If Donald Trump takes office as president of the United States and implements the promises he has made, it will be worse than Brexit.
Although the Republican candidate’s economic speech, delivered in Detroit this week, outlined proposals that would wreak havoc on the world’s economy, the markets didn’t take it seriously and were unmoved.
Their indifference is a result of two things: there is widespread scepticism that Trump stands a real chance of winning the presidency and, even if he did, his promises are impossible to deliver.
In presenting his economic policy, dubbed Trumpanomics, he proposed widespread tax cuts, scrapping unnecessary regulation, lifting energy restrictions to support jobs in the coal, oil and gas sectors, and, “one of the most important reforms of all”, that of trade.
Analysts agree that Trump as president would be particularly bad for emerging markets because of the uncertainty it would create and, subsequently, risk aversion. Low growth and even negative interest rates in developed markets of late have seen investors moving back into emerging markets in search of yield.
Already the predictions are that if Trump becomes president of the world’s largest economy it will push up the gold price substantially. The market stresses this year, such as those caused by Britain’s decision to leave the European Union, have already seen the metal price rally by almost 30%.
Peter Attard Montalto, an emerging markets analyst at Nomura, said a Trump presidency is looking increasingly possible. But, “with any result possibly coming down to the line in November, we think emerging markets may remain in denial about the prospect of a Trump presidency until it actually occurs. This is especially true in this ‘risk-on’ environment that is driven by lower growth.”
Critics say much of Trump’s plans for trade relations would have global ramifications.
In his speech, Trump alluded to his seven-point trade plan, which seeks to reform the US’s “failed trade policy”. This includes withdrawing the US from the Trans-Pacific Partnership, a trade agreement yet to be ratified that involves Australia, Canada, Japan, Malaysia, Mexico, Peru, Vietnam, Chile, Brunei, Singapore, New Zealand and the US.
The agreement will eliminate 18 000 taxes and other barriers to American goods entering these countries, with their exports, in turn, receiving preferential treatment when entering the US.
But detractors, including Trump, argue that the imports will kill more jobs than the US’s exports will create.
Trump also plans to renegotiate the North American Free Trade Agreement to get a better deal for the US, with the possibility of walking away from it if the US isn’t satisfied with the outcome. The agreement came into effect in 1994 and created one of the world’s largest free trade zones between Canada, the US and Mexico. It’s credited with creating employment in the US but Trump says it has destroyed the country because it encouraged multinationals to outsource to Mexico, or to move their entire factories there.
Additionally, Trump is targeting China. He wants it listed as a currency manipulator, to bring cases against it through the World Trade Organisation (WTO) and to institute more tariff protection against Chinese imports.
Analysts warn that a yuan trade war between the US and China would be recessionary.
But Donald MacKay, the director of XA International Trade Advisors, said leaving such trade agreements is easier said than done. “He talks about it like it’s an effortless process, like he does about getting the Mexicans to build that wall [on the US border at their own expense]. The reality is different.”
Trump’s proposals do, however, form part of a global trend to assess whether free trade has been such a good thing overall, MacKay said.
There is a general concern about Chinese currency manipulation, keeping the yuan low, so that their exports are exceedingly competitive, said MacKay. “China was brought into the WTO with the thinking being that it would be easier to regulate them, but China has been particularly badly behaved since they became a WTO member.”
But Catherine Grant Makokera, the director of Tutwa Consulting, said China’s admission to the WTO took decades and its involvement is subject to several conditions.
Grant Makokera said, although the US would be within its rights to take more cases against China to the WTO, it probably hasn’t because so much of what China is doing is illegal.
Trump’s assumptions about combating cheap Chinese imports shows a “very shallow understanding of global trade”, she said, noting that China is highly competitive because of its scale, its ability to undertake research and development, and its cheap labour force, rather than because of subsidisation.
The chances that Trump can wage a trade war against China
seems unlikely, given that China is the biggest buyer of US treasury notes and so is the largest holder of US debt.
“Trump has been quiet on that,” said MacKay. “China is not a docile nation that will do whatever the US says. The consequence could be that they soften on buying US debt.”
Makokera said the biggest effect of Trump’s reforms would be on US multinationals. “If all about global value chains and production is divided … by restricting the ability of multinationals to develop production capacity in that way, Trump is going to harm his own companies.”
Andrew Canter, the chief investment officer of Futuregrowth Asset Management, said Trump’s hostility to globalisation meant that anyone with plans for investing in other markets with a view to sell into the US would be better off just investing in the US now. “Or maybe you sit on your hands for a few months before you make any investment decisions,” he said.
Attard Montalto said, overall, some individual safe havens may be the likes of Hungary and Russia, which are in favour of a Trump-led US and would benefit from moves such as sanctions being dropped. But Poland and South Africa could be affected negatively by foreign policy issues and lower commodity prices, he said.
“Brexit seemed unlikely but then it happened,” said Canter. But it was a more conclusive event, which brings the entire European project into question.
“Whatever happens with Trump, it will be slower moving,” Canter said, noting it would be impossible for Trump to fulfil the promises he has made with the budget at his disposal.
“I hope Americans are not as dumb as to listen to him.”