International trade and immigration were flashpoints of Donald Trump’s presidential campaign, and in his first year he has shown that he intends to fulfill his promises to slow down the movements of goods and people. Last month negotiations over NAFTA began with Canada and Mexico, with the U.S. trade representative Robert Lighthizer announcing that current bilateral deficits “can’t continue.” The President threatened to shut down the government if Congress does not approve the funding for a wall with Mexico—a threat that seems to have been retracted in view of the need to approve funding for relief funds to Texas. But another aspect of globalization—international financial flows—seems to have escaped the President’s wrath. The reason for this divergence tells us much about the reasons for the President’s opposition to economic globalization.
President Trump has complained about exchange rates, particularly those of China and Germany, insisting that their governments lower the value of their currencies to increase exports to the U.S. But the U.S. Treasury did not label either country a currency manipulator in its latest report, although they made the “watch list.” (How Germany manipulates the euro has yet to be demonstrated.) Similarly, Trump received considerable press coverage during his campaign when he attacked U.S. firms that allegedly transferred U.S. jobs abroad. Recently his indignation seems to have trailed off, and has been replaced by the assertion that lower corporate tax rates will serve as an incentive for U.S. firms to repatriate funds held abroad that they will spend on domestic investments—a claim with little evidence to back it up. The President has rarely voiced any concern about the impact of financial globalization.
While Senator Bernie Sanders did not make international finance a focus of his campaign for the Democratic nomination for the presidency, he sharply criticized the financial sector. He called for the breakup of the largest financial institutions, and proposed a tax on financial transactions to finance public colleges and universities. Any of these actions would certainly affect capital flows. And Sanders expressed strong disapproval of the IMF’s programs with Greece.
The reason for the different stances on finance by Trump and Sanders can be explained using a framework recently proposed by Professor Dani Rodrik of Harvard’s Kennedy School of Government. He distinguishes between the sorts of cleavages that can divide societies. One of these is an ethno-national/cultural cleavage, which differentiates people by nationality and/or race. The other is an income/social class cleavage, which distinguishes people by income class. The former results in right-wing populism that targets foreigners as the source of the hardships that domestic citizens experience. The second form of division leads to left-wing populism, which criticizes the wealthy, banks and corporations.
Trump’s appeal has been to a base that is largely white, and who often live in economically distressed areas. They are receptive to the argument that foreigners are the cause of their economic distress, and that the country needs a strong leader who can stand up to the external threat. Research by Diana Mutz and Edward D. Mansfield of the University of Pennsylvania has shown that opposition to globalization is often based on attitudes and views outside the economic realm. They cite as sources of opposition to globalization: first, a belief that the U.S. is superior to other nations; second, a desire to avoid engagement with the rest of the world; and third, negative feelings towards those who are racially and ethnically different.
Trump’s opposition to trade and immigration allows him to show these voters that he will support them against the foreign menance. International finance, on the other hand, lacks a clear foreign villain. It is difficult to attack foreign central banks for helping to finance our fiscal deficits, and the financial crisis of 2008-09 originated in this country.
But Rodrik points out that there are countries where international capital movements have been much more controversial. Latin American countries have often faced financial shocks, which led to a left-wing populism that opposed foreign banks. More recently, Greece has been receptive to populists who oppose the austerity measures imposed by other European governments and the IMF.
In the case of the U.S., Sanders’ campaign showed that a leftist form of populism would include opposition to the financial sector. This form of activism can, of course, be found in U.S. history. The populist movement of the 1890s called for the abandonment of the Gold Standard and an increase in the provision of credit to farmers. More recently, opponents of the Federal Reserve have included members of Congress from both parties.
While Trump was willing to criticize Wall Street during his campaign, he has adopted a very different stance since his election. He has called for repeal of most of the Dodd-Frank Wall Street Reform Act. Steve Mnuchin, the Secretary of the Treasury and Gary Cohn, Director of the National Economic Council, both worked at Goldman Sachs. But Trump’s opposition to trade and migration allows him to maintain his base of support among Republican voters.
International bankers know that they have nothing to fear from a Trump administration—except perhaps his incompetence. Any threats to the stability of financial markets will come from self-inflicted wounds, such as a government shutdown over the debt ceiling. The low market volatility foreseen by the VIX index may soon be upended.