Donald Trump’s unexpected win in the US presidential election is coming at a crucial moment for the world’s economy. Inflation in the international market, weak commodities prices, lower confidence in the business and consumer sectors as well as rising household debt pressures to deflate as well as historically low rates of interest are a sign of a world economy recovering from the effects caused by the crisis in 2008’s financial markets.
Trump’s election will not do anything to change this trend, and his economic policies, if enacted, could stifle global trade, growth, and investment. It could trigger the start of currency and trade wars.
Here’s why. Trump’s macroeconomic plan proposes radical changes. First among them is trade protection; however, it also promises modifications to immigration policy that could affect the US employment market.
His trade policy aims to reverse years of liberalisation. This will start with the withdrawal of the unratified Trans-Pacific Partnership (TPP) that is in the process of being ratified by Congress and a renegotiation, or a possible withdrawal out of the North American Free Trade Agreement (NAFTA) with Canada and Mexico and the designation of China as an unregulated trader manipulator and the imposing of a tax of 45% for Chinese imports to the US.
He also has demanded the imposing of an additional 35 percent tariff on goods purchased from US companies that outsource their production to Mexico and has instructed a US commercial representative at the World Trade Organisation to take action against China.
Trade protectionism
Prolonged trade protectionist policies could have a detrimental effect for as well the US economy and trade overall. Modeling conducted by Moody’s Analytics, for example, suggests that the tariffs that are proposed for Chinese and Mexican products will increase costs by 15 percent and US consumer prices by three percent and reduce disposable income, demand for consumer goods as well as domestic economic activity.
Post-protectionism American consumers may not be able to find any cheap Mexican-made Christmas decorations. Imelda Medica/Reuters
Inflationary pressures will be further aggravated due to Trump’s immigration policy, which entails tightening quotas as well as returning illegal immigrants to their countries of origin, as policies that will limit the mobility of workers and could result in a shortage of workers in the already crowded labor market.
Inflationary pressures on wages and prices will trigger tighter monetary policies by the Fed, however, with implications for the rate of interest, affordability of housing, and the ability of American households to pay for consumer purchases and, consequently, sustain spending, which is an important factor in US economy.
The impact of the impacts abroad
The impacts of the event on China as well as Mexico will be equally significant because Mexico and China are both major trading partners, while the US is the main trading partner for both countries. China, particularly, is likely to see its exports drop and exacerbate the already steep drops in exports due to the slowing global economy.
Prior to Trump’s victory, Chinese exports had decreased by 7.3 percent through the last year, which left Beijing dependent on its domestic growth sources to keep economic activity going.
A further drop in exports could deteriorate Chinese economic activity with devastating consequences, potentially leading to an international recession when trade volumes fall along with economic volatility, volatility grows, and the confidence of investors declines.
Workers create stuffed dolls that will be sold in Europe as well as North America, Jiangsu province in September 2015. Reuters
Controlling the effects of economic downturns isn’t easy for the Chinese authorities, particularly given the huge increase in both private and public sector debt. There are concerns regarding stability in the political arena in which the export sector is an important source of employment.