Speculating Trump’s second term

President elect of the US, Donald Trump has already designated key members of his team. Based on his election agenda, speeches and rhetoric and personal views of his designated team members, market participants are speculating about the likely policy framework of Trump 2.0 administration, and its implications for the global trade and markets.

My personal view is that the actual agenda of governance might have some shades of the election rhetoric but its actual path may not materially deviate from the trend seen in the post GFC (2009) period. At this point in time, I do not expect to sight any black swan in global economics and/or markets. With this caveat, let me summarize the current market speculations and its likely impact on India.

Trade tariffs

Trump has been speaking about imposing high tariffs on the US merchandise imports to promote local manufacturing, cut US trade deficit and strengthen USD. He has been suggesting 20% universal tariff on all imports, 60% tariff on imports from China and restrictions on the trade partners that he believes have artificially undervalued their currencies to gain trade surplus with the US. India is seen as one of these currency manipulating countries.

The administration will have to assess the impact of higher tariffs on businesses that are heavily reliant on imported inputs. Besides, the present US infrastructure and worker pool may not be adequate to onshore much of manufacturing activities. The impact of higher tariffs on the monetary policy objectives will also need to be calibrated.

Trump 1.0 started a manufacturing renaissance of sorts in the US, through tax incentives, tariffs and favorable skilled worker immigration policies. The Biden administration has carried forward the Trump 1.0 agenda and provided added further impetus though It would be reasonable to assume that trend will continue. There may be some random measures taken to address the political constituency, but a universal restrictive tariff policy (if at all implemented) will take much longer, maybe a couple of years, to evolve. A trade taken on the likely contours of the tariff policy may be frustrating.

In this context, it would be pertinent to note the comments of Michael Feroli, chief US economist at JPMorgan. Feroli said, “One path sees tax cuts and deregulation unleashing animal spirits, thereby boosting productivity growth and GDP outcomes while keeping inflation well-contained. The other path foresees policy uncertainty hindering growth, while trade and immigration restrictions impart a stagflationary bias.”

Collateral

Presuming Trump carries out his threat of a 60% tariff on Chinese imports – it may have consequences for most of the trade partners of the US and China. Some of the tariff hikes may be absorbed through CNY devaluation like China did in 2018; but some of it will have to be shared by the US consumers and producers. This essentially means higher US inflation and lower corporate profitability. China may dump the surplus production on Non-US importers, impacting local producers in those markets – thus exporting deflation throughout the world.

The Indian chemical sector, for example, which has already been suffering from Chinese price cuts may suffer further damage. Considering the massive capacity addition in the past 5-6 years and leveraged balance sheets, some of these companies might not be able to survive.

Energy policy

Trump has designated Chris Wright to head the energy department. Wright has been a known supporter of fossil fuels, disregarding the threat of climate change. He believes that the oil and gas industry has brought security and power and development to the United States, and global emissions aren't going down with greater focus on clean energy. He famously rejected carbon dioxide as a pollutant, claiming “carbon is essential for life”.

In the words of Wright, “Climate change is a real and global challenge that we should and can address. However, representing it as the most urgent threat to humanity today displaces concerns about more pressing threats of malnutrition, access to clean water, air pollution, endemic diseases, and human rights, among others.” He therefore advocates a need to bring down the price of energy and secure energy independence for the US.

Anticipating higher US oil production and return of thermal power in favor, the traders are placing a trade on fossil fuel – buying coal miners, fracking companies and drilling equipment manufacturers.

If Trump-Wright energy doctrine is actually implemented it would mean – collapse of United Nations Climate Change Conference (COP), sharp rise in the US oil production and exports resulting in lower global crude prices, decline in clean energy subsidies resulting in poor demand growth for solar energy and EVs.

In the past one-decade massive investment has been made in the production and adoption of clean energy solutions for electricity and mobility needs. The viability of these investments, especially in emerging economies where viability gap is already funded through fiscal support, would need to be reassessed.

Collateral

A 20% duty hike on the Indian exports may hurt some of the Indian exporters, as they may not be able to pass on the whole of the duty hike to the importers.

Cheaper oil may hurt the economies of OPEC countries, which are major trade partners, investors and employment providers for India.

Cheaper oil may help current account, inflation and INR.

Immigration policy

Immigration was a core issue in the entire campaign of Trump. He promised strict action against all illegal immigrants and several restrictive actions against the legal immigrants. We have heard similar rhetoric during the election campaign of Geroge Bush jr, Hillary Clinton, and Trump 1.0 etc.

It is widely accepted that ~47 million immigrants form a critical element of the US economy. They support the US businesses by providing a highly skilled workforce; boost federal revenue by paying taxes and contribution to social security; support the economy through high rates of savings and investments; and are an important consumer group.

President-elect Trump has indicated that his administration plans to carry out mass detentions and deportations of millions of immigrants, including long-term residents, by declaring national emergency and deploying armed forces to carry out deportation exercises. This could lead to family separations and negative mental and physical health consequences. This could potentially create widespread civil unrest, affecting the mental and social health of millions and the health of several small businesses who employ these immigrants. It is also feared that there could also be higher taxes on legal foreign workers.

Collateral

Uncertainty about jobs and residential status and higher taxes could result in lower job opportunities for the Indian workers employed in the US, negatively impacting remittances. Tougher VISA norms and immigration policies may also have some negative impact on the margins of the Indian IT services companies.

Geopolitics

George Washington implemented a policy of isolationism and neutrality with regards to the internal affairs of other nations. The successive US presidents followed this policy till the president Wilson was forced to change it in the wake of threats to the American interests that emerged from the first World War. In April 1917, the US entered the war with Germany “to make the world safe for democracy”. In the past 107 years, the US has followed this doctrine in its foreign policy.

Trump has now vowed to revert to the policy of isolationism and neutrality. Many geopolitical experts fear that this will end a major deterrent to the global expansionist forces like China and Russia, and could potentially unleash some major wars.

In my view, Trump may not hurry to a policy of isolationism and neutrality. I believe the US derives most of its power from the bombs they dropped in Hiroshima and Nagasaki. This nuclear deterrent has kept most expansionist ambitions at pay in the post WWII era.

The promise of liberty, fairness and equal opportunity has tremendously enhanced the US’s power. It has enabled it to attract and retain top talent from their adversaries like Vietnam, Japan, China, Russia, East Europe, Iran, Cuba, etc. and even talent starved countries like India, Pakistan, Bangladesh etc. The US will be able to retain its supremacy only as long as these immigrants are loyal to the US and the US administration is ready to bomb any country to protect the world order.

(PS: A large number of people believe that “the save democracy” democracy doctrine of the US is a façade to camouflage its own expansionist agenda. There are strong arguments on both sides of this belief. I would not like to get into that debate here.)

Collateral

If the US does revert to the policy of isolationism and neutrality by cutting aid to the countries like Ukraine and Israel, we may witness widespread unrest globally. This will unfold the worst human tragedy since WWII.

Besides the above mentioned factors, there are speculations about the trajectory of USD, Rates, Crypto, Gold during the second term of Trump. I believe that these all are derivative factors which would depend on the macro policies of the new US administration. It may be too early to call a good trade on these.