A new American president, faltering hopes for the world

As the new president comes into power in the U.S., the rest of the world waits with bated breath for clarity of his policies. While campaign rhetoric is one thing, there is such a thing as the limitations of power. Yet, U.S. President Donald Trump has thus far been so different that one wonders whether the restraints of power will work. He has made clear they will not. The rest of the world still finds it hard to believe that the same America that elected former President Barack Obama has now elected Trump. A sign perhaps as Brexit was of the rise of inward -ooking populism and a backlash against globalization. For the developing countries of Asia and the Muslim world, what Trump has said of his intended policies has serious consequences. The pivot to Asia is gone, the Trans-Pacific Partnership Agreement (TPPA) will be a non-starter and the sabre rattling with China over trade could intensify. Most unusually for American presidents or presidential candidates, Trump has gone on record with overtly anti-Muslim rhetoric. It is difficult to see how the cozy relationship that some Muslim regimes had with the White House can continue. His seeming disdain for environmental issues and promise of increased support for domestic shale oil production is obviously not good news for the oil-dependent economies of the Muslim world.

More than his politics, it is the economic autarchy that Trump promises that will be worrying to developing countries. Economically, aside from limitations on exports to the U.S., he has promised substantive corporate tax cuts from 35 percent to 15 percent, to keep interest rates low, expand fiscal expenditure through private-public arrangements and require American firms to repatriate their profits and relocate their overseas production facilities back home. For an economy that has already been on a continuous sugar-rush of repressed interest rates and unprecedented monetary expansion, this adds more fuel. When executed, there is no doubt that there will be a positive impact on domestic growth, but whether it will get him the 25 million jobs he has promised to create is questionable. The policy premise of the Trump policy team appears not to be win-win but zero sum. For a nation that is the world's largest economy and one that many other countries look to for policy direction, this is an obvious realignment of long-standing policies.

Blaming the rest of world for ones woes is standard political gimmickry. If American firms have moved their production overseas, there are good economic reasons. If Californian farmers have to depend on cheap Mexican labor, there is also a good reason. Forcing American producers to do the opposite of what is economically rational cannot possibly lead to better long-term equilibrium. The big tax cuts and fiscal expansion will undoubtedly create multiplier effects to temporarily boost growth and employment, but whether these can lead to sustainable, long-term growth is questionable. Much like former Fed Chairman Alan Greenspan's interest rate cuts that provided several years of impressive growth but veered the economy onto the disastrous path of the sub-prime mortgage crisis, no tweaking of what is rational can lead to good long-term outcomes. There are several reasons why one has to be skeptical of the outcomes of Trump's policies. First, American firms will lose competiveness when forced to move production to higher cost locations back home. Second, U.S. labor, despite higher productivity, simply cannot match the low cost of labor in developing countries. Trump's policy team seems to think that limiting imports will address reduced competitiveness and falling margins. But a third problem is inevitable, which is that of rising inflation. The so called “China price" had put a lid on inflation globally and within the U.S. Furthermore, as is always the case with import restrictions, citizens lose out regarding quality of life. The fourth problem is obvious, as with fiscal deficits already in place, further expansion will balloon government borrowing. Debt in the world's largest debtor nation will only increase. It is worth noting that at no point has Trump talked of paring down debt with higher growth. A fifth problem is that with all these inconsistencies, autarchic policies will inevitably affect the supremacy of the dollar. Its position as a global currency grants the U.S. huge policy flexibilities, and it is this that will be at stake.

Unless policies are designed to clear existing inefficiencies and/or create new efficiencies, one cannot expect real long-term gains. History has shown us that populist policies have never led nations to greatness. Although everything that has not worked appears to have worked for him in the election, it is hard to imagine that his policies will bring any real or long-term, tangible benefits to the American people. The promised “good' may be illusory. It may yet again be a case of the road to hell being paved with good intentions.