The Trump Effect on Global Trade and Business: Good or Bad?
Posted on 29th March 2017 at 10:56
During his campaign, the current President of the USA Donald Trump ran on a platform determined to put ‘America first’ in terms of economics and business - but how does this affect the rest of the globe in terms of trade and business?
Only two months into his presidency and he has already posed a potential risk to the global economy, suggest Fitch, a credit rating agency. His administration’s aggressive tone, his unpredictability and his departure from traditional ‘norms’ in terms of international relations could pose a threat to some global conditions.
Trump’s proposed policies for higher trade tariffs, increased federal stimulus, tax cuts for Americans and corporations, and kerbing illegal immigration will likely give the US a short-term bump in GDP, but it could potentially have serious consequences for global growth.
Under Trump’s administration, US policy has become unpredictable, and his lack of attention towards international communications multiplies the risk of possible disruptions to trade relations and migration rules. His confrontational exchanges with other policymakers may also spark uncertainty in currencies and financial markets.
The primary risks to sovereign credits include diminished international capital flows, disruptive changes to trade relations and migration limits that affect remittances.
Renegotiation of trade policies
Currently, trade policies outlined by the new president point towards a less benign global outcome.
Trump’s administration has laid out plans that are set to tackle trade deals including the Trans-Pacific Partnership and the North America Free Trade Agreement. Instead, Trump wants to implement policies that will put America and its citizens first.
Trump believes tough agreements over international trade can be used to grow US economy and return millions of jobs to America’s shores. However, these current plans could provoke reactions from trade partners. Businesses and economies from around the world that rely on exports for a large part of their revenue may feel a squeeze as their products become more expensive in foreign markets, causing a drop in sales and profits. On the other side, new US tariffs and border tax on imports may raise costs and affect margins on importers in the manufacturing and retail industries.
One economy set to be affected by these new policies is China. Trump believes China committed the greatest jobs theft in history and wants to put a 45% tariff on Chinese imports.
Credit rating challenges
Countries who have close financial and economic ties with the US are most at risk. Trump’s administration believes these ties give countries an unfair advantage. Countries like Canada, Japan, Germany, Mexico and China have been explicitly identified as having exchange rate policies that warrant Trump’s attention.
The deregulation and reform of certain industries, such as the ACA (Affordable Care Act), could also impact credit. New bidding procedures and reforms will put pressure on profit margins for healthcare-related companies and Pharma industries around the world.
However, the effect of Trump’s plans for increased federal stimulus and government spending on credit is less straightforward. Due to the already historic levels of debt, the amount of new debt that can be added is limited, making the impact hard to predict. Borrowing could either widen or narrow credit spreads, affecting currencies and more.
Developing countries at risk
US global leadership is heading towards a shift away from globalisation, open markets and free trade. Multinational companies and emerging economies are likely to suffer due to the fact their business strategies and development models have assumed open capital flows and free trade. Although Trump’s protectionism is likely to cause big trouble for developing countries, relatively closed economies such as Russia, India and Brazil could be possible exceptions. Their development strategies are less reliant on foreign financing and free trade, protecting them from potential changes to current policies.
The true implications of Trump’s policies on the global economy will only be known once new reforms and trade deals are implemented.
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