In German, 9 November is known as Schicksalstag – the day
of fate – for it was on this day in 1848 that the politician Robert Blum was assassinated;
in 1923 Hitler launched his first failed attempt at a coup;
in 1938 Kristallnacht took place and in 1989 the Berlin Wall was opened. For the record, it was the day in 1921
that the Italian fascist party was formed. It will also be remembered as the
day that Donald Trump was elected as the 45th President of the
United States.
At 5.30 am this morning, as the rain was beating down against the window, markets also looked to be taking a beating as the news came through that Donald Trump was on his way to the White House. In the event the markets took the election in their stride. Compared to the chaos which ensued after the Brexit referendum, it was small beer. I can only assume that whatever reservations markets have about Trump’s plans, they know that today is not the day to express them. For one thing, he has to wait another two months before being given the keys to 1600 Pennsylvania Avenue. For another, markets learned a lesson after the Brexit vote that it may pay to digest the wider implications of the vote before making a move.
But as one of my colleagues noted today “if 1989 was the year that the walls came down, 2016 was (metaphorically) the year they went back up again.” Voters in the UK and US have now sent a strong message that their tolerance for globalisation has reached its limit. And with Italian Prime Minister Renzi next month staking his future on a constitutional referendum which he may lose, and general elections next year in Germany and France, the stage is set for a period of extreme uncertainty in western politics – and by extension economics.
Economic fears centre primarily on the new president’s attitude towards foreign trade. Unfortunately, globalisation has been seen as a zero-sum game in which there is one winner and one loser. This is far from the case, though try telling that to the former steel workers in the rust belt. Undoubtedly, manufacturing jobs have been shifted offshore although in the process US consumers are now able to gain access to high quality goods at lower prices than if they were produced locally. Clearly, their utility function is such that they would trade some of their better material prosperity for some of the jobs which have been lost. This does not make their economic argument right, or indeed wrong, though I suspect it tells us something that I have long suspected – namely, that attempts to measure consumer well-being in monetary terms defines too narrowly the problem of economic dislocation in the wake of globalisation. It was a failure of successive UK governments to comprehend this that led to the vote in favour of Brexit.
But where Trump is wrong is to suppose that starting a trade war will alleviate the problems. In a first act, he is likely to kill the Trans-Pacific Partnership, a trade pact involving 12 Pacific Rim nations, which Obama had hoped would be approved by Congress after the election. Indeed a press conference involving representatives from Australia, Japan, New Zealand and Singapore which was scheduled for tomorrow, has now been cancelled. This may be a recognition that progress is unlikely. Admittedly, ending the TPP would not involve any additional costs since it has not been ratified anyway.
But threats to pull out of NAFTA would be more problematic. Trump wants to impose steep tariffs on goods imported from Mexico in order to deter additional jobs from moving south. Economists continue to debate whether NAFTA is beneficial to the US. But it is likely that many of the jobs lost would have gone anyway, and with the US trade deficit with China roughly five times bigger than that with Mexico, around five times as many jobs have been lost to China as Mexico. Moreover, outsourcing some of the lower value added processes to Mexico and reimporting them into the final product has helped to keep US labour costs down. You can argue about it, but it does not seem as though NAFTA has been the killer that Trump has argued.
Threats to impose import tariffs on the likes of China would quite simply be very bad economics. For one thing, we know where that got us in the 1930s, as beggar-thy-neighbour policies depressed world trade. For another, China holds large swathes of the US bond market. Attempts to pick a trade war could have adverse consequences if the Chinese decided to dump their Treasury holdings.
Trump’s fiscal policies don’t add up either for they imply a lot of unfunded promises. We can come back to this at a future date but suffice to say that if you want to expand fiscal policy, it may not be a great idea to antagonise the Chinese too much: They might turn out to be the best customers for your bonds! Finally, and in an echo of the UK debate, relationships between Trump and Fed Chair Yellen are not exactly cordial which has given rise to speculation that Yellen could walk the plank when her term expires in January 2018. It would not be the first time that the White House and the Fed have clashed in this way but it does not send a particularly positive signal to the markets on the conduct of monetary policy.
All in all, markets may have dodged a bullet today but there is enough for them to worry about in future to suggest that today could only be the calm before a very big storm.
At 5.30 am this morning, as the rain was beating down against the window, markets also looked to be taking a beating as the news came through that Donald Trump was on his way to the White House. In the event the markets took the election in their stride. Compared to the chaos which ensued after the Brexit referendum, it was small beer. I can only assume that whatever reservations markets have about Trump’s plans, they know that today is not the day to express them. For one thing, he has to wait another two months before being given the keys to 1600 Pennsylvania Avenue. For another, markets learned a lesson after the Brexit vote that it may pay to digest the wider implications of the vote before making a move.
But as one of my colleagues noted today “if 1989 was the year that the walls came down, 2016 was (metaphorically) the year they went back up again.” Voters in the UK and US have now sent a strong message that their tolerance for globalisation has reached its limit. And with Italian Prime Minister Renzi next month staking his future on a constitutional referendum which he may lose, and general elections next year in Germany and France, the stage is set for a period of extreme uncertainty in western politics – and by extension economics.
Economic fears centre primarily on the new president’s attitude towards foreign trade. Unfortunately, globalisation has been seen as a zero-sum game in which there is one winner and one loser. This is far from the case, though try telling that to the former steel workers in the rust belt. Undoubtedly, manufacturing jobs have been shifted offshore although in the process US consumers are now able to gain access to high quality goods at lower prices than if they were produced locally. Clearly, their utility function is such that they would trade some of their better material prosperity for some of the jobs which have been lost. This does not make their economic argument right, or indeed wrong, though I suspect it tells us something that I have long suspected – namely, that attempts to measure consumer well-being in monetary terms defines too narrowly the problem of economic dislocation in the wake of globalisation. It was a failure of successive UK governments to comprehend this that led to the vote in favour of Brexit.
But where Trump is wrong is to suppose that starting a trade war will alleviate the problems. In a first act, he is likely to kill the Trans-Pacific Partnership, a trade pact involving 12 Pacific Rim nations, which Obama had hoped would be approved by Congress after the election. Indeed a press conference involving representatives from Australia, Japan, New Zealand and Singapore which was scheduled for tomorrow, has now been cancelled. This may be a recognition that progress is unlikely. Admittedly, ending the TPP would not involve any additional costs since it has not been ratified anyway.
But threats to pull out of NAFTA would be more problematic. Trump wants to impose steep tariffs on goods imported from Mexico in order to deter additional jobs from moving south. Economists continue to debate whether NAFTA is beneficial to the US. But it is likely that many of the jobs lost would have gone anyway, and with the US trade deficit with China roughly five times bigger than that with Mexico, around five times as many jobs have been lost to China as Mexico. Moreover, outsourcing some of the lower value added processes to Mexico and reimporting them into the final product has helped to keep US labour costs down. You can argue about it, but it does not seem as though NAFTA has been the killer that Trump has argued.
Threats to impose import tariffs on the likes of China would quite simply be very bad economics. For one thing, we know where that got us in the 1930s, as beggar-thy-neighbour policies depressed world trade. For another, China holds large swathes of the US bond market. Attempts to pick a trade war could have adverse consequences if the Chinese decided to dump their Treasury holdings.
Trump’s fiscal policies don’t add up either for they imply a lot of unfunded promises. We can come back to this at a future date but suffice to say that if you want to expand fiscal policy, it may not be a great idea to antagonise the Chinese too much: They might turn out to be the best customers for your bonds! Finally, and in an echo of the UK debate, relationships between Trump and Fed Chair Yellen are not exactly cordial which has given rise to speculation that Yellen could walk the plank when her term expires in January 2018. It would not be the first time that the White House and the Fed have clashed in this way but it does not send a particularly positive signal to the markets on the conduct of monetary policy.
All in all, markets may have dodged a bullet today but there is enough for them to worry about in future to suggest that today could only be the calm before a very big storm.
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