27th June 2017

The Trump Administration: How much will it change, and what will it mean for Czechs and Europe?

Donald Trump may be the most polarizing President ever. Much of his appeal or repulsion is that we live in polarizing times, fed by the breakdown of traditional news sources into online echo chambers which reinforce prejudices instead of challenging them. Part of it is that Donald Trump has been building a personal brand through techniques honed from his reality television business that prize ubiquity and conflict, on being everywhere all the time, and having a strong opinion on every subject. Combine that approach with the fact that he is now President of the United States, which is perhaps the only position in the world in which all your opinions are front page news. The result is massive dose of one personality. Even someone less flamboyant would inspire hate or love with so much attention. Donald Trump provokes disturbing levels of both.

His omnipresence makes it hard to present an objective view of how his presidency will influence us. It is hard to separate our desire for what could happen with what is the probable outcome. I certainly have an opinion about the man which colors any dispassionate assessment of his presidency. And, even if I could squeeze every bit of opinion out of my analysis, readers are just going to splash their own ideas about the man back on every sentence I write. Yet, the position of the President of the United States influences economies and countries around the world. We cannot have a view of how the Czech economy will fare over the next four years without having a view of how it will be affected by decisions made in Washington, D.C. Therefore, I will try to give an honest view of what is happening in US politics.

What questions need answering to determine how President Trump- or, even more broadly, Republican control of Washington- will change the economies and policies of Europe? There are four. Will the Trump Administration change the US approach to global trade? Will the US accelerate the change in the security relationship with Europe? Will the Trump Administration enact economic policies domestically that will prolong its period of global dominance? And what will be Europe’s response to the Trump Administration?


Will investigations and politics derail the Trump agenda before it can accomplish anything?

  • The investigation into Russian collusions hurts President Trump, but should take some time to reach either political or legal conclusions.

  • The Republicans face a very real possibility of losing the House of Representatives. This would severely limit the Trump Administration’s ability to act.

  • Therefore, the realistic timeframe to assess the administration’s ability to change the current environment is from now until November 2018.

The answer to the first three questions- and likely the fourth- depend on how long Trump and the Republican will be able to dominate policy in Washington That will be determined by two events: the investigation into whether the Trump campaign colluded with the Russian during last year’s presidential election and the outcome of the 2018 Congressional election.

Both the intelligence professionals and a large majority of politicians outside of the Trump Administration concur that Russian interfered with the elections. The remaining question is whether, and how much, the Trump campaign assisted in that interference. A good deal of evidence has been made public that the Trump campaign was in communication with the Russian government during the campaign. That only proves communication, however, not collusion. The President has insisted that collusion did not occur, and that all the attention paid to the issue is the product of fake news. We have no hard evidence to indicate we should not believe him. However, his behavior- refusing to fire his NSA Advisor despite proof he had lied about contacts with the Russians, firing the FBI director in charge of the investigation- has persuaded many people that there should be thorough and public investigation to determine that there was not any collusion. A special prosecutor has been appointed to try to find out what is true. The prosecutor’s evidence will likely dictate whether the President will face impeachment proceedings. That is likely months or years away, and it is still more probable that President Trump will lose the 2020 election (although we are not predicting he will) than face impeachment.

The more imminent and precise threat for President Trump is the 2018 Congressional elections. The President’s base of support lies with Tea Party Republicans in the House of Representatives. Every member of the House is up for re-election in November 2018. Congressional approval ratings now lie at 12%; President Trump’s approval ratings have sunk in some polls to 37-38%. Polls are not votes, but these are not good numbers for the Republicans. The party has received some good news in four recent elections to replace House members who joined the Trump administration: all four were won by Republicans. Yet, all four districts are considered safe Republican districts, and the margin of victory for the Republican candidate was significantly smaller than usual. The Democrats need to win 25 more seats to become the majority party in the House; they likely need to win 10 more seats to make it nearly impossible for the Republicans to pass any of Trump’s major promises without Democratic support. Hillary Clinton won the presidential vote over Donald Trump in 23 districts currently held by Republicans. The probability that the Republicans will lose the House in 2018 is a little higher than 50%.  

The window, therefore, for President Trump to make major policy changes has a good chance of closing in May of next year, and staying shut after November. That is a short time to do big stuff.

Will the Trump Administration change the US approach to global trade?

  • Expect tough talk, mixed signals, and little action before the 2018 Congressional elections. If Democrats win, the threat of drastic action by the Trump Administration increases as he seeks to rally his base for his own re-election.

The administration’s decision to withdraw from the Trans-Pacific Partnership, a trade agreement with 12 other countries aimed at curbing Chinese economic ambitions in the Pacific, was not really a change in policy; Hillary Clinton also pledged to withdraw due to the treaty’s unpopularity in key Midwestern states. Even his threat to enter a trade war with China is a fairly common threat among presidential candidates.

His promise to renegotiate or depart from NAFTA, however, would be a major change, and the cancellation of the treaty would cause, at least for the mid-term, an economic crisis. Both Mexico and Canada have announced they are open to re-negotiations; the result, however, may be a different deal, but not one that significantly improves the US position, especially concerning manufacturing jobs. The largest probability is that the administration will ask to re-negotiate, make tough pronouncements, but freeze everything in negotiations.

What does that mean for Europe? The best guess is that nothing will happen on trade before January 2019. TTIP will not move anywhere in the next year. The regular negotiations on commerce will continue without much change in the US approach.

The politics of trade will get much trickier if the Democrats retake the House in 2018. At the moment, President Trump has staffed his administration with diametrically opposed views on trade. Congress is full of Republicans sworn to free trade. The best bet is that the administration will talk tough, but adjust only marginally. If the Democrats win in 2018, and President Trump believes he could lose the next election, he might take some dramatic action to rally his base: NAFTA would be the obvious choice, but the EU- a popular enemy of his base- could also be a target.

Will the US accelerate the change in the security arrangement in Europe?

  • The probability of more rapid change to Nato is high, and in a positive sense. Nato could have more capability and a more modern mission in four years’ time.

The US Senate passed a law last week re-affirming the country’s commitment to Nato by a 100-0 vote. Earlier, the Senate approved- by a 97-2 vote- a law that prohibited the President from altering sanctions on Russia without its approval. These two votes indicate that the US will not abandon Nato.

Nato will change, though. President Trump is not the first American President to demand other members of Nato spend 2% of their GDP on security. That pressure will continue to grow. We can expect a debate over whether that spending should be tanks or better border controls or more humanitarian efforts. That is a debate worth having. Nato was built to counter a Russian military threat. That is lower down on the threat list now. Nato needs to adjust to maintain its place as the world’s most effective security alliance. Trump’s national security team- staffed with a significant number of military types- could persuade their boss not just to demand more cash, but to change the mission to fit the times. President Trump seems to defer to military men (perhaps because he himself was deferred from the draft five times). Rate it as a good probability that Nato will not only stay intact, but be upgraded in mission and capability.


Will the Trump administration’s economic policies reinvigorate the American economy?

  • What tax reform will be remains uncertain. Whether it can pass Congress is equally unknown.

  • The infrastructure bill is also unformed. It stands a better chance of passage because many Democrats support more such spending.

  • Regulatory reform in many sectors will happen. The chances of it having much impact on overall economic performance are low, but it depends on the quality of the reform.

The Trump administration has three main priorities for the domestic economy: tax reform, infrastructure development, and reducing regulatory burden. The administration has already sent over a single sheet of principles for tax reform to the House of Representatives. They have signed numerous executive orders cancelling Obama era regulations, particularly on the fossil fuels industry. An infrastructure investment bill is in the midst of construction.

The Speaker of the House has connected tax reform to repealing and replacing the Affordable Care Act. The House already passed their version of a new health care system. Senate Republicans released their version of the law last week and plan to vote on it before the end of this one. With 52 Republican Senators, only two can oppose it and the law still pass. Five already have indicated they would not vote for it. If the Senate overcomes this resistance and passes their version, the two versions must be reconciled, and then sent to the President. Failing to achieve their version of health care reform would be damaging for the rest of the Republican agenda. Political insiders are split on whether Senate Republicans want to pass a bill, or fail it so they can get on to other business. The guess here is that they have opened a Pandora’s box, and will not manage it, but that the failure will almost guarantee they will pass some form (any form) of tax reform.

Passing health care reform, though, brings its own risks for the Republicans. Their proposal is deeply unpopular with voters, and the Congressional Budget Office estimates that more than 20 million people would lose health insurance. The political and health consequences of this are obvious. What is not often considered is the economic impact. The primary reason President Obama made health care a priority is the same reason Teddy Roosevelt made it a priority at the beginning of the twentieth century: uninsured people are a huge drag on economic performance at the micro and macro level. We can expect the savings created by cutting tax on the wealthy and lowering premiums for the healthy to be mitigated by the costs incurred by those and for those without insurance.

Tax reform comes with many what-ifs. Reducing the amount of money shifted from the private sector to the public sector should increase the amount of money available for generating growth in the private sector. But it is not automatic. Reducing the tax rate among low income earners usually generates the most spending in the economy. Reducing the tax rate among high income earners typically generates less spending proportionately, as individual use the spare money for investment or savings. Investment or savings are a good thing if the investment is in the same economy, but investments created by cutting taxes in America may end up creating economic growth in Asia. All this is speculation, though. We still have no clear plan on how the Trump administration plans to restructure the tax system. And if that plan is not put to a vote before Christmas this year, the chances of any tax reform drop close to zero. The guess here is that the Republicans are going to sustain a great deal of damage for their health care reform and the secretive way they passed it, and that is going to weaken their resolve for major reform to the tax code. House leadership and President Trump may insist on the reform anyway, and they will get it because major Republican donors will threaten House members that they will be challenged by a new Republican candidate. If this happens, the Democrats are almost certain to pick up seats.

The economic benefit of infrastructure spending depends on how the money is spent. American infrastructure is in dire need of repair. If the money is mainly devoted to repair, the economy will benefit incrementally by the increased use of already existing structures. If some of the money is invested on new infrastructure- especially such things as rapid transit- the economy could benefit exponentially. The President would be wise to seek bi-partisan support for this bill. He has not done so seriously so far. If he does, he has a good chance of passing a significant bill. If he does not, he has a one-in-three chance of getting something passed before the 2018 congressional elections.

The Trump administration has already begun rollbacks of Obama era regulations. The administration claims that this will jumpstart the economy. No hard evidence exists at the moment. The latest job report shows that mining work increased by 7000 jobs from May to June- a nice jump- but that represents less than 10% of the total job growth and time will tell if this is temporary or can be sustaines. That can be said about regulatory reform in general: will any economic boost last behind the initial months? It is still too early to make a categoric judgement. Again, regulation usually shifts the economic burden from one player to another. For instance, clean air regulation shifted the burden from the health care sector (which paid for illness caused by dirty air) and agriculture (which paid for polluted fields) to the creators of the pollution. Undo such regulation, and the costs shift back. It is very hard to determine the ultimate cost/benefit analysis of regulation. In this case, the Trump administration appears to be hoping that reducing the cost to producers will outweigh whatever cost there is to the wider economy.

So, it is difficult to predict whether the Trump administration’s plans will increase the size of the economic pie for the United States and the world, or whether it will simply shift fruit around inside the same-sized pie. First of all, it is unclear what the tax reform or infrastructure package will be, and whether either can be approved by Congress. The better bet for US economic growth probably still lies in the garages of Silicon Valley and the research labs of MIT, Harvard, and Stanford.

How will Europe respond to President Trump?

  • Trump’s election and period in office seems to have made European’s nervous about their own populist movements.

  • Macron represents the latest version of the European future. Whether he is seen as that future in four years will depend on how he can reform France, as well as bring some sense of unity and purpose to the European Union.

The simplistic answer is President Macron. Before he was elected, the question was whether Europe would continue in the populist trend that has produced Brexit and Viktor Orban. Now, with the clear victory of Macron in the French presidential elections and subsequent parliamentary elections, and the bruising of Theresa May in the British parliamentary elections, Europe seems to be delivering a rebuke to President Trump.

Macron represents some of the same characteristics of Trump- an outsider who rejects politics as usual- but with some distinct differences- an internationalist instead of an isolationist, a patriot without being nationalist, and an inclusionary political style instead of confrontational style. If Macron can deliver economic reform in France, and re-establish Franco-German cooperation in Europe, he may become the paradigm of the next generation of European leaders. Despite his two dramatic victories, the task of re-vitalizing the French economy is daunting, as is uniting Europe. He may find that the two are not mutually compatible.  

Members of the American Chamber of Commerce in the Czech Republic