wiiw Opinion Corner: What will change after Donald Trump's victory?

19 December 2016

wiiw economists reflect on the results of the US elections and their likely impact on US trade relations, on Iran, Russia and CIS

photo: Matt A.J., CC-BY-SA 2.0

Robert Stehrer on US trade relations

The 45th new president(-elect) of the United States, Donald J. Trump, announced a rude protectionist approach of the US against other countries in terms of trade relations which might impact not only on the US trade patterns but might have consequences for the whole world.

In his speech he announced a number of action points in line with his statements of ‘Making America Great Again’ and to ‘protect the American workers’. These announcements on action points include (i) to renegotiate or withdraw from the North American Free Trade Agreement (NAFTA) which has been in place since the beginning of the 1990s, (ii) to withdraw from the just recently signed (though not yet ratified) Trans-Pacific Partnership (TPP) agreement, and (iii) to label China as a currency manipulator. Further, he announced (iv) to end foreign trade abuses which impact American workers unfairly, and (v) to end the offshoring act by establishing import tariffs to discourage companies from laying off their workers in order to relocate to other countries and ship their products back to the US tax-free. He also announced to raise tariff rates up to 45% on imports from China, which is against WTO rules (such an action might even lead to a US withdrawal from the WTO). Similar rhetoric has been used referring to trade with Mexico and Japan.

Europe has not been in the focus of the trade policy debate in the US so far, probably because US trade with the EU is more balanced and a successful conclusion of the TTIP agreement has now become very unlikely. Though not that explicitly mentioned by Mr Trump, it is unlikely that the Transatlantic Trade and Investment Partnership (TTIP) will be finalised any time soon. Whereas TTIP has already been declared dead by many observers and commentators, the European Commission still wants to keep negotiations going even if at a much slower pace. As such, the direct effect of TTIP not coming into force can be expected to be rather small; most analyses projected only relatively minor effects of the agreement on income and employment. If the fiscal stimulus package in the US economy is implemented, this could even imply some positive effects on the European economies (as well as other economies).

An increasingly protectionist US trade policy would entail some other effects: First, if such harsh measures were in fact to be introduced, there are likely to be currency responses such as devaluations of the Chinese yuan or the Mexican peso (if only due to markets getting nervous) which would counteract the effects of higher import tariffs in the US. Second, specifically in the US case, hikes in tariffs against China would mean that particularly consumer goods would become more expensive in the US, which probably will not be matched by increases in US wages, thus making consumers poorer (and likely increase inequality even further). A similar argument holds when accounting for the fact that in some cases imports consist of parts and components which again would suffer from higher import tariffs. If US firms aim to preserve corporate profit margins, this would again lead to higher consumer prices in the end. Further, even if such protectionist measures were to bring production back to the US, this would again increase production costs as US workers are still more expensive than their counterparts in other countries. Therefore, such changes in trade deals could spoil other effects of the fiscal stimulus package.

It is further commonly argued that such protectionist measures would not only have devastating effects on the countries affected (in particular Mexico but also China); it would also hurt the US economy resulting both from tariff hikes themselves as well as the surrounding policy uncertainties. Further, if such measures were to be introduced on the US side – even if only partly – counteracting retaliation measures on the part of the countries affected are likely; this would increase the risks of trade and currency wars globally, which in turn are likely to affect global growth negatively.

Finally, a last question relates to the probability of such protectionist rules being really implemented after January 2017. As a matter of fact, Donald Trump and his team have already started to play down fears of a US trade war against China 1). This is supported by the fact that parts of the Republicans party are supportive of free trade. However, a much harder stance on selected trade issues and for selected products and with respect to anti-dumping measures (such as on steel) is certainly to be expected. Also, more generally, it can be assumed that international economic relations in the near future will be characterised by a more protectionist stance.

Vasily Astrov on Russia and CIS

I view the possible impact of Donald Trump’s victory in the US presidential elections on Russia and the CIS region with cautious optimism.

During the election campaign, there was much talk in the Democratic camp about the alleged links between Mr Trump and the Russian leadership, although it is difficult to verify whether those links really exist. It is true that at some stage there was an exchange of mutual compliments between Mr Trump and President Putin, and that the coverage of the US elections in Russian state media oriented towards an audience abroad was relatively more favourable towards Mr Trump. However, the latter probably had more to do with Russia’s aversion towards Hillary Clinton – whose election campaign relied on the demonisation of Russia and President Putin as one of its cornerstones – rather than the person of Mr Trump per se.

Still, in my view, US-Russia relations under President Trump will at least not deteriorate further, and may even improve – albeit starting from a very low basis. The latter is far from certain, but the chances are certainly higher than they would have been under Ms Clinton. The United States will probably not impose additional sanctions on Russia and may even lift some of the present sanctions, e.g. if a deal on Crimea (recognising the latter as part of Russia) is reached. In return, Russia could e.g. commit not to make further inroads into Ukraine or possibly harden its stance on Iran as a concession to the US. In Syria, President Trump will probably be more ‘hawkish’ on ISIS than the outgoing Obama administration – and will likely enjoy Russia’s support on this. Any improvement in US-Russia relations would certainly have positive repercussions also on Russia’s relations with the EU, which will be less pressured by the US in dealing with its eastern neighbour and will generally have more room to manoeuvre.

One important factor which could play a role in such developments will be the likely US drive towards more isolationism under President Trump. The United States will be less eager to spread ‘democracy’ and ‘US values’ around the world than has been the case so far, it will be more pragmatic and more focused on domestic problems. For the post-Soviet region, the relative withdrawal of the US would not necessarily be a disadvantage, given that the Unites States’ recent involvement e.g. in Ukraine (but also in the Middle East, for that matter) has proved ultimately destabilising. The pro-western and nationalist forces which came to power in Kyiv in the wake of the Maidan revolution – and especially the anti-constitutional way in which this happened – triggered a similarly strong reaction in the eastern parts of the country, leading to its de facto break-up. Post-Soviet countries like Ukraine and neighbouring Moldova (where the internal divide runs similarly deep) are ‘sandwiched’ between Russia and the EU not only in geographic, but – more importantly – also in economic and cultural terms. Therefore, stable and more cooperative Russia-EU relations (which in turn strongly depend on Russia-US relations) are crucial for those countries’ internal stability – and indeed territorial integrity.

In practical terms, the victory of Mr Trump is not good news for Ukrainian President Poroshenko: less US support – financial and otherwise (including military) – to Ukraine will push him more towards the political centre or may potentially open the door to a change of power in the country. Although it remains to be seen which political forces might succeed President Poroshenko (a third ‘Maidan’ organised by nationalistic groupings certainly cannot be ruled out), there is a chance that more ‘centrist’ forces may come to power in Ukraine, which would pursue a more balanced foreign policy and attempt to reconcile the country’s deep internal divisions – akin to policies pursued in the past by former presidents Kuchma and Yanukovych (but which would hopefully be less corrupt). Such a scenario would prevent a further disintegration of the country – even if parts of Donbass (let alone Crimea) may not be realistically returned to Ukraine anymore.

Mahdi Ghodsi on Iran

The prospects for US international relations under President Trump are as unclear as those for his other policies. Although he was calling the Iran deal a disaster during his campaigns, he did not present any plan for future interactions with Iran and left it ambiguously open. So it seemed to be yet another of his populist statements to challenge the Democratic Party in which Hillary Clinton played a major role as its earlier Secretary of State, though not as its negotiator with Iran. It was John Kerry in Obama's administration who was the only one to engage in public negotiations with Iran since the Islamic Revolution in 1979. In fact, Obama's intensified sanctions against Iran may be considered as one of the key factors that finally induced Iran to enter into negotiations.

A few days prior to the US elections, Ayatollah Ali Khamenei, the Supreme Leader of Iran, hailed Mr. Trump's speeches for clarifying the truth behind discrimination, inequalities, racism, and poverty in the US society which Americans were facing in their daily lives. Besides, hardliners and their media in Iran interpreted Mr. Trump's views as the true face of the United States and its constitution. These events occurred much more recently than Mr Trump’s announcement to ‘rip up’ the atomic deal after being elected. While that statement had prompted the Supreme Leader of Iran to threaten to burn the deal in retaliation, his recent speech showed he could be more in favour of Trump over Clinton. This might be interpreted as a welcoming signal to the presidency of Mr Trump by the Iranian leader.

After Trump had been elected, the Iranian president reiterated that Iran's policies towards the United States had not changed with the election results. Iran’s foreign minister, Javad Zarif, asked the US president-elect to remain committed to the signed atomic deal. These statements assert that the nuclear deal, signed by four other permanent United Nations Security Council members plus Germany and by Iran, could not be easily withdrawn or renegotiated. More precisely, as long as Iran does not violate its commitments, it will be difficult for a single counterpart member to withdraw from the agreement. However, even after the deal and under the Obama administration, some other barriers remained, such as the ban on banking transactions with Iran in US dollars. The new US president may potentially impose other restrictions for any alleged reason, such as human rights violations in Iran. In other words, atomic issues are unlikely to trigger any new sanctions, while other allegations could be made by the new US government against Iran.

Another important aspect affecting the relations between the US president-elect and Iran is associated with a third party, namely Russia. President Putin had been a key international figure signalling his supports for Mr Trump during the presidential campaign. It is thus important to take account of the recent collaboration of Iran with Russia in the Middle East conflicts, in addition to other previous ties between Moscow and Tehran such as nuclear cooperation and air defence systems. Therefore, a scenario in which the US turns against Iran will only take place if Mr Putin betrays his shadow ally in the Middle East. Such a betrayal, which in fact has already occurred several times, might be potentially possible again while bargaining for other conflict territories.

An important conclusion can be derived from the fact that the Islamic Republic of Iran has been an independent player in the region for almost four decades. Despite its isolation from the West, it is proud to be one of the most stable and secure countries in the region. However, western sanctions damaged its economy, as did the mismanagement of President Ahmadinejad's government. Iran has recently shown that it is preparing itself to play a more important role in international relations. Gaining higher trust in the European Union and negotiating with the US government for the first time are good examples. It is conceivable that such relationships continue under President Trump, given that Republican presidents in the US usually maintained better relations with the Islamic Republic than the Democrats.

Vladimir Gligorov: The Times They Are a-Changin’ (Bob Dylan)2)

Three important facts or observations and one slightly theoretical assumption help to comprehend the results of the US elections and to forecast future policies.

First, Hillary Clinton won the popular vote, but lost the Electoral College. This suggests that there is significant gerrymandering in the way the Electoral College is elected. Clinton’s elector, according to still preliminary results, was about one-fourth more expensive in votes than Donald Trump’s. Put differently, the weight of Trump’s voter was that much higher than that of Clinton’s.

Second, the long-term strategy of the Republican Party has been to roll back the welfare state (the legacy of reforms undertaken by Roosevelt and Johnson), but not to challenge desegregation, and to accept, and sometimes push for, almost all advances towards equal rights (women’s right to have an abortion, to decide on their body and health, is the main exception to the latter).

Third, the damage attributed to globalisation pales in comparison to the costs of the financial crisis, especially when it comes to loss of jobs. Jobs losses due to NAFTA are minimal, if there is even a loss at all. China’s entry into the WTO led to the loss of between 1% and 2% of the US labour force (this is gross rather than net).3) The negative labour market effects of the 2008 financial crisis have been much larger and more recent too.

Theoretically, populism tends to be explained on the assumption that the median voter does not change (though the ideological or political space may become more polarised), but for different strategic reasons (reputation, commitment, truthfulness), the decisive voter ends up being either to the left (mostly) or to the right (rarer in recent literature) of the median one. 4) This is theoretically inadequate. Normally, there is a rearrangement of the ideological and the political spaces and the old median voter is pushed to one or the other side (e.g. the median voter by income is pushed aside by the median voter by ethnicity). In other words, either the right tail moves to the left, or vice versa, thus putting together a new majority.

This theoretical assumption explains the votes cast in the US election, though that would not have been enough without the gerrymandering because Clinton still won the plurality of the votes (and indeed the majority when third party votes and abstentions are accounted for). So, this is a populist movement that has yet to succeed, which is why policies that will be implemented are so important. This shift was made possible by the Republican Party dropping its commitment to equal rights for the first time. Even though the Republican Party’s support in the South has been dependent on the unpopularity of the Democratic Party since Johnson’s reforms, until now the party has never voiced open support for one or the other type of inequality by race, gender, religion, or style of life.

That is what Trump changed. He reached for the votes of the white majority, in particular in the states where they felt threatened or left behind. His slogan, Make America Great Again, was understood in the counterrevolutionary sense of the white majority taking their country back. In addition, that is congruent with the other part of the Republican agenda; to roll back the welfare state. Therefore, voters chose welfare reform and equal rights reversal.

In the past, because scaling back social welfare was unpopular, the Republican strategy was to ‘starve the beast’. This means to reduce federal taxes on the better off, and to increase spending on defence, with the rising deficit financed by cuts in spending on social welfare and federal government programmes. That essentially means further privatisation of health care, social security and welfare transfers, and cuts in educational, scientific, and environmental programmes. Mr Trump is highly likely to add increased spending on infrastructure to this list, which should for one pay for itself but, if that fails, for another require further spending cuts. And given what the Federal government spends money on, that means social security, broadly conceived.

The other part of the traditional Republican agenda is support for owners of capital, i.e. entrepreneurs, through tax cuts, subsidies, and deregulation of the financial sector. When it comes to the latter, anti-trade rhetoric has proved useful. On the one hand, blaming foreigners helps to indict the Establishment for cosmopolitanism and corrupt disregard of national interests. On the other, it weakens the resistance to deregulation of domestic industries and of the financial industry in particular. It unites the interests of the capitalists and the workers into national interests contrasted with foreign interests – which is the characteristic of right populism.

Of the measures announced by Trump, tax cuts, changes to the Dodd-Frank Act (financial regulation), and at least partial repeal and replacement of the Patient Protection and Affordable Care Act (’Obamacare’) should be expected relatively soon. This expectation seems to be what is supporting the positive reaction to Trump’s election in the financial markets.

What will come for trade policy is hard to tell. NAFTA could certainly be renegotiated on the threat that the US is willing to pull out unilaterally. But even if that happens, trade would still be regulated by the WTO. The US can of course withdraw from the WTO too, but it is unlikely that such a far-reaching decision would be taken quickly. Barring that, the US could attempt to influence e.g. the exchange rate policy of China or taxation and labour market regulation in Mexico, but it is hard to see how it could succeed with a stick alone, so some carrots will be needed too. With current rhetoric, it is not easy to see which those would be.5)

Assuming increased public spending e.g. on infrastructure with lower taxation, increased fiscal deficits and rising public debt are likely. If, as in the past, it proves hard to cut spending on the social security system, inflation may rise, the economy being quite close to full employment, with the Federal Reserve increasing interest rates to counteract that development. That will lead to a far-reaching policy dilemma. Congressional Republicans prefer rule-based monetary policy, which would support monetary tightening in order to slow down inflation with the implication that the real value of public debt will be preserved. The Trump government, however, might prefer financial repression, i.e. erosion of public debt through inflation (Trump has even suggested an outright default on public debt, the part that is foreign owned mostly). In addition, higher inflation without monetary tightening should prevent the dollar from appreciating. The Fed, however, will certainly see its mandate in terms of fighting inflation, even though it has resisted Congress’ calls to adopt a strict Taylor rule. The implication of all of that may be that cutting spending on social security and other federal government programmes is the only way to pay for tax cuts and increased infrastructure spending, which is what the Congressional Republicans want to do anyway.

That, however, has to survive the challenge of the mid-term elections. In two years, the House of Representatives and one third of the Senate will be re-elected. By then, social benefits are likely to have decreased, while the promised macro and trade policy benefits will have not had time to kick in. Therefore the liberal majority, the majority that voted for Clinton, may reassert itself. Then things will change.

Finally, though the pre-election pro-Trump propaganda painted a different picture, Obama is leaving behind a relatively positive foreign policy state of affairs, at least for the US. The anti-ISIS strategy seems to be working, with costs for the US contained, while the war in Syria is probably going to be prolonged as in Afghanistan, with no breakthrough for any of the sides involved. Trump would like to repeal the deal with Iran, but this is a multilateral agreement and there do not seem to be takers for this proposal among the other signatory parties (which would be needed to go back to the regime of sanctions once the US withdraws from the deal). Finally, terrorist threats will remain, even though they seem to be declining, but these developments will not be influenced all that much by walls or ethnic profiling. Eventual new terrorist strikes may speed up already existing plans for mass deportations, bans on Muslims, and erosion of civil liberties. Those may otherwise face resistance in the Congress. Also, relying on strong men in charge of unstable countries in the Middle East and elsewhere is mostly counterproductive, at least if history is to go by, though this is what Trump seems to be betting on.

Conspicuously, the relationship with the EU has not featured all that much or not at all so far on Mr Trump’s agenda. The EU is a strong partner in trade, and not much can be done to change the world trade regime, in order to make it more protectionist, without the consent of the EU. Indeed, TTIP is going to be scrapped, as will TPP as things stand now, but that will not make a dent in the current level of globalisation of trade. Trump will also find that lower trade in goods also means less exports of US financial services, and that may not be in the interest of the financial industry he intends to boost by deregulation. The EU is not a geopolitical player, but it is an important geo-economic one, and while emerging illiberal democracies within the EU are thrilled with Trump’s nationalism and authoritarianism, most of those are strongly supportive of at least the single EU market and of EU trade power in global negotiations. In fact, the UK may be caught between a rock and a hard place because it may very well have less of an influence both in the USA and in the EU after Brexit.

Of course, if the EU disintegrates, things will certainly change. And Trump has expressed support for such a development arguing, at times, that the EU was set up only to harm American interests through increased competitiveness. On top of that, the threat to withdraw US support for NATO, even though unlikely to be followed through, is in part designed to nudge the EU to be more cooperative with the new protectionist and nationalist America. Trump’s negotiating tactic is to threaten to walk away on the assumption that the costs of the threat going through are higher to the other side and will thus lead to further concessions. It is not clear that the assumption applies to this case if the EU does not disintegrate and the US’s costs prove to be actually higher.

In conclusion, a traditional Republican programme of tax cuts and deregulation is likely to be enacted fairly quickly, increased spending on infrastructure will take some time to materialise, though there is bipartisan support for that, while the change in trade policy has yet to be designed, and so will not be implemented for some time. The Supreme Court will be expected to reverse some of the pro-equal rights laws and sentences, but whether it will indeed do so depends very much on how successful the overall policy shake-up proves to be. Similarly, a new foreign policy set-up with Russia on power-sharing in Europe and the Middle East and with China in trade may prove more difficult and costly than initially forecasted. Similarly, mass deportations of immigrants and the policy of pushing Mexico around may not bring the expected benefits. And then if mid-term elections deliver at least the Senate to the liberal majority, things will change again. 4)

 

 

Footnotes

1) See ‘Trump team plays down fears of US trade war with China’, The Financial Times, 14 November 2016.

2) Thanks to Richard Grieveson and Mario Holzner (wiiw).

3) D.H. Autor, D. Dorn and G.H. Hanson (2016), ‘The China Shock: Learning from Labour Adjustment to Large Changes in Trade’, NBER Working Paper 21906.

4) A classic study of left populism in Latin America is R. Dornbusch and S. Edwards (1989), ‘Macroeconomic Populism in Latin America’, NBER Working Paper 2986. They make the argument, prevalent in literature on populism, that it hurts its own supporters. A recent study that explains support for the left of median voter programme as a reputational device is by D. Acemoglu, G. Egorov and K. Sonin (2013), ‘A Political Theory of Populism’, The Quarterly Journal of Economics, Vol. 128, pp. 771-805. The latest entry revisiting the argument by Dornbusch and Edwards is A. Dovis, M. Golosov and A. Shourideh (2016), ‘Political Economy of Sovereign Debt: A Theory of Cycles of Populism and Austerity’, NBER Working Paper 21948.

5) It is with these policies that Dornbusch’s argument that macro-populism is self-defeating is usually invoked. Basically, it is hard to bias the relative prices in one’s favour with macro policies.


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