United States President Donald Trump is a proverbial ticking time bomb for US and global economic conditions and financial markets.
While US stocks have generally been strong since Trump’s shock election win in November, the optimism has been based on a yet-to-be-tested policy approach, which is focused on high infrastructure spending, cuts to company tax, and policies aimed at supporting domestic manufacturing.
These may prove to be positive for the US economy, but what is being understated by the markets is his approach to trade and old-fashioned protectionism. These policies by themselves have the potential to dislocate trade flows and unwind decades of successful specialisation, which has resulted in a rapid productivity growth, sustained low inflation and falling prices for many goods and services. This in turn has been pivotal in reducing global poverty and increasing the wellbeing of the bulk of the world’s population.
Trump has already bullied a number of US car manufacturers to abandon their plans for investment in efficient, low-cost producing countries such as Mexico. Those cars will now be produced in the US, clearly at a higher price to consumers and a loss of jobs and investment in Mexico.
This is the tip of the iceberg, if such policies extend to US–China trade relations. Any stalling or reversal in trade flows would chop away at global growth which would in turn undermine confidence in financial markets.
There already have been examples of Trump causing market ructions with a simple tweet. On December 6, 2016, Trump tweeted, “Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!” Within 10 seconds of this tweet, Boeing shares dropped 1.6 per cent.
Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!
— Donald J. Trump (@realDonaldTrump) December 6, 2016
A few days later, Trump tweeted that Lockheed Martin, the main manufacturer of military aircraft, was imposing “out of control costs” on defence orders and that “Billions of dollars can and will be saved on military (and other) purchases after January 20th”. The Lockheed Martin share price fell 5 per cent.
The F-35 program and cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20th.
— Donald J. Trump (@realDonaldTrump) December 12, 2016
If these tweets and possible policy actions on those fronts extend to the US imposing higher tariffs, the escalation of the currency tensions with China, who is a “currency manipulator” according to Trump, the consequences will be material and obviously negative.
According to World Bank data, global GDP has risen by around 350 per cent since 1980. Global trade has, over the same time, risen 750 per cent and directly contributed around one-third of bottom line economic growth. In other words, without greater global trade since 1980, global GDP growth would be around one-third less, which would have meant lower incomes and wellbeing around the world.
Lower growth also has negative implications for corporate earnings, investment and profits. It is noteworthy how strong global stocks have been over the past three decades, notwithstanding severe hiccups including the 1987 crash, the Nasdaq tech wreck and, of course, the more recent global banking and financial crisis.
Weaker growth due to protectionist policies would harm corporate earnings, which in part accounts for the fickleness of markets whenever Trump tweets or talks about economic policy.
It is important to emphasise something obvious, but worth reflecting on – that Donald Trump will be president for four years. Over that time, he will be pulling the policy levers and leaving his mark on the economy. For at least the first two years, he will have a sympathetic Congress, meaning that many of his policy ideas will become law.
Clearly, it is early days for the Trump administration and he is lucky to be inheriting a strong economy with low unemployment, record-high stock prices, an improving budget and low inflation. In the US, the financial crisis is an increasingly distant memory.
This good news is vulnerable to policy missteps and overreach. Given Trump’s track record in business, during the Presidential election campaign and the period he was ‘President-elect’, there are significant risks for the economy and markets as he takes control of the policy levers. The risk being that he just might do some of the things he has been talking about.