Dear PGM Capital Blog readers,
On Tuesday, November 9th, the people of the United States, elected Mr. Donald John Trump, as the 45th president of the country.
In this blog article we want to provide a professional analysis, -without wanting to mingle into internal USA politics- of the possible implication for the World, International Trade and future of Globalization under a Donal Trump, presidency.
If Donald J. Trump, does during his presidency, what he said during the presidential campaign, he is positioned to achieve the most radical reshaping of economic policy since Ronald Reagan.
Even under Reagan, Republicans never controlled both houses of Congress.
His election to the presidency of the United States makes Brexit look like a hiccup.
Of broader business interest are Trump’s proposals on trade. They have sometimes been dismissed on the grounds that the Constitution specifically gives Congress authority over international trade.
But this argument seems flimsy given the president-elect’s apparent impatience with constitutional limits on executive action. A president intent on transforming trade can find many ways to do so, especially if the same party — albeit one divided on this issue — also controls both houses of Congress.
Who should watch out for a reformulated Trump trade policy?
- Countries with which the U.S. runs the largest bilateral deficits are likely targets, starting with China and Mexico. Others in this inner circle include Canada, Germany, Japan, Mexico, and South Korea.
- Trump’s trade doctrine appears to propose tied trade. For instance, it mentions the possibility of persuading countries with the largest trade surpluses with the U.S.A. to buy U.S. hydrocarbons.
- U.S.A. and foreign companies will face increased pressure to demonstrate that they create jobs in the U.S.A.
- U.S. multinationals abroad and multinationals from elsewhere that seek to operate in the U.S.A. may find themselves caught up in larger tensions between home and host governments, so they need to think through how to deal with that ahead of time.
- U.S.A. exporters in particular have to watch out for retaliation by other countries.
PGM CAPITAL ANALYSIS AND COMMENTS:
Mr. Trump has promised an immediate attack on trade deals, at least with countries he views as manipulators.
International Trade, which has been proved to stimulate economic growth both here and abroad, has already been slowing, and Mr. Trump is determined to slow it further in an effort to protect blue-collar manufacturing workers, for which many of them are his supporters.
U.S.A. Presidents have significant authority to act unilaterally in this area, and Mr. Trump has insisted he would put 35 percent tariffs on imports from Mexico and 45 percent on those from China.
Based on reciprocity, in this case Mexico and China will then impose the same tariffs on imports from the U.S.A.
Trade War is a synonym for Economic downturn.
Below charts show an estimates of how trade-restriction scenarios would affect United States G.D.P. growth for the years 2017, 2018 and 2019.
- Full trade war:
The U.S.A. imposes a 45 percent tariff on non oil imports from China and a 35 percent tariff on non oil imports from Mexico. China and Mexico then impose the same tariffs on imports from the U.S.A.
- Limited trade war:
The U.S.A. tariffs are imposed for only one year, because China and Mexico concede to U.S.A. demands or that Congress overturns the action or President Trump loses in the courts, or the public outcry is such that the administration is forced to stand down.
Mr. Trump’s tariffs would raise the prices of imported goods in the U.S.A. sharply, cutting the purchasing power of every American. Lower-income Americans - including Mr. Trump’s core supporters - would be hurt the most because they disproportionately buy less expensive imported items.
For China, and particularly Mexico, the economic costs would be significant, which is why the Mexican peso had plunged after the election of Mr. Trump to a record low of MXN 21 to US$1 as can be seen from below chart.
Trump has also criticized the North American Free Trade Agreement, which Mexico depends on.
He also promised to build a wall between the two nations and suggested high tariffs on Mexican goods, and suggested that people who entered the United States illegally will be deported.
As Nigel Farage, the leader of the UK Independence Party, put it, the election of Trump is
“Brexit times three.”
This new reality will require businesses to rethink globalization, starting with the aspects Trump is most critical of.
Trump’s plans so far have focused on restricting two facets of globalization: trade and people.
As a consequence of these, there may even be implications for outbound flows, such as people who say they are willing to move at least as far as Canada to evade Trump’s presidency. These pressures will impact some firms more than others.
Restrictions on the inflow of people — not only illegal immigrants but also Muslims — have been one of Trump’s signature campaign themes.
The above implicates that Brexit and the Trump election as USA 45th president, being just the two most recent blows to free trade, -movement op people and globalization.
In a best-case scenario, they and their internationalizing missions will retain relevance in the new world as opposed to being entirely sidelined.
Until next week.