Donald Trump and the Global Economy

Donald Trump was elected as the 45th US President on November 8, 2016, and is stated to take office as the President of the United States on January 20, 2016. The new US President elect Donald Trump has proposed many new policies for running the government, which have generated curiosity among the global investors. Experts suggest that these policies may prove to be costly, and not just to the US but to the overall global economy. Most importantly, the global trade scenario is expected to drastically change under his leadership. However, domestically, his policies can boost Global, at least in the short run.

Donald Trump will be holding the US presidential office only in early 2017, so the current and the near-term market reaction stems mainly from the anticipation and expected policy changes. Once in office, he plans to pursue expansionary fiscal policies (increasing expenditures especially on defense and infrastructure), relax debt limits, and drastically cut taxes (primarily benefitting bigger corporations). This fiscal stimulus could well boost the economic growth in the US at least in the short run, along with the inflation. However, as the tax revenues gets smaller and spending gets larger, budget deficits to the government are expected to mount unless such reforms resulted in increased tax collection. This will act as a bottleneck to growth and employment in the US, and substantially increase inflation as the economy reaches the full employment mark.

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Several policies as proposed by Trump have various complications for economies around the world. From completely undermining the importance to address climate change or global warming to spreading xenophobia, the most striking, however, remains its protectionist agenda towards global trade.

His motives to put tariffs on the US imports from emerging economies, in particular China and Mexico, and label China a currency manipulator could negatively impact the global trade. Most importantly, his stand on withdrawing the US from the Trans-Pacific Partnership (TPP) signals a move towards “anti-globalization”. These factors combined with his remarks regarding “ripping up trade deals’ and measures to remove immigrant workers pose an immense threat of global trade war, which could easily lead to a global recession.

Trans-Pacific Partnership (TPP), which was culminated in late 2015 after years of negotiations among trade chiefs of 12 nations along the Pacific rim excluding China, is aimed at addressing trade issues among the nations involved. This agreement is planned to cut more than 18,000 trade barriers among the member nations, making the largest US Free Trade Agreement (FTA) by trade flows. Any changes to this agreement could lead other nations to retaliate with higher tariffs or introduce more trade barriers.

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Michael Gapen, a chief US economist at Barclays, suggests that these policies, if pursued, could lead to a 0.5% to 1% drag on the economic growth in the US over the next year. For the global economy, if these trade patterns of “anti-globalizations” are followed by other nations, it could further increase the downside risk of trade and currency wars, and eventually global recession. The first half of the year 2017 will be crucial, and the whole world will be watching the US and, particularly, Donald Trump for his next moves.

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by Vishal B Patil