Trump’s antagonistic anti-globalization policies undermine global risk appetite

Posted on February 1st, 2017

Trump is generating considerable uncertainty over the outlook for the US and global economy.  The market had taken many of the policy ideas floated by Trump during his election campaign with a grain of salt, considering them as too radical to be implemented to the extent the new President had campaigned.  However, Trump is proving indeed willing to pursue his agenda aggressively and may shake the foundations of global trade and geopolitics.  His travel ban and other rapid-fire executive actions suggest he will further inflame tensions with Middle East Muslim countries.  By antagonizing major multi-national US companies, foreign governments, unsettling support in Congress and dividing public opinion, he is generating a sense of instability and distracting attention away from more productive reform.  His aggressive pursuit of his agenda suggests a border tax on imports and policies aimed at pressuring US companies to manufacture more within the USA will be high on his agenda.  His top trade advisor described a trade deal with Europe as dead and effectively dismissed the concept of the EU.  The anti-trade message and antagonist approach to Mid-East Muslims, the EU, Mexico, and China are likely to be viewed as negative for global growth.  A border tax and America First policy may boost US wages, yields, and the USD, but it would impose more costs on US business and weaken foreign business income, undermining US share prices and global share prices. The Trump policies on corporate tax reform and infrastructure spending may have boosted equities, but they appear lower down the agenda.  While Trump’s America first protectionist policies may support the USD longer term, global risk aversion may continue to support low yielding current account surplus currencies like JPY and EUR in the near term.


Travel ban points to ongoing geopolitical uncertainty

Trump’s decision to throw a blanket ban on entry to the USA from people from 7 predominantly Muslim countries has incensed many people around the world.  It is more or less what Trump said he would do during his election campaign, but few saw it coming.

The ban is regarded by many as driven by distrust of Muslims as a religion and Middle-Eastern people.  Trump has said this is “not a ban on Muslims” but an act to provide more security against possible terrorist attacks.

However, many people in America see this as an act of discrimination that is against the principles of the United States that has pride its long history of immigration and stands for personal freedom; including religious freedom, which is enshrined in its constitution.

Trump fired the acting Attorney General Sally Yates because she refused to enforce the ban. The stand by Yates on her view that the ban is not just or right is likely to work against the confirmation of Trump’s cabinet picks in Congress, especially that for Attorney General, Jeff Sessions.

Many people, including some outspoken GOP representatives, argue that this ban may increase the threat of terrorist attacks by making it seem the USA is against the religion.  Early in the ban, Trump said that he would give priority in future to Christian refugees, until it was pointed out that this may be in contradiction to the constitution and is likely to be unlawful.  The impression generated is one where Trump is drawing a line between Muslims and Christians.

Trump has also made consistent positive overtures to Israel and appears to favor their claims over Palestinians; favoring Jewish over Muslim claims.  Trump has suggested he plans to move the US Israeli embassy from Tel Aviv to Jerusalem, a move that would be seen as extremely provocative in the Arab world.  He has strongly criticized the US-Iran nuclear deal.  Trump may yet pursue more actions in relation to these policies that may further fuel tensions between the USA and several Muslim nations.

On 29 January, Trump ordered military leaders to given him a report in 30 days that outlines a new strategy for defeating the Islamic State.  He said, “This is the plan to defeat the Islamic State of Iraq and Syria, in other words, ISIS,” he said as he signed the order. “I think it’s going to be very successful. That’s big stuff.”

This pronouncement may open an avenue for Trump to pursue tighter relations with Russia, something that will not sit well with many in Congress, including from his side of the aisle.  It generates considerable uncertainty in the field of geopolitics.

Trump is eager to build up the USA’s military power and may be more willing to flex it against ISIS with broader implications for its relations with Middle Eastern countries, Russia, Europe and setting a standard that will influence relations with China.  Trump has been critical of China on several fronts of trade, cyber-security, and claims over the South China Sea.

Trump Orders New Military Strategy to Defeat ISIS –

We do not know how soon and how forcefully Trump will pursue actions on Israel, Iran, or ISIS.  The travel ban action suggests that it could be quite soon and happen without warning. This would generate considerable controversy in the US and globally and would be a very big distraction for global financial markets.


Business backlash

Apart from possible wider pathways for geopolitical risks, multi-national companies in the USA see the travel ban as a threat to their profits.  There has been considerable public criticism from many large USA companies.  It appears that they fear a backlash from international consumers of their products and services.  They are also responding to pressure from their employees to make a public stand against Trump’s travel ban.  These companies employ nationals from many countries at offices and home and abroad.  They rely on a global talent pool and they promote a corporate culture of equal opportunity. To maintain good relations with their employees and customers, many US companies are trying to distance themselves from the Trump ban policy.

The Travel ban and Trump’s protectionist policy towards trade may make it harder for US companies to break into and even sustain existing markets share in global markets.  It also creates incentives for these companies to move operations outside of the USA to further distance themselves from Trump’s agenda to increase its access to foreign markets and talent.  But doing so might also draw more direct ire from Trump that has a penchant for direct threats against specific companies for moving jobs and production offshore.  This places USA companies in a delicate balancing act not to endanger their global business, upset its employees, or upset US President Trump.


Protectionist Agenda a threat to global investor appetite

Trump has withdrawn from the TPP, said he wants to renegotiate NAFTA and has made a number or comments suggesting he is will be scrutinizing trade with China.

Trump’s top trade advisor appeared to also throw out any possibility of a trade deal with the EU.  Furthermore, he made a number comments that suggested that the USA administration is against the very existence of the EU.

The FT reported that Peter Navarro, the head of Mr. Trump’s new National Trade Council, “called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a US-EU agreement, known as the Transatlantic Trade and Investment Partnership (TTIP), dead.”

Navarro held nothing back in an attack on Germany.  He said he viewed the TTIP dead once Brexit was voted for in the UK.  He considered the TTIP as a multilateral deal (Trump has said he is against multilateral deals in favor of bilateral ones).  He thought Germany was exploiting other countries in the EU and the US through an undervalued currency.

Trump’s top trade adviser accuses Germany of currency exploitation –

The USA, through G20 meetings, has often argued that Germany could do more to support the rest of Europe via expansive fiscal policy, considering the relative strength of its economy in the Eurozone and large current account surplus.

Germany has, in turn, argued that structural reform was more important across Europe and fiscal restraint was in the region’s long-term interest.

There is little doubt that if the Eurozone were to break-up and retreat to national currencies, it would result in a significant appreciation of the Deutschmark against other currencies in Europe and probably against the USD.

Navarro said that the EUR is grossly under-valued and gave Germany an unfair trading advantage.  This seems to ignore the economic difficulties still faced by other Eurozone countries and appears to shun the notion that it is a legitimate economic region.

These views probably have little bearing on the political stability of the EU or the Eurozone, but it more acutely places pressure of the relationship between the US and EU.  This may impinge on US companies’ capacity to do business in Europe and vice versa.

The relationship with the EU is already fraught over Trump’s strong endorsement of Brexit, his overtures towards Russia, his tepid support for NATO and calls for European countries to spend more on Defense.


Border tax undermines investor confidence

Navarro also provided a strong endorsement of the Trump and Republican proposal for a border tax

The FT reported, “The unequal treatment of the US income tax system under biased WTO [World Trade Organization] rules is a grossly unfair subsidy to foreigners exporting to the US and a backdoor tariff on American exports to the world that kills American jobs and drives American factories offshore,” Mr. Navarro said. “President Trump promised during the campaign he would put an end to this unfair treatment of our income tax, and the House border adjustable proposal offers one possible option among several.”

Navarro also clearly linked US trade policy to reducing globalization and bringing more of the supply chain and jobs in production back to the USA.  He said, “It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” he said. “We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”

Tougher USA trade policy and a border tax appear likely to be a pillar in Trump’s “America First” agenda.  The implications are likely to be seen as detrimental to global growth and inflationary in the USA.

It would probably be negative for global equities, including those in the USA, as companies abroad lost business, and US companies had to spend more to maintain their supply chains.

US share prices have rallied since the Trump election on the prospect of corporate tax cuts and the potential for new infrastructure spending.  The prospect of a border tax may be seen as potentially lifting wages and employment, but it represents a cost to doing business and thus should be seen as negative for share prices in the USA and globally.

The USA approach to trade relations may also be seen to impede trade deals between other countries if it encourages other countries to adopt similar policies, and/or the USA uses its clout as a major trading partner to discourage other countries from entering trade deals with each other.


Currency manipulators

Navarro has echoed a number of comments by Trump suggesting that his administration will target tougher trade deals with countries it sees as manipulating their exchange rates.  This has included Japan, China and now Germany.

This suggests to some that the USA administration will pursue a weak USD exchange rate policy.  The administration has no direct way to influence exchange rates.  Instead, it appears more inclined to restrict trade with countries it sees as having a trade advantage.  Restricting trade is more likely to lift the USD and weaken currencies where trade is restricted.

As such, these comments about other countries manipulating their currencies are unlikely to have lasting impacts on their exchange rate.

That said, the administration’s combative approach to international relations and protectionist policy agenda may be seen as undermining global investor confidence.  This may weaken global investor appetite, push down global bond yields, and through this channel contribute to some pullback in the USD, especially against lower yielding current account surplus currencies, including the JPY and EUR.