What to expect as the Trump era begins

President-elect Donald Trump’s acceptance speech on November 9 began with a pledge that he would be the President for all Americans.  After a bitterly fought campaign, he said that Americans needed to work together for a great economic plan, for national growth and renewal, and to rebuild highways, bridges, tunnels, airports, schools and hospitals. Trump also implicitly referred to working with consensus, saying “we will seek common ground, not hostility; partnership, not conflict”.

The Trump era will be different from all the previous administrations, even the Republican ones.  One of the earliest indications of this was his taking the congratulatory call from the President of Taiwan. It was not just an accidental event, but one that was apparently well planned. This has no precedent.

It was truly the speech of a statesman.  Earlier in his campaign, Trump had made many controversial statements, most of which were notched down as the race made its way to the final finish. You can ascribe some of his early statements to campaign rhetoric. But some opponents of Trump have refused to accept the vision of his acceptance speech. Some continue to believe that the Trump administration will quash ideological opponents and will unleash policies that may undo the achievements of the past liberal era. Their fear is strengthened by the fact that Republicans now control both the houses of the legislature, and Trump may appoint judges with his preferred ideological inclination. Only time will tell whether this apprehension is unfounded or not. Many leaders have been known to change or evolve once they take office, and Trump is no exception. Besides, the checks and balances of the American system and its institutions ensure that Presidential powers cannot be absolute.

What is however clear is that the Trump era will be different from all the previous administrations, even the Republican ones.  One of the earliest indications of this was his taking the congratulatory call from the President of Taiwan. It was not just an accidental event, but one that was apparently well planned. This has no precedent. American has followed a “One China” policy and hence officially deals with Beijing, even though there are trade and economic linkages with Taiwan. But Trump now says he is not sure why the U.S. should follow the “One China” policy.

The wider US-China relationship has many diplomatic, strategic and military thorns, even though the two countries are tightly embraced in an economic relationship.  China’s tremendous growth has been partly possible because of access to US markets for its exports, and US investments into manufacturing capacity in China. Yet, every year, even on trade, there have been awkward moments. US policy makers and industry have accused China of keeping their currency artificially undervalued, giving an unfair advantage to their exports. But lawmakers routinely fail to formally label China as a “currency manipulator” despite ritual sabre rattling every year. For its part, China too knows when to move back from the brink, and indeed its currency started getting stronger since 2005. All that may change now, as China faces a sharp slowdown. Into this complex milieu, Trump’s China policy is going to be a big departure, it seems.

There are some other clear indications that the Trump era will be different.

First of these is fiscal policy. As outlined in the acceptance speech, and even earlier, the Trump government is going to vastly increase spending on infrastructure.  It is crumbling, and badly in need of repair and fresh investment, resources for which can only come from the Federal government. As if in anticipation, the bond market is already signalling much higher deficits into the future. Yields on government bonds are rising. The deficit will be further affected adversely due to lowering of taxes, which Trump has promised.  Trump will also be willing to give tax amnesty to American companies who will bring back their profits that are parked abroad in tax havens.

Since US interest rates are rising, it leaves less space for India’s Reserve Bank to lower its own rates.  Higher US rates are also making the US dollar very strong, as capital moves “uphill” back from developing countries to the US. During the last year, almost one trillion dollars have flown out of China alone.

The second area of change will be “Make in America” and protectionism. Trump will aggressively pursue a policy to retain jobs and manufacturing capacity in America. He has already warned Toyota that if it produced cars in Mexico for sale in the US, he would impose a border tax.  More than 1.4 million Japanese made cars produced in Mexico are sold in the US. Trump has also indicated that he would be willing to renegotiate the North American Free Trade Agreement and impose stiff import duties on cars made outside the US. To protect American jobs, he is willing to turn extra protectionist, and even take a “strategic deviation” from internationally agreed protocols and treaties. The Trans Pacific Partnership (TPP) Agreement pushed strongly by the Obama administration is all but dead under a Trump regime.

This might be a boon to India, as it gets a breather in its quest “not to be left out” of regional blocs, of which TPP was an example.  The Trump policies may also affect India’s Information Technology and software exports, if H1-B visas are restricted, or more burdensome requirements are imposed on local recruitment within the US.

The third big area is of US-Russia relations. There are many indications that while Trump is willing to needle China, he is warming up to improving relations with Russia. It’s not just a personal chemistry with President Putin but perhaps a desire to reduce America’s military expenditure in Europe that is motivating Trump. This is a big change of direction for US foreign policy. It will also affect the geopolitics of the Middle East, and developments in Syria and Turkey. Remember that Russia is not a member of OPEC but has a significant impact on oil and gas markets. Given India’s proximity with Russia, the US warming up to the latter can perhaps provide collateral benefits to India.

Finally, there are several other areas where a Trump administration is likely to deviate substantially from preceding policies. Some of these are retraction from global climate change treaties, tighter anti-immigration policies, tougher anti-terrorism and surveillance measures, promoting American exports, attempting to cap dollar strength and impacting the independence of the Federal Reserve Bank.
 

(The writer is a senior economist based in Mumbai)