On the heels of the US presidential election, the “Trump reflation trade” buoyed equity markets as investors focused on the potentially growth-enhancing aspects of the president’s agenda, particularly infrastructure investments, tax reform and regulatory rollbacks.
A general consensus emerged that these business-friendly reforms would spur economic growth and, ultimately, “good” inflation. Now that Trump has assumed office, focus has begun to shift to parts of his agenda that could prove to be growth depleting, accompanied by “bad” inflation.
In the early days of his administration, President Trump’s attention has been focused squarely on international trade and immigration, which has created concern among investors that aggressive revisions to existing trade and immigration policy could make the United States a less inviting place for both labor and capital.
Additionally, there are general concerns that whatever fiscal policy emerges from the new administration will take longer to unfold and be smaller than the markets have priced in to date.
Trump has been quick to sign a flurry of executive orders, withdrawing from the Trans-Pacific Partnership, advancing his plans for a wall on the US-Mexico border and implementing a number of immigration restrictions.
Talk of import tariffs, aimed at some of the America’s largest trading partners, has also taken center stage.
These policies have the potential to hamper US economic growth. Given the declining growth rate and aging US labor pool, cutting off the flow of immigrants could lead to a drop in both economic potential and dynamism.
Immigrants coming to the United States tend to be young, and the vast majority of them flow directly into the work force.
For example, Hispanics, who make up the majority of migrants, are both younger than the US median and participate in the labor force at a higher rate, according to the Pew Research Center.
Recent studies examining developed world labor markets suggest that as work forces age, they become less productive, vibrant and entrepreneurial.
Additionally, concern is growing that the H-1B visa program will be reformed, making it more difficult for US technology firms to recruit highly skilled workers from overseas.
Demographically, the US has until now fared better than most developed countries given previous immigration levels. But a significant shift in policy could eventually see the US economy slide back into the pack with the rapidly aging and sclerotic eurozone and Japan.
A realignment on trade policy could also negatively impact growth, both in the US and globally.
President Trump has threatened to impose a 20 percent tariff on imports from Mexico, ostensibly to fulfill his campaign pledge that Mexico will pay for a border wall.
Over the decades, the US Congress has ceded a great deal of power to the executive branch in the international trade arena, and thus Capitol Hill would not be a near-term impediment if the administration chooses this policy path.
Such a tariff could have severe effects on the Mexican economy and would likely negatively impact US multinationals with operations south of the Rio Grande.
Furthermore, Mexico is the third largest trading partner of the US, accounting for approximately 13 percent of trade. If US-imposed tariffs on Mexican imports lead to a significant deterioration in trade between the two countries, not only could hundreds of thousands of jobs — in both countries — be at risk, but the prices of many goods sold in the US would likely rise.
The Trump administration has also leveled charges of currency manipulation at China, Japan and Germany.
All have countered the allegations, with China having the strongest case, as it has spent nearly US$1 trillion over the last 18 months to support the yuan.
Meanwhile, Japan says that it’s acting within the G20 agreement to avoid competitive devaluation by conducting monetary policy for domestic purposes in order to stave off deflation, and German chancellor Merkel asserts that monetary policy is the purview of the ECB and Germany will not question its independence.
The new US administration’s rhetoric is only increasing the likelihood of beggar-thy-neighbor currency wars, or worse, an all-out trade war, with the US against the world.
Given the slow-growing, highly indebted state of the global economy, it’s not inconceivable that trade battles could tip the world back into recession, or perhaps worse.
Under such a scenario, risky assets would likely run into turbulence at a time when central banks have few weapons left in their arsenals.
Although it may be unfashionable to say so, it’s important to note that tariffs are not always associated with bad outcomes.
Indeed, for the first 150 years of its existence, the United States was actively protectionist, yet all the while advancing toward superpower status.
More recently, the Asian tigers have followed a similar path. However, with global tariff rates so very low, changing direction dramatically could prove tumultuous.
So, while taking steps toward a more level playing field in trade policy and reexamining the goals of immigration policy are not unreasonable aims, one hopes the new administration considers the potential adverse consequences of pushing too far too fast.
Moving precipitously on tariffs risks slowing, or even reversing, the persistent flow of labor and capital into the United States that has consistently made the US among the most vibrant and flexible economies in the developed world.
The views expressed in this are those of the author, and are subject to change at any time
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