China Research

Donald Trump’s victory in the American presidential election gives a number of reasons for second thoughts. One should deal with the consequences for emerging markets. 

Worsening trade and interest rate conditions

President-elect Donald Trump is not really a skilled economist. He does not care about economic basics – or he simply does not understand elementary economic principles. This is bad news for many emerging countries.

First, Trump is a dedicated supporter of protectionism; despite the fact that science stands completely united with the conclusion that protectionism can do a lot of harm (also to emerging economies). This would certainly be true if Trump introduced tariffs on all countries with 10-20 per cent which he had announced in the presidential campaign (against China even more). This would have a negative effect on exports from individual (emerging) countries to the U.S. – but also on total world trade (which already has been growing more slowly in the past few years).

Second, Trump wants to cut taxes or maintain already previously lowered taxes which probably raises government debt and at some point also U.S. interest rates (which many emerging countries’ foreign borrowing is linked to).

Third, high U.S. rates may also – at least for some time – strengthen the U.S.dollar. This would also do harm to emerging-market borrowers in USD. 

Fourth, another plan by Trump – i.e. to cut independence of the  Federal Reserve (Fed) – may in the worst case lead to higher inflation and interest rates as well.

Fifth, after some time, Trump’s “America-first-policy” may develop into an own goal because of finally growth-impeding consequences at home (mainly via higher interest rates).

Sixth, weakened world trade and global growth as the result of more protectionism may at some point also lead to shrinking demand for commodities (often the main revenue source for emerging countries) – particularly if mainly China with its enormous imports of commodities will be hit by higher tariffs all over the globe (as intended).

Anyway: Decisive will be how president Trump will act – not what he has been saying so far.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University