Donald Trump’s presidency could be a disaster for the global economy

A broker in Mumbai reacts on November 9. Danish Siddiqui/Reuters

Donald Trump’s surprise victory in the US presidential election comes at a critical time for the world’s economy. Weak international investment, depressed commodity prices, low business and consumer confidence, rising household debt, deflationary pressures, and historically low interest rates are indicative of a global market still reeling from the fallout of the 2008 financial crisis.

Trump’s victory will do nothing to reverse this, indeed his economic policies if implemented will slow global trade, growth and investment – and could potentially trigger trade and currency wars.

Here’s why. Trump’s macro-economic agenda promises radical reforms, first among them trade protectionism, but also changes to immigration policy that will affect the US labour market.

His trade policy seeks to reverse several decades of liberalisation, commencing with a withdrawal from the as-yet unratified Trans-Pacific Partnership (TPP) currently before Congress, a renegotiation or possible withdrawal from the North American Free Trade Agreement (NAFTA) with Canada and Mexico, the labelling of China as a currency manipulator, and the imposition of a 45% tariff on Chinese imports into the US.

He has also called for the imposition of a 35% tariff on products imported from US businesses who outsource production to Mexico, and will direct the US trade representative to the World Trade Organisation to bring cases against China.

Trade protectionism

Aggressive trade protectionism will have a chilling impact on both the US economy and global trade as a whole. Modelling by Moody’s Analytics, for example, suggests the proposed tariffs on Chinese and Mexican goods will raise their prices by 15% and US consumer prices overall by 3%, reducing household disposable income, consumer demand and domestic economic activity.

Post-protectionism, American consumers might not find anymore cheap Mexican-made Christmas decorations. Imelda Medica/Reuters

Inflationary pressures would also be exacerbated by Trump’s immigration agenda which involves tightening quotas and sending illegal immigrants back to their home countries, policies that would curtail labour mobility and possibly lead to shortages in an already tight labour market.

Pressures on prices and wages would trigger tighter monetary policy from the Fed, but with knock-on consequences for interest rates, housing affordability, and the ability of American households to afford consumer purchases and thus sustain consumer spending – a key driver of US economic activity.

Impacts abroad

The impact on China and Mexico would be no less significant, since the US is the largest trading partner for both nations. China, in particular, would see its exports fall, exacerbating already deep declines in export volumes due to the sluggish global economy.

Even before Trump’s, election, Chinese exports had contracted 7.3% in the year to date, leaving Beijing reliant on domestic sources of growth to sustain economic activity.

Any further decline in exports would contract Chinese economic activity with severe implications, possibly triggering a global recession as trade volumes tumble, volatility and economic uncertainties rise and investor confidence retreats.

Workers make stuffed dolls which are to be exported to Europe and North America, Jiangsu province, September 2015. Reuters

Managing the economic fallout would not be straightforward for Chinese authorities, especially given the massive rise in public and private sector debt. There are also concerns about political stability in a context were the export sector remains an important source of employment.

Mexico, too, would be badly affected. Its exports to the US are larger in value than the combined exports of its next 15 trading partners. US retrenchment would affect American businesses operating in Mexico, depress profits and potentially throw the economy into recession. That, in turn, would have repercussions for Latin American countries that also export to Mexico.

Get ready for the trade war

Bad as it sounds, all this would only be the initial impact. A trade war is now likely, with China retaliating by imposing tariffs on US imported goods and Mexico perhaps doing the same.

This scenario would have widespread negative implications for US economic activity. Mexico and China are the second- and third-largest export markets for the US ($250 billion and $100 billion respectively), and account for almost a quarter of total goods exported. US export volumes to two of its largest trading partners would thus fall significantly, depressing profits and employment and reverberating throughout the global economy.

For US business, the disruption to trade patterns would affect complex supply chains across numerous product categories from aviation and electronic components to automotive part supplies and pharmaceuticals. These impacts would then increase costs and depress productivity.

Businesses could, of course, switch suppliers and begin to source inputs from Southeast Asia. But such a pivot would take time and incur costs and would occur in an uncertain and volatile environment, making it difficult to navigate.

A mandate for change

Of course these dire scenarios are only likely if Trump’s proposed trade and immigration policies are implemented. The Republican Party is not, historically, anti-trade or protectionist, and the party retains control over both the US Senate and House of Representatives.

But Congressional control may not be significant. Trump’s power base is not the Republican Party but a constituency of angry, disaffected American voters who view trade as undermining America’s economic future and immigration as a threat to their way of life.

While Trump will face opposition from members of his own party, if not also from business, ultimately the US president-elect’s political future rests on delivering on his radical reforms. The Republican party owes its successful showing in gubernatorial, Senate and Congressional races to Trump and his policy platform.

Delivering on these in some measure will thus be in the political interests of the Republican party if they are to retain the Senate and House in the midterm elections – just a few years away.

Trump knows all of this. And he will defend his presidency and scuttle the party if it resists his agenda. Like it or not, some form of trade protectionism and immigration reform is coming – and for the global economy, the outlook is gloomy.