A financial crisis, rising dollar, multinational corporations returning to the United States - Singapore and the world better buckle up
According to Peter Navarro, author of Death By China (2011) and head of United States President Donald Trump's National Trade Council, America's sub-par gross domestic product growth of 1.6 per cent since 2001 (compared with 3.5 per cent growth from 1947 to 2000) meant the loss of two million jobs a year since then. In America, mainstream economists accept the sub-2 per cent growth rate as the new normal and 4.7 per cent unemployment rate as the new normal for full employment.
Mr Trump does not accept either and has announced his goal of 4 per cent growth and believes that the true unemployment rate is about 9.2 per cent. The resultant policy approach will be markedly different.
To achieve his goal, Mr Trump will deregulate business by eliminating 75 per cent of existing regulations. He will incentivise infrastructure spending of US$1 trillion (S$1.41 trillion), and cut and reform personal and corporate taxes. Mr Trump will not cut entitlements because of his support base and he wants to expand military spending by 10 per cent.
If his budget plans are carried out, US inflation and interest rates will rise, attracting huge capital inflows. This will result in an appreciating dollar, worsening the US national debt and trade deficit, and increase the likelihood of protectionism and competitive devaluation.
Similar policies by president Ronald Reagan led to voluntary export restraints imposed on Japan and other countries. At the 1985 Plaza Accord, the US forced Germany, France, Britain and Japan to revalue their currencies upwards by 50 per cent against the dollar. Japan's subsequent efforts to reflate its economy created a huge property bubble which burst in 1990, severely damaging its financial system and economy, from which it has yet to recover.
This is just one policy of Mr Trump's with outcomes that will have a significant effect on the world, and indeed here in Singapore. A look at several other policies also throws up scenarios with similar widespread effects to ponder.
CONTEXT OF THOSE POLICIES
First, though, it is useful to understand the factors that led to the rise of Mr Trump.
Although US economic growth and recovery from the financial crisis of 2007/08 were better than other industrial countries', growth was sub-par: almost 2 percentage points below trend. Income and wealth inequality is as bad as in 1929, the onset of the Great Depression. Productivity performance is poor and declining.
The measured unemployment rate of 4.7 per cent was trumpeted as a great achievement. However, almost a third of workers are on part-time jobs and real wages are stagnant or falling. Technological change, plus the relocation of factories to China, Mexico and elsewhere, resulted in ghost towns.
Many workers who lost their jobs became long-term unemployed and unemployable. Others depend on welfare: 43 million Americans are now below the poverty line and depend on food stamps. Since 2007, more than three million people had themselves certified as handicapped to qualify for allowances. Labour force participation fell about 4 percentage points.
The visible presence of recent immigrants, particularly illegal ones, plus the rapidly changing demographics, raised social and political tensions. China and Mexico became convenient targets for the Trump administration. Against that backdrop, here are some of Mr Trump's economic policies that have emerged - and some possible outcomes that could arise.
Mr Trump has announced his intention to revisit Dodd-Frank, the financial legislation that president Barack Obama put in place in the aftermath of the 2007/08 financial crisis. Mr Trump believes Dodd-Frank has raised the cost of lending by banks and therefore hindered economic growth.
If his efforts result in substantial deregulation of finance, the world could face a future financial crisis, perhaps on a greater scale.
WITHDRAWAL FROM TPP
President Trump has already renounced the Trans-Pacific Partnership (TPP). I believe this is because he thinks trade pacts are heavily influenced by vested interests. He feels that American workers have lost out, while capitalists and owners of intellectual property stand to gain. Moreover, he believes that America will have greater leverage in bilateral trade deals rather than multilateral ones.
Withdrawing from the TPP means handing over trade leadership to China, whose Regional Comprehensive Economic Partnership is currently being negotiated. China also has the One Belt, One Road initiative and the Asian Infrastructure Investment Bank. America's abdication is China's gain.
Likewise, President Trump wants to renegotiate the North American Free Trade Agreement (Nafta), because America lost factories and jobs to Mexico directly via US companies transferring plants there. It lost factories and jobs indirectly via other countries such as Japan and Germany setting up factories in Mexico to enter the US market by the back door. Obviously, the rules of origin could be tightened to safeguard American interests.
Economists need to revisit their theories of free trade agreements (FTAs) and Customs unions (a trade bloc that imposes a common external tariff). Both Nafta and the European Union became problematic when they expanded to include poor countries. The loss of factories and jobs, plus immigration of poor workers, created huge problems. It should be noted that FTAs, Customs unions and the like do not result in free trade, but rather less restricted trade.
FTAs came about because the founders of the General Agreement on Tariffs and Trade/World Trade Organisation (WTO) allowed an unfortunate exception to the Most Favoured Nation principle of non-discrimination. All FTAs are discriminatory, like membership of a club: Non-members do not enjoy the privileges. The world is now awash in some 267 FTAs, somewhat like spaghetti in a bowl, to use a metaphor coined by Professor Jagdish Bhagwati of Columbia University in 1995.
POINTING THE FINGER AT CHINA
According to Mr Trump's official site, "America has lost nearly one-third of its manufacturing jobs since Nafta and 50,000 factories since China joined the World Trade Organisation".
President Trump blames the US' trade policies, growing trade deficits with Mexico and Canada, and China's "unfair subsidy behaviour" for the US' "deindustrialisation" and its disappearing middle class.
According to Navarro, China accounts for 75 per cent of the US trade deficit, excluding oil. President Trump has also complained about China's currency manipulation. However, since mid-2014, China has spent about US$1 trillion propping up the yuan because of massive capital outflows.
Obviously, Mr Trump is using a negotiating tactic with China to reduce barriers to imports so that America can export more to China.
For good measure, President Trump has also accused Germany and Japan of currency manipulation. A weak euro or yen means a stronger US dollar. This works to America's competitive disadvantage.
BORDER ADJUSTMENT TAX
Of serious concern to other countries, including Singapore, is Mr Trump's proposed border adjustment tax to raise revenue and to reduce the US import deficit. It is a value-added tax levied on imported goods. It is also called a border-adjusted tax, border tax adjustment or destination tax. Exported goods are exempt from tax on profits; imported goods sold domestically are subject to the tax on value added.
Some have questioned the legality of the border tax at the WTO level, but then, President Trump has threatened to withdraw from the WTO. If he does so, the global rules-based system established at Bretton Woods will be disrupted.
IMPACT OF TRUMP'S POLICIES ON SINGAPORE
To the extent that President Trump's economic stimulus package raises US growth, Singapore exports to the US will increase. Of course, this effect will be mitigated by the border adjustment tax.
Singapore will also have to reorientate its manufacturing and supply chain networks to cope with increasing American multinational corporation "reshoring" - returning their manufacturing back home - and China's ambitious move up the value chain.
Higher American interest rates and a stronger US dollar will pose challenges for Singapore's exchange rate-centred policy. If the Singapore dollar tracks the US dollar rise too closely, Singapore's companies will become less competitive. Recall that in the early 1980s, the Singapore dollar became severely overvalued, leading to an asset bubble and subsequent recession.
Taxation is another important area where President Trump's policies will have an impact on Singapore. He has spoken of reducing corporate tax from 35 per cent to 15 per cent. He also wants to cut income tax rates. To retain Singapore's competitive advantage, the country's low personal and corporate income tax rates may have to be brought lower, necessitating a rise in the goods and services tax (GST). Already Finance Minister Heng Swee Keat has hinted at the future need to increase GST to fund increasing social expenditure for the ageing population.
A question may also be posed regarding the future of private banking in Singapore. President Trump is proposing a tax amnesty rate of 10 per cent for companies to repatriate their money from overseas. We have already experienced the tax amnesty by Indonesia repatriating money from overseas, including Singapore.
A deeper question regarding financial stability will arise when American interest rates rise significantly. Already the prospect has undermined the global bond market. For countries and companies exposed to US-dollar bond issues, traumatic losses will occur as currencies tumble.
The Bank for International Settlements has reported that about 90 per cent of Turkey's sovereign debt and more than 80 per cent of China's and South Korea's non-financial corporate debt is dollar-denominated.
Even locally denominated bond issues are not immune if foreigners had bought the bonds. In Singapore, we have seen major losses by banks already on account of oil and gas-related bonds being downgraded to junk bond status. US-dollar-denominated bonds will cause more grief as the US dollar appreciates substantially.
The writer is practice professor of economics at Singapore Management University.
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