Trump and the Art of the Deal: Understanding Current American Negotiation Strategy

TRUMP AND THE ART OF THE DEAL:

UNDERSTANDING CURRENT AMERICAN NEGOTIATION STRATEGY

I do not know why it did not hit me sooner, but I now understand Trump’s tariff’s strategy. He has always been a bit irrational and chaotic, prone to emotional overreaction and not terribly bright. But for some reason, I thought when it came to the United States, he would act in the best interest of the country. I have therefore been surprised at his use of tariffs as instruments of foreign policy, wielded at historic allies with potentially devastating economic effects both here and abroad. So, his desire to use tariffs as instruments of foreign policy surprised me.

But then I read a couple of articles lately. One from the New York Intelligencer discussed the origins of the “TACO Don” nickname given to Trump. It stands for: Trump Always Chickens Out or “TACO”, and it occurred to me that Trump has not imposed any significant tariffs, at least not yet. He announces sometimes severe tariffs but then, usually at the last minute, delays or suspends them. His announcement of tariffs causes the stock market to fall significantly, but then the suspension of the tariffs causes the market to rebound somewhat. Why?

Then there was the Court of International Trade decision in New York that held the President does not have the ability to use the International Emergency Economic Powers Act (IEEPA) to impose tariffs. The decision is accurate and straightforward, but the decision came under a blistering attack from Trump and his allies. Tucked in the text of one of his many social media posts was a complaint that the courts were preventing him from “negotiating”.

So, if the courts are preventing Trump from negotiating new free-trade agreements with foreign powers, they are not allowing him to make the deals, he wants to make. And someone who has always been focused upon “the deal”, we can start to understand what the tariffs are all about. They create economic pressure on our allies to re-negotiate the agreements that already exist in exchange for a new deal. Trump does not want the tariffs to take effect, and that is why he always backs down. It appears that he has no interest in actually imposing tariffs. He is more like an actor playing the part of a strong man, as he did in his reality television show. Like a second grader on the playground, he intends to bully his way through this mess that he has created.

But here is the catch that Trump does not understand—it is not about the deal. Of course, The Art of the Deal, wherein Trump set forth his strategy for economic domination, was written in 1987, before his six bankruptcies. When most businesses negotiate deals, those deals may involve only one transaction, but the astute businessperson is looking not for the “best deal” but for a relationship. In fact, having a trusted partner is worth far more than a few dollars that might be chiseled from the party on the other side of a transaction. Trusted partners can come to a business owner’s aid in times of economic distress and can extend payment dates or place orders that can save a struggling company in a tight position. If a partner is trusted, there is far less chance that a party will go elsewhere to seize a better deal.

By focusing on the deal, however, Trump creates a transactional, as opposed to a trusted partner, relationship. If business success were defined by the “deal”, i.e., the purchase of a company, then Trump would have struck success with the Trump Taj Mahal. He purchased the casino in 1990, calling it the “eighth wonder of the world”, for $1.2 billion. But he declared bankruptcy in 1991, and the casino was later sold for only $50 million, about four percent of what Trump had put into it. Five other bankruptcies followed, all of which exhibited a similar pattern. Trump paid too much, put too much into these businesses, and, in the end, they did not generate enough revenue to pay the enormous debt Trump has accumulated. In every case, he walked away, leaving investors and financial institutions who trusted him to pick up the pieces.[1]

[1] This article is about Trump’s negotiating strategy and not his business acumen. However, since his bankruptcies in the 1990s, He has continued to accumulate lawsuits, mostly from people who, unfortunately, trusted him. It is noteworthy that when first elected in 2016, he quickly settled two suits which were pending against Trump University for fraud and other violations. He was also convicted of falsifying business records between his first and second administration.   

Unfortunately, Trump has not learned from his prior mistakes. In fact, he may not even be able to admit a mistake. Now, however, he sits at the head of the world’s largest economy seeking to use the nation’s economic power to bully other nations into accepting the free-trade agreements he wishes to create. The question is: will it work?

Understanding International Trade.

Throughout the history of the United States, free trade has always been an important goal. The Declaration of Independence list the colonies grievances against the Crown, one of which was “Cutting off trade with all parts of the world”. Within the Republican Party in particular, free trade was a major goal of the Party under Ronald Reagan, George Bush, and George W. Bush. Even Democratic Presidents like Bill Clinton and Barrack Obama, long beholden to powerful unions, eventually saw the benefits of free trade.

Free trade does a couple of things. First, it allows American goods and services to be sold more cheaply in international markets. Second, it allows Americans to purchase goods that are made more cheaply overseas and then shipped to the U.S. It fosters an international conductivity and allows corporations to become more transnational in their operations. However, allowing clothing to enter the U.S. market at prices substantially below the cost of their manufacturer in the United States undermines American manufacturers and creates unemployment in the regions where clothing can no longer be made economically. On the other hand, it allows American consumers to purchase clothing at a small percentage of what it would cost if the clothing were made in the United States. So, not everyone benefits from free trade. Nevertheless, as free trade has expanded around the world, the standard of living for a majority of the people has increased.

Tariffs and Their Effect on Free Trade.

There are several barriers to free trade that nations can erect, but Trump’s main focus has been upon tariffs. Tariffs are a tax imposed upon importers of foreign goods. A tariff imposes a cost on the manufacturer, and that cost can either be born by the importer, absorbed by the country exporting goods to the United States, or passed along to the consumer. The hope among Trump and his supporters is that the cost will be absorbed by the country manufacturing the goods. However, predictions as to what will happen vary from product to product, and it is difficult to determine how much of this tax will be passed along to the citizens of the U.S.

In this nation’s early history, Congress funded the federal government largely through tariffs. In those years, Americans were not subject to direct income taxes, and so, tariffs were one of the only ways to fund the federal government. As time passed, however, tariffs came to be seen as a regressive form of tax[2]. They were also thought to protect domestic industries from foreign competition causing American industry to be less efficient than it would have to be if it were forced to compete.

[2] A regressive tax means that the burden of a tax falls primarily on the poorer elements of society.

Free trade agreements generally require the reduction or elimination of tariffs. Although the term “free trade” is used, the fact is that nations spend months or years negotiating the protection that will be permitted to remain and those that will be removed. Nearly all nations, for example, ensure a readily available supply of strategic materials necessary for national defense. They also seek to protect food production and other industries considered to be politically important. The result is an agreement that seeks to take into consideration all of the needs or the negotiating parties and construct an agreement that benefits the largest number of people, even if some people end up losing out.

Since tariffs are taxes, the power to impose tariffs rests with Congress. Trump, however, has been using IEEPA to impose tariffs. The problem Trump faces, however, is that IEEPA is not a tariff statute; it is a sanctions statute intended to prevent American “concerns” from conducting business with entities designated as “Specially Designated Nations” (SDNs). Under normal circumstances, the President signs an Executive Order pursuant to IEEPA authorizing the Office of Foreign Assets Control (OFAC) to designate entities as SDNs thereby cutting them off from conducting business with U.S. concerns and, essentially, the international banking system. The SDN designation is immediate and severe.

By using IEEPA to impose arbitrary taxes that seem to be based upon the President’s mood on a particular day, Trump is allowing Americans to conduct business with entities that are not even designated as SDNs. The “sanction” is a higher tax, which can be immediately suspended or postponed whenever Trump calms down a bit. IEEPA, however, does not mention or authorize tariffs; it cuts potential enemies off from U.S. commerce. Trade with a SDN may be permitted under certain limited circumstances, but even here, there is no authority to impose tariffs. So, even if Trump views his tariff threats merely as bargaining chips, they cannot be used in that way under current American law.[3]

[3] Of course, Congress could amend IEEPA or pass another statute authorizing the President to impose tariffs under whatever criteria Congress establishes. There does not appear to be any interest in Congress to take this action, however.           

Another issue with IEEPA is that it is directed against adversaries and criminals. Predecessors of IEEPA were used before World War II to prevent the sale of strategic minerals like oil and steel to Japan. Trump has imposed sanctions on almost every nation in the world. Our closest ally, Canada, has been subjected to sanctions. Russia, a clear adversary to the United States, has not.

The Greater Problem with Trump’s Tariff Approach.

Trump’s tariffs seem to be based on a belief that the United States is “being ripped” off by every nation in the world.[4] It is a phrase that seems to strike home with the Trump base, but the reality is far different. Although all nations, including the U.S., protect some industries, the ability of the U.S. to buy steel or oil, for example, on international markets, allows American businesses to keep operating at competitive levels internationally. This also saves American consumers money since they benefit from more cheaply made foreign items. The current system of international trade protects Americans.

[4] In 2015, one of Trump’s biggest targets was the North American Free Trade Agreement (NAFTA) which Trump called terrible. After his election, he gave notice that the U.S. was withdrawing from the Treaty. This resulted in a flurry of negotiations between the United States, Mexico, and Canada that resulted ultimately in the United States, Mexico, Canada Agreement (USMCA). Once that Agreement was signed, Trump hailed it as the best trade agreement ever. Now, he calls it terrible and a rip off of the United States. The reality is that the USMCA as a whole is worse than NAFTA.

The real problem, however, comes from the Trumpian approach to business as outlined in The Art of the Deal. Our alliances with our friends around the world have been built through painstaking negotiations and increasingly close relationships between the citizens of allied countries. The U.S. is the strongest nation in the world, and as the leader of alliances sharing a common belief in democracy, has created a world where freedom has been growing over the past six decades. Allies, like successful relationships with neighbors, are built upon the honest commitment to talk about problems and solve them as they arise. There will always be problems, but they are best served within the context of a relationship.

Trump has no commitment to the truth, which makes him an unreliable negotiating partner, and his focus on “the deal”, even at the expense of a relationship, bodes poorly for this country. By imposing tariffs on nearly every nation on earth, he has created substantial pressure to enter into new agreements with every nation in the world simultaneously. He says every nation is coming to him, and I am sure they all want to negotiate new free trade agreements, but are the new agreements going to be anything more than window dressing Trump can point to in order to declare success? Probably not.

In the end, we will be left with weakened international relationships, allies that are going to be more reluctant to come to our aid, and “deals” that are likely to be as successful as the Trump Taj Mahal deal.

We need to be vigilant, and we need to do better.