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The Founding Fathers could surely not have made it up; a rank outsider – Donald J. Trump - has beaten the establishment at its own game. But while he lost the total popular vote by just 0.2% - 47.5% to Clinton’s 47.7%, he won where it counted and secured the states that gave him the electoral college, the institution that under the US constitution directly votes in the president.
Trump ran his campaign on rhetoric and, as some would see it, on the basis of insult and mudslinging. Whatever your view, he took an anti-establishment, pro-US, pro-change, and protectionist line. He polarised the electorate in a way not seen in decades and succeeded against all odds.
But apart from the populist sentiment, what is the Trump administration going to look like and what does it mean for the world outside of America? What are his policies – his “visions”?
Trade and the markets
One of the central planks in the Trump campaign involves the state of the US economy. Despite it being on, as the OECD notes, a “moderate growth trajectory sustained by mutually-reinforcing gains in employment, income and household spending”, Trump has called for its rejuvenation – at the expense of other nation’s economies.
And so it’s interesting to note that with the announcement that Trump was in the lead, and then subsequently had won the election, the financial markets understandably reacted – but not in the way that many expected. The pound rose against the euro and the dollar; and the Mexican peso fell to its lowest rate on record against the dollar as the possibility of US/Mexican relations deteriorating became more likely – as did the wall that Trump wants between the two countries and the rapid renegotiation of the North American Free Trade Agreement (NAFTA).
As David Johnson, director at Halo Financial, notes, “Those selling US dollars headed for the safety of the Japanese Yen and gold. While the dollar has stabilised, Trump does not officially begin his term as US President until January 2017, so market uncertainty and volatility will surely continue in the coming months.”
Yes, stock markets initially fell, but they had risen by the end of the day – the FTSE ended 1 per cent up, the Dow Jones rose 1.4 per cent, and the Dax closed 1.5 per cent higher. The election result did cause an initial intake of breath on global markets, says Laith Khalaf, senior analyst at Hargreaves Lansdown. However, his view is that the initial drop in global markets with the subsequent recovery and shrug indicates that the US political system has a limited effect on the markets – something which is to be lauded.
So where will President Trump take the US?
First off, the Trump administration would withdraw the US from the Trans-Pacific Partnership, a new trade agreement between 12 pacific rim nations; he’s not keen on its goal of reducing barriers to trade, lowering of tariffs and the removal of protectionism.
Similarly, analysts at Investec think the Transatlantic Trade and Investment Partnership trade deal between the US and EU will go no further for the same reasons. Citi economists have cautioned that the result of any rising US protectionism may send exports from emerging markets towards the EU which will only serve to strengthen the hand of protectionists in the EU as well. For the UK, this could mean a much tougher time at the EU negotiating table once Article 50 has been triggered; by definition this could have a detrimental impact on the UK plc once we leave Europe.
On a parallel tack, Trump’s administration will target what it sees as violations of trade agreements that harm US workers.
China is particularly in Trump’s sights. He considers the country a currency manipulator; is unhappy with its alleged misuse of state subsidies (that give the Chinese producers an unfair advantage); and would use every presidential power he has to pursue trade disputes with China if it does not “stop its illegal activities, including its theft of American trade secrets.” With top exports from China, according to the CIA Factbook, including electrical and other machinery, data processing equipment, clothing, furniture, textiles, and integrated circuits (as well as plastics, iron and steel, and medical equipment), this is a big deal.
The biggest weapon in the armoury, as Trump sees it, is the application of trade tariffs – duties in other words. Johnson notes that this could slap an extra 45% on the cost of US imports – China won’t be happy. While on first blush this appears to a Sino/US issue, the squabble has the potential to go global. Why? China produces so much and if it can’t sell it to the US it may well ‘dump’ it elsewhere. That could result in other countries imposing tariffs on imports and as Johnson puts it, could contribute to a global economic slowdown.
It’s entirely possible that, if Trump’s campaign policies are followed to their natural conclusion, the US could remove itself entirely from NAFTA and the World Trade Organisation. So will we see a full on trade-war? Quite possibly. Will Americans lose as much or more than they gain? Quite possibly too.
The main, and some would say populist thrust of the Trump campaign, aims to add (more) jobs to the US economy – a goal of 25m in ten years has been mooted on the campaign website – and this requires, quite simply, Americans to do more domestically. The stated plan is to boost economic growth to 3.5% a year (half of what China has recently been achieving, even in its ‘slowing’ economy). To do this, the Wall Street Journal has noted that the Trump administration plans to spend $1tn over the next ten years on infrastructure projects. It very much sounds like Franklin D Roosevelt’s 1930’s New Deal policies that helped the US economy post-Depression; the US construction sector is delighted of course.
Interestingly, there’s no hint of any planned tax hike to pay for this investment which will, at first, help the US economy. But in time the US will become saddled with more debt which it will find hard to service. Analysts at Moody’s, according to Forbes.com, foresee trouble soon – they see interest rates rising to entice the money in that the (new) US government will need for this new investment. And where the US Federal Reserve leads on interest rates, the world follows. Further, some reckon that the Trump plans for the economy and trade will backfire and put the US economy into recession by 2018 – that’s the view of Megan Greene from Manulife Asset Management.
As an aside, the US bond market is heavily owned by foreigners, “including nations like China where Trump has made unfriendly comments,” said Jim Leaviss, head of retail fixed interest at M&G Investments. So it’ll be interesting to note how Chinese investors view funding US debt while Trump is hard at work bashing China.
There are others, including Larry Hatheway, chief economist at GAM, a global asset management firm, who think that Trump’s spending plans could also leading to a jacking up of inflation in an economy that’s already close to full employment, especially if he carries out his threat to deport illegal workers en masse while choking off the supply of workers (mainly muslims) from overseas. It’s a point made by Trump himself when he said that he wants to “establish new immigration controls to boost wages and to ensure that open jobs are offered to American workers first.”
On tax, the Trump campaign website points to what could be a new race to the bottom in terms of corporate taxation. The present tax regime in the US charges 35% on business profits, but Trump is suggesting a rate of 15%. The UK is presently 20%, but the former chancellor George Osbourne talked of aiding the UK’s post-Brexit position with a 15% or less tax rate. In comparison, Ireland has pegged its rate at 12.5%. Further, Trump is planning to give US companies the option of repatriating overseas profits with a one-time charge of only 10%. The last time the US offered something similar was in 2004 where companies paid just 5% on repatriated profits. However, a study of the policy found that for every dollar companies brought home, they increased shareholder payouts between 60 and 92 cents. And pharmaceutical Pfizer—the single largest beneficiary of that experiment, used it to bring back $35.5bn in foreign earnings before cutting 11,748 US jobs over the next three years.
It’s quite clear that Donald Trump as president could fuel global economic uncertainty if he carries through on all of his trade and economic policies. However, for the UK, in the short term, the impact could be muted. Indeed, Capital Economics has left its forecasts for UK growth unchanged 1.5 per cent in 2017 and 2.5 per cent in 2018 following the US election result.
Sure, the US is the UK's biggest export market, with a fifth of UK goods and services sent across the Atlantic, but the Capital Economics suggests that the Brexit vote might actually prove to be an insulator. Firstly, the rapid drop in the pound (and now the drop in the dollar) since the Brexit vote has made UK exports more competitive (by definition, imports are more expensive). Secondly, the UK has had its revolution while eurozone states are now more open to attack - France, Germany and Italy, must be concerned.
However, it’s worth noting that before the Brexit vote in June, President Obama said that the UK would go to the back of the queue when it came to negotiating a post-Brexit trade agreement. However, Trump has said that it makes no difference to him (and therefore trade with the US) if the UK is in or outside of the EU. Indeed, his trade advisor Dan DiMicco has gone on record as saying that he “absolutely” wants to strike a trade deal with the UK, possibly before Article 50 is triggered. Johnson thinks that markets could be reassured by Trump’s talk of continuing the UK-US “Special Relationship” and by the UK’s Chancellor of the Exchequer, Philip Hammond, commenting that he anticipates “a very constructive dialogue” with the new US administration. As we’ve seen, Trump considers China as the real threat.
The impact on tech
The election of Trump as president is going to be interesting on the world of technology. He’s talked about limiting immigration (even if immigrants are highly skilled which the sector needs) and curbing imports (which supply the tech sector with componentry and finished goods) while dealing with alleged Chinese intellectual property theft. It’s certainly not going to help the likes of Apple conquer markets as huge such as China and India if Trump essentially wants to ‘protect’ (read isolate) the US from those nations.
Indeed, some suggest that Trump’s policies on free-trade will make it harder for the US to sell its wares. However, others including Michael Yoshikami, head of Destination Wealth Management, think the reason for the slower rebound in tech stocks is easier to explain: "I don't think there's anything in the new administration that's going to be negative for tech stocks. It's just that other things are more in demand, and so there's a rotation." It appears that defence and building and associated materials shares are in greater demand that tech stocks. It’s quite telling that the while the stock markets fell but rose above and beyond pre-vote levels, in general technology hasn’t done so well – as of 11 November, Microsoft, Facebook, and Apple were still below their pre-election peaks.
So while, to an extent, it’s true that when the US catches a cold we all sneeze, if the US economy grows then the afterglow could spread around the world – but only to the extent that any new tariffs allow.
The problem for Trump is that globalisation and free trade has been good for the global economy. While the popular sentiment (not quite if you consider the 0.2% lead Clinton had over Trump) was for protectionism, Americans who voted for Trump will lose out if for no other reason that they (and the rest of the world) will cease to benefit from cheaper goods and greater choice. From the food in their supermarket to their holiday or favourite smartphone, prices are surely going to rise if trade becomes subject to a tariffs and a trade war. Only time will tell.