Trump's Congress speech moves markets

Donald Trump is changing policies all round the world. The US president has forced the Europeans into promises to borrow more or to rejig their budgets to rebuild their own defences. He is forcing Canada and Mexico to toughen their border controls to stop illegal migrants and dangerous drugs crossing into the US. He is in talks with Russia and seeking to engage Ukraine in serious peace talks. He is taking unilateral action to get the remaining US hostage home from Gaza, despite Israeli concerns about talking to Hamas. He is helping cut the price of oil and gas by backing more US production. He is ignoring international rules, overturning long held diplomatic conventions and showing that he means business even where many people and countries are worried about what he might do.

The views of US voters

Mr Trump is a second term President who cannot stand for re-election. Nonetheless, he seems to care a lot about voter approval, both because he would like to be liked and because he knows his revolution in policy would be more secure if he is followed by a Republican like the vice president who buys into his unique agenda.

CBS ran a poll of viewers watching the speech to Congress. More Republicans than Democrats watched. The sample was stated to be 51% Republican, 27% Independent and 20% Democrat. The Democrat minority said they were worried and angry about what he said.

An unusual, 76% of the viewers said they approved of the speech, thinking it dealt with their main concerns about the state of the US. A majority 74% thought him both “presidential” and “entertaining” showing they liked his TV skills in drawing in the guests at the event for special recognition.

The two most popular strands were controlling the borders and removing wasteful spending, commanding 77% support. There was 73% support for his way of seeking peace in Ukraine, and even 65% for the use of tariffs. The speech mainly concentrated on domestic issues, reflecting public concerns. Controlling price rises remains a very important public priority.

Controlling borders

The president claimed he had much better control of the borders, cutting numbers of illegal migrants. He wants more of the jobs to go to settled Americans. He would be happy with higher wages from a tighter labour market but would hope productivity increased to help with the real costs. He is so far keeping the 25% high tariffs on Canada and Mexico to get them to commit more resources and achieve more success at stopping the flow of harmful drugs but would probably be happy at some point to lower them when there is sufficient action.

An important part of an amended defence budget will be the plan for an Iron Dome to protect the US from any incoming missiles, drones and aircraft.

Eliminating waste and unwanted expenditure

So far, the emphasis has been on removing the large commitment of spending to Ukraine, as well as making major cuts in overseas aid.

The president’s prime reason to want peace in Ukraine, as he has often stated, is to stop the dreadful loss of life and the damage to property and the economy from the war. An important secondary aim is to end much of the spending on Ukraine or to divert the burden of the war costs to the Europeans who are closer to the conflict and state they are strongly behind the Ukrainian view. He looks very determined to achieve a substantial saving compared to the $180bn spent so far according to Congress.

He is highlighting lots of uses of overseas aid that he thinks are undesirable. At some point there will need to be a decision about how much aid going forward will be directed to famine relief, improved healthcare, disaster relief and other mainstream aid activities. It is unlikely the US will end all of these, but there will be overall savings.

He and his adviser, Elon Musk, will see what government bodies can be abolished or amalgamated and will wish to slim the large federal civilian workforce. There will be deregulatory initiatives which will reduce the workload.

He may well find big savings in net-zero subsidies. He is seeking to reorient the whole approach to onshoring more industrial activity. He wants to pay less subsidy and achieve more onshore investment by tariffs against imports and by more attractive tax deals in the US.

Ukraine, Gaza and peace

The poor reception to President Trump’s sketchy ideas on Gaza, which upset Palestinian opinion, led the US administration to challenge the main interested neighbouring countries to produce their own peace plan. It looks as if Mr Trump is not committed to a given outturn or timetable.

In contrast, he is very concerned to end the war in Ukraine. The difficult encounters between the President of Ukraine Volodymyr Zelensky and the US team in the Oval Office reflected misunderstandings between the two sides. The US thought Mr Zelensky was ready to sign the investment agreement with US security guarantees. That did not turn out to be the case.

President Trump is now pressurising Ukraine into accepting the kind of deal he has in mind, which he hopes to be able to sell to Russian President Vladimir Putin. President Trump’s bottom line appears to be an end to military assistance to Ukraine with others helping Ukraine if necessary. The US as the dominant contributor to Nato can use its member veto to ensure Nato does not guarantee Ukraine’s future, just as President Biden was very concerned to stress to Russia it was Ukraine fighting the war, not Nato.

Tariffs and trade

The speech repeated the four different ways President Trump uses tariffs. There are the high tariffs to force a change of policy as with the Mexican and Canada tariffs. There will be some tariff rises based on reciprocity as the US identifies countries and trading blocs like the European Union (EU) charging the US higher tariffs than the US imposes. There is the wish to impose tariffs on various strategic imports as a further inducement to get onshore investment in manufacturing in each product area. There may be higher general tariffs as a way of increasing revenues.

Former President Joe Biden pursued an onshoring policy driven by subsidies but also including some bans on technology products from abroad, some tax breaks and favourable regulation. President Trump wants to attract more by lower taxes, less regulation and possibly by tariffs on imports.

The international rules-based order

This administration is a critic of much of the international body of law, guidance and convention, seeing it as an attempt to limit US sovereignty, take US money and hollow out US industry. President Trump is pulling out of the Paris Climate Change Treaty, seeing it as a “scam” trying to prevent him exploiting cheap available US fossil fuels. He is pulling out of the World Health Organisation, having reservations about their conduct during Covid-19 and challenging some of their advice about vaccines and lockdowns.

He is telling European members of Nato they need to make a large increase in their contribution to the alliance and take responsibility for Ukraine. He does not need to pull out of Nato, as Nato does not bind its members to enter a war or to make any given response to a conflict involving Nato members.

The US does not anyway accept various international court judgements and has a Security Council veto on United Nations action. The World Trade Organisation has rules over when tariffs and other retaliatory measures can be taken against members and does judge states’ actions. It does not have enforcement powers likely to be sufficient to stop the US following a more maverick policy.

Markets are adjusting rapidly to the new realities. Europe will borrow more and spend more on defence, providing some stimulus to the slow growth EU economies. Bond markets will need to fund more spending.

There will be more trade turbulence as President Trump explores how far he can achieve change by short-term shock tariffs and how much he needs longer-term higher tariffs for his world view. He may well at some point become more worried if higher tariffs damage the stock market and cause price rises in the US. The EU is likely to be the next target now he has rolled out tariffs against Canada, Mexico and China.