Trump's Economic Proposals and How They Might Backfire

When presidential candidates are campaigning for office, they will promise everything from free healthcare to free lawn care if that is what is needed to get the votes they need to win. So when they do get elected, many of them renege on a great number of their campaign pledges. Sometimes, it’s because they never had any serious intention to go through with their pledges. And sometimes, it’s because they just didn’t have enough political capital to do everything they wanted to do.

However, for reasons that experts will be studying for years to come, Donald Trump is not like most politicians. During the 18 months that he campaigned for the presidency, Trump said a great number of things, ridiculous things, that would have permanently tanked any other politician’s career. Who else remembers that back in 2004, Howard Dean’s aspirations for the presidency was destroyed all because of a scream? Simpler times, indeed.

One of his more ridiculous pledges was to enforce a complete and total shutdown of Muslims entering the United States. That pledge has been quietly withdrawn. A year ago, he also said that he would “absolutely” require Muslims to register in a federal database. When he was asked how that would be different from the way Jews had to register with the government in Nazi Germany, he repeatedly answered by saying “You tell me.” Thankfully, that, too, has been withdrawn.

If it quacks like a Nazi...
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Now it appears that Trump will have to backtrack from his most famous pledge - his pledge to build a “big, beautiful, powerful wall” on the US-Mexico border. Even Newt Gingrich, former Speaker of the House and ardent Trump supporter, admitted that Trump’s promise to get Mexico to to pay for the wall may have just been “a campaign device.”

It has only been a few days since Trump won the presidential election and he is already going back on some of his biggest promises such as punishing corrupt special interests or locking up Hillary Clinton. Many of his supporters are not likely to be happy about Trump’s flip-flopping. This will mean that even before he begins his presidency, he will likely lose a lot of good will from the many people who voted for him.

However, this is not a moment for anyone who opposed Trump to be allowing themselves to enjoy feelings of schadenfreude. That is because Trump will most likely resort to other methods to placate his supporters and the fact of the matter is that Trump is a deal-maker and he will make the kinds of deals that are profitable to him, but not necessarily anyone else.

So among the first things that Trump will do as president is to fulfill his pledge to rip up trade deals. The TPP will be the first casualty. It’s unclear if Trump would actually be able to abolish NAFTA as he said he would. After all, NAFTA has been in place for a long time and there will be many vested interests who would be severely opposed to such a move. On the other hand, the TPP, which is still in its embryonic stage, would be much easier to terminate. The rationale behind it would be to prevent a “job-killing” deal that might cause a trade deficit for the US.

To complement that decision, Trump will likely push to keep another promise, which he also knows will face little to no opposition from the newly elected Republican Congress - his promise to levy a one-time 10 percent tax on all repatriated corporate profits that are currently being held offshore. Added together with the Federal Reserve’s independent plan to gradually raise short-term interest rates in the near term future, there is a good chance that at least within the first few months of Trump’s presidency, the US might see a spike in capital inflows, which could have a large stimulative effect on the US economy.

I'm rich, bitch!
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Trump is hoping that the repatriated capital would be able to be used to generate US$1 trillion in private sector infrastructure investment over a decade to rebuild the country’s infrastructure. That way, he hopes to create thousands of jobs which would have a cumulative effect on the economy. However, repatriation of corporate profits is a temporary fix. Realistically, to raise the kind of capital needed to overhaul the nation’s infrastructure over the long term, Congress would also need to raise taxes such as the the federal gas tax and tying future increases to inflation. Needless to say, however, raising taxes is not popular and probably won’t be considered.

Unfortunately, the bad news doesn’t end there. The repatriation of corporate profits will come at the expense of other countries around the world and this could particularly hurt Europe. After all, as a result of a US$14 billion penalty from the US Justice department stemming back to the subprime mortgage crisis, Deutsche Bank, one of the largest banks in the world, almost faced a Lehman Brothers-like collapse a few short months ago. Deutsche Bank barely survived but the Eurozone debt crisis and negative interest rates continue to haunt it and other major European banks. A sudden loss of significant US Dollar reserves, which would likely follow such a generous corporate tax and a Federal Reserve interest rate hike, could very well hurl the entire European continent into yet another banking crisis.

Trump might receive less support (in fact, he might face fierce resistance) but another thing that he might attempt to do is fulfill his pledge to impose a 35 percent tariff on all imports coming from Mexico. What is much less certain, however, is his pledge to impose a 45 percent tariff on all imports coming from China. In fact, as unlikely as the former may be, the latter is even more unlikely. An imposition of even minor tariffs can and do lead to economic retaliations, which if left unchecked, could spiral into a vicious trade war. And a trade war could be devastating. It is likely that those sums that Trump suggested were yet another example of “campaign devices.”

So far, that would mean that Trump would have killed a trade deal that was never born in the first place and force corporations to repatriate their profits back to American banks. The first suffers from a bad case of “the seen and the unseen” and the second would be easy for the Democrats and other progressives to ridicule as yet another example of trickle-down economics. In other words, they’re both weak sauce. Trump would need to deliver something much bigger to appease the voters and Congress.

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So if Trump can’t punish China and Mexico, there are other countries that Trump can punish to show his loyalists that he is “doing something” for them without having to face too severe a backlash. The easiest target will likely be South Korea.

Politically, South Korea would be easy to throw under the bus. Unlike China, it doesn’t have a billion-strong population and it is not the second largest economy in the world. And unlike Mexico, South Korea doesn’t share a long border with the United States that has allowed for centuries of trade, easy immigration (legal and illegal), and cultural exchanges. Furthermore, South Korea is an American ally in an unfriendly far-away neighborhood, which means that South Korea has little choice but to be more cautious (read, timid) in its dealings with the US.

For a deal maker like Trump, South Korea is the perfect negotiation partner - one that he can kick around and squeeze for as much concessions as possible. Trump will twist arms and deploy brinkmanship-esque negotiation tactics with regards to military cost-sharing plans and renegotiating the ROK-US Free Trade Agreement.

Threatening South Korea by stating that he would be willing to walk away from the alliance would certainly be an effective strategy. It would certainly cause initial resentment among South Koreans, but it probably will not change the fundamentals of the partnership. As a result, unless South Korea balks (which is highly unlikely) the alliance will not break.

Whether or not the free trade deal gets renegotiated to Trump’s satisfaction, the renegotiation alone would take years. In the meantime, Trump would be able to tell the voters that he is looking out for their best interests by squeezing more money out from “ungrateful and free-riding allies.”

Trump's preferred means of negotiations
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However, Trump might not have much room to put too many other Asian countries in a vice grip. That is because now that the TPP is dead, China is wasting no time to push ahead with their version of the TPP - the Regional Comprehensive Economic Partnership (RCEP). Just as the TPP excluded China and Russia (something Trump didn’t know about until it was pointed out to him by Rand Paul) as a way for Washington to set trade rules for the fast-growing Pacific-rim region before Beijing does, the RCEP will exclude the US for the very same reason.

So although Trump might still do away with the TPP, he cannot completely abandon trade deals with Asia.

For its part, as a result of the previously mentioned closer relationship between the US and Russia and a continued (if somewhat sputtering) Asia Pivot, China might think it necessary to continue to accelerate its military modernization program, which would further cause nervousness among China’s smaller neighbors or even compel them to shift allegiance to Beijing.

So if Trump cannot afford to squeeze East Asia too hard, there are two other related areas that he could exploit. The first is to rescind Obama’s policy and allow TransCanada Corp. to re-submit its application for the proposed Keystone XL oil pipeline in return for a larger percentage of profits generated. Furthermore, he could put the Environmental Protection Agency on a much shorter leash (as it had been under the George W. Bush administration) in order to encourage more U.S. energy exports.

Naturally, however, this would lead to a larger glut of supplies, which in turn would lower oil prices and help the US grow its oil market share. Although some individual oil companies will certainly suffer as a result of sustained low prices, in the larger scheme of things, this could nominally help the US. However, not everyone would be celebrating this turn of events. OPEC members and other natural-resources based economies in Africa and Southeast Asia would not be happy.

Even wealthy countries like Saudi Arabia are struggling as a result of low oil prices and facing ever dwindling foreign-exchange reserves. Things have become more desperate among poorer OPEC member states such as Russia and Venezuela (and other smaller Gulf kingdoms, albeit to a lesser extent). Combined with an ongoing Sunni-Shiite proxy war and continued conflict in Syria, it is highly unlikely that anyone in the Middle East is celebrating Trump’s victory.

Speaking of Syria, one thing that Trump would certainly do to great fanfare is to withdraw US forces from that country. Trump is a deal maker and truth be told, for the US, the Syrian conflict is a moral one. And for a deal maker like Trump, intangibles such as morals or loyalty don’t carry any weight. Regardless of how that conflict turns out, the US would not see direct profits from it. However, due to the aforementioned Sunni-Shiite proxy war, that does not mean that a US withdrawal would help to usher in peace in the Middle East.

It should be noted, however, that withdrawal from Syria would not mean that Trump would push for a general withdrawal from the Middle East region altogether. Trump has always projected himself as a strong leader to the point of thuggery. A single terrorist attack would likely compel Trump to retaliate disproportionately, which could very well keep the vicious cycle of US involvement in the Middle East ongoing.

There is, however, one bright side - if it can be called that. An unintended consequence of growing unease in the Middle East as a result of continued drop in oil prices would likely be that Middle Eastern governments are going to seek assurances that they will not be toppled by their own people. The Arab Spring still remains fresh in Middle Easterners’ collective memory as many are still living through its consequences. In order to ensure regime survival from their own people and each other, Middle Eastern governments could very well increase their arms procurement, thus helping America’s arms industry to make even more money than before.

(Although the TPP may be dead, Trump’s policy advisers have said that the military aspect of the Asia Pivot will still continue and that Trump would do so by enlarging the US Navy. This will also help to raise jobs and help the arms industry be more profitable. In the long-term, however, increased defense spending is unlikely to help the US economy.)

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Thankfully, however, as a result of Trump’s narrow focus on only making deals that are profitable, there is little chance that there will be a war between the US and North Korea. There is no reason to attack North Korea because there is no way that doing so would profit Trump or the US. In fact, it is entirely possible that Trump might wish to pursue engagement with North Korea because he might want to exploit North Korean natural resources. Whether such an endeavor would be fruitful, however, is another matter entirely.

Besides, another reason why there most likely will not be a war with North Korea is that to date, no nation state armed with nuclear weapons has ever been attacked.

The future does not look too bright for Donald Trump. If he pushes through the aforementioned pledges, they will certainly benefit the US. At least in the short run as the country will be awash in capital that will provide an economic stimulus but without the Broken Window effect. However, the negative effects that they would have on developing economies in Asia, Africa, and even in Europe could lead to a prolonged worldwide economic recession. This would have a domino effect and the US would not be spared.

Unless Trump pursues better policies that would help to promote free trade and cooperative partnerships with other countries around the world, there is a very good chance that Trump would end up being a one-term president.

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Korea's Carbon Trading Market: Empty "Feel-Good" Politics

On January 12^th 2015, in an effort to curb carbon dioxide emissions, Korea established the world's second largest carbon trading market. The government has decreed that this year's total carbon dioxide emission quota would amount to 1.59 billion tons. The government has also announced that the carbon emission quota would be imposed on 502 Korea-based companies.

According to the same article from The Korea Times, analysts estimated that the affected companies will have to spend nearly ₩12.7 trillion (US$11.71 billion) over the next three years to buy extra emission rights or to install carbon emission-reducing facilities.

Now the question is whether or not this will work. I, for one, have serious doubts.

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Politics

The world's largest carbon trading market was stared in 2005 and it is located in the European Union. The first phase of the carbon market, which lasted from 2005 to 2007, did not reduce carbon dioxide emissions. Instead, overall emissions increased 1.9 percent over that period.

But why would that be the case? It was because was “a surplus of allowances and international credits compared to emissions.” If this were a “natural” market, it would be easy to say that this oversupply of emission allowances was a result of market failure, which could be easily remedied by lowered prices. However, this is not a natural market. It was a market that was artificially created by the EU Emission Trading System (EU ETS), an intra-governmental agency.

So what happened? Politics happened. European politicians knew that cap-and-trade can be economically harmful. Especially due to the worldwide economic slowdown that began in 2008, no European politician wanted to go down in history as the one who deliberately exacerbated his or her country's unemployment woes. Case in point, even “good” European leaders like German Chancellor Angela Merkel thought that climate change politics must not trump jobs. Considering the economic gloom that has besieged Europe for the past few years, it should not come as a surprise that Chancellor Merkel was not alone in her opposition to stringent rules that dictated her country's economic productivity.

If a market that is imposed on the private sector is run by the government, there is always the possibility, nay assurance, that it will not be dictated by market forces, but rather by government diktats. Political convenience will always trump principles.

It was politics that failed the world's largest carbon trading market. There seems to be no reason whatsoever to suggest that Korean politicians will be any better than their European counterparts.

The irony! It BURNS!
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Subsidizing the Bad

Politics, of course, is not the exclusive domain of politicians. It goes without saying that corporate leaders also take part in it quite regularly through the form of lobbying.

The theory behind cap-and-trade has always been that that eventually, the government will reduce the availability of carbon permits, which will ensure scarcity. That way, the market will retain its value while at the same time forcing a reduction in the overall level of pollution. Then those businesses will further trade those permits with each other, thus forcing each actor to innovate and find new ways to produce less carbon dioxide emissions.

At least that's the theory.

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As mentioned earlier, a combination of industrial lobbying efforts and political impracticality have ensured that the the EU ETS granted more pollution rights to private firms than the polluters needed to cover their existing level of emissions. However, what makes it worse is that even before the rights were granted, the amount of pollution rights that the government considered to be allowable was calculated based on existing levels of pollution.

What that means is that those who have polluted the most in the past have been rewarded with the greatest subsidy. If that is not a backward way of doing things, not to mention unjust, then I do not know what is.

Will Korea avoid the mistakes that were made in Europe? I will always hope for the best, but I shall not bet the jeonse on it.

The Regulation of Everything

One of the most successful government acts that actually helped to reduce air pollution occurred in the United States. The Environmental Protection Agency began to regulate sulfur dioxide emissions, the gas that was most responsible for increased acid rain, in 1971. The world's first large scale cap-and-trade system was born in 1990 when the Clean Air Act was amended to create an allowance-trading program for sulfur dioxide.

By all measures, the creation of the sulfur dioxide cap-and-trade market has been viewed as a great success. As a result, many people who champion carbon cap-and-trade markets often point to the former as a way for the latter to go forward.

However, what people often don't realize is that that is like comparing apples and oranges.

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The most important difference is that when the American government tried to regulate sulfur dioxide emissions via its cap-and-trade system, only 110 coal-fired power plants were included in the system, which later expanded to 445 plants.

Then there is also the fact that long before the Environmental Protection Agency came around to creating the world's first cap-and-trade market, coal-fired power plants already had many low-cost options to reduce sulfur dioxide emissions without reducing electricity production. In other words, the technology that was needed to reduce sulfur dioxide already existed and was already underway in the private sector even before the Johnny-come-lately government entered the market. On the other hand, unlike sulfur dioxide emissions, an economically viable technology that helps to reduce carbon dioxide emissions does not yet exist.

Furthermore, unlike sulfur dioxide, which is industry-specific, carbon dioxide is emitted by everything and everyone. The biggest producers of carbon dioxide may be easy to point to – automobiles, electricity production, oil processing plants, and farms just to name a few. Unfortunately, however, that list includes millions of businesses, non-profit organizations, and even just ordinary individuals.

The Korean government may have picked out the largest 500 companies to impose its cap-and-trade system. However, there is no way that it can succeed in achieving its goals if it does not regulate everyone. Of course, the real problem with it is that it cannot regulate everyone. The government is neither omnipotent nor omniscient. Regulating everyone is simply impossible.

That's why I can sleep at night - the knowledge that as much as the government can try, it can't regulate everything
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Minimal Impact

For the sake of argument, however, let us presume that Korea's carbon trading market does work the way it is advertized and it does become successful. Then the question that has to be asked is how that success would be measured.

It is estimated that Korea produces approximately 630,000 kilo-tonnes of carbon dioxide per year, or about 1.69% of the world's total carbon dioxide emissions. On the other hand, China produces 10,330,000 kilo-tonnes and Russia produces 1,800,000 kilo-tonnes. Japan produces 1,360,000 kilo-tonnes and the United States produces 5,300,000 kilo-tonnes.

Korea is truly a shrimp that is surrounded by whales. The following link provides a “carbon atlas” of the world.

Even if Korea somehow manages to successfully stop using fossil fuels completely, it will not change the fact that other countries around the world will pick up Korea's slack in no time. After all, the world's largest consumers of fossil fuels are developing economies.

In other words, Korea's domestic cap-and-trade system will most likely have a virtually unnoticeable effect on global warming while imposing substantial costs on all Korean businesses and households.

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The Tragedy of Unintended Consequences

Again, for the sake of argument, we have to assume that the carbon trading market will be successful.

It is no secret that coal is one of the dirtiest ways to produce energy. However, as coal is relatively cheaper than other fuel sources, much of Korea's businesses rely on coal for their electrical needs. In fact, Korea is the fourth largest net-importer of coal in the world. Though this might not occur immediately, as natural gas is a cleaner alternative to coal, and especially considering the recent tumble in oil prices, it will only be a matter of time before Korean businesses will begin to rely on natural gas as a substitute for coal.

Oil prices have fallen in recent months and Saudi Prince Alwaleed bin Talal recently said that the world will never again see the price of oil rise to US$100-a-barrel. That might offer some comfort for Korean manufacturers. However, even if the prince is right, the law of supply-and-demand states that when demand goes up, ceteris paribus, the price will also go up.

As the price of natural gas goes up and coal remains undesirable due to its high carbon dioxide emission rates, Korean businesses will become less competitive. Seeing how Korea is already facing an uphill battle in maintaining its edge in the manufacturing industry vis-à-vis China, Japan, India, and other emerging Southeast Asian economies; not to mention Korea's aging population and low birth rate, this new cap-and-trade system will hurt Korean manufacturers' profit margins even further.

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And when a business' profit margins start to shrink, one of the first things that a business usually tends to do is lay off workers.

The rise in the price of natural gas, which is coupled by a decrease in demand for coal, will do more than hurt manufacturers, unfortunately. It will also affect average citizens as it will become increasingly expensive to cool and heat people's homes or to fuel their cars. It goes without saying that this will hurt the most vulnerable members of society, the elderly and the poor, more than it will affect anyone else.

Furthermore, as regulations will force businesses to be more mindful of carbon emissions, businesses will have no choice but to spend more money on carbon trapping technologies, which will lead to higher prices. And when prices go up, consumers buy less. It is a vicious cycle. It is also common sense, which many policymakers seem to lack.

Conclusion

The cap-and-trade system for carbon dioxide emissions has been a miserable failure in Europe and has been a political non-starter in the United States. There were good reasons for this.

Cap-and-trade may have been started with the best of intentions. In practice, however, it has turned out to be little more than empty feel-good politics. It is a noble failure that succeeds in doing only one thing – showing the rest of the world that people care, and are willing to do something about protecting Mother Earth. Never mind that the something that they are doing is, to use an understatement, counterproductive.

If only feeling good about oneself could solve all of the world's problems...
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