We should’ve hired Donald Trump to negotiate Brexit. His advice would’ve been clear.

Trigger Article 50 and tell Europe we’re leaving. And then threaten it with a whole new set of trade barriers under World Trade Organisation (WTO) rules.

Its cars will be taxed, its cheese banned under new pasteurisation laws and its champagne outlawed for its high CO2 content. If any European government wants to access London’s financial markets, it’ll face a surcharge. And the Royal Navy will be inspecting any fishing vessels in British waters, ready to apply customs duties for imported fish.

The result of such an announcement would’ve been an excellent free-trade agreement with the EU.

This is the negotiation Trump pursues. It’s similar to the one you use to buy a house or used car.

First, you make a stupidly low bid. The whole point is to get negotiations off on the right foot. You want to ensure your seller is unsettled and begin the bidding on a level that favours you. The eventual compromise will be far more in your favour that way. If you make an honest offer, you’ll get ripped off.

Another way to understand Trump’s genius is kung fu technique

If you want someone to move in a particular direction, the easiest way to do it is to push them in the opposite direction. If you do it in an irritating way, they’re guaranteed to step in the direction you wanted them to. This is also the basis of all inter-sibling relationships. And some parental ones…

Let’s take a look at the three-step process Trump has followed in achieving just about all of his policies. They’re especially obvious on trade and North Korea, so I’ll use those as illustrations.

Step one is to take the legal high ground. When it comes to trade, make sure you play within the WTO rules. For example, it’s legal to put a tariff on for national security, and if you do it to every other nation equally. WTO rules forbid targeted trade wars, not generalised ones.

Notice how Trump’s tariffs targeted no individual nations in the letter of the law, while the EU threatened particular manufacturers in states that supported Trump. He got on the legal high ground and the EU backed down because its counter would’ve been illegal.

Step two is to make threats. You establish your negotiating position as being very unfavourable to both of you. This forces your opponent to take the opposite position – the person trying to compromise to the benefit of both of you. As soon as they take on this role, any concession you make actually brings you closer to your end goal. Their concessions still favour you too.

This even worked on Kim Jong-un!

Trump’s threats gave Kim the opportunity to oppose the West by compromising on the missile tests, with the Olympics thrown in for show. Trump’s wild Twitter aggression led to de-escalation by allowing Kim to play the good guy. Not out of fear, but by reframing the negotiating positions. Notice how it brought the two Koreas together – the ideal resolution for the US.

Step three is to compromise, achieving your initial goal. The last few weeks have seen South Korea, the EU and China all announce compromises on trade. The result has been an enormous shift in favour of the US’ goals of opening Asian markets and reducing their protections.

In fact, the Chinese seem to be giving in on their nationalist ambitions more than Kim. Chinese Premier Li Keqiang told the China Development Forum that the country would open its markets and comply with intellectual property law. The South Koreans have agreed to the updated trade agreement with the US too.

For now, not much is officially agreed. But Trump’s belligerence is delivering his goals.

Remember, Trump is not against trade. His presidential run was intended as a marketing strategy. He wanted name recognition before a branding push into Asia. After all, the Trump brand is his biggest asset. He is very much in favour of foreign investment.

What Trump objects to is “unfair trade”

What he’s referring to are trade imbalances. The US trade deficit versus China and Germany’s surplus. These are in part due to subsidies and tariffs in China and Europe. The EU is extremely trade restrictive while China exerts huge influence over its economy.

Trump’s threats are stunts. If you look closely at his rhetoric, he wants free trade. He’s arguing others aren’t playing by the rules, so he threatened not to either. He’s pushing other nations into playing by the rules by threatening them with a taste of their own medicine. When he compromises, he’ll point to what he said about fair trade and have the last laugh once more.

All this is why I never understood international diplomacy. Whoever takes the most outrageous position gets the best out of the compromise by biasing where negotiations begin. Behaving like Trump is the optimal strategy. The only problem is, you have to be convincing and behave like a real pain in the neck.

Compare all this to our negotiations with the EU…

The EU is following Trump’s strategy of threats, belligerence and hyperbole.

The UK isn’t even allowed to negotiate a trade deal, but must pay a ransom!

Here in Australia, policymakers are pining for a trade agreement with the UK. The UK’s membership of the EU supposedly hammered Australian agricultural exports.

Banning negotiations for trade agreements is probably the EU’s most vindictive position on Brexit. If they truly favoured trade and stability, they would’ve encouraged existing trade relationships to automatically transfer to the UK, and for new deals to be opened.

But Britain goes along with the EU’s behaviour like a scolded child. Kowtowing will not deliver the best result for Britain. Trump would. In an even more entertaining way too…

Stocks and the trade war

The media has pinned the stockmarket tumble on the trade wars. Hence the rally on Monday as those trade wars wound down when Trump got his way with China. So much for escalation and retaliation…

If I’m right about Trump, and the world continues to walk into his traps, that spells good news for the markets. Less trade barriers, not more.

But it’s not that simple. There are plenty of other consequences to a world with Trump’s fair trade. The imbalances which Trump rails against won’t just disappear smoothly.

How many Chinese steel mills will close down or dump their product elsewhere if Trump gets his way? Can the Chinese compete on their own intellectual property yet? Can they repay their vast amounts of debt under a new economic order?

Another fear is what will happen to the global supply of US dollars. If the Americans manage to shrink their trade balance, they’ll be shipping less US dollars into the world. It’d have the same effect as reversing quantitative easing. But can the world stomach tighter monetary policy in its reserve currency? A lot of international companies and countries borrowed in US dollars.

For these reasons, and more, the stockmarket remains vulnerable.

But why make things complex? There’s a very simple reason why stocks will fall. This one.

Until next time,

Nick Hubble
Capital & Conflict

Where to put your cash today

Bonds have been booming for decades and yields are now well below inflation.
Gold hasn’t gone anywhere for years. Cash is a non-starter in the era of central bank money printing.
Stocks, however, have been on a tear since 2009. Investors are still piling in. Market sentiment is sky high.
Each week brings a new high… onwards and upwards…
Capital at risk. A regulated product issued by Southbank Investment Research Ltd.