A Trump Presidency Would Bring A New Set of Financial and Political Uncertainties
Yesterday, we discussed the uncertainties surrounding a possible Hillary Clinton presidency in light of potential ongoing leaks regarding the Clinton Foundation and overwhelming public distrust surrounding her candidacy.
Today, we examine the uncertainties of a Donald Trump presidency and the participation of third party candidates in the presidential race.
While it is difficult to predict what Donald Trump might do as president because he does not have a political record (which itself creates a fair degree of uncertainty), some of the proposals that Mr. Trump has mentioned, if he were to act upon them would create tremendous uncertainty.
North American Treaty Organization (NATO)
NATO is an alliance of 28 member states founded in 1949 of which the U.S. is a founding member. NATO’s primary function is to provide for the security of the North Atlantic area.
The United States provides the highest percentage of direct NATO funding based on a cost-sharing formula among NATO nations. The U.S. also provides the highest percentage of indirect NATO funding. Late last week, Donald Trump doubled down on his call for the United States to withdraw some of its economic and military commitments to NATO. The impact of such a withdrawal could have serious economic, budgetary and military consequences. Mr. Trump went as far as to state that under his Presidency the U.S. may not guarantee military protection to a NATO country in the event of an attack against it. Military support would depend on whether the country requiring or requesting the military protection or support was ‘fully paid up’.
Any reduction or elimination of financial and military commitment to NATO might potentially leave Europe militarily unable to defend itself (at least until the member states were able to fill the necessary gaps in spending). During such interim period the geo-political situation may become more uncertain. Mr. Trump, however, believes that such a scenario will not come to pass because a direct threat to remove U.S. funding would leave the other NATO members scrambling to immediately pay up.
As Mr. Trump puts it:
“We have to walk. Within two days they’re calling back! Get back over here, we’ll pay you whatever the hell you want. They will pay us if the right person asks,” he said. “That’s the way it works, folks. That’s the way it works.”
But what if it doesn’t work that way?
World Trade Organization (WTO)
The WTO is an organization founded in 1995 consisting of 163 nation states. The WTO creates global rules for trade among nations.
A cornerstone of Mr. Trump’s campaign is that the U.S. gets the wrong end of the stick on many trade deals and that the U.S. has lost high paying manufacturing jobs due to U.S. corporations offshoring their labor requirements. In order to even the playing field, Mr Trump believes that the U.S. it needs to penalize U.S. companies that move their production offshore. In an interview on “Meet the Press” last week, Chuck Todd remarked that such action might violate WTO agreements.
Mr. Trump’s response:
“Then we’re going to renegotiate or we’re going to pull out. These trade deals are a disaster, Chuck. World Trade Organization is a disaster.”
The U.S. not participating in NATO and/or the WTO could result in situations where trade routes and trade are disrupted. Frederic Bastiat once said “When goods don’t cross borders, soldiers will”. Whether threats and/or actions to pull the U.S. out of NATO and/or the WTO ultimately lead to a better ‘world order’ or disaster, uncertainty of outcome is certain if there is any change in U.S. involvement with either organization.
In addition to the uncertainties created by either a Clinton or Trump presidency, there is the uncertainty during the period running up to the election caused by third parties.
The Rise of Third Parties?
The two party system has been embedded in the U.S. political landscape for over a century. This year the Democratic Party was throw into disarray because of a strong challenge by life long independent Bernie Sanders and the Democratic National Convention Wikileaks. The Republic Party establishment was cast into exile this year by the nomination of outsider Donald Trump against their wishes and efforts. Weakened Democratic and Republican parties allow for the rise of third and fourth parties to threaten to end the hegemony the two parties have held over U.S. politics. The ‘two-party system’ in the United States has provided certainty in recent decades in that the President and Congress came predominately or exclusively from either the Democratic or Republican parties. That certainty may be ending.
Currently, the Libertarian (Gary Johnson) and Green Party (Jill Stein) presidential candidates are collectively polling about 15%. It is currently inconceivable that either Mr. Johnson or Ms. Stein would win the presidency. Their numbers, however, may grow if dissatisfaction with either or both of the Democratic and Republican nominees grows. It is improbable but not impossible that in such a circumstance, a third party candidate this year may receive more votes than one of the major two party candidates, something that hasn’t happened since 1912 when Teddy Roosevelt finished second running under the Bull Moose Party banner and outpolled Republican presidential nominee William Howard Taft.
No matter who gets elected this November, we are in for a long period of uncertainty.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.