As the Economy Booms, Trump Makes Progress on Trade

As the Economy Booms, Trump Makes Progress on Trade

This week, despite the growing fiasco of the President's legal troubles, has seen the release of overwhelmingly positive economic numbers and key developments in international trade.

For the third time this year, the Federal Reserve has hit its core inflation target of two percent, showing a level of control only achieved twice otherwise since April of 2012. This provides further backing to Fed Chair Jerome Powell's insistence that the economy should continue to be normalized; it reassures investors that the central bank will go forward with two planned rate hikes and continue to dump bonds through the end of the year. Consumer spending, which accounts for 2/3 economic activity, rose 0.4 percent in July, matching the June increase. The consumer savings rate in turn remained relatively consistent, slipping only 0.1 percentage point, indicating that consumer confidence is likely to remain high in the coming months. There's no doubt that Fed remains under pressure to show progress and control in an economy that many believe is too good to true, yet it's plausible that continued cash injection from the White House, which might come in the form of indexing capital gains to inflation, will complement forthcoming rate hikes to continue the unprecedented expansion deep into next year. 

On Thursday, the President told Bloomberg he is considering tying capital gains taxes to inflation, foreshadowing yet another boost to Wall Street profits and stock prices.

On the international trade front, the President's unprecedented, gunslinging approach to negotiation seems to be paying off. Just this week the President's threatened car tariffs have forced another concession from the European Union, which has said it is now willing drop tariffs on cars imported from the US completely. They had previously indicated a strict unwillingness to do so. The EU remains insistent that the US drop its own tariffs as well, but given the contrast of a slowing European economy over the backdrop of continued strength in the United States, further concessions in the context of a wide ranging agreement  are plausible. 

The President's anti-NAFTA bluster, roundly criticized as reckless, has translated into progress as well. On Monday, the White House announced an agreement with Mexico to revise key portions of NAFTA in a pact which threatens to leave Canada out of the mix. It is unlikely that the United States will cut Canada out completely given the significant interdependence of the three economies, but reports indicate that the pressure of a Friday deadline set by the President has accelerated negotiations to join the currently bilateral agreement to a feverish pace. It was that same pressure, however unsustainable in the long run, that forced Mexico to drop its insistence that Canada be a part of any agreement from the outset. 

There are things that we don’t control, particularly the political relationship between Canada and the U.S., and we definitely don’t want to expose Mexico to the uncertainty of not having a deal. Not having a trade agreement with the U.S., that’s a substantial risk to the Mexican economy.
— Mexican Foreign Minister Luis Videgaray Caso, via the New York Times

The agreement itself seems to be a win across the board for the Trump administration, provided that US manufactures can keep prices down in light of changes. Under the changes agreed to by the US and Mexico, car companies will have to manufacture greater value in North America to qualify for tariff exemption, and will also be required to utilize more locally produced raw materials. Labor unions also received a surprising boost, given the agreement's provision that 40-45% of any manufactured car must be produced by workers earning at or above $16 an hour. 

Given the length of the current expansion and the President's erraticism on trade, one has the right to be skeptical that economic stability and the final signatures on these trade agreements will last very long, but the signs are undeniably good and strengthening. Wage growth remains a significant problem for the administration, as does a continued stalemate with the Chinese on trade, but President Trump is making undeniable progress. Let's hope it continues. 

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