Trump’s signal of protectionism raises risks of trade wars, retaliatory tariffs
NEW DELHI: Donald Trump took oath of office as the 45th President of United States of America, with a call to buy American and hire American, where analysts saw threats of trade wars, retaliatory tariffs, currency wars in the global economy.
In an inaugural address that smacked of an era of fierce protectionism for American jobs and trade, Trump vowed to put America first in everything he does, sending out a strong signal to the world. He promised to bring jobs back to the US, and “eradicate completely” Islamic terrorism.
Jittery global markets, including Indian market, could react negatively when trading resumes on Monday.
Most of the global markets closed the week in the red. The FTSE of Britain saw a 1.2 per cent cut, while Dow Jones slipped 1.1 per cent, Nikkei 0.8 per cent and the Sensex 0.7 per cent.
The new US administration said its trade strategy to protect American jobs would start with the withdrawal from the 12-nation Trans-Pacific Partnership (TPP) trade pact.
Soon after Trump’s inauguration, a White House statement said the United States would also “crack down on those nations that violate trade agreements and harm American workers in the process.”
“US President Trump’s assertion that ‘We will follow the two principles of Buy American & Hire American’ is an unambiguous signal of the start of a new era of fierce protectionism for American jobs and trade as well as isolationism,” Ajay Bodke, CEO & Chief Portfolio Manager – PMS, Prabhudas Lilladher, told ETMarkets.com.
“A Trumpian view that looks at global trade and commerce and geo-strategic alliances as a zero-sum game with losers and winners against a win-win for both trading partners and geo-strategic allies can only fuel trade wars and raise fears among allies dependent on America for security,” he said.
Before taking oath as US President, Trump had vowed to label China as a currency manipulator for purposes of a competitive trade advantage. He threatened to impose a tariff of up to 45 per cent on Chinese exports to the US, a move that may set off trade war.
If China devalues its currency further, it may lead to fierce currency war, which will be unsettling for global markets. A devaluation of the yuan would be accompanied by volatility in the rupee, pressure on experts as well as weakness in equity markets.
One of the main reasons that made China the global manufacturing hub was globalisation. Amid rising debt levels, the latest economic estimates do not show a bleak picture yet, but if manufacturers pull out of China, the GDP growth of 6.8 per cent recorded in the fourth quarter is likely to take a hit.
“Countries like India and China have been the biggest gainers of globalisation. The US has also gained enormously, but unfortunately, Trump does not see the gains. He only seems to think in terms of jobs that have been transported across to other countries,” said Mythili Bhusnurmath, Consulting Editor, ETNow.
The Trump era would also mean more rate hikes by the US Fed and a fall in corporate taxes in the US.
“If Trump stimulates the economy significantly, that will push interest rates and the dollar higher, which will create problems, worse if he implements protectionism,” Devan Kaloo, Head of EMs, Aberdeen AM, said in an interview with ETNow.
However, experts feel India stacks up quite well in that respect, and it is a safe haven within the emerging markets basket. But, it will still hurt sentiment of the investment community.
Bodke said trade wars, retaliatory tariffs and barriers to free movement of people and trade can cause turbulence in global markets.
He said the outsourcing industry and exporters to the US would need to be especially worried about this assertive call to protectionism.
US business accounts for 50-80 per cent of the total business of Indian IT companies. Minimum wage hike to $100,000 may translate into a 9-25 per cent cut in earnings per share (EPS) in FY18. However, the management commentaries for TCS as well as Infosys rebuffed those fears.