Trump’s Global Strength
Much effort has been expended to explain Donald Trump’s unexpected victory in the United States’ presidential election. But perhaps the simplest explanation is the most accurate: Trump’s opponents got played. From former Secretary of State Hillary Clinton, who was by virtually all accounts the favorite to win, to the Republicans who opposed his candidacy, people vastly underestimated the US president-elect. World powers, particularly in Asia, should not make the same mistake.
During the campaign, Trump knew exactly who Clinton was: smart and experienced, but lacking his cunning and showmanship. So he played the fool, campaigning in states that many claimed were a waste of time, while Clinton followed a data-driven strategy. Her approach won her over 2.7 million more votes than Trump. His approach won him the presidency.
Now preparing to take power, Trump is using many of the same tactics he used during the campaign, prioritizing rallies over press conferences, weighing in on the US comedy show “Saturday Night Live” instead of focusing on, say, the escalating crisis in Syria. Meanwhile, he is upending US diplomacy, perhaps most notably by taking calls from Philippine President Rodrigo Duterte and Taiwanese President Tsai Ing-wen. Rather than allowing Trump to shock the world yet again, we must learn to read him.
The bottom line for anyone dealing with Trump is that he is the ultimate Machiavellian prince, operating almost exclusively on ruthless self-interest. According to Machiavelli, “the first opinion which one forms of a prince, and of his understanding, is by observing the men he has around him.” So, to determine Trump’s plans, we should start with his appointments.
Among Trump’s picks for national security, defense, and foreign policy positions, a pattern quickly emerges: all are Middle East and Russia specialists. Trump, it seems, plans to reverse his predecessors’ approach of isolating Russia. Instead, he will use Russia to help him manage the Middle East.
For Trump, who is first and foremost a businessman, letting a competitor take care of his enemies appears good for the bottom line. (It also perfectly complements his declared intention to charge US allies for protection.) It helps that Trump seems to have some affinity for Russian President Vladimir Putin, whom most US intelligence services believe intervened in the election to help Trump.
But the reasons for – and implications of – Trump’s pivot toward Russia extend beyond the Middle East. Both the US and Russia benefit from higher oil prices, whereas countries like China and Japan suffer. Russia can also put geographic pressure on China – and, indeed, the rest of Asia. (Notice how quickly Japan is sidling up to China.) And, finally, Russia may be the force that finally spurs Europe to take more responsibility for its own defense.
Trump’s economic policies will also reverberate around the world, including in Asia. And, again, his cabinet appointments are revealing.
Trump has selected three former employees of Goldman Sachs – yes, the same Goldman Sachs that Trump railed against during the election campaign – to lead his economic team. His promise to “drain the swamp” of cronyism and corruption, was thus tactical, rather than genuine. It also indicates that deregulation, along with tax cuts, will be among the only campaign promises on which Trump will deliver. Policies aimed at constraining “too big to fail” banks – most notably, the 2010 Dodd-Frank financial reform legislation – are unlikely to survive a Trump presidency.
In fact, Trump and his team don’t see the problem with being too big to fail. On the contrary, they’re applying the same logic to the US budget. Recognizing that the world has no choice but to continue lending to the US, Trump is comfortable building up US deficits and debts, by simultaneously cutting taxes and spending on infrastructure.
Contrary to the claims of some doomsayers, Trump’s economic policies might actually work. With enough investment in infrastructure – and with the help of negative real interest rates – Trump may well manage to revive productivity and GDP growth enough to reduce America’s debt overhang in real terms. The key to success may well be controlling the appreciation of the US dollar, which has reached a 13-year high since the election.
A strong dollar is not good for Asia, either. When the dollar is weak, multinationals borrow in dollars to finance their business in emerging markets, which yield higher returns in local currency. The positive carry – higher returns in local currency and declining costs for US dollars – benefits everyone, especially the emerging markets, which gain from higher exports and growing capital inflows.
But when the dollar begins to strengthen, the cycle reverses. Both foreign-currency and credit spreads widen for emerging-market currencies, making trade expensive. (At least 40% of global physical trade is conducted in US dollars, which account for at least 60% of financial flows.)
Eventually, emerging markets may start investing in dollars, because the rate of appreciation is higher than the profit on trade, pushing up the dollar’s value still further. Rising geopolitical tensions reinforce the cycle, as the dollar represents stability, especially at a time when the US Federal Reserve is signaling faster normalization of interest rates.
As it stands, almost all Asian currencies, including the yen and the renminbi, are under downward pressure; indeed, both the Bank of Japan and the People’s Bank of China have taken steps to try to curb that depreciation, with little impact. And emerging economies more broadly are suffering from low commodity prices, which are being suppressed by reduced demand. The dollar’s continued climb will exacerbate these problems.
But, as Trump and his right-wing colleagues understand, when emerging markets get into trouble, only the Fed can provide the liquidity to ease the pressure. In other words, here, too, Trump is working from a position of strength. The rest of us need to avoid underestimating him – or we will all risk becoming collateral damage.
Andrew Sheng, distinguished fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance, is a former chairman of the Hong Kong Securities and Futures Commission, and is currently an adjunct professor at Tsinghua University in Beijing.
Xiao Geng, president of the Hong Kong Institution for International Finance, is a professor at the University of Hong Kong.
Copyright Project Syndicate
20 Dec 2016