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Winners and losers in Trump’s world

Manu Bhaskaran
Manu Bhaskaran2/6/2017 02:37 PM GMT+08  • 10 min read
Winners and losers in Trump’s world
US President Donald Trump came to power vowing to shake things up. It is clear from his inaugural address, the composition of his cabinet and his comments in press interviews that he means what he said. There will be seismic changes in US policies on trad
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US President Donald Trump came to power vowing to shake things up. It is clear from his inaugural address, the composition of his cabinet and his comments in press interviews that he means what he said. There will be seismic changes in US policies on trade, security alliances, energy and the climate — and many of these will cause ructions in Asia.

Trade will be a major risk for Asia

Apart from demanding an early renegotiation of the North American Free Trade Agreement, one of Trump’s next actions on trade will probably be measures directed against China. China will almost certainly be labelled a currency manipulator, which would help justify restrictions, beginning with anti-dumping charges and expanding to other non-tariff barriers. It is unlikely that the new American trade authorities will act only against China; other trading nations are also likely to face trade restrictions as well, especially those that have had consistently large trade surpluses with the US.

Our suspicion is that Trump is keen to demonstrate to his constituency that he is prepared to act tough and in doing so, it would not surprise us if he is willing to flout World Trade Organization rules. After all, it would take years of litigation before any complainant WTO member is able to force the US to reverse such non-compliant trade restrictions.

Second, tax reforms that Trump’s Republican allies in Congress are planning will include a “border adjustment tax”. This is a new form of corporate tax that essentially does not allow any imported item as a deductible expense. At the same time, export- related revenues will not be taxed. In effect, this border tax will discriminate against imports and subsidise exports. While it is not clear where Trump stands on this specific tax, there is a strong incentive for Congress to pass this measure. It will raise substantial revenues to pay for the tax cuts and higher defence spending that Trump plans.

Third, Trump’s known opposition to outsourcing and the granting of H-1B visas to [non-immigrant] skilled foreign professionals means that restrictions are likely in these areas. India and the Philippines could be big losers.

Fourth, the new administration is likely to follow through on Trump’s threats to penalise firms that move operations out of the US to cheaper locations. That would hurt US investment abroad.

How far Trump will press this protectionist line depends on two factors. First, does he see such actions simply as tactics to press trading partners to offer quick concessions which would satisfy him, or is he determined to fundamentally reverse decades of American commitment to the principle of free trade? We suspect it is the latter.

Second, will other countries retaliate or will they cave in? We think there will be a good amount of retaliation. Other nations will retaliate with targeted measures to hurt US interests, while stepping up efforts to create exclusive trading blocs. This could lead to a prolonged period of trade tensions during which global trade volumes will fall and there will be considerable dislocation in the world economy. If this scenario unfolds, Asian trading nations will be quite severely damaged.

There could be other areas of economic risk

However, at another level, since the US economy is close to full employment, the risk of overheating will rise. That would result in a faster pace of monetary tightening and a stronger US dollar. As deregulation and tax cuts boost corporate earnings in the US, US equities will also become more attractive. This could precipitate more capital outflows from Asia, depressing local currencies and causing turbulence in asset valuations.

Asia will be a major arena for geopolitical competition

Earlier, Trump had dismissed the North Atlantic Treaty Organization alliance as obsolete while also making clear his disdain for the European Union and its leaders, such as Chancellor Angela Merkel of Germany. There was nothing to suggest that Trump would look at foreign policy from the standpoint of enlightened self-interest.

Trump’s signal that under him the US would be more focused on its immediate self-interest than previous administrations could encourage America’s rivals to see this as an opportunity to advance their interests through bold moves, which they may not have risked before. There are two risks in Asia to watch out for:

• First, China could become more confident that its long-term goal of edging the US out of East Asia is now more achievable given American disengagement. It might announce an Air Defence Identification Zone in the South China Sea to strengthen its controversial claims there. It is also likely to step up its pressure on, and inducements to, the smaller Asian nations, assured that these nations are now so rattled by Trump’s reduced commitment to the region that they would be more amenable to cutting deals favourable to China.

• Second, North Korea will almost certainly move quickly to strengthen its nuclear weapons capacity by testing more powerful nuclear weapons as well as developing an inter- continental ballistic missile which could threaten the mainland of the US.

Another consistent theme in Trump’s comments to the press in recent months has been his deep suspicion of China. Our understanding is that the Trump national security team is much more agitated about China’s enhanced military position in the South China Sea than the Obama administration. Trump has now repeated his Secretary of State-designate’s vow to block China’s access to disputed rocks and shoals that it has seized from other claimants. The new administration may well deploy more US air and naval forces to the region. It may also step up trade and military relations with Taiwan to penalise China for its assertiveness, which would enrage the Chinese. Tensions in East Asia are likely to be aggravated.

Who would be the winners and losers in Asia?

First, China will face the greatest challenges.

• China hopes to benefit in one respect: Should the US reduce its engagement in the region, smaller Asian nations would be left with little choice but to defer more to China’s wishes. Indeed, the signals that Trump has sent so far will probably unsettle Asian nations and persuade some to shift closer to China. Of course, there will be some Asian nations which, remaining suspicious of China, will seek to form alliances of their own to enhance their bargaining power. We can see Japan, Australia and India working more closely together. However, without some form of US support, there is no combination of Asian middle powers (Japan, India, Australia, Indonesia, South Korea and Vietnam) that can wield enough power to counter-balance China completely. A unilateralist US will certainly be a boon to China’s long-term ambitions to be pre-eminent in the region.

Second, India could make strategic gains but lose out modestly on outsourcing.

• Trump’s suspicion of China and determination to wage war against so-called Islamic radicalism could make India an appealing ally of the US. Many in the large and growing Indian diaspora in the US were supportive of Trump’s candidacy in the election.

Third, South Korea should be nervous as well.

• Trump’s questioning of US alliances with Japan and South Korea and his generally isolationist tone could encourage North Korea to engage in provocative actions that undermine South Korea’s security, as described above. This is especially so given the political crisis in South Korea, where President Park Geun-hye’s impeachment leaves a political vacuum and has reduced the country’s ability to respond to such challenges.

• In economic terms, South Korea’s large trade surplus and its management of its currency leave it open to US trade pressure. Fourth, Singapore has much to worry about.

• Singapore had allied itself closely with the US in recent years, even in the face of China’s growing disapproval. Singapore’s relationship with China has become more troubled of late, culminating in the seizure by Hong Kong authorities, probably at China’s behest, of armoured vehicles that Singapore was shipping home from its training grounds in Taiwan. China has clearly decided to make an example of Singapore for not deferring to its interests by allying itself too closely with the US and by continuing its military relationship with a Taiwan ruled by a pro-independence party. Singapore is in the invidious position where its US ally may be less interested in providing security cover, while it cannot now concede to China without losing credibility.

The bottom line

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 764 (Jan 30) of The Edge Singapore.

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