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Trump trade faces test from disruptions

Asset price movements in the past few weeks have pointed both to the upside and a major risk for the global economy and markets under a Trump administration. Enthusiasm over higher US growth powering the global economy has been tempered at times by worries that certain elements of the president-elect’s “America First” approach could undermine longstanding trading relationships, opening up the risk of economic and financial disruptions. In the process, we have learnt more of what is needed to unleash America’s considerable potential.

Pro-growth policy announcements by Mr Trump (such as tax reform, deregulation and infrastructure spending), coupled with better prospects for congressional passage, have led forecasters to improve their growth outlook. Concurrently, protectionist talk has evolved away from campaign threats of crushing tariffs and the dismantling of trade agreements such as Nafta. With that, stocks and the dollar moved notably higher post election, pausing for some air recently as investors wait for announcements to be translated into policy design and implementation.

As illustrated again last Wednesday during the president-elect’s press conference, generally cheerful markets remain twitchy about the risks to pricing and cross-border supply chains — an issue that is particularly relevant for China and Mexico, the two countries that have been mentioned most frequently by Mr Trump in this regard. Developments there, including significant currency depreciations since the elections, also highlight a major threat to the global economy and markets.

Both countries worry about lower exports to the US and less foreign direct investment, especially as American companies rethink their business strategies. Currencies touched record lows against the dollar and, ironically, have eroded US price competitiveness. In the process, they have also served as a reminder that weak exchange rates can go from being part of better outcomes — higher exports, production and jobs — to becoming problems in themselves.

In the case of Mexico, the peso depreciation has fuelled imported inflation, led to increases in administrated prices (including a petrol price rise that triggered street protests) and forced the Bank of Mexico to intervene directly in the foreign exchange markets. Chinese worries about capital outflows and reserve depletion have pushed the central bank to stop the managed depreciation of the currency and tighten restrictions on capital outflow. Again, the concern is that the positive impact of a weaker currency on competitiveness would be offset by collateral damage, including excessive currency mismatches in the asset-liability management of the corporate sector.

This is a tricky situation for the incoming Trump administration, as well as for markets that have rushed to price in higher growth, inflation and corporate earnings. Willingness to single out companies, be they American or foreign, undoubtedly sends loud signals that can influence individual behaviours and, perhaps, even whole sectors in some selected cases (eg, pharmaceuticals and automobiles). But there are also limits, particularly in a world of internationally integrated production management and globalised consumption preferences.

Co-operative relationships among major trading partners — one involving fair and free trade — remain an important part of America’s strategy for delivering high inclusive growth. As such, it is also important for the wellbeing of financial markets. But the effective response needs to go beyond defusing trade tensions through collaborative actions on all sides. If the new administration ends up alone in pursing pro-growth policies, the dollar would appreciate further because of two powerful divergence forces: the relative economic outperformance of the US that entices more direct foreign investment; and a tighter Federal Reserve policy stance that attracts larger inflows of financial capital.

The management of “win-win” cross-border production and consumption relationships needs to be undertaken cooperatively in the context of wider internal reforms by more than just the US. Indeed, the lesson of the past few weeks is that fulfilling the country’s considerable economic and financial wellbeing under the Trump administration will require more than the implementation of his pro-growth policies.

The US cannot fully succeed domestically if it turns away from the rest of the world, nor can it alone pull the global economy. Its significant upside, and the beneficial spillover this entails for markets of other countries, also requires supportive domestic reform efforts on their part.

The writer is chief economic adviser to Allianz and author of “The Only Game in Town”

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