The Wrong Bottom Line

Trump focuses only on win/lose. If the US earns $1 trillion from trade and the rest of the world (ROW) earns $1.2 trillion, he sees this as a $200 billion loss. The ROW is winning, taking advantage of the USA and its unenlightened deal makers. If the US earns $500 billion from trade and the ROW earns only $400 billion then we are winning by $100 billion. Trump sees the second scenario as far superior to the first. Relative winnings (win/lose) are the bottom line rather than actual winnings (win/win). This is a fundamental flaw.

The Wrong Measure

Trump only sees costs; he doesn’t consider benefits. Net benefits, benefits minus costs is the right measure.

The Wrong Timeframe

Trump only looks at the short-run. He ignores the long-run. He believes that he can always renegotiate any situation.

International Relations is Complicated

Trump only sees dollar signs. The trade balance can be measured. It is positive or negative. The cost of defense can be measured. Either we pay or others pay. We trade goods and services. Defense/security benefits matter. We care about immigration, crime, taxes, personal security, climate, health, economic development, investments, rule of law, intellectual property, labor, the environment, etc. Other countries care about all of these dimensions. We must too.

International Relations is Irrational

Citizens have an irrational commitment to their nations. They are willing to die for them. Nations have sovereignty. Each has certain minimal rights. Politicians respond to these irrational beliefs. Ignoring this reality is irrational, even though it is very frustrating.

Alliances are Cheaper than Empires

The US learned from European, Japanese and American experiences. Empires are very costly to establish and maintain. Nations can be enticed into becoming reliable allies at a fraction of the cost. They are rationally willing to evaluate costs and benefits, risks and rewards, short-term and long-term, labor and capital, sovereignty and influence, security and opportunity. Trump is right to negotiate, but wrong to discount this basic approach.

Global Agencies are Cheaper than Individual Deals

The US has greatly benefited from the post-1945 system of global governance, finance, economic development, health and trade. Global deals designed by the global leaders provide a framework for low-cost transactions. Trump believes that the strongest nations can extract even more net value through individual deals. Too many countries. Too much complexity to negotiate all of these topics effectively.

Single Deal or Repeated Deals?

Trump comes from the real estate world where each deal is “one off”. International relations and trade are repeated deals. The optimal strategy is different when the “tit for tat” strategy can be used. Firms and nations will punish any bully, even at a significant cost to themselves. The strongest players must consider the weaker players’ strategies. When firms or nations find that they cannot trust someone the total costs go up significantly.

Playing Chicken

There are many strategies in the game of chicken. The strongest player does not automatically win. Bluffing matters. Posturing matters. Resources matter. The ability to endure losses and pain matter. Allies matter. Insurance matters. Flexible resources matter. Capacity matters. Creativity matters. Credibility matters. Non-negotiable factors matter. Trump seems to confuse simple economic might with certain winning.

Comparative Advantage

Trump does not understand David Ricardo’s theory of comparative advantage from 200 years ago. You can be better than someone else in everything, at least in theory. You cannot have a comparative advantage in every production process. Between any two individuals, firms, states or nations, there will be differences in relative productivity. This is the basis for trade and specialization. The U.S. cannot be better in every industry. We can be relatively better in many industries, but not in all. As our incomes and standard of living increase, we will be relatively less competitive in those activities that can use lower cost labor. This is an unavoidable fact. We can choose to subsidize low skilled manufacturing employment, but we are fighting against very strong market forces.

Dealmaking Strategy

Trump focuses on simple short-term one-time win/lose. The best negotiators know that the greatest value comes from “growing the pie” in the long-run (win/win). They don’t assume a fixed-sum game. They cooperate to grow the pie, perhaps at the expense of suppliers, competitors, labor, investors or customers. They exploit comparative advantages to lower overall costs, lower risks and increase benefits. They share or signal their relative priorities. They fulfill their commitments. They create incentives for sustained cooperation. They cooperate to build market power. They manage customer expectations. They under promise and over deliver. They manage the government. They build shared cultural expectations and priorities. They build personal relationships. They manage large risks. They manage and coordinate supply chains. Modern business is complex. The real winners understand and deal accordingly.

Summary

Trump’s dealmaking approach fails on every critical dimension. It is a losing approach for almost all firms and for all countries. His supporters need to understand that he cannot win with his approach and force him to change. His opponents need to highlight these failures. The United States has too much at risk from Trump’s losing strategies.