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Economic Affairs

Trump's tough talk on trade and what it spells for Singapore

This port city stands to lose in trade and investments but may gain if the US banking sector recovers

Asian markets have declined by 3.6 per cent since Nov 8, when the United States Republican candidate Donald Trump won the election. The Singapore market recovered yesterday and is marginally higher than after the election result was out. The Singdollar has also shed some 1.5 per cent but is slightly off its 11-month low.

After the Nov 4, 2008, election, the Singapore market rose before falling back.

What's driving their reaction? Markets are skittish largely due to uncertainty over the policies that the incoming Trump administration will introduce. However, it is early days and some are optimistic that the realities of day-to-day government will mean that too-extreme policies will not be introduced.

TRADE AND INVESTMENTS

The prospect of the Trans-Pacific Partnership (TPP) making it into law has dimmed considerably since Mr Trump's victory. US President Barack Obama's administration announced late last week that it had suspended its efforts to win congressional approval for the Asian free-trade deal before Mr Trump, the President-elect, is sworn in on Jan 20 next year.


ST ILLUSTRATION: MANNY FRANCISCO

Now, even though the Lower House of Japan's Parliament has passed the trade deal, the TPP's prospects look bleak.

On Monday, Prime Minister Lee Hsien Loong said on the sidelines of his first Leaders' Retreat with Indonesian President Joko Widodo that "we feel disappointed that the TPP looks very unlikely, or will not be passed, or ratified now before Jan 21".

Asia-Pacific Economic Cooperation leaders will discuss the 12-nation trade deal on the sidelines of their upcoming summit in Peru later this week.

Observers like Deutsche Bank chief economist for Asia Taimur Baig are not optimistic. "Any move," he says, "that contributes to adding friction to global trade leaves small, open economies like Singapore worse off. Having invested heavily in TPP, Singapore and other signatories to the trade liberalisation initiative will be disappointed by its unravelling."

But even as the added benefits of the TPP are unlikely to materialise any time soon, there is also the potential body blow of tougher trade restrictions if Mr Trump follows through on his comments, such as renegotiating the North American Free Trade Agreement or if the US slaps higher tariffs on goods from China.

Deutsche's report last week make for sober reading. Singapore's exposure to the US, in terms of export earnings, if global production chains are included, is a substantial 14 per cent.

If there was a 30 per cent drop in export earnings from the US, for Singapore and Hong Kong, growth could be pared sharply, Deutsche predicts.

If Asian neighbours - the likes of Taiwan, Thailand, South Korea and Malaysia - are likewise affected and fall into lower growth or even contractionary territory, that would also have a knock-on effect on Singapore.

 

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As ratings agency Moody's puts it, "an increased aversion to free trade, particularly in Western democracies, may also undermine growth prospects".

Many businesses in the US and globally may delay their foreign investment plans until there is more clarity on US policy, added a report from Credit Suisse.

For Singapore, which regularly enjoys billions of dollars in foreign investments every year, this would be another blow. Already, this year's projected sum of $8-10 billion is lower than last year's $11.5 billion.

And China has responded, such as by making the yuan cheaper by fixing it at an eight-year low yesterday. Such moves could spark off a round of competitive devaluation that will benefit no one.

Not only will an anti-trade stance by the US generally be negative for Asia from the perspective of less growth and trade, the added uncertainty could affect stock markets as well, DBS suggests.

BRIGHT SPOTS?

Analysts have also focused on another plank of Mr Trump's campaign such as tax reform and a proposed substantial increase in infrastructure spending. The money could come from corporate tax reforms - say, if they manage, with lower taxes, to get US companies operating overseas to bring back their profits to help fund an infrastructure programme.

Tech giants such as Apple and Amazon are in the spotlight. Amazon could pay far more tax, while Apple, which has outsourced manufacturing operations to places outside the US, has been challenged by Mr Trump to bring them home to help create jobs.

The expectation that the US might go on an expansionary path has resulted in a stronger US dollar. With that, comes the expectations that the US Federal Reserve will hike rates come its December meeting.

That too does not spell good news for Asian markets and the economies.

While a weaker Singdollar may help exports, the flip side is that funds will flow out of the Singapore market - via the stock market, for example. For companies that have borrowed in US dollars, they will find that their debt burden has become more difficult to service, a factor that will exacerbate their problems in the current slowdown.

As Bank of Singapore's chief investment officer, Mr Johan Jooste, writes, a fiscal expansionary path - after having dealt with cheap money for so long - will mean policymakers will have to manage less predictable outcomes in the stock and bond markets.

Regardless of how hardline the new US President turns out to be in reality, the current result is more volatility in financial markets and sharp movements in exchange rates that make it more difficult to manage the economy.

US bank stocks are doing well on hopes of a lighter touch from the regulators. If banks end up not having to stump up so much capital, as required earlier , they would be less inclined to pull back from various markets. Also if rates rise, Singapore banks' margins will improve.

As the Chinese yuan weakens, it would not be improbable that Chinese investors would also look for ways to hedge the value of their assets and put it in property in Hong Kong and Singapore, for example. As the US dollar strengthens, it is equally possible that US investors may find Singapore assets cheap, and invest here.

ADAPTING TO CIRCUMSTANCES

The results of Brexit and the US elections show that many voters have had enough of what they see as the downside of globalisation - a widening wealth gap, poor wages and heightened job insecurity.

While Singapore has been forward-thinking in policy measures that take care of the less well-off, it is inevitable that around the world, there will be more pressure on government budgets, which will have to face the strains of an ageing population amid a low-growth global economy.

For Singapore, where a key plank of its economic strategy is going overseas, given its small domestic market, there are long-term implications if the US turns insular. The risk is that not only will there be less foreign investment here and transfer of intellectual capital, it will also be more difficult for Singapore to expand beyond its shores.

Still, the United Kingdom will also be searching for trade partners once it exits the European Union.

And yesterday, Japan's Prime Minister Shinzo Abe told lawmakers, "There's no doubt that there will be a pivot to the RCEP if the TPP doesn't go forward." He was referring to the 16-member Regional Comprehensive Economic Partnership.

Singapore may well have to learn how to do things differently and adapt to circumstances fast, working that much harder to forge a path forward.

A version of this article appeared in the print edition of The Straits Times on November 16, 2016, with the headline 'Trump's tough talk on trade and what it spells for Singapore'. Print Edition | Subscribe