The Trump Presidency: Investment Implications for American and Global Investment Portfolios.

In a few short weeks, a new US president intends to set a juggernaut of an economy on a new course. President-elect Trump’s expressed goal is for the United States to reassert American economic dominance. His view is that economic altruism is for suckers and that America has been played as a fool by much of the developed world. This author believes that Trump’s advancement of such an expressed goal is both long overdue and just. For much of the free world, an attitude adjustment towards the US appears well in order.

A Trump presidency has the potential, in an extreme form, to permanently reshape global economic models of trade, to change geopolitical alignments and to better balance global military expenditures. Forget about media political machinations over immigration; the greatest issue confronting America is trade.

Those proponents of a “world made better by free trade”, it should be noted, truly only have about 50 years of real world experience to work with. Even the most primitive forms of economic policy, going back more than a millennium, were built upon restricted flows of goods and services. From the times of guilds, through various forms of mercantilism; barriers and roadblocks, in the form of duties, tariffs and restrictions, served to advance domestic interests. Free trade is a novelty and perhaps that novelty is wearing a bit thin. Protectionism, on the other hand, while supposedly unfashionable, remains proven, time-tested and effective.

Those in Europe, Canada, Mexico and Asia assume, probably naively, that America may simply seek to exercise a somewhat bellicose model of moral suasion; their baseline priediction is that Trump will prove all bluster and have no substance. Foreign mandarins hope that Trump will bore easily; they believe that he will attempt to do little more than shame supposed global partners and allies into ending their more than half a century of “free-riding” off of the coat tails of American largesse. However, for the better part of thirty years, American economic moral suasion has failed; what policy options are left for America when supposed partners and allies cannot be shamed, other than the unsavory option of hitting people over the head with a sledgehammer?

By way of example, consider the supposedly benign partner to the north of the US border, Canada. Since 2000, the average positive balances of trade with the US has exceeded $50.2 billion annually. That surplus is only marginally lower than the reported amounts Mexico enjoys with the United States. My own economic modelling, using data obtained from the US government census.gov, has concluded that Canadian GDP, as a result of NAFTA, benefits by roughly 6% annually. This whopping disparity is partially due to the Canadian average trade surplus with the United States based upon the the one-sided NAFTA agreement; moreover, it includes the benefit derived from foregone Canadian defense expenditure. Canada has underspent its NATO funding agreement by more than $350 billion US, over that interval.

Canadian governments politely coo about their close working relationship with successive American governments to any who will listen; that sheen of friendship wears thin when it is learned that Canada maintains hard import quotas, or punitive tariffs, on supposedly such inoffensive products as American root vegetables, American sugar, American wheat, American barley, American beef, American pork, American poultry, American dairy products and American eggs. Try bringing more than 2 dozen American eggs, 5 pounds of cheese or a 40 pound sack of sweet potatoes back to Canada, from a cross border shopping trip to the US; one’s vehicle is then subject to seizure. Sweet potatoes do not grow well in the northern climate; there is absolutely no point in attempting to defend such posturing as protecting “mom-and-pop’ family farms against corporations. Canadian protectionism is so extreme that even coffee and tea, neither of which can be produced in the northern climates, are subject to import duties. Canada restricts foreign competition in banking, investment firms, telecoms, airlines, insurance, airlines, media. In fact, almost 80% of Canadian private sector industry is protected to varying degrees from American competition. Canada is every bit as egregious an offender in the manipulation of their currency as are other nations. Yet, Canada, at every turn, attempts to shame America on trade fronts. Almost all of the Canadian automotive manufacturing industry exists only as the result of the Canadian-US dollar currency differential, perpetually maintained by the Bank of Canada. J’accuse!

Leave aside Canada for a moment, and consider the opinions of free trade proponents in Asia and Europe, or speak to the officials in Mexico that almost daily prepare incentive packages that promote the relocation of American factories south of the border; when pressed, many external businesspersons, economists and foreign politicians readily concur, typically off the record, that American bureaucrats do seem to be perpetually to be on the short end of every major trade deal negotiated.

And as for defense spending; this remains a pressing sore point with America vs its supposed allies and partners. There is almost total unanimity among NATO that, for the most part, it is the United States that has done virtually all of the heavy lifting, to defend democratic principles, since the end of WW2. Again, look at Canada, the country that calls itself the “true north strong and free”; Canada spends less than 1/2 the amount on defense as does Australia, a nation with an economy only 2/3 the economic heft of Canada. Canada refuses to maintain an airforce sufficient to meet NATO mandates and NORAD contractual obligations. The Canadian north lacks multiple rocket launcher missile systems. The Canadian navy has no combat operational destroyers at present. The Canadian northern military outposts are staffed with fewer than 120 soldiers and they still use WW2 era Enfield carbines. Canada has no attack helicopters, no close combat aircraft, and does not maintain a sufficiently trained and kitted force to permit more than 120 NATO peacekeepers to be deployed at any given time. In fact, Canada is so tightfisted that during the initial stages of the Afghanistan mission, the United States had to supply Canada with appropriately colored camouflage uniforms, for close to one year. Presently, the Canadian armed forces rations bullets, for its troops, for training purposes, to less than 50 per year, for live firing. It is well known among NATO allies that Canada prefers not to engage in joint exercises that require live firing. This is not just due to the expense of buying ammunition, it is for fear that the equipment will break and that parts cannot be found for repair. Much of the Canadian equipment is so old that it can be only be found in other parts of the world in war museums, not on the front lines. How can a country with such an miserly attitude towards mutual defense consider itself an effective partner with the US to offset Russian aggression or deter Islamic extremism? Canadians take America for granted, to the point that almost all of the public at large and government officials simply call it as they see it: “why do we need to protect ourselves? America will protect us”.

If Canada, a supposedly staunch ally of America, mistreats the alliance so badly, how bad must it be for the remainder of the trading, economic and military partners of America? I suspect that when we find out, there will be a great deal more than shaming or finger-pointing, there will be real and material punitive consequences that will ensue.

These are massive impediments to US economic success. Being forced to subsidize global defense and being required to permit full access to American consumer markets, while not having reciprocal access to export markets in other countries; that deserves redress. As an investor that divides his time between Europe, Asia, the United States, South American and on occasion, Canada, this author maintains a more pro-America than domicile addresses would suggest. In order to accommodate the demands of an America that deserves better partners and more fairly balanced trade agreements, many scofflaw nations will be expected to do more of the heavy lifting globally.

What will an ideal “Trumpian” America look like in economic terms?

To begin with, if America does not buckle, most NATO nations will almost double their military expenditures. Defense companies should enjoy large increases in their order books.

Next, most American products that cannot presently be freely be sold abroad should enjoy access to new markets, or will enjoy improved access to markets that were ostensibly open, but in truth, were shut tight. Protected economies will be forced to permit US exports into their countries, or will be tariffed accordingly. Economists consider tariffs to be a form of tax; while it is true that US imports will cost more, those tariffs will simultaneously balance the budget and potentially propel America to budgetary surpluses. Virtually all American companies have more potential, under a Trump Administration, to sell into foreign markets. Larger companies will of course benefit disproportionately at the outset. From agriculture to manufacturing and to knowledge industries, the outlook for America appears better than might have been envisioned, when faced with the alternative presidential choice.

Next, should Trump prove to be successful in reducing corporate tax brackets, there might be renewed foreign investment in the United States. This would provide a possible floor to economic growth that is somewhat higher than baseline estimates at present.

All in all, it is the viewpoint of this investor that a Trump presidency, if successful, will go some way towards increasing US GDP. There is a zero-sum game aspect to trade; what will be gained by America should be lost by nations such as Canada, Mexico, China and more than a few countries in Europe. Investment exposures to foreign markets should be assessed quite carefully, as this has the potential to become a secular trend.