Thought of the Week:
Last week, I was in Phoenix for SCOA’s annual Credit Manager’s meeting. Beyond presenting my take on the U.S. economic and political outlooks, the trip offered me the chance to visit Sunstate Equipment, North America’s sixth largest construction equipment rental company, and touch base with many of SCOA’s other subsidiaries. Outside of “what’s going on with the government shutdown,” by far, the majority of questions I received revolved around tariff policy—is the president done imposing them or are more coming, how is the Supreme Court going to rule, what about the USMCA, how can we get around them? At the core of each of these questions was an uncomfortable realization that the White House might not recognize that the imposition of tariffs was making their own goal of reindustrialization more difficult to achieve. While President Trump believes free trade agreements and globalization eviscerated U.S. manufacturing, the fact is that American manufacturing output has grown substantially since 1980. What’s declined is factory employment and manufacturing’s share of GDP, which logically tracks with the increased use of automation and the rising demand for services in all advanced countries. Whether it’s called industrial policy, central planning, or economic nationalism, the Trump administration’s historic tariff increases have led the Eurasia Group to outline three scenarios for the future of trade. The base case (60% probability) sees most countries focusing on limiting the damage from U.S. tariffs, while also advancing both protectionist measures and limited trade deals of their own; the result: a more expensive and uncertain global operating environment for corporations and investors. The second scenario (30% probability) sees increasing U.S. isolation where countries ramp up non-U.S. bilateral trade deals and negotiators make progress toward a renewed global trading system without the U.S. The final scenario (10% probability) is the rise of extreme protectionism where “my country first” policies proliferate with a significant increase in trade protectionism. Economic orthodoxy teaches that trade is a potent lever for lowering prices and injecting more competition and choice into an economy. In fact, there are both conservative and liberal cases to be made for free trade. On the right, because it’s based on the principles of limited government, individual liberty, and free markets, free trade is consistent with conservatism’s historical and intellectual roots; free trade leads to increases in efficiency and growth, lowers prices for consumers, and creates jobs; and by creating shared interests, can reduce armed conflict. From the left, liberals argue that protectionism enriches the privileged few at the expense of the many; that free trade can address inequality by lowering prices on essential goods for low-income households; and that enhanced trade can even prevent conflict by fostering cultural exchange and mutual tolerance. America’s economic superpower has always been its ability to adapt swiftly to economic change and turn the market’s “creative destruction” into new opportunities. Tariffs and reindustrialization are unlikely to win the economic future as the U.S.’s comparative advantage lies in unleashing the initiative, creativity, and entrepreneurship of a free people. The Trump administration’s drive toward economic nationalism may ultimately give detractors, on the right and left, an opening to articulate an alternative way forward.
Thought Leadership from our Consultants, Think Tanks, and Trade Associations
Capstone Says the Government Shutdown Won’t Delay EPA’s Rush to Scrap its Endangerment Finding. Despite the government shutdown, the Environmental Protection Agency (EPA) is on track to revoke the 2009 endangerment finding, which determined that greenhouse gas (GHG) emissions could be regulated as pollutants under the Clean Air Act (CAA). A rollback would immediately remove GHG emissions from tailpipe regulations and set the stage for rescinding rules affecting the power sector. While the process typically lasts up to two years, using the EPA’s current timeline, it would take just five months. Although the accelerated pace makes the rule more vulnerable to legal challenges, which are likely to include allegations of violations of the Administrative Procedure Act (APA), any cases are likely to advance to the Supreme Court. Rollback of the endangerment finding would be negative for electric vehicle automakers that profit from increased demand created by tighter regulations. In the short term, legacy automakers like GM and Ford, as well as original equipment manufacturers such as engine maker Cummins Inc. (CMI), would benefit from selling vehicles powered by internal combustion engines without concern over fines tied to GHG emissions. A protracted legal battle over GHG emissions, however, would raise the level of uncertainty for all vehicle-related manufacturers. While revocation of the endangerment finding would not directly threaten state compliance carbon markets, it could provide the Trump administration with new avenues to target state climate policies. Because such efforts might create legal uncertainty and influence allowance prices, expect the administration to face significant hurdles in asserting federal authority over state GHG programs.
Eurasia Group Sees Big Swings in Energy Policy as a Result of Polarized Politics. The White House’s ongoing effort to curtail support for wind and solar power exemplifies a recent trend in which political polarization results in big swings in energy policy across administrations. Republicans have become far more negative on renewable energy in the last five years, creating incentives for GOP policymakers to lean hard against renewable projects in power. This cycle of development and backlash may hinder stable policy and long-term solutions at least through the medium term. Lawmakers’ responses to higher electricity prices will be tailored to voters’ immediate concerns, not to the most productive solutions. Watch the Republican stronghold of Texas for an indication of where energy politics might head in the coming years. Support for renewables there has been broad on the back of a boom in solar and battery storage development; if that trend withstands the general GOP backlash against renewables, it suggests that more development will eventually breed acceptance on the political right. Democratic primaries over the next year are another signpost, with those on the “abundance” wing of the party likely to pursue broad-based reform that could help expedite permitting reform.
Observatory Group Looks into the Trump Mindset. After nine months in office, President Trump views his aggressive threats on economic and security issues as successful in solving complex challenges—a posture he intends to continue as needed. The president believes he has proven his threats are serious by following through on key ones such as strikes on Iranian nuclear facilities, imposing tariffs, and demonstrating a willingness to escalate with actions frequently first announced in his social media posts. His message to adversaries is: credibility established, disruption complete, and “deals” available for those who want them. For countries refusing to negotiate—escalation threats may continue indefinitely until the White House gets something it can claim as a political victory in the U.S. Critics say he “TACOs” (Trump Always Chickens Out) by not following through with his threats, but he has viewed the pivot from maximum threat to negotiated settlement as always part of the plan. President Trump regards recent foreign policy successes as validating his approach. He referred to ending “eight wars,” including the recent Gaza ceasefire, the Armenia-Azerbaijan peace ending a 35-year conflict, and the India-Pakistan ceasefire. He has concluded trade deals or frameworks with most major trading partners. His leading White House advisers and members of his cabinet concur with his views and will help him execute this strategy for the remainder of his term. Our view is that the president believes he can use this same strategy and leverage the momentum of completed deals to resolve two of the conflicts with the highest stakes: Russia-Ukraine and U.S.-China. There is no guarantee this will work, given China’s rare earths leverage and Putin’s intransigence; however, the maximal tactics should continue until Trump thinks a “deal” simply isn’t possible. And then, it’s very possible he turns TACO to NACHO (Not Always Chickens Out).
“Inside Baseball”
Politico Asks Whether Trump 2.0 has Blown Up Lobbying. There’s been a sharp change in how companies are navigating Washington during President Trump’s second term. After decades of a revolving-door culture, Washington is grappling with a new normal for how influence works in the capital, and it’s been more disruptive than the typical churn that comes with any new administration. In Trump 2.0, policy influence has seen a shift from agency officials, top lawmakers, and key committee staffers to a new reality where change comes from the top. The president and a handful of advisers have seized control over policies once considered the remit of Congress and the agencies, including hyper-specific issues like tariff rates. The president’s gravitational pull has forced CEOs to act as their companies’ top lobbyists, plying the president with gifts and concessions to secure their policy priorities. The new dynamic is transforming the business of Washington influence, shutting out veteran lobbyists and excluding longtime experts from policy fights. With Congress and the agencies sidelined, outside lobbying firms and in-house specialists—many with decades of experience and cross-party relationships—are seeing their influence wane. Top lobbyists say the old levers of Washington influence and intelligence are increasingly broken, starting with Congress. The legislative branch has lost importance as Republicans—in charge of both chambers—take their cues directly from the White House. The same is true at federal agencies, which once operated independently but are now closely responsive to the president. From K Street’s point of view, there’s only one lever consistently worth pulling—and it sits in the Oval Office. Lobbyists and trade associations who can’t get clients and members in front of the president are trying to adapt, and the White House is aware, calling it a feature, not a bug, of Trump 2.0. So, companies that can’t get their CEO into the Oval are searching for new ways to capture White House attention. They’re increasingly turning to PR and advertising firms that spread messages across television, social media, and podcasts popular with the Trump team. Consequently, lobbying shops are beefing up their PR and ad wings. With lobbyists ignoring expert staff and devaluing policy knowledge in favor of White House access, the fear is that Washington will land on policies that are divorced from reality and riven with presidential quid pro quos. Despite the upheaval, corporations’ mix of enthusiasm and concern about what Trump is doing has led K Street to be on track to earn more money than in any year since 2010. White-shoe firms still tend to bring in the most cash, but newer Trump-linked firms are racking up clients. The natural lobbying order could always reassert itself. In fact, legacy lobbying firms point out that partisan lobbying surges in any new administration—George W. Bush brought a Texas flavor to K Street in the early 2000s, and Barack Obama oversaw the rise of Democrat-leaning shops. Established firms have survived rough political cycles in the past, and are questioning whether clients of the new Trump-friendly shops are getting their money’s worth. These firms are staying the course, keeping their political contacts broad, and their policy expertise sharp, confident that Washington will revert to type within an election or two.
In Other Words
“If the IEEPA tariffs are upheld, this and future Presidents would ‘enjoy virtually unlimited power to rewrite’ U.S. tariff laws—by adding, increasing, or decreasing taxes on imports—whenever and however they chose,” Supreme Court brief filed in the suit known as Learning Resources, et al., v. Trump.
Did You Know
When Sen. Jeff Merkley (D-OR) yielded the floor earlier this week, he secured the third position on the list of continuous speeches. He’s behind only Cory Booker (D-NJ), whose 25-plus-hour speech earlier this year set the new record, and then-Democrat Strom Thurmond’s 24-plus-hour address in 1957.
Graphs of the Week
U.S. Energy Politics have Become Highly Polarized, a Trend that Will Lead to Extreme Policy Swings. Just five years ago, solar and wind power development had broad bipartisan support. A gap has grown dramatically since then—with Republicans turning against these technologies. In May 2020, Republicans prioritized expanding renewables over fossil fuels by a 2-1 margin; today, that preference has flipped. The change is feeding an escalating political cycle that encourages Republicans and Democrats to take divergent paths on energy. The upshot: ever larger swings in policy.
