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November 14, 2016

The economic fallout


November 14, 2016

The world is still trying to catch its breath since hearing the news that Donald Trump managed to snatch the most powerful seat from a relatively popular Hillary Clinton. The news of Trump’s victory reminded me of comedian George Carlin’s famous quip of not underestimating the power of stupid people in large groups.

There is genuine fear in the global economic community, reflected in an open letter issued by a large number of Nobel Prize winning economists, who warned against consequences of Trump’s victory. And as news of Trump’s victory poured in, stock markets around the world took a tumble, again reflecting the fear gripping the whole globe. 

Start with Trump’s infatuation with turning trade in the US’ favour, and putting exporters to the US at a disadvantage. In expressing his desire to turn trade to the US’ favour, Trump simply repeated what all leaders express for their countries. But it’s the vitriol and methodology that do not augur well.

There is global consensus amongst the economic community about the benefits of relatively unhindered trade (aka free trade), but Trump’s plan speak of unravelling and undermining that consensus. Sure, not everybody is a winner in trade, and some jobs in some sectors would be lost. But there is enough evidence to suggest that the gains have historically been higher than the losses.

Yet, when Trump talks about job losses in the US, the blame squarely falls upon trade, especially with China. His plans include imposing hefty duties upon imports from other countries so that American jobs are saved. This was one of his rallying cries during the election campaign. Moreover, his polemics against immigrants (especially those from Mexico) also has the ‘saving American jobs’ card as a component.

That he managed to convince American voters of this line of thought does not necessarily conform to reality. Research indicates that a major portion of job losses is explained by the prevalent economic conditions, where a depressed demand in the economy works as a barrier for firms willing to hire. Second, labour-saving technologies are on the rise, which means that the same job may not need the same number of employees anymore. So to say that all job losses in the US are due to negative trade balances is far from the truth.

Moreover, Trump’s histrionics over imposing hefty duties conveniently ignore the likely consequence of tit-for-tat reaction. If the US can impose hefty duties, so can the other countries. This kind of behaviour could multiply easily. We would do well to remember that just before the First World War, protectionism had reached its zenith and the free flow of goods had been replace by hefty trade duties.

The reputation of the US as the safe haven for bond investment could be affected too, at least in the short run. The bonds issued by the American treasury are considered the safest in the world, a reputation that owes a lot to the fact that the US has never defaulted on its debt.

If Trump’s election rhetoric morphs into reality, then the risk associated with investing in American bonds may rise too, this in turn would lead to rise in the rates offered on the bonds. Put another way, in the case of increase in uncertainty, the American government may find it difficult to raise debt at such low levels as the investors (like China and Japan) may shy away from lending to the US.

Countries like Pakistan can now expect less favours from the US administration (if they already haven’t). The free flow of dollars to Pakistan, which were instrumental in powering the ‘high growth’ eras of military men, has all but come to an end. Similarly, expect less in terms of opening the American market for Pakistani goods. For Pakistani policymakers, this may sound like a death knell. But I say that let’s take this opportunity to stop begging for favours once and for all, and do something on our own.

Countries like China whose exports to US are substantial may also confront a reality where exports to the world’s largest economy may not be that easy now. A vary and nervous Europe is also likely to face a hawkish policy setup in US whose main thrust would be to dissuade any such trade deal where there is a potential for even a slight loss for the American people.

This would compel Europe, China and others to look towards other destinations from where economic benefits can be gained. One such bargain was struck recently between Canada and the EU in the form of a trade deal. China is already doing that in the form of extending its ‘one belt, one road’ policy, a mammoth project of linking Asia and Europe with China at its heart (the CPEC is a part of that project). In essence, countries and regions too reliant on the US and its consumers would likely want to diversify their sources more now that Trump will be at the helm.

Coming to the US, his plans for tax breaks are reminiscent of George W Bush’s infamous tax cuts, which ended up benefitting the wealthy by a large margin. Those who have studied his proposed plan have little doubt that if implemented, it will end up benefitting the rich again. And this does not surprise many since Trump is not known for sitting in the company of common folks, but rather in high places with high-valued people.

Then there is the threat of other measures like repealing Obamacare and stopping migrants from coming to the US. Obamacare provided health coverage to millions who had previously remained uninsured. Its repeal would again leave them without any insurance. Regarding his plans to discourage immigrants, the think tank American Action Forum calculated that this policy, if implemented, would cost the GDP a hefty $1.6 trillion besides creating a labour shortage of 11 million workers.

In conclusion, Trump’s ascent has given rise to economic uncertainty within the US and outside of it. Of course, what he said might turn out to be just election rhetoric and President Trump may turn out to be different. After all, all the forecasts predicted a win for Hillary Clinton but it didn’t happen. We all wait with our fingers crossed as to what the most powerful man on earth has in store for the others.


The writer is a freelance contributor.

Email: [email protected]

Twitter: @ShahidMohmand79

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