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May 14, 2019

Trump gives Orbán his blessing

Given the warm relations Washington entertains with regimes such as the Saudi monarchy, one may be tempted to discount as gesture politics some of the heated US debate about whether Donald Trump should have received Viktor Orbán in the White House or not. But, however one sees this, Orbán’s visit itself went very much according to Trumpian precedent. As was to be expected, Trump thumbed his nose at bipartisan indignation in Congress about the reception of Orbán. During the ritual press availability with his guest, the President characterised Orbán as tough but respected, and probably a little controversial, just like himself. He praised specifically Orbán’s hard-line immigration policies, saying the EU would have avoided major problems had it only taken its policy cues from Orbán.

Politically, Orbán got the backing he had come for. Whether he enjoyed the moment personally is another matter. With most of the journalists’ questions about the Mueller report, the trade conflict with China and the US economy, Trump, sitting next to his guest, lavished praise on himself in long meandering answers. Watching the video of it, one is tempted to detect more than a whiff of irritation emanating from the Hungarian visitor.

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May 14, 2019

Outcome of Belgium's parliament election on Sunday totally open

A headline in La Libre Belgique says it all: here is proof that the outcome of the elections is more uncertain than ever, the Belgian newspaper wrote yesterday. Belgians elect their federal and regional parliaments on Sunday and, if the outcome is reasonably close to the polls, a continuation of the present coalition government headed by the liberal Charles Michel is just as likely as a change.

The reason is that, in Belgium’s fragmented political and institutional landscape, even small shifts in the vote can lead to outgoing coalitions losing their majority and new coalition possibilities opening up. This is especially true now that the Flemish independence-seekers in the NVA have been accepted by most other parties as a potential coalition partner. La Libre Belgique listed no less than seven politicians from different political parties as serious aspirants to the job of PM. What is clear is that a political coalition of three parties or more will have to be formed at the federal level for a new government to take office. The arithmetics of potential majorities are completely open at this stage, writes the newspaper.

Precedent tells that government formation can take a great many months, and that whatever government emerges its politics will likely be marked by continuity more than rupture. Radical positions tend to get diluted in the great Belgian compromise machine. It is no accident that the expression compromis à la Belge has entered the French language.

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May 14, 2019

Has Trump really got the economics of trade all wrong?

One of the reasons for the crisis of liberal democracy and its institutions is complacency - over-reliance on old narratives and on liberal democracy's favourite experts. And so it goes that everybody seems to be in agreement that Donald Trump's trade policy is self-defeating, because every trade expert in the world seems to have placed their trust in studies that have shown this to be the case. We heard similar arguments during the Brexit debates.

Tyler Cowen, a US economist who is certainly no Trumpian, warns us that Trump's calculus in his trade wars with China might actually work. The economic literature, he writes, does not take into account the factors pertinent to this particular case. His criticism is not just confined to US/China trade relations. It would apply to a trade war between the US and the EU as well.

In the case of China, a trade war has several consequences apart from the raising the cost of imported Chinese goods in the US. The first is that production might shift from China to countries like Vietnam, which has lower labour costs than China and a free-trade deal with the US. The overall result would be an initial increase in cost to US consumers, followed by a fall in cost after a certain period. This is very similar to the argument made by Larry Kudlow, Trump's chief economic adviser, over the weekend. Cowen also makes the point that, if there is no US-China trade deal, multinationals will become more wary of investing in China. They are looking at the trade deal itself as justification for their commitment to invest. 

And, as regards German cars, Cowen makes another important point that is often ignored in the debate. If a product has a large profit margin, like a Mercedes car, the cost of a tariffs will fall disproportionately on the producer, not on the consumer. This is so because Mercedes is more likely to accept lower profit margins than to try and pass higher prices through, given markets conditions. 

We agree with Cowen's conclusion that it is humbug to argue that the US consumer is the one and only victim from a trade war. Shifts in production and cuts in profit margins mean that a larger share of the costs will be borne by the producers. In other words, we should consider Trump as dangerous, not as stupid. 

We have been arguing as well that countries with extremely high trade surpluses, like Germany and China, are correspondingly vulnerable to trade tariffs, and that we should not rely on academic studies showing low tariffs to be a win-win proposition for everybody all of the time. We have made a similar argument in the case of Brexit, given the EU's large and persistent trade surplus with the UK. The impact of tariffs is highly complicated, and rarely captured by economic models that fail to take into account the specific nature of the concrete situation. In the UK, for example, it is not clear whether a 10% car tariff on both sides would end up shifting production into the country or out of the country.

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