The world must accept that Trump firmly believes it needs the US, more than the US needs it
If the rest of the world won’t dance to his tune, the new president is perfectly prepared to pull up the economic drawbridge
If Asia, and indeed the rest of the world, is to get to grips with US President Donald Trump’s apparent agenda on currencies, jobs and trade, then it is important not to think of him as a maverick but rather to recognise that Trump’s positions, at least on economic policy, fit into a historical narrative.
It would currently appear he believes that his nation can essentially be economically self-sufficient, that the rest of the world needs the United States more than America needs it, and that if the rest of the world won’t dance to his tune, then the US can pull up the economic drawbridge.
And while such a stance might be deeply unpalatable to liberal thinkers around the world who have championed free trade and globalisation, it is a position that will resonate with Trump’s electoral base and that borrows from policies adopted by previous US presidents going back almost a century.
Trump’s talk of an import tax which, while intended to stimulate US job creation would lead to US consumers paying higher prices – echoes of earlier measures, notably 1922’s Fordney-McGumber tariff and the 1930 Smoot-Hawley Tariff Act.
The latter legislation provoked retaliatory measures from the US’ trading partners and, contributed to the creation of the conditions in which the Great Depression of the 1930s unfolded.
While Trump’s pick for Commerce Secretary, Wilbur Ross, may have said on January 18 that Smoot-Hawley “didn’t work very well then and it’s very likely wouldn’t work now”, it’s notable that Republicans in the US House of Representatives are still working on proposals for a Border Adjustment Tax.
The 1930 act, signed into law by US President Herbert Hoover, brought in duties placed on over 20,000 imported goods. It’s political intent was to preserve American jobs, particularly in the agricultural sector, by discouraging foreign imports. Sound familiar?
Protectionist tariffs aside, intertwined with Trump’s desire to restore the US’ manufacturing base is his emphasis on the “weakness” of other countries’ currencies, his desire to unpick what he characterises as unfair trade agreements and his commitment to deregulation.
Trump’s loose fiscal policy and infrastructure investment plans should lend themselves to offsetting tighter monetary policy, but actual rate rises by the Federal Reserve will necessarily also be accompanied by an unwinding of the Fed’s previous quantitative easing programmes that have resulted in the US central bank’s balance sheet ballooning.
Hidden in the footnotes of a January 19 speech by Fed chief Janet Yellen was the pronouncement that downward pressure on long-term US interest rates, occasioned by the Fed’s holdings of Treasury securities and agency mortgage-backed paper, is easing and that “over the course of 2017, this easing could increase the yield on the 10-year Treasury note by about 15 basis points, all else being equal”.
“Such a change in longer-term yields would be similar to that which, on average, has historically accompanied two 25 basis point hikes in the federal funds rate,” the Yellen speech footnote added.
And that’s on top of actual rate hikes.
With that in mind, and given the nature of Trump’s spending plans, the US President’s attempts to roll back the 2010 Dodd-Frank Act, that raised capital requirements for banks, doesn’t seem idiosyncratic but rather a rational strategy to ensure a greater availability of banks’ lending capacity at a time when there might well be an increase in demand for borrowing.
As for currencies, the combination of policies that attract dollars into the US and tighter Fed monetary policy should naturally underpin the value of the greenback and that segues into Trump’s criticisms of other countries’ currencies already being too weak compared to the greenback and thus disadvantaging US manufacturers.
Given that previous bouts of quantitative easing by the Federal Reserve weighed heavily on the dollar, it might seem a bit rich of the Trump Administration, for example, to focus on Japanese monetary policies that have contributed to yen weakness, but this is politics.
And anyway, historically, US presidents, both Republican and Democrat, have had no qualms in either forcing the dollar down or talking it down if Washington felt that suited US interests.
Nixon’s 1971 decision to end the international convertibility of the dollar to gold precipitated a devaluation of the greenback.
Reagan’s administration orchestrated the multinational Plaza Accord in 1985 to drive the dollar weaker, while the Clinton Administration’s decision in Feb 1993, to begin publicly talking the US currency down versus the yen, caused Japan’s currency to soar.
Donald Trump may wish to appear a maverick but there is method in what is emerging from the White House. For countries on the receiving end of criticism from the Trump administration, forging a response will be easier if that is understood.