The Trump trade, a market cliche for revamped trade policy, low taxes and less regulation, is likely to remain intact even if President Trump loses a possible re-election bid in 2020. That’s the assessment from Robert Hockett, Edward Cornell Professor of Law at Cornell Law School and senior counsel at Westwood Capital, a New York-based investment bank.
Hockett’s thinking is this: A Trump re-election loss in 2020 would likely be the result of a win from a progressive Democrat, someone aligned with the thinking of Sen. Bernie Sanders (I-VT), for example.
“I don’t think a Bernie-type person would reverse the Trump trade vision” Hockett said.
Progressive Democrats tend to agree with Trump on revamping U.S. trade policy in order to help American workers hurt by globalization. And Hockett sees Democrats pushing to add tax cuts for the middle class (something President Trump supports), rather than undoing the corporate tax cuts passed last year.
The continuation of both of these themes is good for markets, according to Hockett.
Even though trade war fears have kept a lid on the stock market in 2018 and sparked bouts of volatility, Hockett is focusing on the possibility of long-term benefits from a more level playing field between the U.S. and its trading partners.
For decades, U.S. workers have been competing with foreign workers, which is one reason why wages for U.S. workers have been stagnant for 30-40 years, Hockett noted.
If Trump and his lead trade advisor Peter Navarro craft a comprehensive trade policy, Hockett expects wages for U.S. workers to rise.
“More and more production has been outsourced to jurisdictions that have no labor bargaining power,” he said. “Globalization forces are being diminished by Trump trade policies — organized labor will begin to get stronger.
Plus, if foreign nations retaliate by purchasing fewer goods from the U.S., American producers will be even more reliant on U.S. consumers.
“If companies want to rely on the American market for their sales, workers have to be paid enough so they can afford to buy things,” Hockett said.
Even though CEOs typically sound the alarm on rising labor costs, Hockett thinks any increase in wages will more than pay for itself from higher aggregate consumer demand. Put simply: If consumers earn more money, they’re likely to spend more. Two-thirds of gross domestic product accounts for consumer spending.
The corporate tax cuts have helped companies post 25% earnings growth this year, roughly five times the typical earnings growth rate.
Companies have also used the savings from lower taxes to fund share buyback programs, which also boosts stock prices.
Hockett thinks the tax cuts are safe from repeal for two reasons.
If the Democratic caucus becomes more progressive, it could actually result in additional tax cuts primarily for the middle class. Hockett stresses that progressive Democrats aren’t concerned with deficits and would likely not tinker with the Trump tax cuts from last year, which largely went to corporations.
Hockett doesn’t expect changes to the Trump tax cuts even if Rep. Nancy Pelosi (D-CA), who is concerned about deficits, becomes Speaker of the House again. “The fact that [Tuesday’s] Democratic win wasn’t as big as it could have been means that even the more austerity-minded Democrats like Pelosi probably don’t want to take on Trump where the tax cuts are concerned,” he said.
There’s also the Senate to consider. Remember, Republicans still control the Senate.
“A proposal making substantial revisions to the 2017 tax reform legislation is very unlikely to attain the 60 votes needed in the Senate, if it even came up for a vote,” wrote Goldman Sachs analysts in a note to clients Wednesday.
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