In this commentary, Wellian Wiranto of OCBC explores the possibility of Donald Trump winning the upcoming US presidential election, and looks at what this would mean for Asian economies.
SINGAPORE: Say what you may of his personality, Trump has obviously come a long way in his political journey – and he is hardly done yet. Having secured the Republican presidential nomination, he is now just one contest away from ruling the world’s largest economy.
While the market appears to be assuming that his contender, Hillary Clinton, will win the day, the sting of the UK's Brexit surprise last month reminds us to take nothing for granted. In short, we should at least think seriously about the possibility of a President Trump.
What he says as a candidate is unlikely to reflect what he does as a president completely. Even a subset is confounding enough, however. From pulling out of the World Trade Organisation (WTO) to slapping discounts on US Treasuries, elements of his unorthodox platform can be a huge, huge deal for us all.
WE'VE GOT TO TALK ABOUT TRUMP
Donald Trump is a man who has said a lot of things. That America should build a wall along its southern border that it would bill Mexico for was just one controversial comment he made early on in his political gambit in June last year. Since then, one has probably lost count of the times when he graced news headlines for the wrong reasons. The ironic thing, of course, is that the more controversial comments he makes, the better his political fortunes appear to be.
Once upon a time, Trump was just an often-bankrupt property developer. His whims and actions would only matter greatly if you happen to be one of the contestants at the receiving end of his “You’re Fired” missiles on reality TV shows. Alas, times have changed. He is now a contestant himself, in what is arguably the greatest race of all, that of becoming the 45th president of the United States. Aside from having the constitutional prerogative to launch non-verbal missiles and much, much more, the office would also decide key economic policies that carry important implications not just for Americans, but a multitude of families outside his wall – metaphorical or otherwise.
Hence, in the spirit of hoping for the best while preparing for the worst, we believe it’s high time to dissect some key aspects of his economic platform and ponder the implications for Asia, in particular.
NO COUNTRY FOR OLD TRADE
One of the major ways in which what happens in the US can quickly translate into what happens in Asia is via the trade channel. Countries like Indonesia and India with large domestic economies and relatively little dependence on trade in general - and trade with the US in particular - are relatively more insulated. However, there are plenty of others in the region that would have to fret more. In particular, any fallout from the US would be felt especially strongly in economies such as Singapore, Hong Kong and Vietnam, where exports to the US make up chunky portions of overall GDP.
Source: UNCTAD, OCBC
Hence, the old saying that “When America sneezes, the world catches a cold” still applies to Asia. Not only do Asian economies depend on the health of the US economy and its demand for imported goods, they also depend on the closely-knit web of global trade flows remaining undisturbed. It does not help, then, that the US presidential election season is busy kicking up swirls of dust and fanning them on with gusto – almost as if to make sure that America will indeed sneeze. In particular, even though trade policy in general has been a regular feature in past elections, it appears to take on a whole new degree of antagonism this time round.
As an illustration, Trump’s official campaign website had a video with a headline screaming “TRADE WAR: Our country is getting ripped off. We need the smartest people negotiating for us!” In it, he claims that there is already a trade war, and that countries ranging from China and India to Vietnam and Japan are ripping hundreds of billions of dollars off the US economy.
The belligerence echoes what he has said elsewhere. On the NAFTA pact with Canada and Mexico, he variously said that he would either renegotiate it, or threaten to impose a 35 per cent tariff on imports from Mexico, or rip it up altogether. An even more punitive 45 per cent tariff would be slapped on Chinese imports, he proclaimed. On top of that, he also threatened to impose penalties on companies that move production away from the US. When told that these moves would run afoul of World Trade Organisation (WTO) rules in a recent TV interview, he simply said it does not matter and that he could just pull out of the organisation – which has formed the very cornerstone of global trade architecture since 1995 – altogether.
If he is that keen on dismantling the existing global trade structure as it stands, there is fat chance then that Trump would endorse any additional trade deals that allow for even freer global trade in goods and services. This includes the Trans-Pacific Partnership (TPP), an Obama initiative that is yet to be ratified by Congress. Indeed, the strong stance that Trump has exhibited against trade pacts in general and TPP in particular has inadvertently contributed to the lukewarm support that the Democratic nominee, Hillary Clinton, has on the issue. For one, both she and her running mate, Tim Kaine, have reversed their support of the TPP program as of now.
Such developments are bad news for global trade.
On a cyclical basis, it is already suffering from weakness in demand from major economies. Going by data from the World Trade Monitor of Centraal Planbureau of the Netherlands, growth in global trade flows remains stunted at just 0.8 per cent year-on-year in volume terms, as of May this year. In price terms, things look even less comforting, with negative growth rates remaining the norm.
Source: Centraal Planbureau, OCBC
If anyone was hoping to see trade pacts such as TPP becoming a structural pillar of support for the global trade architecture, it appears that chances are more depressed than before. For Asian countries such as Malaysia and Singapore, which have already signed on to the TPP, this represents a potential setback. For Indonesia, whose president has expressed an interest in joining the pact, partly to boost his chances of pushing for tough reforms at home, it would mark a missed opportunity. (See our WSJ op-ed on the issue, for details). All thanks to Trump’s loaded posturing on his anti-trade and antiglobalisation platform.
YES, I'LL DO THIS. NO, I'LL DO THAT.
While Trump’s foreign economic policy poses a threat to the real sector of Asian economies via potential trade disruptions, the domestic elements of his platform would be a cause for concern for Asia as well through financial channels. Here, the main conduit will be how his fiscal stance and incursions into the Fed’s independence can potentially lead to shakiness in the US Dollar and the US Treasury markets.
Firstly, on the fiscal front, Trump has said that his “core beliefs" are that he wants “a major tax cut.” Indeed, his plan calls for a slashing of the top individual tax rate from 39.6 per cent to 25 per cent, that of corporate tax from 35 per cent to 15 per cent, and the abolition of the estate tax. His campaign website claims that these heavy tax cuts will be revenue-neutral. They will apparently be fully paid for by closing loopholes for the very rich and for big corporations, as well as a presumptive "one-time repatriation of corporate cash held overseas”.
That claim did not stand the test of scrutiny by the non-partisan Tax Policy Center, however. Indeed, going by its calculations, Trump’s plan would mean a revenue loss of as much as US$9.5 trillion, or 20 per cent of projected federal taxes over a decade. Curiously, the biggest benefits of his plan would ostensibly go to the richest, with the top 1 per cent of households projected to get a nearly 18 per cent boost in their after-tax income. The same report also points out that unless it is “accompanied by very large spending cuts, it could increase the national debt by nearly 80 per cent of gross domestic product by 2036, offsetting some or all of the incentive effects of the tax cuts."
For the sake of comparison, US debt-to-GDP ratio now stands at around 106 per cent. Trump’s fiscal plan could thus see a significant jump in the indebtedness of the US government. In and of its own, this is already a tricky prospect. It gets even hairier, however, if we consider the uninformed nonchalance with which the presidential candidate spoke about the responsibility of honouring US debt.
In an interview with CNBC in May this year, Trump said that he might seek to reduce the US national debt by persuading creditors to accept a write-down. That is to say, facing a potential uptick in government debt from his tax plans, Trump reached for what he thought was a magic solution of just paying creditors less than they are owed. This looks to be stemming from a misguided thinking that bond repurchase at a discount which corporations sometimes engineer – banking on debt holders’ fears of a full default otherwise – can be applied directly to the sovereign debt market without dire consequences.
The US is no banana republic. And the US Treasury market is no place for such loose talk by a potential top-office holder, especially when it serves as a crucial risk-free benchmark for financial assets globally.
Moreover, about 41 per cent of outstanding US Treasuries are held by foreigners, including a multitude of central banks worldwide which are attracted to the liquidity and depth of the market, and global investors who value its traditional safe-haven status. Within this group of foreign holders, China makes up the lion’s share. Any potential disturbance to the US Treasury market would thus not only have direct economic implications, but also broader geopolitical considerations as well, posing an additional risk to what is already an uneasy bilateral relationship between the world’s two largest economies.
Source: Bloomberg, OCBC
Hence, while Trump has tried to reverse his initial comments by saying that “the bonds are absolutely sacred”, the casualness with which he flipflops on such a fundamental underpinning of the global financial market as the US Treasury market will not go unnoticed.
The same pattern of first making outlandish comments and then backtracking on them seems to hold when it comes to the Federal Reserve as well. After saying that Janet Yellen (Chair of the Board of Governors of the Federal Reserve System) ought to raise rates and that she might have held rates low for political reasons, risking inflation back in November last year, he since reversed his position in May and said that he supports low interest rates. It is one thing for a presidential candidate to weigh in on interest rate policy, which is solely the purview of the independent central bank - it is quite another to have him do so in such a brashly open manner that is so prone to reversals.
MAYBE HE DOESN'T MEAN IT AT ALL?
One hope for global markets is that all that Trump has said on economic policies thus far, be it on free trade or the sanctity of the US Treasury and the independence of the Fed, is merely just random thoughts that somehow stream out of him, rather than representing any fundamental belief that he holds true and will look to implement should he be elected come November 8th. Moreover, if he can change his mind this frequently now – sometimes seemingly halfway through his sentences – then maybe, just maybe, he would see the pragmatic light once he comes into office. After all, in all fairness, what good politician in America and anywhere else in the world has not backtracked on at least some election promise before?
The potential of these scenarios taking place is there, even if the fact that we might have to hold on to the hope that he absolutely will not do what he says he would do cannot be all that reassuring in and of itself.
If we take a step back and try to better understand Trump’s personality throughout his life, including before he sauntered onto the political stage, there might exist another explanation behind it all. In particular, there appears to be a core strategy that served him well as a businessman, and continues to do so for Trump as a presidential candidate: Publicity.
In his 1987 book “The Art of the Deal”, he writes that “Good publicity is preferable to bad, but from a bottom-line perspective, bad publicity is sometimes better than no publicity at all. Controversy, in short, sells.” For good measure, he adds that “The point is that if you are a little different, or a little outrageous, or if you do things that are bold or controversial, the press is going to write about you.”
If his 29-year-old book is any guide, there is some chance that Trump is filling his campaign with as much outlandish policy rhetoric as possible, not because he believes in it or will carry it out, but to serve a single-minded goal of maximising press coverage - simply because he equates publicity to potential votes.
Interestingly, media-tracking firm mediaQuant reckons that as of April 2016, Donald Trump has received the equivalent of more than US$2.4 billion worth of free media exposure in the past year. That’s worth more than the free publicity that Taylor Swift, Kim Kardashian and Kanye West have gotten, combined. Indeed, viewed from this angle, one might be tempted to say that Trump’s is not so much a rags-to-riches story, but more of a brags-to-riches one.
At the end of the day, no amount of psychoanalysis or punditry can truly unmask what a Trump presidency would mean to the global economy. Still, please forgive us for trying, given the gravity of the outcome and the closeness of the race.
While polls had been suggesting that Hillary Clinton will be the one to clinch the US presidency, Trump has edged up and bested her of late. Even if this might be reflecting a temporary boost from last week’s Republican convention and Clinton might yet get a lift from the coverage of her own formal nomination on Friday (Jul 29), the ups and downs of the polls just remind us that we still have more than 3 months to go before election day. Given the thinness of the margin between the two candidates, this race is likely to be enough of a toss-up in the interim for markets to remain wary. This may be especially so after the sting from the shocking end-results of the Brexit referendum last month.
Source: Real Clear Politics, OCBC
A thin margin is not limited to the US presidential polls alone. Zoom out to look at global economic conditions, and we can see its twin in the thin margin of error for economic policies as well. The global economy, reeling from the assaults of the 2008 global financial crisis and 2011 European sovereign debt crisis, and still threatened by a host of uncertainties – about China’s growth transition, pockets of terrorism and unrest globally, and lately ripples from the Brexit referendum – is already testing the limits of economic policies.
This has been most evident in terms of monetary policy. Major central banks, having rolled out quantitative easing and then negative rates, may be increasingly compelled by circumstances to seriously consider helicopter money too – implications of which the global markets are just starting to grapple with.
In all honesty, things are already confusing and concerning as it is. Given what we can gather, it is perhaps fair to say that it will be even more so if Trump wins. Whether the man gets to carry out whatever plans he really has to “Make America Great Again!” or not is therefore a question that will probably make Asian policymakers fret again, and again, in the coming months.
*The writer is an economist at Treasury Research and Strategy, Global Treasury from OCBC Bank.