President Trump stunned the world on Thursday with a sudden announcement about tariffs on imports of steel and aluminum. Of course, he has been talking about doing this since he began campaigning in 2015. But no one expected him to really take that step. Because, as the prevailing wisdom goes, imposing tariffs would quickly become a war that could backfire on America.
Frankly, the way President Trump did it was the only way to do it. The issues are so complex and the supply chains are so interwoven that a creating serious analytical plan would take years. So President Trump simply went ahead and did it. Now the chips can fall where they do.
Think about how President Trump and his team announced the elimination of the deduction for state & local taxes from Federal tax returns. Remember, the storm that created? No one expected it to be included in the Tax Reform bill because no Republican Congressman/Senator would survive in the next Congressional election if they voted for it. So what happened? The deduction was not totally eliminated; it was reduced to $10,000, a figure that protected the middle class tax payers & only hurt the high income ones. The net result is states with high state income taxes like New York, New Jersey, California are now feverishly working to restructure their tax burden on their residents.
1.O Canada
Will President Trump’s tariff announcement lead to a similar restructuring of wasteful financial management in countries that lived off of America? Kevin O’Leary, a Canadian citizen & a successful entrepreneur with business interests in Canada & US, said succinctly about Canada – “the country is shell shocked right now; … a lot of capital is going to be leaving Canada”.
Canada is shell shocked because Canada is the No 1 trading partner for 38 US States with hundreds of thousands of jobs involved in the cross-border trade. They never expected President Trump to include them in his trade tariffs. Their predicament actually goes back to President Trump’s Tax Reform Bill. Canada has long enjoyed a tax advantage because their corporate tax rate of 26.7% was much lower than America’s corporate tax rate of 35%. That allowed Canada to remain fat, dumb & happy. By cutting America’s corporate tax rate to 21%, in the words of Kevin O’Leary, “Trump made Canada incredibly uncompetitive“.
Read what Edward Alden wrote on cfr.org, the site of the Council for Foreign Relations, 2 days before President Trump’s tariffs announcement:
- “I have had conversations with business leaders in recent weeks in which they all quietly acknowledge the same thing: Until they know what the new rules will be under NAFTA, they are likely to hedge their bets by locating new investments in the United States rather than in Canada or Mexico, just in case the rules change and they are frozen out of the largest North American market.”
Well, one set of rules are now about to change, rules for sending steel & aluminum into America. How many businesses might decide to move their plants to America both for lower corporate taxes, immediate expensing of capital investments and for avoiding the newly announced tariffs?
No wonder Edward Alden wrote this past Monday “… Trump is already winning the NAFTA renegotiation“. Look how Kevin O’Leary ended his comments on Trump tariffs on Friday – “Is Trump a great negotiator? Oh, Yeah Baby! Everybody feels it in Canada“.
If Canada feels so, what must Mexico be feeling? And what about the real culprit in getting fat off of America? After watching South Korea be all palsy with North Korea at the Winter Olympics, China must have gloated. They forgot what President Trump told President Xi in their first meeting at Mar a Lago in April 2017. President Trump promised a much better trade deal if China helped America on North Korea. Not only did China not help, but China actually worked against US interests & got South Korea to move away from America.
So now gloves came off a bit and the first salvo of trade action against China was fired. And it is equally against South Korea. This week President Trump showed that actions have consequences and he is capable of acting suddenly and decisively.
2. Big Ten Country & FDR
Remember why Mitt Romney lost the 2012 election to President Obama? He lost Big 10 country – the industrial states that lie along the coast line of the great lakes from Western NY to Wisconsin. Candidate Trump understood even before announcing his bid that he had to win this industrial heartland to win the election. And from day one, his message was about making American Industry great again. He never deviated from this message and promised to act for the forgotten workers of America. They believed he was authentic and that he would fight for them.
This week, President Trump showed he meant what he said in his campaign.
- Donald J. TrumpVerified account @realDonaldTrump Our Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world. We must not let our country, companies and workers be taken advantage of any longer. We want free, fair and SMART TRADE!
A large majority of Americans, including stock & bond market guys, believe in their hearts that America was taken advantage of in global trade. That actually worsened after the 2017 Tax Reform Bill:
- Richard Bernstein @RBAdvisors – Our concerns re tax cut “leakage” stimulating foreign economies may be spot on.
#Trade balance quickly worse since 2018.
Richard Bernstein is a mellow, analytical strategist and investment manager. At the other end of the emotional & decibel spectrum are left leaning Democrat-oriented stocks-lover Jim Cramer and right leaning Republican-oriented bond trader Rick Santelli. Both Cramer & Santelli concur about America being taken for a ride in global trade. Listen to Rick Santelli himself:
- ” I am really happy about it, to be honest with you; its time somebody attempted to get a better deal for us with China and many who take advantage of us; … This President has the type of temperament that is really the perfect man for the perfect time; … I am a big proponent of globalism but I am not a big proponent of being suckered into thinking we are getting a good deal when we are not … “
If a bond trader for 35 years from President Obama’s home state of Illinois feels so and so strongly, how do you think industrial workers from Pennsylvania, Ohio, Michigan & Wisconsin feel? We will find out next week when President Trump holds a rally in Pennsylvania.
Remember what we wrote on January 23, 2016, 8 days before the Iowa Caucus when Bernie Sanders was strong?
- “So a Trump-Sanders election may pit the visions of the last two transformative Presidents against each other – the vision of Ronald Reagan against the vision of FDR.”
That was the conventional static view. At that time, guess what a dynamic forward view suggested to us?
- “You know what is amazing? It would actually be easier for Donald Trump to move left & adopt the FDR banner than it would be for Bernie Sanders to move right to appeal to Reagan supporters. … People hear this message from Trump even if political pandits don’t. That is why so many Democrats are moving to express their support for Donald Trump”
Fast forward to Candidate Trump’s Republican Convention speech. We wrote on July 23, 2016 about the Trump speech:
- “He pivoted into FDR without leaving Reagan. Read the transcript of the Trump speech and you will hear FDR.”
If you look at the past 12 months, you will see an integration of Reagan and FDR from President Trump. On January 29, 2018, Senate Majority Leader Mitch McConnell described 2017 as ““the best year” for conservatives in his decades long career in Washington“. After trying for over 30 years since President Reagan’s 1986 Tax Reform, GOP got the 2017 Tax Reform. Every one in the Republican leadership knows that it happened only because of President Trump. President Trump appointed Neil Gorsuch to the Supreme Court and many conservative judges to Federal Courts.
That was Reaganesque of President Trump. Now it is time to pivot to FDR and focus on the promises to Trump Democrats. If you doubt the FDR pivot, just see who criticized President Trump for the tariffs and who praised him. The GOP leadership uniformly criticized President Trump. But look what Big 10 Democrats, who spent all of 2017 spewing invective against President Trump, said about his tariffs announcement:
- “This welcome action is long overdue for shuttered steel plants across Ohio and steelworkers who live in fear that their jobs will be the next victims of Chinese cheating,” said Senator Sherrod Brown, a liberal and populist Democrat from Ohio.
- Senator Bob Casey, a Democrat from neighboring Pennsylvania, said in a statement that it had taken the administration too long to act, but that Trump’s announcement on Thursday was a“welcome step.”
- Democratic Representative Tim Ryan, whose northeastern Ohio district encompasses an area once known as“Steel Valley,” tweeted:“China has been eating our lunch for decades. These actions will protect good-paying jobs in Ohio and across the country.”
- Democratic Representative Bill Pascrell of New Jersey urged the president to move quickly.“Let’s get it done,” he said.
Democrats from other regions also expressed support for Trump tariffs, even Democrats who have never said anything positive about President Trump:
- Bill Richardson from New Mexico – “in this case, the President deserves support“
- Senator Ron Wyden from Oregon – “pleased Trump“recognizes the importance of addressing these challenges, and finally intends to take action.”“
So what happens to Democrat leadership’s plan to make the November 2018 election about President Trump? How do Democrats win back seats in Blue States from a President who speaks the language of FDR? And how do Democrats win back seats in Red States from a President who has acted like Reagan and delivered like Reagan?
Is that what the elite call a conundrum? Oh, Yeah Baby as Kevin O’Leary would say.
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