Friday 28/02/2020

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Trump: a president without precedent

Chief Economist

Trump’s inauguration on Friday held few surprises. What we already knew was confirmed. Trump didn’t soften his tone. It would be funny if it weren’t so sad. America is heading in a populist and protectionist direction. The downward risks for world trade are considerable. Our chief economist Hans Bevers sheds a light on what to expect in terms of world trade and economics after the inauguration of Donald Trump.

The new White House website was launched shortly after Trump entered the Oval Office in Washington. It again states that Trump will create no fewer than 25 million new jobs. In the (probably unrealistic) supposition that Trump is elected for a second term, this amounts to an average monthly increase of no fewer than 260,000 jobs. That’s more than double the average of the past 30 years. Let’s not forget that the labour market has already seen a clear recovery under Obama and that the unemployment rate fell to under 5%. On his website, Trump also guarantees 4% growth; this is much higher than the average of the past three decades, which is a touch over 2.5%.

Sky-high ambitions

It is already clear that Trump will never be able to fulfil these sky-high ambitions. The disillusionment will more than likely be enormous. His huge infrastructure plan will prove to be an illusion. Many Republicans simply don’t care about improving ailing American roads, stations or airports, especially if that involves new debt. Perhaps they’ll approve a few private-public projects that will benefit Trump’s business friends on the other hand. Tax cuts for the super-rich are a step forward but a step in the wrong direction. America is and remains a very unequal country. Obamacare will be dissolved; a great mistake if they lack a worthy alternative.

What about tax cuts for American businesses and less regulation? There is something to be said for this, but there is also great uncertainty about their implementation. The effect of tax cuts on inflation, the dollar and Federal Reserve policies is unclear. Moreover, Trump and the Republicans have different opinions on how these cuts should be done. Nevertheless, expectations are high. The confidence of American small and medium-sized businesses soared in December and stock exchanges made strong advances. How is he going to pay for that? Didn’t Trump promise to bring down the national debt?

International tensions

Probably the most important question is how his protectionist trade policy can be reconciled with sustainable relationships on the international stage. It’s now quite certain that Trump will formally withdraw America from negotiated trade agreements with Europe and Asia. Canada and Mexico can also expect extremely difficult discussions. In turn, this can have consequences for European exporters to Canada or Mexico.

But the United States’ relationship with China, the second largest economy in the world, is of a different calibre. Trump repeatedly aimed his sights on China, which is struggling with a difficult economic balancing act, and will continue to do so. President Xi of China declared himself a defender of free trade last week in Davos. The contrast with Trump couldn’t be greater, but Xi himself isn’t very convincing if you examine his policies regarding Chinese state companies. He did strike a chord when he said that everyone will be worse off in the event of a trade war.

A country is not a business

Unfortunately, Trump assumes that you can run a country like a business and that the international economy is a “zero-sum game”. In other words, China’s gains always result in losses for the United States, and vice versa. This reasoning is incorrect. By concluding trade agreements, it’s possible for both parties to advance. The Chinese won’t sit by and watch idly if Trump were to impose substantial taxes on Chinese products. They will react and as a result trade will shrink. Everyone will be worse off.

Of course you can always hope that Trump will surround himself with people who understand this and who will inhibit his protectionist direction. But, once again, we must remain cautious. A recent Pew Research Center study shows that only 24% of Republicans support free trade; this is a notable decrease from 55% in 2014.

So protectionism is growing. In the end, Trump will not be able to live up to the expectations that were created with regard to economic policy. Frequent comparisons with Ronald Reagan - that he will surprise us positively - are false analogies. Circumstances were completely different back then. Be that as it may, there is great uncertainty about this president without precedent.