04 Apr Trump and emerging markets: Much ado about nothing?
President Trump was elected on an ‘America First’ economic platform: No more illegal aliens undermining the wages and safety of American workers, no more cheap imports destroying American jobs on the back of an ill-conceived global trade policy and no more allies free-riding on American military spending to keep the world a safe place.
The first couple of months have been a rude awakening for the new President and his ‘merry war’. His travel bans have been stalled in courts and his first major policy initiative, the American Health Care Act, has not even made it to the starting line in Congress. This begs a simple question: Where does the President go from here and what impact will the Trump factor have on emerging markets? Our view is, in short, that drastic changes to American foreign policy will remain off the agenda in 2017. The worst case scenario of trade retaliation coupled with an increased retrenchment of the United States from the global stage is unlikely to materialise soon. Overall, this is very positive for economic and political stability in emerging markets.
Let us start with the two major protagonists: Russia and China. Looking at Russia, it is hard to see how President Trump can lift sanctions against the world’s largest nation considering the ongoing Congressional investigations over alleged links between the Trump campaign and the Russian government. While it is hard to fathom at this point in time what these investigations might unearth, we believe it is unlikely Congress will endorse a plan to lift sanctions against Russia. Meanwhile, the Chinese government has taken a ‘wait and see’ approach towards the new President and this strategy is working very well for them. North Korea continues to rattle the cage and remains a thorn in the side of the United States, allowing China to continue unabated with its military and security strategy in the South China Sea. Overall, President Trump has been distracted by domestic policy quarrels and appears to be yielding to the premise that without risking major military escalations with Russia or China, there is little the United States can do here.
There has also been no change to military strategies in the Middle East and President Obama’s policy of relying on local ground forces to fight extremist groups remains the favourite military option in Washington, DC. Again, our opinion is that this strategy will endure in the near future.
Tax reform is next on the agenda for President Trump and Congress. History is littered with ill-fated political initiatives for tax reform in Western democracies. While changes to corporate and personal tax rates in the US are on balance positive for emerging markets, the border adjustment tax complicates this picture. A big tax incentive for exports over imports will make exports from emerging markets to the United States more expensive while favouring imports from the United States to emerging markets. Part of this negative effect will undoubtedly be offset by a jump in the value of the US dollar and it will also lead to higher inflation in the US. Nevertheless, after the recent health care debacle, we think that a broader tax overhaul in the US is unlikely. This is because Republicans are generally opposed to higher debt burdens in the future, especially in the wake of a lack of appetite for benefit cuts. There has also been strong opposition from various industries, including the car industry, to any border adjustment tax. With these factors in play, we think that Trump’s vision of a sweeping, landmark tax reform legislation passing into law, remains doubtful indeed.
The ongoing political uncertainty in Washington make these and future radical proposals highly unlikely to succeed, affirming an international world order that has generated huge progress in emerging markets over the past thirty years. Any policy changes will now almost certainly require Democratic participation which would lead to only modest adjustments, at most, to the post-War economic and political global consensus. With this framework intact, we should not be surprised that the outlook for business conditions in emerging markets has improved substantially over the past week. While statements from the POTUS should never be dismissed as ‘much ado about nothing’ and certainly have the power to provoke meaningful change in emerging market conditions, it seems that on this occasion the change will fail to materialise. In hindsight, much of the noise generated by this incoming US administration will be remembered as a public “skirmish of wit” rather than meaningful policy change.
Bart Turtelboom is Chairman of APQ Global, an AIM-listed emerging markets growth company.