THE TUCHFARBER REPORT

Accurate Facts, Analysis, and Forecasts

In-Brief

1. Is the “trade war” real, serious, or mostly posturing before negotiations?
2. Trump’s grenade brand of negotiations and diplomacy; will it work or blow up?
3. Syria hammered because chemical warfare on its own people?
4. The National Guard is sent to protect the border.
5. Putin’s oligarch buddies punished by Trump.
6. Nancy Pelosi keeps helping the Republicans with their messaging.

In-Depth

What’s Important

I’m going to address the trade war issue in three parts today. The first part will present basic facts. The second will be my analysis and the third will include a series of insightful quotes from Holman Jenkins, a regular op-ed columnist for the Wall Street Journal.

Trade War Part I: Facts

The following are basic facts about trade and the overall relationship between the US and China:

1. The worldwide US trade deficit in goods and services in 2017 was $566B. That’s approximately 3% of the total US GDP of $20T.
2. The US is certain to have a trade deficit because it spends far more than it saves and invests. But, the current trade imbalance is substantially higher than economic theory and models would predict.
3. The US trade deficit with China was $375B in 2017. That’s two-thirds of the entire US trade deficit and has grown dramatically in recent years.
4. China joined the World Trade Organization [WTO] in 2001. The WTO creates and adjudicates the rules of international trade. China has cheated on those rules in a systematic and purposeful way from the time it joined. It generally plays fast and loose with all international law and rules, except when following the rules is in its interest.
5. Neither Republican or Democratic US administrations have been effective in reining in China’s abuses. Neither have other counties with trade imbalances with China or who have complaints about its trade behavior.
6. There are many ways China cheats, but some major ones are:
   • China heavily subsidizes its companies and industries that are in competition with those of other countries in ways that routinely break international agreements.
   • China and its companies illegally steal technological secrets from foreign firms and countries. It also forces foreign firms that wish to do business in China to “share” technological secrets.
   • China has targeted major industries and technologies such as artificial intelligence [AI], advanced computing, and many others that it thinks will be critical for future growth and world leadership. It has committed large subsidies for Chinese companies working in those areas in ways that violate international trading rules.
7. China’s exports to the US are over 4% of its GDP, while US exports to China are less than 1% of US GDP.
8. China holds about $1T in US debt [treasuries]. This is 5% of total US public debt. US public debt finds ready buyers in the US domestic market and in almost all foreign markets. The fear that this gives China a major weapon against the US is mis-guided.
9. China is NOT a friend of the US. It’s somewhere between an enemy and a major geo-political competitor of the US.
10. China has an enormously high societal debt load [government, corporate, and household] making it highly susceptible to internal and external financial pressures, including a trade war.
11. No one wins a major trade war. All participants suffer economic loss, but some will lose more than others.
12. The integration of the world’s economies does not guarantee that no shooting war can erupt between major trading partners. This was demonstrated by WWI as the world’s economy was as integrated then as it is today.

Trade War Part II: Analysis

I can summarize my analysis in a few sentences. The Trump administration is threatening the prospect of a major trade war to get China and its other trading partners to reduce trade restrictions on US exports. The main target is China, which is cheating the US and almost all its trading partners in unacceptable ways. Trump and his administration do NOT want a major trade war but are NOT prepared to continue the status quo where predatory trade policies, especially by China, persist at an elevated level.

Few people have bothered to really understand Donald Trump’s style, tone, and methods. Most around the world, including within the US, hate them, but don’t understand them. They are much more strategic and nuanced than people think. I won’t go into all the nuances today but will analyze how he treats negotiations and diplomacy.

Trump uses a Grenade Method of Negotiations and Diplomacy. When something is important, he begins negotiations with a flash-bang grenade. A flash-bang does not explode or shatter but creates a loud noise and intense light that temporally deafens and blinds. To say it gets your attention is an understatement. Once he has your attention he gets down to negotiations. He knows both sides must get things they want—”win-win.” Otherwise you don’t get a deal, and/or you make permanent enemies you don’t want to have.

A corollary is that if the negotiations stall, he’ll throw in another grenade. This should not be a mystery to anyone as he wrote about it in his famous book, “The Art of the Deal.” The “grenade” label is mine, but the method is his.

Don’t believe me?

Trump blew up the S Korea-US trade agreement [KORUS]. He blustered but negotiated a deal that didn’t change all that much. It is ready to sign, but Trump has delayed that to make sure S Korea’s President Moon does not undercut the US position when he meets with N Korea’s Kim later this month.

Trump even more dramatically nuked the NAFTA deal with Canada and Mexico. A number of grenades were used, but, according to Prime Minister Trudeau of Canada the deal is ready to sign with only limited overall changes. See the pattern? President Trump is following in the footsteps of President Reagan who demanded much but took what he could get from both the Russians and the Democrats.

Trade War Part III: Insights

Holman Jenkins, in a WSJ article entitled “Trump’s Trade Tactic Might Work,” wrote the following excerpted remarks from his April 7th op-ed…

“Right now a bargaining game is under way that could leave the world trading system better off,     with China cheating less. Not the least benefit, this would strengthen the political sustainability of trade in the U.S. and other Western nations—an outcome of high strategic value even to China. Both sides are in the crotch-grabbing phase at the moment. They want their threats to be treated as credible even if they aren’t.

…Donald Trump’s rhetoric often fails to notice that trade is win-win, but the peanut gallery should not lose sight of the basic context in today’s trade fight: Both sides are putting guns to their own heads and saying, “Give me what I want or the idiot gets it.”

…Such incentives strongly favor the parties reaching a deal and declaring victory for the benefit of the home fans. Both know the U.S.-China trade relationship is too important not to put on a sounder basis.

… So the real question is, ‘Do we have confidence in the wisdom of the Chinese and U.S. administrations?’ Mr. Trump is not a child. He has been in negotiations all his life. It’s the one skill he brought to office that can’t be gainsaid.

…The Chinese deny it but they know the U.S. has legitimate gripes, especially with respect to Beijing shaking down U.S. companies for their trade secrets as a price for getting access to the Chinese consumer.

… Americans, though, have to be ready to accept some risk if they want China to change its behavior.

… Mr. Trump is not the idiot his detractors say, and nobody says the Chinese are idiots. The omens are propitious for a major advance in trade relations.”

Polls and Media

Don’t forget the Tuchfarber 30 Day test — when you get upset about something in the news, ask if it is likely to be IMPORTANT in 30 days or so. Only seldom will it be so and you can usually ignore it.

The Democrats

Another Pelosi Political Death Wish

What is it with Nancy Pelosi and politically destructive things to say? A few weeks ago, she described the tax cut benefits for Americans as “crumbs.” Most voters are quite happy to have several thousand more to spend.

Last week Pelosi made it clear that if she leads the Democrats to a big victory she will reverse the tax cuts. The cuts are very popular, and her statement makes her an even stronger asset in November for the Republicans.” Vote for the Democrats and they’ll take your tax cuts away.”

What also shows political ineptitude is that there is zero chance the Tax Bill can be reversed anytime soon. It is almost impossible to believe the Senate would reverse it even if the Democrats had a majority and it is an absolute certainty that Trump would veto such a bill.

Tuchfarber Global

Global Politics

Trump Hammers Russian Oligarchs

Trump collusion with the Russians?

Trump friendly with Putin?

Such have been the accusations.

In reality, he has been the worst nightmare for Putin and the Russians. He confronted them in central Europe, strengthening NATO.

He has armed the Ukrainians against the Russian “little green men” invasion.

He has increased the US defense budget by $70B, more than the entire Russia military budget—a $70B US increase v the $50B total Russian military budget. The total US defense budget is more than $700B, about 15 times that of Russia.

He has imposed major sanctions on the Russians, while pushing the Europeans to do the same.

Now he has gone directly at Putin’s power base, the oligarchs. Last week, the administration black-listed more than three dozen Russian individuals and entities. They include Putin’s son-in-law and many powerful oligarchs. Treasury Secretary Mnuchin said, “Russian oligarchs and elites who profit from their corrupt system will no longer be insulated from the consequences of their government’s destabilizing activities.”

And, what retribution is coming in Syria for its weekend chemical attack on its own people?

Global Economics

Chinese Lending to Local Governments

An important part of China’s rapid growth has been created by Chinese local governments investing in industrial and housing development. Doing so has created a major increase to growth but at the cost of substantial debt.

The central government has made unsuccessful efforts to rein in that borrowing in recent years. They have evidently decided to crack down much harder now.

The Ministry of Finance has ordered state-owned banks to stop lending to local governments. This cannot help but cut economic growth.

More important, the action points to the huge debt load already extant in China. This new action is an indicator that “Emperor” Xi knows he must cut that debt or at least stop adding to it.

Think back to the story above about the trade war. China is in a precarious financial condition. Xi knows that and so does Trump. That weakens Xi’s hand considerably.

Tidbits, Follow-ups, and Nuggets

This is a new section devoted to short, interesting items, and brief follow-ups to stories from previous issues.

National guard to the border

Trump failed in his attempt to get border wall funding from the Congress. Yet, he had promised the voters much more border security.

As a result, the National Guard is now being sent to the southern border with Mexico. Of note is that President’s G W Bush and Barack Obama also sent the Guard to the border.

Roseanne

The reprise of the “Roseanne” TV show continued to have blockbuster ratings last week with over 15M viewers on Tuesday and many more since. The show has already been renewed for next year and is an interesting indicator of the political-cultural tensions in our society.

Predictive Political & Economic Measures

Minor Changes this week

POLITICAL MEASURES

1. Right Direction-Wrong Track— This measure is widely used by pollsters, asking if things are going well or badly in the US. It has proven to be a good indicator if the party “in-power” was going to do well or badly. If the “wrong-track” reading is 62% or higher, it bodes ill for them. If 58% or lower, they do well. THIS IS MY MOST-PREFERRED ELECTION PREDICTION MEASURE. I use many quantitative and qualitative indicators, but this one seems to strip out a lot of extraneous noise. “Wrong-Track” is now at 56%, down 1% from last week.
2. Generic Congressional Ballot—Also used by many pollsters, this indicator measures the current preferences of voters for which party they prefer in US House races. The polls I’m averaging are now at 45% D and 39% R, the D lead unchanged from last week. More important is that the Democratic lead has fallen from about 13% at the beginning of 2018 to 6% now. Historically, Ds need a solid lead on this measure to win a House majority.
3. Presidential Approval—Trump’s approval rating, using my measure, is now 43%, down 1% from last week. His approval rating is up from 40% at the start of the year. It’s at a below average level for recent Presidents. But, because of his unique and often disruptive style, the Gallup organization and others, including myself, believe this measure underestimates his real approval ratings by 5% or more. I will report his approval rating, but will use it for trend analysis, not election predictions.

ECONOMIC MEASURES

4. U-3 official unemployment rate—The current level is 4.1%, a 17-year low. Low or falling levels of this measure are a positive for the “in” party. It is low and falling now, down from 4.8% a year ago.
5. U-6 unemployment rate [broadest measure, including under-employment]—The current level is at 8.0%. This is a very low level and fell from 9.4% a year ago.
6. CHANGE: GDP GROWTH—Growth last quarter was 2.9% which is significantly higher than the average growth over the last eight years. THIS IS AN INCREASE FROM PREVIOUS ESTIMATES.

WAR

7. The jobs issue and war issue are the 500-pound gorillas of American public opinion. If the economy is bad or there is a major unpopular war, the party in power is in trouble. Unpopular wars, like Vietnam and Iraq, shatter their support. Small wars, like Afghanistan and Syria are nearly always underway and usually do not have major effect unless they grow substantially in the cost in US lives.

ANALYSIS

Among the Political Punditry, the conventional wisdom for months has been that a Democratic Wave was building that would gain them the House majority and minimize their losses in the Senate, where they have many vulnerable seats.

I have disagreed and the predictions in the next section quantify that. I’ve demurred because my preferred metric [right direction-wrong track] is in territory that predicts relative success for the Rs. In addition, economic growth and job creation are excellent, and there is no major war.

The measures above could change, but if they stay where they are, the Democrats will make only modest gains in November. If the indicators change, so too will my predictions.

Predictions

No major changes this week.

Election Predictions

• 80-90%: the probability the Rs will lose seats in the 2018 House elections
• 10-20%: the probability that the Rs will lose control of the House in 2018
• 90-95%: the probability that the Rs will still control the Senate in 2019
• 90-95%: the chance that the Ds will lose seats in the 2018 Senate elections
• 50%: the chance the Republicans will gain five or more Senate seats in the 2018 elections
• 90-95%: the chance that Donald Trump will be the 2020 Republican nominee unless he decides not to run
• 80-85%: the chance that Trump will be re-elected in 2020

Policy & Legislative Predictions

• The odds that the 2^nd amendment will be repealed or changed are less than 1 percent. It takes three-quarters of all the states to make such a change. That is essentially a political impossibility.
• There is more than a 70% chance that pressure on the DACA–“Dreamer” — issue will force the Democrats to negotiate a deal with President Trump on the border wall and other immigration issues this year.
• The chance that Donald Trump will be impeached and removed from office by the Congress in the next three years is less than 1%. *
• The chance that Trump will be removed from office by the Congress in the next seven years is less than 5%.

*NOTE: Remember that after being impeached by a Republican controlled House in 1998, not one Democratic Senator voted to remove Bill Clinton from office. It takes 67 votes and is more of a political process than a legal one. NO President has ever been impeached and removed. Richard Nixon resigned before the House and Senate could impeach and remove him from office.

Until next week…
Al Tuchfarber
Professor Emeritus of Political Science, University of Cincinnati

Al.Tuchfarber@gmail.com
Tuchfarber Political-Economics LLC, Inc.

Dr. Tuchfarber founded the Ohio Poll, one of the nation’s most accurate, while directing the social science Institute for Policy Research from 1975 to 2004. He also founded and directed the Institute for Health Policy from 1996 to 2004. He is an engaging and dynamic speaker and has published over 100 articles and papers about politics, society, and research methods.