deficits and debt. Now, as China tries to export its way out of an economic slowdown once again, comes an alternative notion that challenges contemporary doctrine. This alternative view, which is outlined in detail in Michael Pettis’ book, The Great Rebalancing, holds that the root cause of trade deficits can be found in the industrial policies of surplus countries like China. Pettis notes that China and other export nations deliberately reinvest much of their subsidy-generated surpluses in U.S. Treasuries, stocks, bonds, and real estate; the upshot being a stronger dollar, more expensive U.S. exports, cheaper imports for American consumers, and a supercharged trade gap. This argument provides some needed intellectual heft behind President-elect Trump’s plan to remake global trade by imposing the most comprehensive tariffs in nearly a century; in effect, it may be the method to his madness. There’s no doubt that China, which is on track to hit a record trade surplus of $1 trillion, employs policies that shift resources from its households to its manufacturers—Beijing keeps interest rates low, forbids independent labor unions, makes low-cost loans to manufacturers, and steers discounted energy supplies to favored industries. The merchandise and financial flows created by such actions force deficit countries like the U.S. to increase household and government debt to keep up. Mainstream economists scoff at the notion, and counter that wider economic conditions—not Chinese industrial policy—determine trade outcomes. What’s more, they point to President Trump’s first term tariffs, which led to higher deficits, to support their claim. Is President-elect Trump’s mercantilist view of trade just plain mad, or could there be some method behind this tariff madness to encourage greater U.S. domestic production? Already, the Institute for International Finance says they expect tariff threats to serve as negotiation tools rather than fully enacted policy, and Adam Posen, president of the Peterson Institute for International Economics, says allies are “lining up offers” they could make to the U.S. to mitigate the impact of tariffs. Crazy like a fox?
Thought Leadership from our Consultants, Think Tanks, and Trade Associations
Bloomberg Government Reports that Trump’s Choices May Threaten the House Majority. President-elect Trump keeps plucking GOP lawmakers to serve in his new administration. This could cause problems for Republicans’ fragile House majority. While the former president appears to be rewarding his most loyal defenders on Capitol Hill—and has rarely delved into the finer points of legislating—the threat to House control is real. Republicans are poised to hold their House majority for the 119th Congress, but their margin will be thin. Trump’s selection of two House members, which will trigger vacancies before the special elections to replace them, could endanger Republicans’ narrow edge. Trump has picked House GOP Conference Chair Stefanik (R-NY) for UN Ambassador and Rep. Waltz (R-FL) as his national security adviser. What’s more, now that Rep. Gaetz (R-FL) has withdrawn his name for consideration for Attorney General, his status remains unclear. In the Senate, he picked Sen. Rubio (R-FL) to become Secretary of State. House Republicans frequently struggled to pass their priorities this Congress, and even needed Democratic votes for basic tasks such as funding the government. With the GOP planning to push for far more ambitious legislation, their tenuous grip on the House could be one of the few major obstacles to enacting the Trump agenda. While Republicans will have to watch their numbers carefully, the past two years have given them plenty of experience. Democrats will watch the floor math closely. Republicans have a comfortable margin in the Senate, so the House will be key for Democrats blocking Trump priorities. Trump’s lawmaker-heavy cabinet already differs greatly from the start of his last term when he leaned heavily on the business world. Republicans say the shift is not surprising. Trump spent the past eight years building relationships in D.C., including in the House and Senate, and his long list of policy promises will require communication with the legislative branch.
Capstone’s Outlook for U.S. Energy Policy Under a Second Trump Term. CapstoneDC believes former President Trump and his fellow Republicans will view their strong election performance as a mandate to push forward more extreme energy policies, benefitting those energy industries traditionally supported by Republican lawmakers, while negatively impacting renewables and electric vehicle deployment in the U.S. Although the exact margin in the House remains unclear, Republicans are on track to control the White House and Congress through 2026. As a result of the election’s outcome, the energy sectors that will benefit the most include oil & gas, hydrogen, carbon capture, and biofuels. The sectors negatively impacted the most include solar, on- and offshore wind, and electric vehicles (EVs). With the federal government also likely to take a step back from climate initiatives, it is anticipated that the states will play an outsized role in energy and climate policy, with blue states likely to push even harder on climate in response to a President Trump. Additional expectations from Capstone about how the incoming administration and Congress will impact the Inflation Reduction Act (IRA), trade, individual energy sectors, and chemicals and PFAS is available from the Washington office.
Eurasia Group Speculates on what a Second Trump Administration Means for Latin America. While some Latin American states will be directly affected by former President Trump’s election victory, the bigger repercussions for the region will depend on the global impact of his economic policies. Obviously, heightened inflation in the U.S., weaker currencies in emerging markets, and lower global growth would present economic headwinds for countries with macroeconomic imbalances. Mexico will be particularly hard hit by Trump 2.0 due to the U.S.-Mexico-Canada Agreement (USMCA) revision process coinciding with implementation of controversial judicial overhaul. While the USMCA will probably survive, the process will be bumpy and entail significant concessions, including on immigration and border security. To date, President-elect Trump’s initial cabinet appointments also indicate more aggressive stances on China, migration, and leftist regimes in Latin America; this will amplify Trump’s more hawkish approach toward Venezuela while also posing risks for remittance flows to Central American economies.
Inside the EPA Says that Trump’s Victory Will Spur Major Upheavals in Environmental Policy. As President-elect Trump prepares to return to the White House, the direction of federal environmental policy faces major upheaval. In fact, the former president has pledged to roll back a host of Biden-era climate regulations and is expected to scale back EPA’s work in several areas. One former EPA official says that Trump’s victory will usher in an agenda along the lines of the first Trump administration, but “on steroids.” Initially, Trump’s victory will lead the new administration to attempt to pause pending lawsuits targeting EPA rules as officials begin efforts to scrap or revise them. Oil and gas interests have already prepared for the renewed opportunity to revise or undo Biden administration rules, although there have been some warnings that overreach could carry business risk. Environmentalists say they are prepared for battle. While implementing a Trump deregulatory agenda will spark conflict, officials with EPA’s largest employee union argue that its members are better positioned to withstand political attacks on career employees and say that many of those protections extend to EPA policies, particularly with regard to climate change regulations and other rules based on scientific findings. What’s more, Trump’s victory is spurring Biden officials to finish a variety of pending rules before the end of the current administration. As Trump officials promise a raft of executive orders related to environmental and energy policy, formers policymakers say it is important to note that “the last line of an executive order is that it doesn’t change underlying law.” A Trump win appears poised to set up debates about how far he and his allies in Congress will go in trying to repeal major portions of the Inflation Reduction Act (IRA). However, some Republican lawmakers in the House have urged GOP leadership not to fully scrap the IRA’s suite of clean energy tax breaks, arguing some provisions have an overall benefit to the economy.
Observatory Group’s Cheat Sheet for President-Elect Trump’s First 100 Days. Day 1 of the second Trump administration, January 20th, 2025, will be the busiest policy-making day for any new U.S. administration…ever. Immediate executive orders and actions will need consistent follow-up and may have long lead-times until late 2025 or 2026 before real change occurs. Trump 2.0 should be better at execution than 1.0, with improved organization, ideologically aligned appointees, and a focus on creating a lasting legacy. The highest priority will be to pursue faster economic growth via deregulation, cheaper energy, and promoting AI adoption. A second priority will be tax cuts, including extending the 2017 tax legislation and lowering the corporate tax rate to 15%; however, Congress may only pass these in late 2025. Tariffs and trade confrontation, especially vs. China, will come third, but are also uncertain, given the contrasting views of advisers; do expect action against China during the first 100 days, possibly to include tariffs. Other policy priorities will include: cutting federal spending, addressing legal immigration, deporting undocumented immigrants, and climate related deregulation. Executing executive action is always uncertain and there could be delays, owing to long implementation lead-times and resistance to spending cuts from Congress.
“Inside Baseball”
From today through December 20, Congress has a full plate of issues to deal with before Washington turns red in January. According to Punchbowl News, all the items on the lame-duck agenda are fraught with varying levels of political risk; three deserve special attention. First, government funding. Speaker Johnson says he wants to pass a short-term stopgap funding bill to keep the government open past the December 20 deadline. Strategically, this could be a risky move for President-elect Trump’s 100-day agenda. Moving a short-term measure would ensure Congress is wrapped up in a funding debate for the first quarter of 2025 all while Speaker Johnson would have only a bare-bones majority. What’s more, assembling a three-month CR would be a heavy lift for Congress as the Pentagon hates short-term funding bills and the spending anomalies involved would make the bill run into the thousands of pages. Second, disaster relief and the farm bill. The White House sent Congress a $98.4 billion bill to help the storm-stricken Southeast, which is exactly in line with what Speaker Johnson and other congressional leaders thought the price tag would be. All four corners—Johnson, incoming Senate GOP Leader Thune, House Minority Leader Jeffries, and Senate Majority Leader Schumer—want to get disaster relief passed. However, House Republicans will be the squeaky wheel. Third, the NDAA. For the last six decades, Congress has passed the annual Pentagon policy bill. The Senate is expected to move on the NDAA after Thanksgiving, while House Republicans plan to put a number of bills cracking down on China into the legislation.
In Other Words
“Elon won’t go home. I can’t get rid of him. Until I don’t like him,” President-elect Trump acknowledging Elon Musk’s constant presence at Mar-a-Lago and involvement in all pertinent discussions of the transition.
“The advice and consent of the Senate would tend greatly to prevent the appointment of unfit characters. [The president] would be both ashamed and afraid to bring forward, for the most distinguished or lucrative stations, candidates…possessing the necessary insignificance and pliancy to render them the obsequious instruments of his pleasure,” Alexander Hamilton.
Did You Know
Inaugurated at 36 years old, John C. Breckinridge was the youngest-ever vice president, serving under James Buchanan from 1857 to 1861. At age 40, J.D. Vance will tie Richard Nixon as the second-youngest vice president in U.S. history.
According to The Conference Board’s Holiday Spending Survey, the average U.S. consumer intends to spend $1,063 in nominal terms on holiday-related purchases in 2024, up 7.9% from $985 in 2023. On gifts, consumers plan to spend an average of $677, up 3.4% from $654 last year.
Graph of the Week
President-elect Trump’s first personnel announcement was that Susie Wiles, his campaign co-manager, would serve as his Chief of Staff. Selections for other major positions as well as cabinet nominees are ongoing. Selections are being chosen from lists curated by his campaign co-chairs, with heavy input from Vice President-elect Vance and Donald Trump, Jr. To date, personal fealty to the president-elect and his policy priorities has been prioritized over orthodox credentials. Names of appointees and speculative appointees reflect a range of policy orientations—from “Romney Republicans” to “Populist Nationalists.” Where appointees fall along the spectrum may serve as a useful indicator of potential policy posture. The graph below offers a quick review.
