Across cabinet tables, boardrooms and diplomatic missions this week, one topic of discussion has overshadowed all others. The sweeping victory of Donald Trump and the Republican Party in America’s elections will give huge powers to an impulsive president with unorthodox economic beliefs and a belligerent approach to negotiation. Bigwigs in government and business all over are scrambling to analyse the consequences—for America and for the rest of the world.
America, the world’s largest economy, issues the global reserve currency and hosts the planet’s biggest banks and firms. Its scale, depth and interwovenness with the global economy mean that even small policy changes at home can resonate far beyond its shores. Mr Trump has promised to overhaul the main pillars of the American economy, from trade and regulation to immigration. His policies stand to reshape the flow of goods, capital, and labour, which irrigate the world economy. This will create some winners and many losers all over the globe.
Start with the flow of goods. Mr Trump is deeply suspicious of trade. “The most beautiful word in the dictionary is tariff,” he told a business audience in October. He has advocated a universal protectionist wall, with tariffs of 10-20% on all imported goods, in addition to much higher tariffs aimed at an unfortunate few.
The proposals may not be implemented in full. “On day one, they’ll lay out something that will get everyone’s attention but won’t go straight for universal tariffs because that would lead to stockmarket destruction,” says Sarah Bianchi, a former deputy United States trade representative. Mr Trump may, in part, use tariff threats to extract concessions from friends and enemies alike. Still, implementing just a fraction of what he has proposed would make for America’s largest increase in tariffs since the 1930s.
Who might the administration choose to hit hardest? Mr Trump and his advisers are obsessed with bilateral balances. Any country that records a big trade surplus with America, they reckon, must be cheating Uncle Sam. The list of villains is long.
The president-elect has hinted he would slap a 60% tariff on all Chinese goods, five times the current average level. Analysts reckon China’s exports to America could more than halve as a result, knocking one percentage point off China’s GDP amid already tepid growth. The impact would be limited by the fact that Mr Trump’s original tariffs, kept by Joe Biden, have already caused China’s exports to America to dwindle.
Mr Trump has also threatened tariffs of 25% on most Mexican goods, with cars subject to much higher levies. That would badly hurt Mexico. The value of the country’s goods exports to America is equivalent to 27% of its GDP, compared with less than 3% for China. Mexico has fewer alternatives, too. More than four-fifths of its exports go to its northern neighbour.
The EU also has reasons to fret. The bloc runs a goods-trade surplus of around $200bn with America. Goldman Sachs, a bank, forecasts that new tariffs could shave 0.5% off Europe’s GDP, with Germany, the bloc’s biggest economy, taking the worst hit. Many other countries could find themselves in the firing line. Vietnam’s trade surplus with America hit $100bn last year. Those of Canada, India, Japan, South Korea, Switzerland, Taiwan and Thailand run into the tens of billions of dollars.
Should a tsunami of tariffs materialise, few countries would prosper. But some may gain relative advantages. Allies without glaring trade surpluses with America may be able to secure exemptions (such a deal is reportedly under consideration for Britain). Other countries may benefit by not being China. Some multinational firms will speed up relocation efforts.
Steve Madden, an American fashion firm, announced it would move its Chinese production sites elsewhere. Black & Decker, a toolmaker, has said it will do the same if Mr Trump goes ahead with his tariffs. Firms leaving China may be tempted to shift to Mexico and Southeast Asia—despite these countries being potential targets for higher levies.
The global reallocation of capital—the second big shift—is already in full swing, even though Mr Trump will not be inaugurated for another two months. Investors expect his proposed mix of tax cuts and deregulation to boost domestic corporate profits. The S&P 500, an index of large American firms, hit fresh records from 6-11 November—while stocks around the rest of the world dropped by around 2%.
“We are at an extraordinary confluence of strong American economic performance, weakness in the rest of the world and the likelihood of a set of policies that will further turbocharge the US and its financial markets,” says Eswar Prasad of Cornell University. “It is increasingly difficult for fund managers to make the case for diversification away from the US market.”
