Now that financial markets have gotten over their initial shock, a more optimistic take on the unexpected election of Donald Trump as the US president is gaining currency. The argument is that the damage he might do will be less than his rhetoric suggested because: (a) Once he is in power, he will tone down his professed policies and become more pragmatic; (b) He will surround himself with competent officials who will craft sensible policies; (c) The US political system of divided government will check and balance him. We disagree. The election of Trump will pose immense risks for Asia.

Checks and balances won’t be enough to prevent policies detrimental to Asia
First, he may well walk away from some of the policy suggestions that are unworkable such as building a wall on the Mexican border and getting Mexico to pay for it. But, armed with what will seem to him as a clear and strong mandate from the people, he will feel empowered to carry out enough of his controversial policies to create some disruption, however gracious and statesmanlike his victory speech was.

Second, he may well have some competent cabinet secretaries, but he will probably also have a few highly controversial ones who share his views. George W Bush had cabinet secretaries and senior officials who were sharp, experienced and highly competent, but they still dragged the US into two disastrous wars and oversaw the worst financial crisis since the 1930s. The judgement, instincts and personality of the president matter immensely and on these scores, we cannot be optimistic.

Third, his Republican party now controls the White House, the Senate and the House of Representatives. He will almost certainly appoint a conservative to the empty seat in the Supreme Court, giving the Court once again a conservative majority. The checks and balances are there, but they will much less effective than even on Bush.

How effective can President Trump be as a leader?
There are several reasons why his effectiveness as a leader is likely to be compromised after a brief honeymoon:

  • The serious allegations made against Trump in the course of the past 12 months will not go away. Several women have accused him of improper behaviour and they may well pursue court cases against him. The same could apply to the controversy around Trump University, where large numbers of students claim they had been misled. A Trump presidency could be mired in controversies that distract and weaken his leadership.
  • He has vowed to push through highly controversial policies that will certainly provoke a massive backlash. He wants to abolish Obamacare, President Barack Obama’s signature healthcare reform, which has had its share of weaknesses but has also given millions of uninsured Americans access to decent healthcare. He has also vowed to abolish many other reforms that he sees as debilitating for US businesses such as the Dodd-Frank Act. He seeks to introduce massive tax cuts for corporations and the wealthy. There will almost certainly be a highly charged clash over abortion as well. At the very least, there will be huge political fights over all these changes. His attacks on Hispanics and Muslims may have legitimised racist behaviour and could lead to more racial tensions.
  • Trump and his supporters believe they have a strong mandate. But the losing side will point to how Hillary Clinton won more votes (around 59.8 million, 200,000 more than Trump) and claim the opposite. The roughly half of those who voted who did not support him will feel disenfranchised.
In other words, the big divides in US politics will not go away; they will deepen and create a strong backlash against Trump and his policies. The result would be a US president entangled in controversies and handicapped in providing global leadership. Whether one likes it or not, the fact is that the US alone has the incentive and capacity to provide global public goods such as security guarantees and diplomatic interventions to prevent crises. A weakened US president whose instincts are against the US playing such a role will inhibit the US from fulfilling this role.

What does this mean for Asia?
In the near term, things may look all right. Financial markets are already settling down — as they did after Brexit. Initially, the new administration will make soothing noises that will calm markets and businesses.

But over time, there is little doubt that many ill effects will be visited on Asian countries.

First, Trump can reasonably argue that he has a mandate to turn away from the trade openness that is so vital to Asia. His unexpected victories or near victories in the Democrats’ supposed impregnable states of Pennsylvania, Wisconsin and Michigan as well as in states like Ohio will be ascribed to those voters’ anger at how trade had hurt their jobs and incomes. A Trump administration will certainly pursue protectionism much more aggressively than the Obama administration (which was no paragon of virtue, either, but at least felt constrained by its desire to pivot to Asia) while reviewing its trade agreements with countries such as Korea and Singapore. He will be tough with China on trade for certain. All this will cast a pall on world trade, already challenged by structural forces. It is not only Asian exporting nations that will be hurt — countries such as India and Indonesia, which might have hoped to use export-oriented manufacturing to power their growth strategies will have to rethink their plans. So, it is not just the Trans-Pacific Partnership that is dead — trade as an engine of growth for Asia will be diminished.

Second, Trump’s commitment to security engagement in Asia is weak and that raises geopolitical risks in Asia. He may not walk out on long-standing alliances with Korea and Japan, but his approach will probably weaken them and he is likely to reduce the US commitment of military resources in the rest of Asia. If our analysis above of what happens in US politics is correct, the US will be distracted and its capacity to provide leadership for the rest of the world severely compromised. There are serious implications from this for Asia:

  • The US’s opponents in Asia (and elsewhere) will be tempted to test the new president’s resolve, thinking that his reduced commitment could give them an opportunity to get away with actions that previous administrations would have hit back at. Watch North Korea in particular.
  • The capacity of Asian countries to use security and other ties with the US to balance a rising and assertive China will be hugely reduced.
  • Given China’s burgeoning clout and growing assertiveness, unity in the Association of Southeast Asian Nations bloc could also come under immense pressure as the shifting geopolitical calculus compels an increasing number of countries into China’s orbit.
Third, the economic impact on Asia in the medium to longer term could be negative. Aside from the trade issue, there are several other ways that likely Trump policies will hurt Asia:

Trump had been highly critical of the Federal Reserve Bank during the campaign and there are fears that he will use his powers to appoint hawks to the Fed and chip away at its independence over time. So, the more important issue is not whether the Fed might delay rate hikes because of the uncertainty caused by Trump’s victory, but whether the institutional strength of the most important central bank in the world might be eroded. Trump is proposing massive tax cuts. The record of the US Congress in balancing an administration’s aggressive fiscal policies is poor as the conduct of the Democrat-controlled Congress during the Reagan years shows. With a Republican-controlled Congress, there will be even less opposition and a tendency to assume that economic growth alone can make up for lost revenues, an assumption that has been shown over many years to be wrong. Thus, the US fiscal deficit is very likely to grow massively. That will have consequences for the US current account deficit and eventually the US dollar, undermining global economic stability.

Of course, not all of his policies will be bad. His deregulation efforts may well boost growth — but potentially at the expense of stability in the long run (such as taking away some of the sensible features of Dodd-Frank). He may boost infrastructure spending — but that will only worsen the larger budget deficits he will create.

Who are the biggest losers?
First, small and highly open economies that depend on the US as a market and as a security guarantor; Taiwan and Singapore are prime examples. Vietnam may well find its growing economic relationship with the US compromised and its hopes of gradually engaging the US in security matters dashed. Malaysia and Thailand have substantial export sectors that will feel the heat of protectionism even though the security implications might be less given their growing embrace of China.

Second, China will be a target of trade measures at a time when the painful rebalancing its economy is undergoing makes it more vulnerable to exogenous shocks. China will also have to think hard before it makes big moves on renminbi depreciation since this could give the Trump administration a motivation to step up trade actions against China.

Third, South Korea, facing a growing North Korean threat and a China angered at its acceptance of the anti-missile system the US is deploying to the South, must wonder how dependable the US will be as an ally. It will also be worried about the status of its free trade agreement with the US.

Fourth, not just for South Korea but for Asia as a whole, there is the question of North Korea’s nuclear programme. How a Trump administration deals with a North Korea that may soon acquire nuclear and missile technology sufficiently advanced to threaten the mainland of the US will be a major issue. The US has few effective options and all carry risks. Trump could step up financial and other sanctions on North Korea, such as interdiction of North Korean vessels suspected of carrying nuclear or related materials. China has only just served notice to the US in a meeting last month that it would not support aggressive measures against North Korea.

Fifth, Japan was also singled out by Trump as not paying its share of its defence burden. While its exports to the US are now much less controversial than in the 1980s, it is still a major exporter and will be concerned about protectionism.

Sixth, India and the Philippines will worry about policies to limit business process outsourcing, which has become important engines of growth for both countries.

The bottom line: Asian countries will have to collaborate more effectively
Faced with such challenges, Asian nations, especially the smaller ones, will have to fundamentally rethink their diplomatic and economic strategies. They will have to work better together, collaborating more in security areas while working more in unison on trade and other economic issues so that they can present a united front against an assertive China and a troublesome US.

Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy.

This article appeared in the Corporate of Issue 754 (Nov 14) of The Edge Singapore.