Econ_May_26

The Economist

May 26th 2018

OST American elites be-

lieve that the Trump presi-

dency is hurting their country.

Foreign-policy mandarins are

terrified that security alliances

are being wrecked. Fiscal ex-

pertswarn that borrowing is spi-

ralling out of control. Scientists

deplore the rejection of climate change. And some legal ex-

pertswarn of a looming constitutional crisis.

Amid the tumult there is a striking exception. The people

who run companies have made their calculations about the

Age of Trump. On balance, they like it. Bosses reckon that the

value of tax cuts, deregulation and potential trade concessions

from China outweighs the hazy costs of weaker institutions

and trade wars. And they are willing to play along with Presi-

dent Donald Trump’s home-brewed economic vision, in

which firms are freed from the state and unfair foreign compe-

tition, and profits, investment and, eventually, wages soar.

The financial fireworks on display in the first quarter of this

year suggest that this vision is coming true. The earnings of list-

ed firms rose by 22% compared with a year earlier; investment

was up by 19%. But as our briefing explains, the investment

surge is unlike anybefore—it is skewed towards tech giants, not

firms with factories. When it comes to gauging the full costs of

Mr Trump, America Inc is being short-sighted and sloppy.

The viewfrom the C-suite

Since winning Congress and the White House, the Republi-

cans have sought to unleash the power of business. After the

election Mr Trump held summits with tycoons, televised live

from the boardroom at Trump Tower, and later from his new

in the Oval Office. Though bosses have tired of this kind of

pantomime, particularly after Mr Trump’s equivocations over

white-supremacist protests in Virginia last summer, they re-

main bullish. A reason is the Republican corporate-tax reform

passed in December, the first on such a scale since 1986. It does

several sensible things, including cutting headline rates to av-

erage European levels. The annual saving of $100bn is worth

6% of pre-tax profits (it accounts for a tenth of the fiscal deficit).

Deregulation is in full swing. This week sawa relaxation of

banking rules (see Finance section). The leaders ofmany agen-

cies have been replacedwithTrumpappointees. The change at

the top, firms say, means officials are beingmore helpful. Asur-

prising number of boardrooms support a muscular stance on

trade with China. If, for argument’s sake, China capitulated to

American demands and imported $200bnmore goods a year,

it could boost the earnings of America Inc by a further 2%. The

benefits for business of Mr Trump are clear, then: less tax and

red tape, potential trade gains and a 6-8% uplift in earnings.

The trouble is that companies are often poor at assessing

nebulous risks, and

CEO

s’ overall view of the environment is

fallible. During the Obama years corporate America was con-

vinced itwas under siegewhen in fact, judged by the numbers,

itwas in a golden era, with average profits 31%above long-term

levels. Now bosses think they have entered a nirvana, when

the reality is that the country’s systemof commerce is lurching

away from rules, openness and multilateral treaties towards

arbitrariness, insularity and transient deals.

As the contours ofthis newworldbecome clearer, sowill its

costs to business in terms of complexity and predictability.

Take complexity first. One of the ironies of the Trump team’s

agenda is that, although they want to get out of businesses’

hair at home, when it comes to trade they want to regulate.

When they tinker with tariffs, large numbers of firms have to

scurry to respondbecause theyhave global supply chains. The

steel duties proposed inMarch cover amere 0.5% ofAmerican

imports, but so far this month 200-odd listed American firms

have discussed the financial impact of tariffs on their calls

with investors. Over time, amesh of distortionswill build up.

Because trade is becoming more regulated, a new surveil-

lance bureaucracy is sprouting. On May 23rd the Department

of Commerce launched a probe of car imports. A bill in Con-

gress envisages vetting all foreign investment into America to

ensure that it does not jeopardise the country’s “technological

and industrial leadership in areas related tonational security”.

American firms have $8trn of capital sunk abroad; foreign

firms have $7trn in America; and there have been 15,000 in-

bound deals since 2008. The cost involved in monitoring all

this activity could ultimately be vast. As America eschews glo-

bal co-operation, its firms will also face more duplicative regu-

lation abroad. Europe has already introduced new regimes

this year for financial instruments and data.

The expense of re-regulating trade could even exceed the

benefits of deregulation at home. That might be tolerable,

were it not for the other big cost of the Trump era: unpredict-

ability. At home the corporate-tax cuts will partly expire after

2022. America’s negotiators are gunning for a five-year sunset

clause in a new

NAFTA

deal, although Canada and Mexico

would prefer something permanent. Bosses hope that the bel-

ligerence on trade is a ploy borrowed from “The Apprentice”,

and that stable agreements will emerge. But imagine that

America stitches up a deal with China and the bilateral trade

deficit then fails to shrink, or Chinese firms cease buying

American high-tech components as they become self-suffi-

cient (see China section), or Mr Trump is mocked for getting a

bad deal. If so, theWhite Housemight rip the agreement up.

The newlaws of the jungle

Another reason for the growingunpredictability isMr Trump’s

urge to show off his power with acts of pure political discre-

tion. He has just asked the postal service to raise delivery

prices for Amazon, his bête noire and theworld’s second-most

valuable listed firm. He could easily strike out in anger at other

Silicon Valley firms—after all, they increasingly control the

flow of political information. He wants the fate of

ZTE

, a Chi-

nese telecoms firm banned in America for sanctions viola-

tions, to turn onhis personal whim. Inevitably, other countries

are playing rougher, too. China’s antitrust police are blocking

Qualcomm’s $52bn takeover of

NXP

, a rival semiconductor

firm, as a bargaining chip. When policy becomes a rolling ne-

gotiation, lobbying explodes. The less predictable business en-

The affair

American executives are betting that the president is good forbusiness. Not in the long run

Leaders