09 Nov 2016

Brexit on Acid? What the Trump victory may mean for US politics and the international system

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It is, as the legendary American baseball figure Yogi Berra, once put it, “déjà vu all over again”. As with the UK referendum on EU membership in June, a truly stunning event manifestly representing a revolt against the establishment and undetected by the opinion polls has occurred. As with Brexit there will probably be an instant market recoil followed by an uneasy calm followed by fundamental uncertainty as to the implications. If there is ever a good year to have been in a coma, 2016 is it.

So, what happens now? The most predictable elements involve US domestic politics. The most profound effects will be on the international system. The most perplexing aspect is what this all means about the character of society and thus politics in contemporary capitalist democracies.

Trump and Congress

The Republicans not only unexpectedly captured the White House last night they have also retained control of the US Senate (despite having to defend 24 of the 34 seats contested there) and have kept their losses in the House of Representatives to a minimum. The congressional leadership, which has almost universally disapproved of Donald Trump’s nomination, will now have to eat humble pie and come to an accommodation with him. This may not be as challenging as it appears as he needs their co-operation too and he does not bring with him many policy specifics. There will probably be a deal.

The essence of that deal might be described as his themes meets their agenda. Republicans will soon find themselves in a position to recast fiscal policy and true to their instincts will aspire to cut taxes, even if that means implicitly accepting a higher federal budget deficit as a consequence. The nature of that tax programme will, however, be different from what it might have been if a President Rubio or a President Kasich had emerged from these elections. It will be more focused on lower to middle income Americans as Mr Trump seeks to demonstrate delivery to the constituency that proved to be his core vote, a large section of Americans whose real incomes have been falling for decades. In a similar spirit, the new President will press for more employment-friendly infrastructure projects and largely acquire sufficient support on Capitol Hill to pursue such as an initiative. The energy sector will be allowed, indeed encouraged, to advance without politically-inspired environmental constraints.

There will certainly be a shift in spending towards border security of various forms and Congress may agree to finance a feasibility study on his much promised ‘wall’, although whether anything like it is ever constructed is more debateable. Elsewhere, however, it will be congressional Republicans who have to make the running, including the challenging mechanics of how Obamacare is jettisoned.

As the above analysis suggests, therefore, the Trump effect on the US economy will differ by sector. This creates opportunities as well as risks for those in the private equity industry. The biggest single concern within the sector for many will be the status of carried interest, which in one of his relatively few precise policy pronouncements President-Elect Trump pledged that he would target. This would not be the instinct of House Republicans, for whom all tax increases, and those that may adversely affect investment decisions, are suspect, and it may be that the Oval Office will decide to let the issue drop rather than court internal division on a matter that is not in the sights of most American electors.

This ‘blue collar Republicanism’ is not, though, that different from the Reagan or George W. Bush format. It is the sort of package that Richard Nixon might well have championed with congressional majorities. It may not last long if it does not assist the discontented voters who have been mobilised to back Mr Trump or if an unrelated economic slump (the US is arguably overdue a recession) hits the country. The House Republicans are potentially vulnerable in 2018. Gridlock could return again.
Even if it does not, the character of the US Constitution with its multiple checks and balances will limit the extent to which Mr Trump (or any President) can impose his own will upon Washington. In domestic terms, the American presidency has dealt with individuals with equally uncouth personalities (Lyndon Johnson) and far more paranoid (Mr Nixon).

The businessman-turned-politician is not a new phenomenon in American public life. It is frequently seen in elections to be a Governor or a Senator, and Mitt Romney, lest it be forgotten, was essentially an entrepreneur whose political experience involved one single term as a Governor. At the presidential level, Ross Perot’s 1992 independent drive for the White House (when he won almost 20% of the national popular vote) today looks in retrospect like a dry run for the Trump campaign in that he targeted very similar citizens. In domestic terms, therefore, the Trump era may be more conventional and familiar than is currently expected.


A New World Disorder?

The much larger risks involve the international system. This will be as much because of perceptions as to what the Trump triumph means as anything that he actually says or does as President. The sense will be there that his election represents a repudiation of the ‘global policeman’ function that the United States has played for the past seven decades in favour of isolationism and protectionism.

The regions where this will matter the most are those where the explicit and implicit US security guarantee has been of the most importance. These will include the Middle East and East Asia, and to a more limited extent Europe in so far as Russia determines that it will have more latitude to flex its muscles in Ukraine without American disapproval and decides that it wants to exercise that option.

The analysis that countries which had once effectively outsourced their defence arrangements to the United States (such as Saudi Arabia and South Korea) had better reconsider that stance is likely to become a self-fulfilling prophecy even if, as is probable, Mr Trump sets out to provide reassuring appointments as Secretary of State and Secretary of Defence and makes soothing noises about his administration not wishing to withdraw from the world or abandon its international obligations. This will be reinforced by the near certainty that no major new international trade pacts will be accepted. An era of US authority based on ‘hard power’ and ‘soft power’, which has been under threat from the aftershocks of the debacle in Iraq. might be brought to a close earlier than it would have been.


An elite thesis imperilled?

The even broader and more absorbing question, which runs through Brexit and the Trump victory, is what has triggered the anger of so much of the electorate and what, if anything, can now be done to appease it.

For the past almost 40 years there has been an intellectual accord at the elite level, aligned to seminal technological change, in favour of market economics, free trade and (especially since the demise of the Soviet Union) an American-shaped international order. This has brought with it huge progress (not least a vast reduction in absolute global poverty) but plainly no longer inspires enough social consent (never mind an actual consensus) to sustain itself.

It has been associated with a dramatic shift in the balance of power between capital and labour in the developed world and by a very striking but seemingly unstoppable shift in income distribution. These have become, as much by accident as design, the hallmarks of modern capitalism. They will not be reversed by a referendum result in one nation or a presidential election in another (even the United States). They are, though, subject to considerable challenge, and politicians everywhere will scramble as to how they respond to this. As the fabled Mr Berra also once observed, “when you come to a fork in the road, take it.”

Tim Hames, Director General, BVCA


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