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Firing up America

Americas / 10-01-17 / by
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President Trump is about to shake things up in the US – for better or for worse. Melodie Michel investigates.

 

Attempting to write about what’s in store for America and the world under a Trump administration is daunting: not only do such articles run the risk of being lost in the sea of news, opinions and analyses published since the election, but they could also be completely erroneous, since Donald Trump’s unpredictability is his trademark.

Nevertheless, GTR decided to give it a try, not only because trade is one of the matters most vulnerable to Trump’s proposed policies, but also because, like the rest of the world, we just can’t keep our mouths shut about America’s new president.

That’s the thing about Trump – he leaves no one indifferent. His campaign brought out strong emotions amongst American voters, motivating some and upsetting many, added fuel to social divisions and reignited debates that seemingly belonged to history.

His victory in the early hours of November 9 came as a shock to financial markets, sending the Mexican peso down 13% against the US dollar, its biggest drop for over 20 years. The US dollar itself fell by 2.5% against the yen and 1.5% against the euro. Meanwhile, gold was up 3.2% as investors realised the depth of the uncertainty that was about to become the world’s new normal.

Since then, there has been a big rally in the stock market in anticipation of stimulus pledges Trump made on the campaign trail, including a promise to spend US$1tn on infrastructure in the next 10 years.

The Organisation for Economic Co-operation and Development (OECD) was the first body to forecast a domestic boost based on Trump’s economic plans at the end of November 2016, projecting 3% GDP growth in 2018 (up from a predicted 1.5% in 2016). But the forecast stops at 2018, and longer-term growth is still largely contested and unpredictable.

 

Tax and regulatory breaks

Some US companies expect to find relief in Trump’s plan to cut corporate tax from 35% to 15% and lift some of the regulatory pressures placed on them. Speaking to GTR at the end of October, Dawn Grove, corporate counsel at Karsten Manufacturing Corporation, explained: “Increasingly burdensome administrative and reporting requirements squeeze profits or in increasing exports. When the US has one of the highest corporate tax rates in the world, it makes competing on a global playing field more challenging.”

There is, of course, no guarantee that companies will use the tax relief to fund expansion, as is the goal, and many are wondering how Trump plans to finance his US$1tn infrastructure spending target with the reduced revenue from corporate taxes – a question he has yet to answer.

In the fintech space, Casey Lawlor, co-founder of Hijro (formerly Fluent), believes that regulatory breaks may be beneficial for start-ups. “Regulation tends to be a barrier. Less regulation would give us the ability to enter the market quicker,” he says.

In fact, investors started betting big on small US companies following the election: the Russell 2000, an index of shares with a median market value of less than US$1bn, surged more than 10% in mid-November (compared to 2.7% for the S&P 500). This optimism reflects the idea that small firms could benefit the most from tax and regulatory breaks, and suffer less than their large (and often more international) counterparts from the impact of a higher dollar.

Some experts argue that markets are underestimating the volatility associated with Trump’s planned policies. In an interview with Bloomberg in early January, former treasury head (and democrat) Larry Summers said markets weren’t fully recognising the “enormous uncertainty” that’s about to hit them.

One of the many sectors likely to hail the lifting of regulations is pharmaceuticals. In a statement to GTR, Stephen Ubl, president and CEO of the Pharmaceutical Research and Manufacturers of America (PhRMA), says: “We are in a new era of medicine with treatments and cures that are completely transforming the fight against debilitating diseases. To ensure this innovation continues, we need to modernise the US Food and Drug Administration (FDA) to keep pace with scientific advances, remove regulatory barriers that make it harder to move to a value-driven health care system and focus on making better use of the medicines we have today.”

Trump campaigned on a promise to relax FDA rules and ease access to market for pharma companies. At the time of writing, he hadn’t yet picked a new head for the FDA, but the two names being considered had in common their desire to make things easier for drug manufacturers: Scott Gottlieb is a former FDA deputy commissioner that sits on the boards of multiple drug companies as well as an investment bank focused on healthcare; Jim O’Neill – a much more controversial choice – is a strong defender of the free market in healthcare, arguing that drugs should be legalised before their efficacy has been proven.

Despite the obvious benefits to pharmaceutical companies, many are pointing to the health dangers of deregulating the sector. After the passage of the 21st Century Cures Act – a bill allowing faster approval for drugs – by Senate in December, Vinay Prasad, an oncologist at Oregon Health Sciences University whose research has shown that many new cancer therapies fail to cure it or are even harmful because they are based on inadequate studies, told Health News Review: “Ten years from now someone with a cancer diagnosis will be worse off with this bill. People will be exposed to more things that don’t work.”

In the financial industry too, the idea that Trump could relax – or even repeal – Dodd-Frank seems appealing to some. In fact, the day after the election, bank stocks were on the rise.

However, high-profile industry figures inside and outside the banking sector have warned against repealing Dodd-Frank, which was introduced as a way of keeping the banking sector in check after the financial crisis of 2008.

Nevertheless, the nomination of Steven Mnuchin as treasury secretary has signalled Trump’s intention to fulfil his promise: a former Goldman Sachs banker, Mnuchin has already announced that his number one priority would be to “strip back parts of Dodd-Frank”, namely the Volcker rule, which aims to stop banks from betting with deposit-insured funds. Whether he will be able to achieve this is another issue, as some experts are warning that Mnuchin may face difficulties being confirmed by the Senate given his Wall Street links and lack of political experience.

For any business or bank with international ambitions, benefits on the regulatory side could very well be overshadowed by fears about Trump’s trade views.

“In our case, since we are looking to have an international footprint and deal with global businesses, there’s always a fear that we’re going to fall back into more isolationism. Another negative impact is the uncertainty: I’m not sure anyone knows how this is all going to shape up, and this is a climate no start-up wants to be a part of,” Lawlor tells GTR.

Manufacturers too have expressed concerns about protectionist policies, with the likes of Ford and General Motors reiterating their commitment towards globalisation, and the National Association of Manufacturers warning that 2 million US jobs depend on the North American Free Trade Agreement (Nafta).

The deal reached by air conditioning unit manufacturer Carrier in December offers an interesting example of the way in which a Trump administration may operate: the firm allegedly received a personal call from Trump about its plans to move some of its Indianapolis operations to an existing facility in Mexico, cutting 2,100 jobs in the process. After some negotiation, Carrier allegedly agreed to keep 800 of those jobs within the US (for now) and invest US$16mn into the Indianapolis plants, in exchange
for a US$7mn tax break over 10 years.

It is, however, worth noting that at the time of writing, the details of this deal have yet to be officially disclosed and the contract has not been signed, despite Trump touting the agreement as his administration’s first job-saving victory.

 

Weighing up the risk of trade war

In his first address to the nation at the end of November as president elect, Trump confirmed his intention to withdraw from the Trans-Pacific Partnership (TPP) in his first day in office – a measure that was one of the cornerstones of his campaign.

“My agenda will be based on a simple core principle: putting America first,” he said. “I’m going to issue a notification of intent to withdraw from the Trans-Pacific Partnership, a potential disaster for our country. Instead, we will negotiate fair bilateral trade deals that bring jobs and industry back onto American shores.”

This came as no surprise to anyone familiar with his campaign, and is unlikely to have a strong impact on economic predictions. “I think most analysts had already priced in the prospect of the TPP coming to an end, at least in regards to the US,” says John Raines, political analyst at IHS Markit, adding that his firm generally expects US growth to rise in 2017/18, “especially if Trump’s tax breaks and fiscal stimulus comes on line quickly”.

Among other campaign pledges, Trump also said he would renegotiate Nafta, threatening to leave it if he cannot achieve better terms for the US.

Another deal that finds itself endangered is the Joint Comprehensive Plan of Action (JCPOA) signed with Iran in 2015. Though more than a year old, the agreement hasn’t yet yielded the expected trade and trade finance results, mostly due to large European banks waiting for the results of the US election to decide whether to reopen their credit lines to the country. Now it is unlikely they will, since Trump has repeatedly said that the dismantling of the agreement was his “number one priority”. The appointment of Mnuchin as well as that of James Mattis, known for his hardline stance on Iran, as defense secretary, can be seen as two more blows for the Iran deal.

Asia is set to take a hit too, and both Japan and South Korea organised emergency meetings upon the announcement of Trump’s victory. Japan in particular had made the TPP a priority, and Prime Minister Shinzo Abe has previously said the agreement would be “meaningless” without the US. These countries may have just lost an old commercial (and military) ally, and if, as experts expect, the US’ pivot to Asia is indeed dead, they will need to adapt.

But when it comes to US trade policies, all eyes are on China. Trump has promised to label the country a currency manipulator and to slap an up to 45% tariff on Chinese goods reaching the US. Such a tariff could result in a US$420bn drop in Chinese exports to the US – currently 87% of total exports.

In mid-December, Trump suggested in a Fox News interview that he could put an end to the “One China” policy that has governed almost four decades of official relations between the two countries. He added that the US shouldn’t be bound by the policy unless China makes certain trade concessions in the future.

This, along with many other comments by the president elect, caused outrage in China. The political storm brewing between the two countries is fuelled by the fact that, out of all the countries that may be affected negatively by Trump’s trade policies, China is perhaps the only one with the economic power to retaliate, a reaction which could lead to a full-blown trade war.

The OECD’s November 2016 Economic Outlook warns against such outcome: “This economic outlook suggests that protectionism and inevitable trade retaliation would offset much of the effects of the fiscal initiatives on domestic and global growth, raise prices, harm living standards, and leave countries in a worsened fiscal position.”

Meanwhile at IHS Markit, Raines admits that a trade war with either China or Mexico “would certainly depress economic activity”. Yet no one seems to be factoring in the risk of a trade war in their economic forecasts. Perhaps this outcome seems too unlikely to cause a reaction in markets? Surely recent history has shown that the world is no longer safe from surprise results.

 

Energy winners and losers

Despite all the uncertainty around Trump’s plans, one thing is for sure: under his administration, the US energy landscape will revert to what it was before 2008. Barack Obama’s eight years in office were marked by a strong focus on climate change and the incentivisation of clean energy. Trump has called climate change a “hoax” invented by the Chinese, appointed climate sceptic and fossil fuel lobbyist Scott Pruitt as head of the Environmental Protection Agency (EPA) and vowed to lift federal restrictions against drilling offshore and on public lands.

Globally, a reversal on environmental policy from the US would be catastrophic: Trump has called the Paris Agreement “unconstitutional” and vowed to rip it apart. Though this process would take at least four years, it would jeopardise global efforts to combat climate change. Other countries may choose to follow the US, impose economic sanctions on the country for not fulfilling its part of the deal or just continue without it, but when the world’s second-largest polluter decides to keep polluting, there is not much other countries can do to keep global warming in check.

Domestically, green energy producers will be hardest hit, but the new president’s plans will provide relief to the fossil fuel industry. Doug Getten, a partner in the corporate department of law firm Paul Hastings, believes that the Bureau of Ocean Energy Management (BOEM), a body created after the Deepwater Horizon catastrophe in 2010 to oversee maritime drilling, could be one of the first policies that may be relaxed or repealed.

“This imposed increased bonding requirements [a type of insurance putting financial responsibility on firms in case of oil spills] for exploration and production companies in the Gulf of Mexico. That’s made it very difficult for independent oil companies to operate in the Gulf. I wouldn’t expect President Trump to completely unwind the requirements, but I think there’s some optimism among operators in the Gulf that it will be easier to operate there,” he tells GTR.

Another one is the Renewable Identification Number (RIN) credit system, requiring fossil fuel firms to produce a certain amount of ethanol or buy RIN credits if they don’t produce enough of it. “There are many regulatory tweaks that a president can make that can make it easier or cheaper to operate,” Getten says.

Expect pipeline projects denied under Obama for environmental and social reasons to be revived, such as the Dakota Access Pipeline, which was the object of months of protests in the Standing Rock Indian Reservation at the end of 2016. Environmental activists won the battle when the local government announced it would explore alternative routes in early December, but the conversation could take a different turn if reignited after Trump takes office.

While the world wonders how Trump – who has flip-flopped on climate change – will affect the positive progress made over the last few years in pursuing a sustainability agenda, US fossil fuel producers are rejoicing. A case in point is indebted shale firm Chesapeake’s US$1bn capital market deal on December 6 – its first bond financing in two years.

Getten – who represents many clients in the oil and gas sector – is bullish, despite the global oversupply of oil. “From an energy policy standpoint, the people in the energy business in Houston view the Trump administration as positive for the sector. If you don’t have the right transportation infrastructure once you’ve gotten the oil out of the ground to get it to market, then you might as well not drill the well. Having that infrastructure can also help increase production,” he says.

 

Europe: Pushed to protectionist stance

Donald Trump’s electoral win in the US has boosted populist stances in Europe and created much uncertainty for the banking sector, both of which could have serious implications for trade agreements with the region.

Trump’s strong anti-trade rhetoric not only throws existing and planned trade deals with the US into question, but it is a view that has been gaining traction among member states of the European Union.

Advisor at think tank Global Counsel, David Capparelli, comments: “I think the move towards a more protectionist stance was on the way for quite a long time before the Trump victory. If you look at the French proposal that was announced recently on how to reform EU trade policy, it goes in that direction.”

At the heart of current EU-US trade negotiations is the Transatlantic Trade and Investment Partnership (TTIP), which aims to promote trade between by cutting tariffs and standardising regulations. TTIP has faced numerous obstacles, with the Trump win now adding to that list, many believe it’s over for the trade deal.

However, others have expressed optimism that the EU, if anywhere, could be an easier option for Trump to demonstrate his deal-making capabilities.

The rise of populism isn’t only dictating the direction of trade deals for the EU but is also bringing the very unity of the EU to the fore. Trump’s win, coupled with the UK’s decision to leave the bloc in 2016, has given a substantial boost to more conservative agendas and calls for referendums in other countries. With five member states facing presidential elections this year, the strength and efficiency of the EU is currently undermined.

The Trump campaign has also voiced plans to revisit post-financial crisis banking regulations, including the Dodd-Frank Act. With the current banking climate in Europe and complaints of over-regulatory practices hampering growth, there is speculation that should this happen, banks could shift their bases across the pond.

Such a move would hit Europe’s finance capital London in particular, where the banking sector is already facing uncertainty following Brexit.

While a repeal of Dodd-Frank will largely be seen as a step backwards, it could be a step forward for trade negotiations. A major sticking point for TTIP has been US unwillingness to negotiate key issues of interest to the EU, such as government procurement and financial services.

 

Mena: Competing interests

Everyone is wondering what the Trump presidency will mean for the Iran nuclear deal: on the one hand, Trump has been very vocal about his contempt for the Joint Comprehensive Plan of Action (JCPOA) signed by his predecessor, calling it “a horrible deal”. On the other hand, contracts such as the US$16.6bn aircraft sale Boeing signed with Iran Air in December should appeal to his business sense.

Speaking to GTR after the election, Richard Nephew, a former US State Department sanctions official, now policy professor at Columbia University, explained that the secretary of state appointment would be a determining factor in predicting US policy in the Trump administration. According to him, the nomination of a moderate political figure or businessman to the role would give the nuclear deal better chances of surviving.

At the end of 2016, Trump appointed ExxonMobil’s Rex Tillerson as secretary of state – another sign that his stance on Iran may be softer than expected. Tillerson has strong ties to Russia, having been awarded the Order of Friendship decoration by Vladimir Putin himself, and Russia is one of Iran’s strongest allies. However, it should be noted that at the time of writing, Tillerson’s Russia links were the subject of controversy in the US, prompting concerns that the Senate would not approve his position in early January.

Tillerson’s oil background could also influence US policy in the region: Trump has promised to “drill baby drill”, potentially jeopardising already strained relations with regional producers, particularly Saudi Arabia. But experts don’t expect a negative backlash in the country, as it has already started to shift its exports away from the US, and because one of its fastest-growing export destinations is… Russia.

“Obviously, there’s a huge oil interest now in the American government now, so they’re going to want a strong relationship with Saudi Arabia. At the very top of the government they’ve got a strong relationship with Russia, so in a sense that’s all good news for Saudi Arabia,” says Rebecca Harding, co-founder of Equant Analytics.

The US’ relationship with Israel – a traditional “friend” in the Middle East, could also change slightly under Trump. The new president has repeatedly expressed his “love” for the country, but also vowed to be “neutral” in the Israel-Palestine conflict, breaking with the Republican tradition of unconditionally supporting the Jewish nation.

 

Latin America: Currency concerns

Most Latin American currencies took a hit when Donald Trump was elected president of the US, and the result created a sense of urgency in Latin America, which is still the world’s most dollar-dependent region despite efforts to move towards de-dollarisation in recent decades. The region’s fear was that Trump – who has been very critical of the Federal Reserve’s low interest rate policy over the past two years – would encourage rate hikes.

And it was justified: even before Trump took office, in December, the Fed announced a quarter-of-a-point interest rate increase, and plans to implement three more hikes next year, sending the dollar to a 14-year high.

Mexico is the country most vulnerable to US trade and monetary policy. Following Trump’s win, the Mexican peso fell by 14% against the dollar, mostly based on fears that the president elect will renegotiate Nafta and limit Mexican imports. Arnulfo Rodriguez, senior economist at BBVA Bancomer in Mexico City, believes these fears are partly unfounded.

“We think Nafta is probably going to be renegotiated but we don’t think that the main manufacturing sectors in Mexico such as automobile and electronics will be hit by tariffs because the global value chain is too important to the US manufacturing sector. We expect US companies to lobby to counteract damaging Nafta renegotiation,” he tells GTR.

However, he expects the Mexican central bank to continue hiking interest rates to keep the inflation spurred by the currency’s depreciation in check. Mexico’s revenue could also be affected by Trump’s promise that he would limit foreign remittances, the country’s largest source of foreign currency after foreign direct investment (FDI).

Investment flows into Mexico will also be affected by Trump’s protectionist policies – after all, one of the most attractive aspects of doing business in the country is its proximity and ease of access to the US market.

Other economies will also feel the negative impact of higher US dollar interest rates: Colombia has already experienced one of the largest currency depreciations in the world in the past year, and the peso went down another almost 3% the day after the election. But as a commodity exporter, the country is in a better position than Mexico.

In Brazil, Octavio de Barros, director and chief economist at Banco Bradesco, explains to GTR: “There is volatility based on perception that Fed monetary policy will change, causing rising inflation, but the Brazilian Central Bank has taken measures to stabilise the currency. This has shown the importance of speeding up the reform process [including a proposed cap on government spending for the next 20 years which was passed in December] to stabilise the economy.”

For the region’s commodity exporters, there is a silver lining, as Trump’s promise to limit Chinese imports at the same time as he plans to increase infrastructure spending has sent metal prices on an upward trajectory.

“We have already seen the prices of most of the base metals rallying: lead, zinc, nickel – copper is still behind but I believe it will continue to catch up with the rest,” a commodity trader told GTR after the election. “The effect is unpredictable but it will definitely contribute positively to the countries that produce gold and silver – Peru, Mexico, Chile and Bolivia in particular.”

 

Asia: Focus on RCEP

Donald Trump’s victory effectively killed the Trans-Pacific Partnership (TPP), with Asia Pacific states turning their attention to the Regional Comprehensive Economic Partnership (RCEP), long viewed as a rival deal.

China pushed the agreement at November’s Asia Pacific Economic Co-operation (APEC) conference in Lima, Peru, and will be emboldened by the reaction of officials from countries such as Australia, Japan and Malaysia, all of whom have now thrown their lot in with RCEP.

Further to this, Chinese President Xi Jinping also advanced Beijing’s agenda for the Free Trade Area of the Asia Pacific (FTAAP), a trade agreement which involves the 21 nations of the APEC, including the US.

The FTAAP has been billed in the past as an end-game for Asian trade: an amalgam of the RCEP and TPP deals. But China’s first priority will be sealing RCEP as soon as possible.

RCEP represents about 30% of global GDP and almost half the world’s population. It includes India and China plus Asean, Australia, New Zealand, Japan and South Korea but excludes the US. With TPP off the table, it is the only megaregional trade agreement currently open to Asia Pacific countries, some of which were hoping to double up, as it were, by ratifying both.

Before the election, Japan ratified the TPP in anticipation of a Hillary Clinton victory. Prime minister Shinzo Abe had hoped that by doing so, Japan could persuade the Democratic candidate to revise the populist anti-TPP stance she took on the campaign trail once she took office.

However, after Trump’s shock victory, Japan is now turning its attention to RCEP – an agreement that his government had been relatively cool on before now. “There’s no doubt that there would be a pivot to the RCEP if the TPP doesn’t go forward,” Abe told the Japanese parliament.

In Malaysia, minister for trade II Datuk Seri Ong Ka Chuan said that the country would be turning its efforts to completing RCEP in 2016, although those plans had not materialised as GTR went to press.

“Now with the situation of the TPP, the focus will be on RCEP. We hope RCEP’s conclusion will offset a lot of the negative impact of the TPP,” he said.

Meanwhile, Australia’s trade minister Steve Ciobo said that the country will also throw its weight behind the RCEP – even after prime minister Malcolm Turnbull pledged to continue the country’s alliance with the US after Trump’s election. “Any move that reduces barriers to trade and helps us facilitate trade, facilitate exports and drive economic growth and employment is a step in the right direction,” Ciobo said.

 

Africa: Reciprocity is key

Trump made scant mention of Africa during his campaign: in fact, his engagement with the continent has thus far been limited to a handful of Twitter posts. However, there is a general consensus that he will be restrained from implementing radical changes to US-Africa policy. A more aggressive stance may be adopted should trade deals hit American jobs – which they currently do not.

“If you’re looking at the broader picture of trade, I don’t think the Trump administration will be terribly antagonistic towards Africa,” says Frank Samolis, co-chair of the international trade practice at Squire Patton Boggs, who sits on the board of directors of the US-Africa Chamber of Commerce.

“Trade with Africa is not a case of displacing US jobs. It’s a case  of promoting US interest and developing stronger commercial ties. So, it might lead one to believe that the Trump administration will actually try to foster more robust trade with Africa,” he muses.

He suggests that the way in which it can do so is by making improvements to the Africa Growth and Opportunity Act (AGOA), a 16-year-old preferential trade agreement that provides duty-free market access to the US for qualifying Sub-Saharan African countries.

The agreement, to its detriment however, is a one-way privilege: African countries are not required to import US goods duty-free, and Trump’s experts are likely to pick up on this discrimination. In its favour: since most African exports to the US are natural resources or low-value goods, lobby groups rarely argue that AGOA has a negative impact on American jobs.

If anything, it’s probably due a reboot – one that will look at the obligations of reciprocity for participating nations.

Instead, Trump may prefer to focus on negotiating bilateral agreements with certain African countries that would bring about even greater mutual benefit for the US.

“I think it would be entirely consistent with Trump’s approach to trade,” Samolis tells GTR.

Nonetheless, when it comes to aid, cuts to the US$7.1bn package that the US plans to deliver to Africa in 2017 would chime with Trump’s populist rhetoric, says Ben Payton, head of Africa research at Verisk Maplecroft. “Trump has claimed that ‘every penny’ donated to Africa is ‘stolen’ and in 2014 he criticised Obama for helping fight Ebola.”

But, Payton explains, there are some grounds for hope that Trump will not make extreme cuts, even if aid spending is almost certain to fall. “[Trump] has acknowledged that aid can stabilise vulnerable countries, and has promised to ‘lead the way’ in Aids relief,” he says.

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