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Trump win marks end of trade as we know it

Americas / 09-11-16 / by
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Donald Trump’s presidential victory in the early hours of November 9 was a shock to financial markets, and will certainly represent a dramatic shift in the way the world conducts trade.

Currency volatility reached new highs overnight with the Mexican peso (which suffered many blows throughout this election) falling by 13% against the US dollar, its biggest drop for over 20 years. The US dollar 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’s about to become the world’s new normal.

While the news has yet to sink in, one US-based insurer agreed to give GTR his impressions on conditions of anonymity. “I’m shocked and bewildered by the Trump victory, and as soon as I take stock of what it means for my family and my community, I might be able to postulate what it means for the world,” he says.

“The utter lack of credible policy prescriptions throughout the Trump campaign makes it very difficult to forecast the short and medium-term impact of the election. With that in mind, we’ll be taking a cautious approach to risks until we have a better sense of the economic and diplomatic impact of a Trump presidency.”

Trump’s often vague presidential pledges make it hard to assess the damage to come, but most experts agree that damage will indeed come, particularly in the trade area.

 

Free trade hopes shattered

First, this result is nothing short of a death warrant for the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Trump has made his feelings about such agreements very clear, promising to “rip [them] up”.

Among other campaign pledges, he also said he would renegotiate the North American Free Trade Agreement (NAFTA), threatening to leave it if he cannot achieve better terms for the US. Removing the US from these agreements would undeniably harm global trade, and hit certain economies (Mexico in particular) particularly hard.

At the end of September, GTR looked at the difference between Trump and Hillary Clinton’s trade proposals, including parts of a Peterson Institute for International Economics (PIIE) report which called Trump’s policy “horribly destructive”.

Another deal that finds itself endangered is the Joint Comprehensive Plan of Action (JCPOA) signed with Iran last year. 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”.

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, but did not manage to ratify it before the election, and will now most likely be forced to renegotiate.

China will be the biggest loser from this result, with Trump promising to label the country a currency manipulator and to slap an up to 45% tariff on Chinese goods reaching the US. As explained in this article about the upcoming dark days of Asian trade, a 45% tariff on China could result in a US$420bn drop in Chinese exports to the US – 87% of total exports.

China, along with any other country targeted by Trump with import tariffs, could also retaliate, resulting in a full-blown trade war.

We will get along with all other nations willing to get along with us. America will no longer settle for anything less than the best. Donald Trump

Lindsay Newman, principal analyst at IHS Country Risk, adds that “increased use of World Trade Organisation dispute settlement mechanisms, especially those pursuing Chinese industry, are likely in the next two years”.

“We will get along with all other nations willing to get along with us. America will no longer settle for anything less than the best,” warned the president elect in his victory speech.

However, one US banker, who also asked to remain unnamed, seems confident that Trump’s anti-trade rhetoric during the campaign will not materialise. “Last night middle class Americans spoke and said they were seeking change – and change won. Now it’s a matter of making sure that that change can be further articulated and implemented without the disruptions that people are most concerned about. But in the next few weeks and months, if we find that all of that talk was just a way to try and incite people towards change, and that the real change is going to be positive for everyone, it should be okay.

“Going back to basics, people need to eat, to work and to buy products that other people make, so trade will go on. I don’t think any sort of isolation will happen so trade won’t be impacted in the long run,” he tells GTR, adding that he hasn’t yet received any concerned calls from clients, but a lot of emails from international colleagues jokingly offering visas to move out of the US.

 

Tax and regulations relaxed

US companies and financial institutions may find some relief in Trump’s plan to cut corporate tax from 35% to 15% (which should be welcome news for the likes of golf equipment manufacturer PING), and relax banking regulations.

“Trump’s corporate tax cuts would also likely benefit firms operating domestically as he seeks to retain and drive job growth,” says Newman.

On Wednesday morning (November 9), bank stocks were on the rise on the expectation that Trump’s regulatory programme will bring relief to the sector. Bank of America Merrill Lynch shares climbed 3.5%, Goldman Sachs was up about 2%, JPMorgan about 3%, Morgan Stanley 2.5% and even troubled Wells Fargo saw a 3% jump.

However, Guido Tamburini, managing partner of financial services consultancy CAPCO’s Northeast US practice, believes that this optimism is unfounded. “He’s been very short on detail and I don’t think that has been accidental. He’s walking a very fine line. He does need to empower the financial institutions to start lending again, but at the same time he can’t just relax it all, because regulation exists for a very good reason,” he tells GTR.

“The burden of regulations on small banks is disproportionate compared to the burden on large banks, and if you look at the electoral map and how much he’s been carried by the Midwest, small businesses in those regions will need capital to start growing again. In order for them to get this capital, the financial institutions that service them in these regions need to be unburdened to some degree. But optimism that the Trump administration will be a huge friend to the megabank is very misplaced. I don’t think he was elected on the idea that he would make friends with Wall Street, and that’s part of why the platform is so generic about what he’s going to do about regulation, capital adequacy etc,” he adds.

One area that should see increased opportunities in the medium term is infrastructure, with Trump promising to spend US$1tn dollars on renovating it over the next 10 years – and reiterating this focus in his victory speech. But considering his protectionist rhetoric, it is unclear whether this will result in a surge in foreign investment or trade.

Until Trump’s inauguration (scheduled for January 20, 2017), Barack Obama will be able to continue the actions he has undertaken around the environment, immigration, and relations with Cuba. But Newman warns that “once in office, the 100-day action plan Trump has laid out provides a strong indication that he will look to undo many of Obama’s legacy domestic policies”.

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