Economists brace for trade wars, upheaval under Trump presidency

Australian Financial Review Nov 9 2016 6:32 PM

Jacob Greber

A Trump presidency – whether it delivers his economic plan or not – could open the door to the greatest upheaval in global economic policymaking in decades.

From the potential return of direct executive interference in the way monetary policy is run in the world's largest economy and Reagan-era "supply side economics on steroids" to big budget deficits and trade wars with China, the changes could be tumultuous.

As financial markets struggle to digest the cost of a Trump victory, many economists believe it will mark a fundamental turning point in the way the global economy is run.

"This turns everything upside down," said Australian National University economist and former Reserve Bank of Australia board member Warwick McKibbin.

"The main thing is trade – it really matters what he does about the trade agreements, the security arrangements in Asia and what he does about the Paris [climate change] negotiations.

"And the final thing is his tax cuts and how he will pay for those. That's going to really cause problems for the debt market."

Stephen Anthony, chief economist at Industry Super Australia, says a Trump victory may trigger a "decisive break with essentially 12 years of moving sideways".

Reaganomics on steroids

Given Mr Trump's economic plan involves easier fiscal policy and tighter monetary policy, Mr Anthony believes short-term interest rates are likely to be higher, partly because of a surge in US government debt to fund his administration's planned corporate tax cuts.

"This is Reaganomics on steroids. This is a victory for supply-side economics," Mr Anthony said. "For the long-term global asset markets, that probably means the 200-year peak in asset prices, equities, real estate and bonds will come to an end."

Independent economist Saul Eslake says the greatest danger would be a Trump-appointed treasury secretary charged with fighting China over currency manipulation.

"It means there is a very real risk of a trade war between the world's two biggest economies, and there are never winners from a trade war, as anyone with a sense of history ought to know," Mr Eslake said.

"Trade wars can also become wars of a more worrying kind. Arguably it was a trade embargo that helped push Japan into the Axis camp in the 1930s, when they were on our side in the First World War."

Andrew Charlton, an economist and director of strategy advisory AlphaBeta, says the result adds to a wave of election outcomes – from the UK Brexit vote to Australia's huge Senate crossbench outcome – that reinforce a sense that globalisation has failed.

"People are saying, 'Look, if what they're offering sounds crazy, at least it sounds better than what we have now, which we know doesn't work.' "

The former adviser to Labor prime minister Kevin Rudd said the US result would have a massive impact on the way the right and left set economic policy.

"On these results the Democrats are, in economic terms, an unrecognisable party from their history. They are a coalition of cosmopolitan elites and minorities, and the traditional base of working class, lower-income Americans has deserted them en masse."

Dr Charlton believes this means left-leaning parties will need to renovate their entire policy platforms.

"I think the whole focus for economic policy will shift from economic growth driven by globalisation and open markets to a focus on distributed income growth," he said.

For Mr Trump, that means imposing punitive tariffs against countries the US is running trade deficits against, as well as punishing companies that shift jobs offshore.

"Just saying economic growth driven by globalisation, and then it all trickles down, isn't cutting it any more," Dr Charlton said.

Federal reserve under fire

Mr Eslake, a former Bank of America chief economist, frets that one of the biggest risks is what it means for the US Federal Reserve, which Mr Trump has attacked for pushing interest rates too low.

"Trump threatens to undermine confidence in the custodian in the world's principle reserve currency by his gratuitous and highly personal attacks on [Fed chairman Janet] Yellen, and his explicit support for the audit-of-the-Fed movement, which hitherto was confined to some of the loopier reaches of the Congress.

"And he doesn't mean making sure their accounting statements are correct. He means political interference in the setting of monetary policy.

"Yellen's term doesn't expire until 2018, but she may feel she can't serve under a president that attacked her in that way, and there are two vacancies on the Washington Fed board.

"So president Trump will have capacity to substantially reshape the Fed in ways that are it's hard to imagine likely to increase the credibility of the Fed."