[Warning: This essay "may" contain wild conjecture. Viewer discretion is advised. The goal is just to give you some food for thought.]
I, like many of you, have been asking myself what Trump is doing - constructing the Mexican wall, getting friendly with Putin, and the cold tone with China. Lately, we've been seeing a lot of Mexico headlines. I was a bit taken back the other day when Trump announced he was building a wall. I had just assumed it was an empty campaign promise that was somehow going to get swept under the rug. Maybe it still is. When there is a severe need for real infrastructure spending in the U.S., building a wall did not seem particularly pressing. He also suggested adding a 20% tariff on Mexican imports. Nieto cancelled his trip to the U.S. His (foreign) policies seemed to lack direction and seemed as whimsical as his tweets.
But I had an epiphany with the GDP report last Friday, where the headline GDP disappointed to 1.9%, but the trade deficit accounted for 1.7%. The trade deficit number was just payback from Q3, where we got a sizable boost from exports, but still. It dawned on me that 1.9 + 1.7 = 3.6 percent. Yes. I was a math major. This happens to be in the 3.5 to 4.0% GDP range that Trump references as his goal for the U.S. economy. Maybe he does have a "grand plan" for the U.S.! And this plan could include a boost in GDP from the reduction of the trade deficit. We saw in Q3 what a surge in exports could do.
I then decided to take a closer look at the trade figures. Below are the trade figures for 2015 (in $millions).
If renegotiating trade is going to be one of the centerpieces of his administration (and why wouldn't it be, since he is a businessman and has had a successful history of renegotiating "bad" deals in his favor), there are a lot of future implications that can be gleaned from this table. I call this the game of Trade Balance Diplomacy. Let's look at this as a negotiation/optimization game - the type that someone who is a business man and has gone to business school (like yours truly) would think about. I suspect that Trump's idea of "fair trade" is to somehow get the trade balance to zero (or positive). His foreign policy actions could be very consistent with that:
Trump's Mexico Policy
Note in the last column of the table that Mexico's trade deficit (as a percentage of average exports and imports) is 20%. Where have I seen that number before? Oh! Trump's tariff percentage! Why focus on Mexico, when they are not the largest transgressor of the U.S. trade (im)balance, in either magnitude or percentage? In Negotiation 101, you learn that when you have to negotiate with multiple parties, a common tactic is to negotiate with the weakest counterparty and then get the stronger parties to follow the same model (think United Auto Workers). Mexico's economy is highly dependent on the U.S. An astronomical 81.1% of Mexico's exports go to the U.S. Their economy would be crushed without us (all other things being equal). Canada is similar, but on all measures Mexico is the larger target between the two. Mexico is also an attractive target when there is an immigration card and that Trump can play, and Mexico is a country that Trump can rally popular support against.
If you look at the above table from a negotiation perspective, it is very reasonable to go after Mexico first. Perhaps his preferred negotiation approach is to position himself as far away from the center as possible, to break past molds and make room for as much gains as possible. What makes less sense is the bipolar antagonistic approach by which he is going about the posturing. "We love Mexicans" but we need a wall to keep out the rapists. Um… okay. Alienating a counterparty is always a risk, but really, is Mexico going anywhere? They will ALWAYS answer Trump's call. 81.1% of exports says so. Once he gets the Mexico deal done, it probably wouldn't take much to get Canada on board… lest we just do more with those cost-friendly, trade-friendly and non-rapist Mexicans. Then signing up the rest of the Americas is easy.
Trump's U.K. & EU Policy
Friday was mostly just a photo op with May. I was not sure what would come of the meeting (pre-epiphany). Going in, May was clearly more in need of support from the U.S. than Trump needed from the U.K. Would Trump look to take advantage? But in looking at the above table, the cordial result we got seems obvious. The U.K. is a trade balance equal. Trump would value this type of relationship. But the other important factor is that while May needs allies (and a negotiation precedent) for her Brexit negotiation, Trump also needs an ally for future trade negotiations with the EU. Look at that glaring trade discrepancy with Germany, and to a lesser degree, the rest of the EU! Look for the hammer to come down some time in the next year or two on the EU. Nein! 40-80% tariffs, anyone? The thing with exporting luxuries is… they are "luxuries" not "necessities." Peter Navarro (Trump's trade advisor) got the ball rolling earlier in the week by saying that Germany is using a "grossly undervalued" euro to gain an advantage over the U.S. and its own EU partners. The last part was a nice touch - to try and cause in-fighting and pressure from within the EU.
And you can forget about the days of the U.S. (and now U.K.) taking the lead in footing the NATO bills. Who do you suppose the U.S. is going to insist pays the bulk of the defense fee after looking at this table? If I recall correctly, the U.S. and U.K. have large bodies of water as a buffer from would-be invaders. It would be a shame if a sour trade negotiation resulted in the U.S. and U.K. saying defense is not really their problem. Why would the countries least likely to benefit have to contribute much at all? The U.S. contributes 3.61% of GDP, the U.K. contributes 2.21% and Germany contributes 1.19%. What moron negotiated this? Just saying - you may hear all of the above from the Donald in the future. Don't expect the 40-80% deficit to be around in a few years. Especially considering…
Trump's Russia Policy
The U.S. and Russia have been traditionally more adversarial than cooperative. Trump seems to me to be a "what have you done for me lately" / "what do I get out of it" kind of guy. A guy who has been married three times is likely to think that old relationships don't matter - it's all about the now and the future. So let's ignore history and see what we can infer from our Trade Balance Diplomacy game. Russia is nowhere to be found in the top 20. Part of this is the sanctions. We generally have done very little trade in the past with Russia. There could be some opportunity to do a lot more trade that is mutually beneficial (after sanctions). But more importantly, Russia could be a valuable political ally when dealing / negotiating with the EU and China. It seems to me there is more to gain from good relations with Russia than from bad, even if it is just faking good relations in the near term to get concessions from other countries. If history has taught the Germans anything, it's that you can't win fighting on two fronts. Sometimes, you need to make some people feel uncomfortable to get the best deal. And Trump has no problems making people feel uncomfortable to suit his needs. Add Europe to the new Trump trade deal.
Trump's Non-China Asia Policy
Japan, Korea and Taiwan are all in the ~1.3 fertility rate demographic and economic sinkhole. They need all the exports they can get, because their population surely is not going to support future growth (and will in fact reduce it). They are not in a position to say "no" to anything, after the Americas and Europe have all agreed to the new Trump trade plan. In any event, if Trump is questioning NATO, we may want to cut back in the Pacific too. Duterte and the Okinawans didn't want us… maybe they are right. Why spend money defending someone and be spat on? I wonder if the Chinese can build a man-made island in the East China Sea? Have you noticed how some of those Japanese islands look MUCH closer to the Chinese mainland than the Japanese mainland? I wonder if my buddy Jong-Un needs anything. One China does have a nice ring to it. Weird how my mind wanders. Watching too many reruns of the Godfather will do that. But back to the trade deal… I think non-China Asia will find a way to get on board.
Trump's China Policy
I suppose what Trump is doing is using the "they don't know me, so let's get as far from the middle as possible" theory of negotiation. Make friends with Taiwan. Check. Declare Spratlys illegal. Check. Sound friendly towards Russia. Check. But this is the big end-game. If the trade balance is what we care about, China is it. They account for almost 50% of our trade balance. I'm not sure if the final play is going to be a "we got everyone else to agree, so you should agree"… or if some other pawns are going to be involved. The current trade environment is absurd. Just as one example, our U.S. Postal Service negotiated rates where is cheaper to ship something from China to the US than it is from within the U.S. That is why you see so many goods on Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY), etc with free shipping from China. The USPS has trouble making money, so they negotiate a money-losing deal with China. How are mom and pop supposed to make a living in an increasingly internet world under those conditions? Colossal stupidity like this is why Trump got elected in the first place! Level the playing field! Trump will do what he can to get "fair trade."
Once China falls, everyone else will fall. And just like that, we have won the game of global Trade Balance Diplomacy! Countries have been too comfortable with the status quo. Sometimes, it can be an advantage to be a new-comer to Diplomacy and act crazy in the game. Of course, if he is not acting, that will be a problem. But as I said earlier this year in the CA Digest, "Make sure you have the Trump/cabinet stupidity tail covered. The risk is real and the protection is cheap."
 As an aside, there is an excellent game called Diplomacy, by Avalon Hill - it is approved by Kennedy, Kissinger, Asimov, Bradbury, Cronkite and Choi.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.