The era of globalisation has survived several shocks, says the Financial Times. But “the rise of mercantilist populism in the form of Donald Trump may be its biggest challenge for decades”. The president-elect’s sabre-rattling during the campaign included talk of China artificially lowering the value of its currency, the yuan, to bolster its exports and growth at America’s expense. He intends to officially label the country a “currency manipulator”, which would trigger investigations that could recommend imposing tariffs: he has threatened taxes of up to 45% on Chinese imports.
“China is a currency manipulator, most certainly it is,” says Tim Worstall on Forbes.com. “It manipulates the yuan up, not down.” We know this because its foreign-exchange reserves are falling, which must mean it is selling foreign money to buy its own. The yuan is under downward pressure against the basket of currencies the authorities are measuring it against. That is due mainly to the gradual slowdown in growth and the high debt load, which implies that low interest rates will endure.
Until 2005, you could reasonably say that China manipulated its currency downwards, says the FT’s John Authers. Since then it has allowed it to appreciate steadily against the dollar. The recent dips against the greenback are a question of dollar strength, not yuan weakness. The question now, though, is whether subtleties like this will be drowned out in an increasingly acrimonious standoff between the two countries. Trump “will be a president with points to prove”, but the Chinese president, Xi Jinping, is one who “cannot afford to be seen on the back foot regarding his country’s most important external relationship”, as George Magnus points out in The Times. Chinese officials have already vowed to retaliate against any tariffs.
There may be little to stop Trump and his protectionist team: a US president has the power to tear up trade treaties and impose emergency tariffs. More generally, expecting Congress to temper the administration’s protectionist instincts “is a little like putting the toddlers in charge of the nursery”, according to the FT. Trump may only end up imposing tariffs of 15% rather than 45%, reckons Marianne Petsinger of the US and the Americas Programme at Chatham House. But that “would be enough to spark a trade spat”. As a result, China would be inclined to allow banks to keep lending, says Magnus, potentially causing a nastier downturn later as the credit bubble deflates.
The conflict could extend beyond the US and China: Trump has already threatened to restrict trade with Mexico and Japan. There could even be a 1930s-style trade slump with tit-for-tat protectionism creating a vicious cycle: that era shows how quickly globalisation can unravel. “The fact that politicians know something to be madness,” concludes The Economist, “does not stop them doing it.”
Just how stimulating will Trump be?
During the US presidential election campaign, Donald Trump “cast doubt” on US labour market statistics, claiming that they gave an overly positive picture of the economy, says Economist.com’s Free Exchange blog. “Next year he will probably champion them.” December’s employment data were released last Friday and showed that 2016 was the fifth successive year in which payrolls expanded by more than two million. Most significantly, the annual pace of wage growth reached a post-crisis high of 2.9% in December. This “may be close to the limit of what the economy can produce without sparking inflation”.
Enter Trump, who is determined to deliver a fiscal stimulus. This has yet to find its way through Congress, so the upswing in wage growth underscores the potential inflationary influence that a stimulus can have at this point in the business cycle, Deutsche Bank’s Alan Ruskin told the FT. The US central bank has pencilled in three interest-rate rises this year, but a stimulus on top of an economy running at full employment could well mean more monetary tightening, a headwind for equities.
Yet what kind of stimulus can we really expect? On the campaign trail, Trump heralded tax cuts, infrastructure spending and deregulation. But less than half of his plans are likely to come to fruition, according to Robert Salomon of New York University’s Stern School of Business – “and possibly less than 25%”. Some of his bellicose rhetoric on trade may remain just that, but at the same time he may not get nearly as much stimulus as he wants. Given that buoyant US markets appear to be counting on a hefty fillip, this won’t be good news for equities either.