How Donald Trump’s ‘America first’ policy could trigger an earthquake in the global economic order
David Brown says a new age of US unilateralism is putting world economic growth at risk, with the BRIC bloc particularly vulnerable
The adage says that when the US sneezes, the rest of the world catches a cold. It is also said when the US shines, the rest of the world basks in its glow. When the US does well, the global economy generally enjoys the balm of stronger growth and faster world trade flows.
Maybe things are changing and US munificence is just another victim of US President Donald Trump’s “America first” policies. Trump’s deepening trade war and currency spat with China is a portent that America wants it all. A tectonic shift is happening in the world order right now.
In the past, the US has traditionally fulfilled a vital role as a world leader, setting the standard for global recovery, policy harmonisation and fostering economic development. The New Deal during the 1930s Great Depression, the Marshall Plan for European reconstruction after the second world war and more recent US policy initiatives to spur recovery after the 2008 crash are huge milestones in America’s willingness to take centre-stage in securing a better future for the world.
But now, “America first” is defining a new yardstick for an inward-looking US. Trump wants faster US growth, more domestic jobs, less import-swamping from America’s trade rivals, lower interest rates, a weaker dollar, and a farewell to multilateralism unless it is on US terms. No matter that head-to-head diplomacy, political confrontation and the threat of a world trade war is tipping global stability over the edge.
A new age of US unilateralism has begun. World growth is suddenly at risk.
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Any rational leader wants the best for their nation, so Trump’s goal of “America first” is understandable but not so easy to achieve without upsetting the apple cart for the rest of the world. US economic expansions have always had their flaws, not least the risks to the US twin deficits. Pressing down hard on US monetary and fiscal accelerators usually end up in bigger budget deficits and a wider trade gap with the rest of the world – a cost for the US but a benefit for global growth.
Tax cuts and government spending rises coupled with low interest rates may be a recipe for faster US growth but the weak link is demand leakage abroad for goods and services which the US is unable to produce at competitive prices in the world market. Trump wants to change all that but it will not happen overnight. Trade sanctions, punitive tariffs and a weaker dollar may be Trump’s weapons of fear to protect US industry but are ultimately doomed to backfire.
If Trump turns the screws and China and Europe respond in kind, global growth will take a major hit as global economic confidence goes into knee-jerk reverse. Trump’s threat of imposing tariffs on all US$500 billion of goods imported by China into the US marks a dangerous escalation. It could have seismic effects on confidence just at the point when global recovery is wavering and in need of much more careful nurturing.
Since the start of the year, a marked shift in the pattern of business sentiment has been apparent, with Europe, Japan and the BRICS (Brazil, Russia, India and China) countries all losing out to stronger activity in North America, bolstered by Trump’s fiscal impetus and by the US Federal Reserve keeping interest rates at relatively low levels to keep growth supported.
By contrast, Brazil and Russia have dipped below their critical 50 boom-or-bust lines differentiating the point between expanding and contracting business levels. China is holding in above the pain threshold but with confidence levels looking less certain.
It is still early days and the outlook is deeply clouded. Thankfully, world financial markets are being propped up by more than adequate liquidity levels fed by the glut of global monetary super-stimulus in the last decade. Even so, market sentiment is still vulnerable and could add to the panic if confidence folds.
All BRIC economies are now under threat. For China’s planners, the downside risks are piling up. The real worry is the impact on economic growth expectations next year. This year’s 6.5 per cent growth target should come in OK, but what happens if exports slow dramatically and domestic demand suddenly cools?
Beijing could easily be heading into new territory with economic growth dropping sharply below 6 per cent next year. China is heading into a crisis.
David Brown is chief executive of New View Economics